Professional Documents
Culture Documents
November 2014
2014 2024
The Indian Coffee Can Portfolio
Analysts: Pankaj Agarwal, CFA Nitin Bhasin
Saurabh Mukherjea, CFA pankajagarwal@ambitcapital.com nitinbhasin@ambitcapital.com
saurabhmukherjea@ambitcapital.com Rakshit Ranjan, CFA Ashvin Shetty, CFA
Tel: +91 22 3043 3174 rakshitranjan@ambitcapital.com ashvinshetty@ambitcapital.com
Gaurav Mehta, CFA
gauravmehta@ambitcapital.com Sagar Rastogi Aditya Khemka
Tel: +91 22 3043 3255 sagarrastogi@ambitcapital.com adityakhemkal@ambitcapital.com
CONTENTS
STRATEGY
The Indian Coffee Can Portfolio3
Section 1: The case for a Coffee Can Portfolio.. 4
Section 2: Constructing the Indian Coffee Can Portfolio. 7
Section 3: How the Coffee Can is different to our other portfolio constructs14
Section 4: Todays Coffee Can for 2014-202416
COMPANIES
ITC (NOT RATED) .. 19
HDFC Bank (SELL) . 25
HCL Tech (BUY) . 31
Axis Bank (BUY) . 37
Asian Paints (SELL) 43
Godrej Consumer (SELL) . 49
Marico (BUY) .. 55
Berger Paints (SELL) .. 61
Page Industries (BUY) ...67
IPCA Laboratories (BUY) ..73
Gruh Finance (NOT RATED) 79
Balkrishna Industries (BUY) . 83
City Union Bank (BUY) . 89
eClerx (UNDER REVIEW) ..95
V-Guard (BUY) .101
Mayur Uniquoters (NOT RATED) . 107
The Indian Coffee Can Portfolio The Indian Coffee Can Portfolio
ITC Our stance: NR
We introduce the Coffee Can Portfolio for investors who have the ability to
Mcap (US$ bn): 47.7 ADV - 6m (US$ mn): 40.6
hold stocks for very long periods of time (ideally, for ten years). Our portfolio
consists of large-cap and small-cap stocks that have delivered 10% sales HDFC Bank Our stance: SELL
growth and 15% RoCE every single year over FY05-14. Detailed back-testing Mcap (US$ bn): 36.4 ADV - 6m (US$ mn): 30.0
shows that this portfolio, including a large-cap only version, beats HCL Tech Our stance: BUY
benchmarks across all time periods. The portfolio also performs admirably
Mcap (US$ bn): 18.3 ADV - 6m (US$ mn): 26.9
well in stress tests of maximum drawdown (in periods like the Lehman crisis).
Left untouched for a decade, this portfolio, coupled with the power of Axis Bank Our stance: BUY
compounding, generates returns that are substantially higher than the Mcap (US$ bn): 18.2 ADV - 6m (US$ mn): 32.7
benchmark. Asian Paints Our stance: SELL
The case for a Coffee Can Portfolio Mcap (US$ bn): 10.4 ADV - 6m (US$ mn): 12.0
Thirty years ago, Robert Kirby of Capital Guardian Trust spoke of how a Coffee Can
Godrej Consumer Our stance: SELL
Portfolio of stocks selected using superior research and left untouched for a decade
can deliver superior returns over the long term. Over and above the quality of the Mcap (US$ bn): 5.4 ADV - 6m (US$ mn): 2.4
stock selection process, three other factors help the Coffee Can Portfolio generate Marico Our stance: BUY
superior returns: (a) no churn this reduces transaction costs; (b) the power of
Mcap (US$ bn): 3.4 ADV - 6m (US$ mn): 2.4
compounding stocks that do well over the long term become disproportionately
large in the overall portfolio; and (c) the long holding period of the portfolio helps Berger Paints Our stance: SELL
the investor effectively neutralise the noise that distracts from the core investment Mcap (US$ bn): 2.0 ADV - 6m (US$ mn): 1.5
thesis of a stock. Page Inds Our stance: BUY
Constructing the India Coffee Can Portfolio (CCP) Mcap (US$ bn): 1.7 ADV - 6m (US$ mn): 1.3
We use two filters to build the CCP: (a) sales growth of 10% per annum or more for IPCA Labs Our stance: BUY
each of the past ten years; and (b) RoCE of >15% every year for the past ten years.
Mcap (US$ bn): 1.4 ADV - 6m (US$ mn): 3.5
Back-testing of these filters over five ten-year periods (from 2000 to 2014) shows that
the CCP, including a large-cap version, beats the Sensex in each iteration and Gruh Finance Our stance: NR
delivers alpha ranging from 0.7% to 13% on a CAGR basis for the ten-year iterations. Mcap (US$ bn): 1.4 ADV - 6m (US$ mn): 1.1
Furthermore, relative to the Sensex, the CCPs also have lower maximum drawdown. Balkrishna Inds Our stance: BUY
How is the CCP different from our other portfolios?
Mcap (US$ bn): 1.1 ADV - 6m (US$ mn): 1.3
Over the past four years, we have created two different approaches to cater to
investors needs. Our quarterly Good & Clean portfolio is focused on investors who City Union Bank Our stance: BUY
are looking for short-term returns. The ten-bagger portfolio is based on our Mcap (US$ bn): 0.9 ADV - 6m (US$ mn): 1.4
greatness framework and is ideal for investors looking at a 1-3 year horizon. Our eClerx Our stance: UR
latest construct, the Coffee Can Portfolio, is for investors with a longer term
Mcap (US$ bn): 0.6 ADV - 6m (US$ mn): 0.8
investment horizon (ideally, ten year) because there is a strong body of evidence that
says that longer time periods are a powerful driver of superior investment returns. V-Guard Inds Our stance: BUY
Mcap (US$ bn): 0.4 ADV - 6m (US$ mn): 0.7
So here is the CCP for 2014to be bought now and opened ten years hence!
Our 2014 CCP consists of 16 stocks, including four banks. The list includes large-caps Mayur Uniquoters Our stance: NR
with hugely successful franchises (ITC, HDFC Bank, HCL Tech, Axis Bank and Asian Mcap (US$ bn): 0.3 ADV - 6m (US$ mn): 0.3
Paints) as well as robust, fast-growing mid-caps/small-caps (Godrej Consumer, Source: Bloomberg, Ambit Capital research
Marico, IPCA Labs, GRUH Finance, Berger Paints, Page Industries, Balkrishna
Industries, City Union Bank, eClerx, V-Guard Industries and Mayur Uniquoters).
Analyst Details
Our research clearly shows that valuation at the entry-point does not make a
Saurabh Mukherjea, CFA
difference for those who are willing to invest for the truly long run. Hence, +91 99877 85848
valuation parameters play no role whatsoever in the construction of the CCP. saurabhmukherjea@ambitcapital.com
The Coffee Can Portfolio, including the large-cap version, beats the Sensex in each Gaurav Mehta, CFA
of the five iterations that were run over 2000-2014 +91 22 3043 3255
CAGR returns for ten-year
CCP All-cap CCP Large-cap Sensex gauravmehta@ambitcapital.com
period starting
30 June 2000 30 June 2010 16.7% 17.8% 14.1% Karan Khanna
29 June 2001 30 June 2011 21.7% 23.6% 18.5%
+91 22 3043 3251
karankhanna@ambitcapital.com
28 June 2002 29 June 2012 19.0% 19.3% 18.3%
30 June 2003 28 June 2013 25.1% 27.5% 18.3% Consultant: Anupam Gupta
anupam.gupta@aavanresearch.com
30 June 2004 30 June 2014 31.6% 18.2% 18.1%
Source: Bloomberg, Ambit Capital research
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.
Strategy
compared the portfolios to the market average over three different time periods
(4 months, 1 year and 2 years). In every case, he found two amazing trends: (1)
the stocks that the investors bought consistently trailed the market, and (2) the
stocks that they sold actually beat the market1.
Odean wanted to look deeper, so he next examined the trading behavior and
performance results of 6,465 households. In a paper titled, Trading Is
Hazardous to Your Wealth (2000), Odean, along with Brad Barber, professor of
finance at University of California, Davis, compared the records of people who
traded frequently versus people who traded less often. They found that, on
average, the most active traders had the poorest results, while those who traded
the least earned the highest returns2. The implication here is that people who
might have suffered the most from myopic loss aversion and acted upon it by
selling stocks and did less well much less well than those who were able to
resist the natural impulse and instead hold their ground.
Power of compounding: Holding a stock for a period as long as 10 years
allows the power of compounding to play out. Thus, over the longer term,
winning stocks are rewarded disproportionately as compared to losing stocks
whose weight naturally reduces in the portfolio. The power of this powerful whilst compounding results in a
phenomenon is explained in detail in Section 2 of this note. natural rebalancing of winners and
Neutralising the negatives of noise: Unlike investing in indices (which losers in a portfolio
are typically constructed on simplistic measures such as market capitalization),
the CCP uses a disciplined framework (sales growth of more than 10% per
annum and ROCE of more than 15% every year for 10 consecutive years) to
filter stocks from the listed universe of stocks with a market capitalization of
more than Rs1bn. In this process, the CCP is indifferent to specific sectors,
flavor-of-the-day themes and approaches such as chasing earnings and
By its design, the CCP is indifferent
momentum. This filter results in the CCP having a healthy mix of large cap
to short-term trends, sectors,
stocks (with large franchises and steady-state growth) and mid/small cap stocks
themes, and approaches such as
(which have have greater growth potential but are at a more nascent stage of
chasing earnings or momentum
their development).
The CCPs indifference to short term trends (such as economic booms & busts,
sector-specific fads, performance blips in companies, etc) allows it to
outperform the benchmark consistently. In other words, the benchmark
responds to or reflects - every trend, fad and fashion in the market whilst the
CCP is indifferent to these trends, fads and fashions which are typically
temporary in nature - and even out over the longer term.
The CCP is also an effective way of killing noise that interferes with the
investment process. In Investing The Last Liberal Art, Hagstrom also talks
about the chaotic environment, with so much rumor, miscalculation, and bad
information swirling. Such an environment was labelled noise by Fischer
Black, the inventor of the Black-Scholes formula. Hagstrom goes on to say:
Is there a solution for noise in the market? Can we distinguish between noise
prices and fundamental prices? The obvious answer is to know the economic
fundamentals of your investment so you can rightly observe when prices have
moved above or below your companys intrinsic value. It is the same lesson
preached by Ben Graham and Warren Buffett. But all too often, deep-rooted
psychological issues outweigh this commonsensical advice. It is easy to say we
should ignore noise in the market but quite another thing to master the
psychological effects of that noise. What investors need is a process that allows
1
Terence Odean, Do investors trade too much? American economic review (December
1999)
2
Terence Odean and Brad Barber, "Trading Is Hazardous to Your Wealth: The Common
Stock Investment Performance of Individual Investors," Journal of Finance 55, no. 2 (April
2000)
them to reduce the noise, which then makes it easier to make rational
decisions.
As an example, we highlight how, over the long term, Hero MotoCorps stock
price has withstood short-term news such as disappointing monthly sales,
aggressive competitive launches as well as the split with Honda.
Exhibit 1: Hero MotoCorps stock price has compounded at an impressive 18%
CAGR over 2004-2014
3,200
2,800
2,400
2,000
1,600
1,200
800
400
-
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Hero Motocorp
The chart shown above highlights that over the past ten years there are two
extended time periods when Heros share price has not gone anywhere 2006
to 2008 and then 2010 to 2013. In fact for five of the past ten years, Heros
share price has been flat. And yet, in the remaining half of the past decade,
Hero has performed so well that the 10-year CAGR of the share price is 18%.
At its simplest, this is why the Coffee Can concept works once you have
identified a great franchise and you have the ability to hold on it for a long
period time, there is no point trying to be too precise about timing your entry
or your exit. As soon as we try to time that entry/exit, we run the risk of noise
rather than fundamentals driving our investment decisions.
Source: Bloomberg, Ambit Capital research. Note* The universe in 2002s BSE200 firms (ex-financials);
performance relative to the BSE200 Index.
ROE of 15%: We prefer Return on Equity over Return on Assets because this is
a fairer measure of the banks ability to generate higher income efficiently on
a given equity capital base over time.
Loan growth of 15%: We believe loan growth of 15% is an indication of a We use RoE of 15% and loan
banks ability to lend over business cycles. Strong lenders ride the down-cycle growth of 15% as filters to screen
better, as their competitive advantages surrounding their origination, appraisal BFSI stocks
and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
resilient during a downturn.
We summarise the results of each of the five iterations in the next five pages.
The four stocks that constituted the first iteration of the Coffee Can Portfolio
consisted of one IT, one pharma company, and two companies from the
automobile/auto-ancillary sector. These were NIIT, Cipla, Hero MotoCorp and
Swaraj Engines. The star performer during this period was Hero MotoCorp which
proved to be a ten-bagger whilst NIITs stock price collapsed 78% in this period.
Exhibit 5: Portfolio performance during the first iteration Hero Motocorp was the star
Share price FY2000-10 performer, whilst NIIT was the
Company Price at Start (Rsbn) Price at End (Rsbn)
CAGR PAT CAGR
laggard in Period 1
Date from/to 30/06/2000 30/06/2010
NIIT 295 65 -14.1% -11%
Cipla 69 339 17.2% 23%
Hero Moto 198 2,049 26.4% 27%
Swaraj Engines 118 378 12.4% 7%
Portfolio* 400 1,870 16.7%
Sensex 4,749 17,701 14.1%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs400 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at the start to
Rs1,870 at the end.
2,000 (Rs)
1,800
1,600
1,400
1,200 Swaraj Engines
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs400 at the start to Rs1,870 at the end.
During the second iteration as well, the Coffee Can Portfolio consisted of four
stocks with two repeats (Cipla and Hero MotoCorp from the Period 1) and two new
entries (Apollo Hospitals and Roofit Industries). During this period, note that one of
the stocks in the portfolio, Roofit Industries, was delisted during 2001-2011.
Despite this, the portfolio performed admirably. The star performer yet again was
Hero MotoCorp whose stock price rose 13x whilst Cipla was a laggard at 3.6x.
Exhibit 8: Portfolio performance during the second iteration Apollo Hospitals came close to
Company
Price at Start Price at End Share FY01-11 matching Hero MotoCorps stellar
(Rsbn) (Rsbn) price CAGR PAT CAGR performance in Period 2
Date from/to 29/06/2001 29/06/2011
Cipla 91 331 13.7% 19%
Hero Motocorp 145 1,877 29.2% 22%
Apollo Hospitals 40 478 28.1% 19%
Roofit Inds. 106 NA NA NA
Portfolio* 400 2,855 21.7%
Sensex 3,457 18,846 18.5%
Source: Bloomberg, Ambit Capital research. Note: NA - Data for Roofit is not available because the company
was delisted during this period. *Portfolio price at start of Rs400 denotes an equal allocation of Rs100 in each
stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the period.
Thus, for this period, the value of the portfolio rose from Rs400 at the start to Rs2,855 at the end.
3,000 (Rs)
2,500
500 Cipla
-
Value at start Value at end
Source: Bloomberg, Ambit Capital research. Note: Data for Roofit Ind is not available from FY03 onwards.
Value at start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at end is the
value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at
the start to Rs2,855 at the end.
The Coffee Can Portfolio expanded in size during the third iteration. Compared
with the four stocks in the first two iterations, six stocks qualified to be part of the
Coffee Can Portfolio in the third iteration. Cipla and Hero MotoCorp were
repeated yet again whilst the other four stocks were Infosys, Container
Corporation, Gujarat Gas and Aurobindo Pharma.
Exhibit 11: Portfolio performance during the third iteration
Share price FY02-12 PAT
Company Price at Start (Rsbn) Price at End (Rsbn)
CAGR CAGR
Date from/to 28/06/2002 29/06/2012
Infosys 411 2,509 19.8% 26%
Hero Motocorp 308 2,149 21.4% 17%
Cipla 75 317 15.4% 18%
Container Corpn. 99 613 20.0% 13%
Guj Gas Company 50 310 20.0% 17%
Aurobindo Pharma 24 110 16.6% 11%
Portfolio* 600 3,427 19.0%
Sensex 3,245 17,430 18.3%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs600 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs600 at the start to
Rs3,427 at the end.
Exhibit 12: During this phase, the portfolio broadly tracked the Sensex
4,000 (Rs)
Auro Pharma
3,000 Guj Gas
2,000 ConCor
Cipla
1,000 Hero Moto
- Infosys
Value at start Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs600 at the start to Rs3,427 at the end.
Barring one addition (Sun Pharma), the Coffee Can Portfolio in its fourth iteration
was the same as that in the third iteration. Performance was driven by Sun
Pharmas stellar performance. However, the performance of the large-cap version
was better than the all-cap version of the Coffee Can Portfolio.
Exhibit 14: Portfolio performance during the fourth iteration
Share price FY03-13 PAT
Company Price at Start (Rsbn) Price at End (Rsbn)
CAGR CAGR
Date from/to 30/06/2003 30/06/2013
Infosys 408 2,499 19.9% 26%
Cipla 60 392 20.6% 20%
Hero Motocorp 253 1,663 20.7% 13%
Sun Pharma.Inds. 16 506 41.1% 30%
Container Corpn. 115 719 20.1% 13%
Aurobindo Pharma 37 181 17.1% 14%
Guj Gas Company 45 191 15.4% 18%
Portfolio* 700 6,585 25.1%
Sensex 3,607 19,396 18.3%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs700 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs700 at the start to
Rs6,585 at the end.
Exhibit 15: Sun Pharma delivered a stellar performance in Period 4
7,000 (Rs)
6,000 GujGas
4,000 ConCor
Sun Pharma
3,000
Hero Moto
2,000
Cipla
1,000
Infosys
-
Value at start Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs700 at the start to Rs6,585 at the end.
c. Pricing discipline
(PBIT margin)
We rank the BSE500 universe of firms (excluding financial services firms and
excluding firms with insufficient data) on our greatness score, which consists of six
equally weighted headingsinvestments, conversion to sales, pricing discipline,
balance sheet discipline, cash generation and EPS improvement, and return ratio
improvement. Under each of these six headings, we further look at two kinds of
improvements:
In the next section, we discuss the rationale used for constructing the India Coffee
Can Portfolio.
We note that the stocks identified by this filter are the same as those in our Cusp We add four large-cap stocks (ITC,
of Greatness report (published on 14th July 2014), as we had used the same filter HCL Tech, Asian Paints, and GCPL)
and the same time period in that report as well. However, whilst that report to our Cusp of Greatness list of
focused on mid-cap/small-cap stocks, in this report we add commentary on the stocks
first four large-cap names (ITC, HCL Tech, Asian Paints and Godrej Consumer). As
before, we exclude Insecticides India from this report due to its size.
We run a similar filter for Indias listed BFSI stocks with a market cap of more than Only 1% of stocks in the BFSI
Rs1bn and: (a) an RoE of 15%; and (b) loan growth of 15% for every consecutive universe meet our screening filters
year for the past ten years. In a universe of 507 firms, a meagre 5 firms managed
to pass this test (representing a small fraction of ~1%). This handful of firms is
shown in the exhibit below.
Exhibit 23: The very short list of BFSI firms with superior RoEs and superior loan
book growth (over FY05-14)
Share price performance
Market cap (Rsbn)* FY15 P/E
(CAGR relative to Sensex)
HDFC Bank 11% 2,185 20.5
Axis Bank 11% 1,087 15.4
Gruh Finance 34% 85 39.8
City Union Bank 12% 49 12.9
Dewan Housing 11% 49 7.9
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured
over the last ten-year period (i.e. March 2004 to March 2014). * Market cap as on 31 October 2014.
From the above list, we exclude Dewan Housing due to our standard G&C filters.
60%
40%
R2 = 0.000
FY02-FY12 returns
20%
0%
- 5.0 10.0 15.0 20.0 25.0
-20%
-40%
-60%
-80%
FY02 Price to Book
Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex
The value of the R-squared makes the story self-explanatory. A zero for this value
indicates that the beginning-of-period valuations do not play any meaningful role
in explaining stock returns over the next ten years. This holds true for both P/B (as
seen in Exhibit 25 above) and P/E (as seen in Exhibit 26 below) as the measures of
valuation.
Exhibit 26: Valuation impact on long-term returns - P/E
60%
40%
R2 = 0.001
FY02-FY12 returns
20%
0%
- 10.0 20.0 30.0 40.0 50.0 60.0 70.0
-20%
-40%
-60%
-80%
FY02 Price to Earnings
Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex
Asian Paints, Berger Paints, and HDFC Bank are three stocks from our conventional
coverage on which we have a SELL stance and which are in the portfolio. So why
are these stocks in the CCP? Firstly, all the three stocks are what we would call
valuation-driven SELLs. As valuations have NOT been considered whilst creating
the CCP, these SELL stances are not relevant from the point of the view of the CCP.
Secondly, since our conventional coverage is based on a one-year horizon whereas
the CCP is based on a ten-year horizon, we have not paid heed to these valuation-
driven SELLs whilst constructing the CCP.
ITC has the largest cigarette business in India with >70% market share.
Consumer
It has leveraged its wide distribution and cash flows from the cigarettes
business to rapidly expand and fund investments in its non-cigarette
FMCG business, which has become the third-largest FMCG business in Recommendation
India. However, there are concerns around succession planning once Mcap (bn): `2,838/US$46.2
the current Chairman Mr. YC Deveshwar (YCD) retires in 2017, as the 3M ADV (mn): `1,962/US$31.9
next line of command lacks experience and will have only 5-6 years to CMP: `774
go before retirement from the point they get the top job. TP (12 mths): NA
Largest tobacco company on course to become an FMCG major Upside (%): NA
ITC has been present in India for over 100 years and is Indias largest tobacco
company with >70% market share in the branded Indian cigarette market. In Flags
the last 15 years, the company has diversified its revenue base beyond Accounting: GREEN
cigarettes (~62% of gross sales) and it now derives ~17%/11%/7% of its gross Predictability: GREEN
from the FMCG/Agri products/Paper business. ITC commands ~10% market Treatment of Minorities: AMBER
share in the biscuit market and along with its personal care business it is
among the top-three FMCG companies in India. Catalysts
ITCs moats are its distribution network and cash-rich tobacco business
Consistent profitability by ITCs non-
On the back of its strong cigarette franchise, ITC has developed the most cigarette FMCG
expansive distribution network in India. It has leveraged this distribution muscle
to rapidly scale up its FMCG business. The high cash generation of its tobacco Softening/predictability of
business is ITCs second critical competitive advantage. ITCs tobacco business Governments stance on cigarette
taxation
has ~70% operating profit margins and 100%+ RoCE with strong cash flows
which fund ITCs investments in its other nascent businesses.
Higher dividend payout ratio indicative of prudent capital allocation Performance
About 47% of ITCs operating cash flows have been deployed towards dividend
30,000 390
payouts, with an increase in the payout ratio from 28% a decade ago to over
28,000
60% consistently over FY08-13. The capex needed for the non-cigarettes FMCG 360
26,000
business has NOT been material (4% of CFO over FY04-13) despite this 24,000 330
division being 30% of HULs size and the third-largest non-cigarettes FMCG 22,000
business in India. Cash accumulation remains strong on the balance sheet at 20,000 300
`15bn annually leaving further headroom to increase dividend payout.
Nov 13
Jan 14
Mar 14
May 14
Sep 14
Jul 14
Nov 14
Succession planning post YCD is an area of concern
Mr. YC Deveshwar (YCD) is due to retire in 2017. He has been the sole driver
of value creation over the past 15 years. Neither of the next level of senior Sensex ITC (RHS)
management (Mr. Grant, Mr. Anand and Mr. Dhobale) will be under 60 years
of age in 2017 and hence they will not have more than 5-7 years of tenure as Source: Bloomberg, Ambit Capital research
Chairman. ITC has never appointed an external recruit as its Chairman in the
past. As a result, we have concerns around succession planning.
Diversifying beyond cigarettes to drive next leg of growth
Having realised the limited growth potential of its tobacco business, ITC has
been investing heavily to grow its non-cigarette FMCG business. With continued
brand investments and strong innovation focus, the FMCG business should
become the driver of growth for ITC in the near future. In its tobacco business,
ITC continues to invest in new product development and improving product
quality and packaging to retain its leadership in cigarettes.
Key financials
Year to March FY10 FY11 FY12 FY13 FY14
Analyst Details
Operating income (` mn) 181,532 211,676 247,984 296,056 328,826
Rakshit Ranjan, CFA
EBITDA (` mn) 60,740 71,534 84,996 103,318 120,988
+91 22 3043 3201
EBITDA Margin (%) 33.5% 33.8% 34.3% 34.9% 36.8% rakshitranjan@ambitcapital.com
Adjusted EPS (`) 5.1 6.3 7.8 9.4 11.1 Ritesh Vaidya
RoCE (%) 27.6% 31.6% 34.0% 34.5% 34.3% +91 22 3043 3246
P/E (x) 71.4 58.1 47.1 39.1 33.0 riteshvaidya@ambitcapital.com
Source: Company, Ambit Capital research
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.
ITC
Exhibit 1: Except for FY07-09, sales growth and profitability Exhibit 2: Return ratios have also improved continuously
has been consistent for ITC over the last decade except for FY07-09
Revenues (Rs. Bn) EBITDA margin (%) RHS 38.0% RoCE RoE
350 38.0%
37.0%
300
36.0% 34.0%
250 35.0%
200 34.0% 30.0%
33.0%
150
32.0% 26.0%
100
31.0%
50 30.0%
22.0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Cash generated from operations for ITC (FY04- Exhibit 4: ..has been utilised to increase dividend payout
14) and enter new business segments
Interest Purchase of Increase in
received, Investments cash and
Proceeds 13% - cash
from Subsidiaries equivalents
shares, & Others 5%
6%
Dividend
paid
Net Capex 51%
CFO, 81% (incl.
acquisitions
)
30% Interest
paid
Source: Company, Ambit Capital research 1% Capital research
Source: Company, Ambit
Exhibit 5: ITC P/E band chart for the last 7 years Exhibit 6: ITC EV/EBITDA band chart for the last 7 years
150 150
100 100
50 50
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Ratio analysis
Year to March FY10 FY11 FY12 FY13 FY14
Gross margin (%) 61.4% 61.6% 61.2% 59.2% 60.0%
EBITDA margin (%) 33.5% 33.8% 34.3% 34.9% 36.8%
EBIT margin (%) 33.5% 34.6% 36.2% 36.4% 38.5%
Net profit margin (%) 22.4% 23.6% 24.8% 25.1% 26.7%
Dividend payout ratio (%) 94.0% 69.0% 57.7% 55.9% 54.0%
Net debt: equity (x) (0.1) (0.1) (0.1) (0.2) (0.1)
Working capital turnover (x) 1.1 19.1 21.2 32.7 34.5
Fixed assets turnover (x) 1.5 1.7 1.8 1.7 1.8
RoCE (%) 27.6% 31.6% 34.0% 34.5% 34.3%
RoE (%) 29.2% 33.2% 35.5% 36.1% 36.2%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY10 FY11 FY12 FY13 FY14
EPS (`) 5.1 6.3 7.8 9.4 11.1
Diluted EPS (`) 5.1 6.3 7.8 9.4 11.1
Book value per share (`) 18.0 20.4 24.0 28.5 33.6
Dividend per share (`) 4.8 4.4 4.5 5.3 6.0
P/E (x) 71.4 58.1 47.1 39.1 33.0
P/BV (x) 20.4 18.0 15.3 12.9 10.9
EV/EBITDA (x) 45.8 39.4 33.4 27.7 23.9
Price/Sales (x) 7.7 13.4 11.6 9.8 8.9
Source: Company, Ambit Capital research
Since its inception 20 years ago, HDFC Bank has focused on building a
BFSI
granular retail franchise on both sides of the balance sheet and
maintained a conservative approach on the balance of growth and
asset quality. With a stable management team at the helm, the bank Recommendation
will seek to further penetrate its retail offering on a pan-India basis Mcap (bn): `2,246/US$36.5
and fill the gaps in its corporate banking offering as the economic 3M ADV (mn): `1,807/US$29.4
climate improves. CMP: `930
Numero uno in Indian banking TP (12 mths): `717
Established in 1994, HDFC Bank is Indias second-largest private sector bank Downside (%): 23
by assets. It has ~4% market share in total bank credit. Retail loans form 48%
of the banks loans, with a market-leading presence in most retail product Flags
categories. Its corporate business has focussed on working capital financing. Accounting: GREEN
Predictability: GREEN
Strong retail franchise, stable management
Treatment of Minorities: GREEN
HDFC Bank has differentiated itself from its peers through its strategic focus on
a granular low-cost franchise along with a market-leading position in most
Catalysts
retail products since its early years. Over the last 20 years, the bank has taken
a longer-term approach of protecting its margins and asset quality rather than Increase in retail loan growth in
pursuing near-term aggressive growth. Superior margins and controlled asset FY16-17
quality have driven healthy average RoEs of ~18% in the last ten years. A Capital infusion bolstering tier-1
stable management team and use of technology from the beginning have
Better income traction in corporate
further facilitated the banks consistent performance. banking
Acquirer in the past, recent focus on rapid organic scale-up
A superior profitability has allowed HDFCB to sustain its capital position mainly
Performance
through internal profit generation without undue dilution of its shareholders.
150
The bank has made two acquisitions (Times Bank in 1999 and Centurion Bank 140
of Punjab in 2008) in the past, but its recent focus has been on organic growth 130
through accelerated branch network expansion on a pan-India basis. 120
110
High visibility on succession planning 100
Aditya Puri (MD & CEO) has led HDFC Bank since its inception, and following 90
Feb-14
Nov-13
Dec-13
Mar-14
May-14
Aug-14
Sep-14
Jun-14
Nov-14
the recent clarification by the RBI that about 70 years is the maximum age limit
for private bank CEOs, Mr Puri can serve for another six years. Many members
in the banks senior management team have been with bank for more than ten Sensex HDFC Bank
years and hence offer ample options for succession planning.
Source: Bloomberg, Ambit Capital research
Ripe for growth in retail; filling the gaps on corporate banking
HDFC Bank has expanded its branch network by ~70% in the last three years
with a pan-India focus, putting in place drivers to further strengthen its retail
banking business. There have been few gaps in corporate banking, investment
banking and project finance, and the bank has selectively hired and built teams
in recent years to play a bigger role, as the economic recovery sets in the next
12-18 months.
Analyst Details
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E Pankaj Agarwal, CFA
+91 22 3043 3206
Net Revenues (` mn) 226,637 264,023 308,909 369,385 445,045
pankajagarwal@ambitcapital.com
Operating Profits (` mn) 114,276 143,601 172,667 210,711 260,447
Ravi Singh
Net Profits (` mn) 67,263 84,784 99,920 122,192 147,975
+91 22 3043 3181
EPS (`) 28.3 35.3 41.4 50.6 61.3 ravisingh@ambitcapital.com
RoA (%) 1.82% 1.90% 1.86% 1.87% 1.83%
Aadesh Mehta, CFA
RoE (%) 20.3% 21.3% 21.1% 21.9% 22.2% +91 22 3043 3239
P/B (x) 6.11 5.13 4.39 3.70 3.09 aadeshmehta@ambitcapital.com
Source: Company, Ambit Capital research
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.
HDFC Bank
Exhibit 1: Loan growth and net interest margins Exhibit 2: RoA and RoE
Loan growth - LHS Net interest margins - RHS RoA - LHS RoE - RHS
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Gross NPA and provision coverage ratio Exhibit 4: Tier-1 capital ratio
Gross NPA - LHS Provision coverage ratio - RHS Tier-1 capital ratio
2.5% 100% 14%
12%
2.0% 80%
10%
1.5% 60% 8%
13.3%
12.2%
11.8%
11.6%
11.1%
10.6%
10.3%
6%
9.6%
1.0% 40%
8.6%
4% 8.6%
0.5% 20%
2%
0.0% 0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the long term Exhibit 6: Forward P/B evolution over the long term
20.4x 3.56x
1000 800
16.8x 3.02x
800
600
600
400
400
200
200
0 0
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Source: Company, Ambit Capital research; Trading band=Mean+1SD Source: Company, Ambit Capital research; Trading band=Mean+1SD
Exhibit 8: HDFC Bank - Three quarters of the pie on our STAR* framework
Criteria Score (%) Comment
Competitive advantage Strong retail franchise with long-term track record
Accounting quality Nothing unusual in the accounting
Capital allocation An acquirer in the past, but recent focus on organic build-up
HDFC Bank is not part of Ambits Connected Companies Index and does not appear to have
Centrality of political connect
any questionable political connections.
Treatment of minorities Sensible approach towards a possible merger with HDFC a positive
Succession planning Stable management team with high visibility on continuity
Total (%)
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Balance sheet
Year to March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Networth 362,141 434,786 511,543 606,053 726,345
Deposits 2,962,470 3,673,375 4,371,316 5,464,145 6,830,181
Borrowings 330,066 394,390 448,203 525,224 619,773
Other Liabilities 348,642 413,444 496,133 620,166 775,208
Total Liabilities 4,003,319 4,915,995 5,827,195 7,215,588 8,951,507
Cash & Balances with RBI & Banks 272,802 395,836 467,999 552,796 650,576
Investments 1,116,136 1,209,511 1,487,744 1,835,232 2,274,449
Advances 2,397,206 3,030,003 3,540,536 4,419,965 5,523,514
Other Assets 217,175 280,645 330,916 407,595 502,969
Total Assets 4,003,319 4,915,995 5,827,195 7,215,588 8,951,507
Source: Company, Ambit Capital research
Income statement
Year to March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Interest Income 350,649 411,355 485,526 572,496 681,486
Interest Expense 192,538 226,529 268,599 311,728 364,832
Net Interest Income 158,111 184,826 216,927 260,768 316,654
Total Non-Interest Income 68,526 79,196 91,982 108,617 128,391
Total Income 226,637 264,023 308,909 369,385 445,045
Total Operating Expenses 112,361 120,422 136,242 158,674 184,598
Employees expenses 39,654 41,790 45,815 51,970 58,687
Other Operating Expenses 72,707 78,632 90,427 106,704 125,911
Pre Provisioning Profits 114,276 143,601 172,667 210,711 260,447
Provisions 16,764 15,873 22,412 26,963 37,928
PBT 97,512 127,728 150,255 183,748 222,519
Tax 30,249 42,944 50,335 61,556 74,544
PAT 67,263 84,784 99,920 122,192 147,975
Source: Company, Ambit Capital research
Key ratios
Year to March FY13 FY14 FY15E FY16E FY17E
Credit-Deposit (%) 80.9% 82.5% 81.0% 80.9% 80.9%
CASA ratio (%) 47.7% 45.6% 45.3% 45.0% 44.7%
Cost/Income ratio (%) 49.6% 45.6% 44.1% 43.0% 41.5%
Gross NPA (` mn) 23,346 29,893 38,475 39,069 54,518
Gross NPA (%) 0.97% 0.98% 1.08% 0.88% 0.98%
Net NPA (` mn) 4,690 8,200 13,466 13,674 19,081
Net NPA (%) 0.20% 0.27% 0.38% 0.31% 0.35%
Provision coverage (%) 79.9% 72.6% 65.0% 65.0% 65.0%
NIMs (%) 4.57% 4.39% 4.28% 4.24% 4.15%
Tier-1 capital ratio (%) 11.1% 11.8% 10.7% 10.3% 10.1%
Source: Company, Ambit Capital research
Du-pont analysis
Year to March FY13 FY14 FY15E FY16E FY17E
NII / Assets (%) 4.3% 4.1% 4.0% 4.0% 3.9%
Other income / Assets (%) 1.9% 1.8% 1.7% 1.7% 1.6%
Total Income / Assets (%) 6.1% 5.9% 5.8% 5.7% 5.5%
Cost to Assets (%) 3.0% 2.7% 2.5% 2.4% 2.3%
PPP / Assets (%) 3.1% 3.2% 3.2% 3.2% 3.2%
Provisions / Assets (%) 0.5% 0.4% 0.4% 0.4% 0.5%
PBT / Assets (%) 2.6% 2.9% 2.8% 2.8% 2.8%
Tax Rate (%) 31.0% 33.6% 33.5% 33.5% 33.5%
ROA (%) 1.8% 1.9% 1.9% 1.9% 1.8%
Leverage 11.2 11.2 11.4 11.7 12.1
ROE (%) 20.3% 21.3% 21.1% 21.9% 22.2%
Source: Company, Ambit Capital research
Valuation
Year to March FY13 FY14 FY15E FY16E FY17E
EPS (Rs) 28.3 35.3 41.4 50.6 61.3
EPS growth (%) 28% 25% 17% 22% 21%
BVPS (Rs) 152.2 181.2 211.9 251.0 300.9
P/E (x) 32.9 26.3 22.5 18.4 15.2
P/BV (x) 6.11 5.13 4.39 3.70 3.09
Source: Company, Ambit Capital research
Feb-14
Apr-14
Aug-13
Dec-13
Aug-14
Jun-14
vertical heads for Harvard Management programmes) and on-the-job training
through additional responsibilities to build a second line of command. The
company also profiles its employees and has created top-10 performer bands Sensex (LHS) HCLT (Rs) (RHS)
and 100 Best CEO Club to groom future leaders. We believe that HCLTs
succession planning is in line with its peers. Source: Bloomberg, Ambit Capital research
What is being done to strengthen the franchise further?
The company is now focused on larger-sized, more complex deals in the IMS
segment. Although HCLT was a laggard in application management services, its
growth is now accelerating due to cross-sell opportunities at IMS clients and
differentiated innovations such as ALT ASM. It is also innovating to improve its
positioning in engineering services outsourcing and digitalisation opportunities.
Key financials (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Net Revenues (US$ mn) 4,687 5,360 5,995 6,877 7,849 Analyst Details
EBIT (` bn) 50.4 79.4 86.3 101.5 115.9 Sagar Rastogi
EBIT margins 19.6% 24.1% 23.5% 24.0% 24.0% +91 22 3043 3291
Diluted EPS (`) 56.4 90.2 105.0 123.6 140.8 sagarrastogi@ambitcapital.com
RoE 31.8% 37.2% 33.5% 31.9% 29.3% Utsav Mehta
P/E 28.6 17.8 15.3 13.0 11.4 +91 22 3043 3209
EV/EBITDA 18.2 12.0 11.4 9.7 8.5 utsavmehta@ambitcapital.com
Source: Company, Ambit Capital research
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.
HCL Technologies
Exhibit 1: The companys margins have grown steadily in Exhibit 2: resulting in a marked improvement in
the last three years profitability
6,000 30% 40%
1,000 5% 15%
- 0% 10%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Exhibit 3: Sources of funds over the last ten years (FY04-13) Exhibit 4: Utilisation of funds over the last ten years (FY04-
13)
Equity Debt raised Interest
Other raised Increase in
3% paid
income 4% cash
3%
5% 6%
Investments Dividend
10% paid
33%
Acquisition
17%
CFO Capex
88% 31%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward EV/EBITDA evolution over the past ten
years
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Income statement
Year to March (` bn) FY13 FY14 FY15E FY16E FY17E
Revenue (US$ mn) 4,687 5,360 5,995 6,877 7,849
Growth 12.9% 14.4% 11.9% 14.7% 14.1%
Revenue 257.3 329.6 367.8 422.9 482.7
Cost of goods sold 172.4 209.7 236.7 268.1 306.3
SG&A expanses 34.5 40.4 44.8 53.3 60.5
EBITDA 57.1 86.8 91.1 107.4 123.0
Depreciation 6.7 7.3 4.7 5.9 7.1
EBIT 50.4 79.4 86.3 101.5 115.9
EBIT Margin 19.6% 24.1% 23.5% 24.0% 24.0%
Other Income 1.6 (0.2) 8.6 10.2 11.5
PBT 52.0 79.3 94.9 111.8 127.4
Tax 12.2 15.5 20.8 24.6 28.0
Rate (%) 23.5% 19.5% 21.9% 22.0% 22.0%
Reported PAT 39.8 63.8 74.1 87.2 99.3
Diluted Adj EPS 56.4 90.2 105.0 123.6 140.8
DPS 12.0 22.0 32.0 32.0 36.0
Source: Company, Ambit Capital research
Balance sheet
Year to March (` bn) FY13 FY14 FY15E FY16E FY17E
Net Worth 142.9 200.0 242.8 304.1 373.8
Other Liabilities 22.1 22.0 20.6 20.7 20.7
Capital Employed 165.1 222.0 263.4 324.8 394.5
Net Block 76.9 82.6 89.7 97.6 106.0
Other Non-current Assets 23.0 23.5 26.7 26.8 26.8
Curr. Assets 130.7 197.5 239.7 307.0 383.3
Debtors 44.6 56.6 64.8 74.5 85.1
Unbilled revenues 17.1 20.2 25.2 29.0 33.1
Cash & Bank Balance 49.8 99.6 124.5 174.6 232.1
Other Current Assets 19.1 21.2 25.2 29.0 33.1
Current Liab. & Prov 65.4 81.6 92.7 106.6 121.7
Net Current Assets 65.2 115.9 147.0 200.4 261.7
Application of Funds 165.1 222.0 263.4 324.8 394.5
Source: Company, Ambit Capital research
Ratio analysis
FY13 FY14 FY15E FY16E FY17E
Growth
Revenue growth (US$) 12.9% 14.4% 11.9% 14.7% 14.1%
EBIT growth (`) 50.3% 57.6% 8.7% 17.6% 14.1%
EPS growth 62.9% 60.1% 16.4% 17.6% 13.9%
Return Ratios (%)
RoE 32% 37% 33% 32% 29%
RoCE 25% 33% 28% 27% 25%
ROIC 34% 54% 52% 55% 58%
Turnover Ratios
Receivable days (Days) 88 85 89 89 89
Fixed Asset Turnover (x) 3.4 4.1 4.3 4.5 4.7
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY13 FY14 FY15E FY16E FY17E
P/E 28.6 17.8 15.3 13.0 11.4
EV/EBITDA 18.2 12.0 11.4 9.7 8.5
EV/Sales 4.0 3.2 2.8 2.5 2.2
Price/Book Value 8.0 5.7 4.7 3.7 3.0
Dividend Yield (%) 0.7% 1.4% 2.0% 2.0% 2.2%
Source: Company, Ambit Capital research
May-14
Jul-14
Nov-13
Sep-14
Jan-14
Mar-14
Nov-14
Professional approach to succession planning
The current MD & CEO, Shikha Sharma, was appointed in 2009. She is 55 years
old and her second three-year term ends in May 2015. Whilst the RBI now allows Sensex Axis Bank
private bank CEOs to work until the age of 70 years, the board of Axis Bank
began looking for a successor when the last chairman turned 60. In any event,
Source: Bloomberg, Ambit Capital research
succession is likely to take place through a professional process that will consider
both internal and expernal candidates.
Well placed to explore a wider range of opportunities
As corporate asset quality began to come under stress in 2011, Axis Bank was
early to de-risk its balance sheet by lowering the share of corporate loans and
wholesale funding and by building a retail franchise. With a diversified balance
sheet mix now and improving outlook for GDP growth over FY16-17, the bank is
well placed to exploit opportunities across a wider spectrum of banking in
corporate, commercial, retail, rural and international banking. Analyst Details
Key financials standalone (` mn) Pankaj Agarwal, CFA
Year to March FY13 FY14 FY15E FY16E FY17E +91 22 3043 3206
Net Revenues (Rs mn) 162,174 193,569 216,578 253,664 299,001 pankajagarwal@ambitcapital.com
Operating Profits (Rs mn) 93,031 114,561 125,507 147,703 176,709 Ravi Singh
Net Profits (Rs mn) 51,794 62,181 70,061 84,016 102,196 +91 22 3043 3181
EPS (Rs) 22.1 26.5 29.8 35.8 43.5 ravisingh@ambitcapital.com
RoA (%) 1.65% 1.72% 1.70% 1.74% 1.77%
Aadesh Mehta, CFA
RoE (%) 18.5% 17.4% 17.1% 17.8% 18.6%
+91 22 3043 3239
P/B (x) 3.37 2.93 2.55 2.21 1.90
aadeshmehta@ambitcapital.com
Source: Company, Ambit Capital research
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.
Axis Bank
Exhibit 1: Loan growth and net interest margins Exhibit 2: RoA and RoE
Loan growth - LHS Net interest margins - RHS RoA - LHS RoE - RHS
70% 4.0% 2.00% 25%
60% 3.5%
20%
50% 3.0% 1.50%
2.5% 15%
40%
2.0% 1.00%
30% 10%
1.5%
20% 1.0% 0.50%
5%
10% 0.5%
0% 0.0% 0.00% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Gross NPA and provision coverage ratio Exhibit 4: Tier-1 capital ratio
Gross NPA - LHS
Provision coverage ratio - RHS Tier-1 capital ratio
2.5% 80% 14%
70% 12%
2.0%
60% 10%
1.5% 50%
8%
12.6%
12.2%
40%
11.2%
10.2%
6%
9.4%
9.5%
1.0%
9.3%
8.9%
30%
7.3%
6.4%
20% 4%
0.5%
10% 2%
0.0% 0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research; Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the long term Exhibit 6: Forward P/B evolution over the long term
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD
Exhibit 8: Axis Bank - Three quarters of the pie on our STAR* framework
Criteria Score (%) Comment
Competitive advantage Solid roots in corporate banking; efficient retail network
Accounting quality Nothing unusual in the accounting
Capital allocation Efficient investment in building an organic retail network
Axis Bank is not part of Ambits Connected Companies Index and does not appear to have any
Centrality of political connect
questionable political connections.
Treatment of minorities No material instance of unfair treatment of minorities.
Succession planning Likely to be a smooth professional process
Total (%)
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Balance sheet
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Networth 331,079 382,205 438,798 507,422 591,202
Deposits 2,526,136 2,809,446 3,230,862 3,812,418 4,613,025
Borrowings 439,511 502,909 593,687 722,352 879,435
Other Liabilities 108,881 137,889 165,467 198,560 238,272
Total Liabilities 3,405,607 3,832,449 4,428,814 5,240,752 6,321,934
Cash & Balances with RBI & Banks 204,350 282,387 333,522 394,108 475,889
Investments 1,137,375 1,135,484 1,267,735 1,495,607 1,803,972
Advances 1,969,660 2,300,668 2,740,395 3,269,846 3,981,787
Other Assets 94,222 113,910 87,162 81,191 60,285
Total Assets 3,405,607 3,832,449 4,428,814 5,240,752 6,321,934
Source: Company, Ambit Capital research
Income statement
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Interest Income 271,826 306,412 349,164 404,112 476,371
Interest Expense 175,163 186,895 213,656 243,994 284,958
Net Interest Income 96,663 119,516 135,509 160,118 191,413
Total Non-Interest Income 65,511 74,052 81,069 93,546 107,589
Total Income 162,174 193,569 216,578 253,664 299,001
Total Operating Expenses 69,142 79,008 91,072 105,962 122,293
Employees expenses 23,770 26,013 29,598 34,038 38,142
Other Operating Expenses 45,373 52,994 61,473 71,924 84,151
Pre Provisioning Profits 93,031 114,561 125,507 147,703 176,709
Provisions 17,501 21,070 21,712 23,235 25,308
PBT 75,531 93,490 103,795 124,468 151,401
Tax 23,736 31,310 33,733 40,452 49,205
PAT 51,794 62,181 70,061 84,016 102,196
Source: Company, Ambit Capital research
Ratio analysis
Year to March FY13 FY14 FY15E FY16E FY17E
Credit-Deposit (%) 78.0% 81.9% 84.8% 85.8% 86.3%
CASA ratio (%) 47.0% 47.4% 46.8% 46.3% 45.7%
Cost/Income ratio (%) 42.6% 40.8% 42.1% 41.8% 40.9%
Gross NPA (` mn) 23,934 31,464 33,061 45,916 49,157
Gross NPA (%) 1.20% 1.36% 1.20% 1.39% 1.23%
Net NPA (` mn) 7,041 10,246 9,918 18,366 22,121
Net NPA (%) 0.36% 0.45% 0.36% 0.56% 0.56%
Provision coverage (%) 70.6% 67.4% 70.0% 60.0% 55.0%
NIMs (%) 3.18% 3.40% 3.36% 3.37% 3.35%
Tier-1 capital ratio (%) 12.2% 12.6% 12.5% 12.1% 11.6%
Source: Company, Ambit Capital research
Du-pont analysis
Year to March FY13 FY14 FY15E FY16E FY17E
NII / Assets (%) 3.1% 3.3% 3.3% 3.3% 3.3%
Other income / Assets (%) 2.1% 2.0% 2.0% 1.9% 1.9%
Total Income / Assets (%) 5.2% 5.3% 5.2% 5.2% 5.2%
Cost to Assets (%) 2.2% 2.2% 2.2% 2.2% 2.1%
PPP / Assets (%) 3.0% 3.2% 3.0% 3.1% 3.1%
Provisions / Assets (%) 0.6% 0.6% 0.5% 0.5% 0.4%
PBT / Assets (%) 2.4% 2.6% 2.5% 2.6% 2.6%
Tax Rate (%) 31.4% 33.5% 32.5% 32.5% 32.5%
ROA (%) 1.7% 1.7% 1.7% 1.7% 1.8%
Leverage 11.2 10.1 10.1 10.2 10.5
ROE (%) 18.5% 17.4% 17.1% 17.8% 18.6%
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 22.1 26.5 29.8 35.8 43.5
EPS growth (%) 8% 20% 13% 20% 22%
BVPS (`) 141.5 162.7 186.8 216.0 251.7
P/E (x) 21.5 18.0 16.0 13.3 11.0
P/BV (x) 3.37 2.93 2.55 2.21 1.90
Source: Company, Ambit Capital research
Jan-14
Apr-14
Jul-14
Oct-14
from executive roles on the board in FY10, leaving the non-promoter
executives - Mr. P.M. Murty and then Mr. K.B.S. Anand - as the CEO & MD.
Since then, several incremental responsibilities have been awarded to the Sensex Asian Paints (RHS)
senior members of the third generation of the promoter family who have a
proven track record in executive roles at Asian Paints. However, there remains Source: Bloomberg, Ambit Capital research
a risk of capital misallocation, as the third generation drives inorganic growth.
Initiatives taken to further strengthen the franchise
Recent initiatives by Asian Paints including installing GPS tracking on vehicles in
the supply chain and bar-coding of all stocks at a depot level should further
improve supply chain efficiency, a key strength which will enable the firm to
sustain its market leadership. Moreover, the firm continues to extend its
consumer connect with upgraded branding initiatives, expansion of experience
stores and expansion of its home solutions network.
Key financials consolidated (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Analyst Details
Net Sales 109,707 127,148 148,609 175,904 208,240
EBITDA 17,319 19,979 25,060 30,405 36,665 Rakshit Ranjan, CFA
EBITDA (%) 15.8% 15.7% 16.9% 17.3% 17.6% +91 22 3043 3201
EPS (`) 11.6 12.8 16.5 20.4 24.5 rakshitranjan@ambitcapital.com
RoE (%) 36.3% 33.1% 36.1% 38.0% 38.9% Aditya Bagul
RoCE (%) 35.3% 30.7% 34.7% 36.7% 37.7% +91 22 3043 3264
P/E (x) 55.9 43.5 39.3 31.9 26.4
adityabagul@ambitcapital.com
Source: Company, Ambit Capital research
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.
Asian Paints
Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years
Revenue (Rs mn) EBITDA Margin (% RHS) 60% RoCE RoE (% RHS) 60%
150,000 22%
20% 50% 50%
120,000
18%
90,000 40% 40%
16%
60,000
14% 30% 30%
30,000 12%
- 10% 20% 20%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Interest Dividend Increase in Debt
received, received, cash and repayment,
Debt 1% 4% cash 3%
raised, 4% equivalents,
9%
Dividend
Purchase of paid, 36%
Investments
, 10%
Net Capex,
38% Interest
paid, 4%
CFO, 92%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
45
40 14
35 12
30 10
25
8
20
15 6
10 4
5
2
-
-
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Godrej Consumer (GCPL) has a strong domestic franchise built around Consumer
its market leadership in household insecticides (HI), hair color and the
second largest soaps business in India. However, the series of overseas Recommendation
acquisitions made since FY05 have faced serious issues resulting in
Mcap (bn): `337/US$5.5
reduction in overall RoCE from ~130% in FY05 to ~15% in FY14. In the
6M ADV (mn): `135/US$2.2
domestic business GCPL faces market share saturation in HI and high
CMP: `944
competitive intensity in soaps and hair color. With its continued focus on
acquisitions, RoCE deterioration remains a risk for the company. TP (12 mths): `722
Downside (%): 24
GCPL has made several international acquisitions over FY08-14
Godrej Consumer (GCPL), the flagship company of the Godrej Group, is a
household and personal care products company. It is a leader in the domestic Flags
insecticides space with key brands such as Good Knight and HIT (Insecticides), Accounting: AMBER
Cinthol and Godrej No.1 (Soaps) and Expert (hair care). Through ten overseas Predictability: AMBER
acquisitions since FY05, the company now has ~50% of its revenues coming Earnings Momentum: AMBER
from Africa, Latin America, Indonesia and the UK.
Expect GCPL to face significant headwinds with regards to growth Catalysts
GCPL has a strong domestic franchise in the HI and soaps category with almost
60% and 10% market share respectively. However, in HI we believe GCPLs Integration issues in its acquisitions in
share is reaching saturation and the firm faces intense competition from global Africa and LatAm
HI majors like SC Johnson and Reckitt Benckiser. In the fully penetrated soaps Increased competitive intensity in the
category where premiumisation is the only growth driver, GCPL is losing share domestic HI and soaps category
as it lacks a strong premium portfolio. In the international portfolio, Indonesia is
the best performer but faces slowing growth due to market share saturation.
Performance (%)
Africa and LatAm have generated sub-optimal return ratios so far for GCPL.
30,000 1180
26% sales CAGR target presents more risks than rewards around M&A 28,000 1080
GCPLs 26% sales CAGR target over FY11-21 is likely to include substantial 26,000 980
capital allocation for M&A. However, with the international portfolios RoCEs 24,000 880
declining from 16% in FY08 to 7% in FY14, we see the risk of a sustained drag 22,000 780
on ROCEs, due to challenges around management bandwidth, integration 20,000 680
Nov 13
Jan 14
May 14
Jul 14
Nov 14
Mar 14
Sep 14
expertise and incentive to consolidate the existing portfolio before further
acquisitions are pursued. Inorganic growth ambitions are expected to keep
dividend payout ratio at the current level of ~25%.
Sensex GCPL (RHS)
Family-owned and professionally managed
GCPL is a professionally managed company with Vivek Gambhir as the MD. The Source: Bloomberg, Ambit Capital Research
promoter, Adi Godrej, serves as the Chairman and oversees longer term
strategy including inorganic plans for the company. Mr. Godrejs younger
daughter, Nisaba, is actively involved in the business and serves as the
Executive Director looking at the innovation function at GCPL. We expect her to
assume greater responsibilities in GCPL after Mr.Godrej retires.
Headwinds for existing business, acquisition ambitions a key risk
Changes in the product portfolio include: (a) recent relaunch of Cinthol
branded soaps; and (b) cross pollination of HI portfolio from Indonesia and hair
color portfolio from LatAm. However, we forecast only 14%/16% sales/EPS
CAGR over FY14-18 due to the headwinds around market share saturation in HI
and macro/integration issues in the international business. Due to overseas
acquisitions, RoCEs should remain at ~18-20% over FY14-18.
Key financials Consolidated (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E Analyst Details
Operating income (` mn) 64,074 76,024 87,994 100,668 114,398 Rakshit Ranjan, CFA
EBITDA (` mn) 9,824 11,503 12,972 14,942 17,208 +91 22 3043 3201
EBITDA Margin (%) 15.3% 15.1% 14.7% 14.8% 15.0% rakshitranjan@ambitcapital.com
Adjusted EPS (`) 19.6 22.2 25.8 30.4 35.3 Ritesh Vaidya
RoCE (%) 15.1% 16.1% 17.5% 20.3% 21.9% +91 22 3043 3246
P/E (x) 48.1 42.6 36.6 31.0 26.8 riteshvaidya@ambitcapital.com
Source: Company, Ambit Capital research
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.
Godrej Consumer
Exhibit 1: Revenue has grown at a CAGR of 34% over FY05- Exhibit 2: Return ratios have deteriorated rapidly due to
14 due to series of acquisitions since FY06 low yielding overseas acquisitions
Revenues (Rs mn) EBITDA margin (%), RHS RoCE RoE (RHS)
84,000 21% 130.0% 200%
74,000 20% 180%
110.0%
64,000 160%
19%
54,000 90.0% 140%
18% 120%
44,000 70.0%
17% 100%
34,000
50.0% 80%
24,000 16%
60%
15% 30.0%
14,000 40%
4,000 14% 10.0% 20%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: CFO over the last ten years.. Exhibit 4: has been utilized to fund inorganic growth
Interest Increase in
received, cash and
Debt 5% cash
raised, equivalents
Dividend
21% 10%
paid Interest
17% paid
5%
Net Capex
CFO, 57% (incl.
acquisition
Proceeds s)
from 68%
shares,
18%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: GCPL P/E band chart for the last 7 years Exhibit 6: GCPL EV/EBITDA band chart for the last 7 years
50 50
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Ratio Analysis
Year to March FY13 FY14 FY15E FY16E FY17E
Gross margin (%) 53.9% 53.2% 53.0% 53.1% 53.2%
EBITDA margin (%) 15.3% 15.1% 14.7% 14.8% 15.0%
EBIT margin (%) 15.2% 14.9% 14.5% 14.7% 15.0%
Net profit margin (%) 11.2% 10.7% 10.8% 11.1% 11.4%
Dividend payout ratio (%) 27.7% 25.6% 33.4% 35.4% 36.5%
Net debt: equity (x) 0.3 0.2 0.1 (0.0) (0.2)
Working capital turnover (x) (301.0) NA (60.8) (60.8) (60.8)
Gross block turnover (x) 3.0 3.4 3.8 4.1 4.5
RoCE (%) 15.1% 16.1% 17.5% 20.3% 21.9%
RoE (%) 23.4% 23.0% 23.4% 24.1% 24.4%
Source: Company, Ambit Capital research
Valuation Parameter
Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 19.6 22.2 25.8 30.4 35.3
Diluted EPS (`) 19.6 22.2 25.8 30.4 35.3
Book value per share (`) 97.4 110.9 127.4 146.2 167.5
Dividend per share (`) 5.0 5.3 8.0 10.0 12.0
P/E (x) 48.1 42.6 36.6 31.0 26.8
P/BV (x) 9.7 8.5 7.4 6.5 5.6
EV/EBITDA (x) 33.8 28.7 25.2 21.4 18.1
Price/Sales (x) 5.0 4.2 3.7 3.2 2.8
Source: Company, Ambit Capital research
Jan 14
Mar 14
May 14
Sep 14
Jul 14
Nov 14
FY13). We expect RoCE to increase to 43% by FY18 from 17% in FY13.
Professional management to lead the company
In March 2014, Harsh Mariwala stepped down as the MD, handing over the Sensex Marico (RHS)
control to a professional management team led by Saugata Gupta. Mr.
Mariwalas focus on operating Marico in a professional manner since its Source: Bloomberg, Ambit Capital research
inception has helped create a senior management team capable of driving the
next phase of growth for Marico even in the promoters absence.
Changes implemented to drive the next leg of growth
Since FY14, changes have been made around: (a) shift in control from a
promoter-led management team to professionals; (b) management incentive
structures, giving greater weightage to long-term growth drivers; and (c)
capital deployment focus on organic growth. This should drive 22% EPS CAGR
over FY14-18E with RoCE expansion from 17% in FY13 to 43% in FY18E.
Key financials
Year to March FY13 FY14 FY15E FY16E FY17E
Analyst Details
Operating income (` mn) 45,962 46,865 53,985 62,760 73,148
Rakshit Ranjan, CFA
EBITDA (` mn) 6,258 7,480 8,809 10,555 12,668 +91 22 3043 3201
EBITDA Margin (%) 13.6% 16.0% 16.3% 16.8% 17.3% rakshitranjan@ambitcapital.com
Adjusted EPS (`) 5.6 7.5 9.2 11.1 13.4 Ritesh Vaidya
RoE (%) 17.1% 21.5% 31.5% 36.6% 41.0% +91 22 3043 3246
P/E (x) 45.0 33.6 27.5 22.8 18.9 riteshvaidya@ambitcapital.com
Source: Company, Ambit Capital research
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.
Marico
Exhibit 1: Revenue has recorded a CAGR of 19% over FY05- Exhibit 2: Return ratios expanded over FY05-08 but
14 with EBITDA margin expansion of 720bps contracted sharply thereafter due to a series of
acquisitions
Revenues (Rs mn) EBITDA margin (%) RHS 65.0%
53,000 17.0%
48,000 16.0% 55.0%
43,000 15.0%
38,000 14.0% 45.0%
33,000 13.0%
28,000 12.0% 35.0%
23,000 11.0%
25.0%
18,000 10.0%
13,000 9.0% 15.0%
8,000 8.0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
RoCE RoE
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Cash generated from operations for Marico Exhibit 4: has gone to fund low-margin international
(FY05-13) expansion
Source: Company, Ambit Capital research. Note: Size of the pie represents Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt, cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY04-13. FY04-13.
Exhibit 5: Marico P/E band chart for the last 7 years Exhibit 6: Marico EV/EBITDA band chart for the last 7 years
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on *STAR: Sustainable and Tenable Advantages Rank.
Jul-14
Oct-13
Jan-14
Apr-14
Oct-14
Professionally-run organisation with limited promoter involvement
The promoter group follows a hands-off approach and is involved in only
Sensex Berger Paints (RHS)
strategic decision-making. Strategy execution at the ground level is completely
managed by professionals and this has helped nurture an entrepreneurial
management team over the past 20 years. Whilst members of the promoter Source: Bloomberg, Ambit Capital research.
family occupy certain junior managerial positions, we believe that operational
control will remain in the hands of professionals.
What is being done to strengthen the franchise further?
The company is implementing the following initiatives to strengthen its
franchise: (a) a better incentivised sales team to help expand the dealer
network; (b) IT-related investments to enable centralised MIS, which will help
improve supply chain efficiencies; and (c) branding investments in premium
products like Berger Silk. These initiatives will help Berger gain market share
from Akzo and Kansai in the future.
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Net Sales 33,464 38,697 44,753 52,672 61,986
Analyst Details
EBITDA 3,712 4,314 5,206 6,180 7,458
Rakshit Ranjan, CFA
EBITDA (%) 11.1% 11.1% 11.6% 11.7% 12.0%
+91 22 3043 3201
EPS (`) 6.3 7.2 8.7 11.0 13.9
rakshitranjan@ambitcapital.com
RoE (%) 22.9% 24.1% 24.7% 26.5% 28.1%
Aditya Bagul
RoCE (%) 18.6% 17.4% 18.3% 21.1% 24.5% +91 22 3043 3264
P/E (x) 57.4 50.3 41.8 33.0 26.0 adityabagul@ambitcapital.com
Source: Company, Ambit Capital research
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.
Berger Paints
Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
- 8%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Dividend Increase in Debt
Interest
received, cash and repayment, Dividend
received,
Debt 0% cash 3% paid, 17%
4%
raised, equivalents
29% , 8%
Purchase Interest
of paid, 10%
Investment
CFO, 60% s , 4%
Proceeds
from
Net Capex,
shares,
58%
7%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
35 8
30 7
25 6
5
20
4
15 3
10 2
5 1
- -
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Over the last 20 years, Page Industries has successfully transformed the
Jockey brand into a market leader in the fast-growing, organised Consumer Discretionary
innerwear segment. Jockeys highly aspirational brand image has been built
by consistent delivery of comfortable, durable and affordable products. Page Recommendation
is likely to outperform its peers over FY14-20 amidst a strong macro tailwind Mcap (bn): `109/US$1.8
for mid-premium innerwear through: (a) backward integrated 3M ADV (mn): `88/US$1.4
manufacturing (delivering high-quality product at affordable prices); and (b) CMP: `9,796
aggressive distribution expansion along with an aspirational brand recall for
TP (12 mths): `9,265
Jockey. We build in 28% revenue CAGR and 29% earnings CAGR over FY14-
20E with RoEs of ~60% over this period. Downside (%): 5
Jan-14
Apr-14
Jul-14
Oct-14
Although Pages promoters are a part of the executive senior management team,
decision-making at a functional level is carried out in an independent and
professional manner. Mr. Sunder Genomal, Managing Director, is 60 years old and
Sensex Page Industries (RHS)
his son, Mr. Shamir Genomal, is the Chief Strategy Officer and he also heads the
R&D and product innovation function.
Initiatives underway to strengthen R&D, distribution and branding Source: Bloomberg, Ambit Capital research.
To strengthen Pages R&D capabilities, the company recently hired two senior
executives, Ms. Shelagh Margaret Commons (experienced in global innerwear
industry) and Mr. Nihal Rajan (ex-Levi Strauss & Co). Two key initiatives are underway
in distribution: (a) rapid expansion of exclusive brand outlets to help push new SKUs
into multi-brand outlets; and (b) IT investments to help track sales of products from
distributors to retailers. The firm is also stepping up its investment behind
advertisements (spends to record 30% CAGR in FY14-18 vs 16% CAGR over FY10-14)
to expand its presence into new categories like leisurewear. The firm is also working
on expanding the e-commerce sales channel.
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E Analyst Details
Net Sales 8,758 11,876 15,567 20,267 26,177 Rakshit Ranjan, CFA
EBITDA 1,766 2,511 3,323 4,358 5,647
+91 22 3043 3201
EBITDA (%) 20.2 21.1 21.3 21.5 21.6
rakshitranjan@ambitcapital.com
EPS (`) 100.9 137.8 182.5 243.5 318.7
RoE (%) 59.3 61.2 60.8 61.5 61.0 Aditya Bagul
RoCE (%) 42.4 41.9 44.8 49.4 51.1 +91 22 3043 3264
P/E (x) 96.8 70.8 53.5 40.1 30.6 adityabagul@ambitcapital.com
Source: Company, Ambit Capital research
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.
Page Industries
Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years
Revenue (Rs mn) EBITDA Margin (% RHS) 60% RoCE RoE (% RHS) 120%
15,000 22%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Dividend Increase in
Interest Debt
received, cash and repayment,
received,
0% cash 1%
2% equivalents,
Debt 1%
raised, Purchase of
23% Investments
, -1%
Dividend
paid, 49%
Proceeds Net Capex,
43%
from
shares, CFO, 67%
9%
Interest
paid, 7%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
40 25
35
20
30
25 15
20
15 10
10
5
5
- -
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
IPCA has built an enviably profitable and growing franchise in the India
Healthcare
and export market by playing to its strengths. The companys sustainable
competitive advantage is around innovation and cost management. It
has innovated around manufacturing processes and formulations such Recommendation
that the product is more cost-efficient and patient-friendly. This has Mcap (bn): `86/US$1.4
aided IPCA in building brand equity in front of Indian doctors. At the 3M ADV (mn): `217/US$3.5
same time, IPCA has managed costs efficiently, as reflected by its CMP: `684
consistent RoCE. Brand IPCA is showcased through various publications in TP (12 mths): `949
medical journals like Lancet and through its dominance in therapy areas Upside (%): 39
like malaria and pain in India.
Market domination in segment like malaria and rheumatology Flags
IPCA currently manufactures 350 formulations and 80 APIs across various Accounting: GREEN
therapeutic segments and sells in India (38% of sales in FY14), regulated markets Predictability: AMBER
(20%) and emerging markets (25%). IPCA is an emerging player in most Treatment of Minorities: GREEN
geographies and it dominates in segments like malaria (34% market share) and
rheumatology (46% market share) in India. Catalysts
Innovation and established brand - the key competitive advantages
Award of tenders in Africa in the
IPCAs excellence in process re-engineering, innovation in formulations, near term
established brand in front of doctors, relationship with regulators and cost Progress on 505(b)(2) projects in
leadership are its key competitive advantages. Its cost competitiveness may FY16
decline over time, but as the company scales up the value chain, the other Progress on resolution of FDA issues
factors are likely to sustain (the key factor being brand). IPCA has been able to by FY16
sustain RoCE and RoE of >15% led by high cash generation and rational capital
allocation owing to tight working capital investment and low capex.
Performance
Prudent capital allocation as evidenced by strong EBITDA margins
29,000 900
Rational capital allocation has been IPCAs forte, as evidenced by its comparable 27,500 850
gross and EBITDA margins vs its peers despite owning plain-vanilla products. The 26,000 800
company has spent 60.3% of its cash on capex aimed at increasing 24,500 750
manufacturing capacity and vertical integration. The gross block turnover has 23,000 700
remained stable at ~1.9x over the last decade, indicating that investments in 21,500 650
capex have yielded sales. IPCA pays ~15% of its profits (at par with peers) as 20,000 600
Nov-13
Dec-13
Jan-14
Mar-14
Apr-14
May-14
Sep-14
Jun-14
Jul-14
Oct-14
dividend, consistently ploughing back most of the profits.
No management transition in sight
Sensex Ipca, RHS
IPCA has not hired any external talent in the top management in the past decade
and continues to be a promoter-run business. The first-generation entrepreneur,
Mr. Premchand Godha, still plays an active role in execution whilst his sons, Mr. Source: Bloomberg, Ambit Capital research
Pranay Godha (Head of exports) and Prashant Godha (Head of domestic
business), are now well entrenched in the company. We believe a management
transition is not in sight.
Higher focus on R&D spend and innovation through 505(b)2 ventures
Whilst it continues to strengthen its regulatory ties and maintains its intense cost
focus, IPCA has become more growth-oriented since the second generation of
the Godha family has taken over. We see higher focus on R&D spend and scaling
up the value chain and an end to the legacy of vertical integration in every
product. The companys 505(b)2 ventures in the US also show that it is looking to
derive more out of its innovation capabilities.
Key financials consolidated (` mn)
Analyst Details
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Aditya Khemka
Net Revenues (` mn) 28,131 32,818 35,387 42,185 50,098
+91 22 3043 3272
Operating Profits 4,876 6,575 7,154 8,931 10,304
adityakhemka@ambitcapital.com
Net Profits 3,686 5,333 5,226 6,573 7,615
Diluted EPS 29.2 42.3 41.4 52.1 60.3 Paresh Dave, CFA
RoE (%) 23.0 27.2 24.1 24.8 23.6 +91 22 3043 3212
P/E (x) 25.0 17.3 17.7 14.0 12.1 pareshdave@ambitcapital.com
Source: Company, Ambit Capital research
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.
IPCA Laboratories
Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years
40% 40%
35.0% 35.0%
35% 35%
30.0% 30.0%
25.0% 25.0% 30% 30%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue growth Operating margins, RHS RoCE RoE, RHS
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Sources of funds over the last ten years (FY03-14) Exhibit 4: Utilisation of funds over the last ten years (FY03-
14)
Proceeds
from Interest Increase in
Interest
shares, paid, 8.2% cash and
Debt received, Dividend
0.0% cash
raised, 1.8% paid, equivalent,
26.1% Dividend 12.0% 2.1%
received, Debt
0.2%
repayment
, 15.9%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
25 6.0
20 5.0
4.0
15
3.0
10
2.0
5 1.0
0 0.0
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Jan-14
Mar-14
May-14
Sep-14
Jul-14
Nov-14
Its RoEs have averaged ~33% in the past four years, implying that it has not
raised capital despite recording 30% CAGR over the same period. It has
Sensex Gruh Finance
sustained a generous dividend payout of ~40% over FY05-14.
Succession planning would be driven by its parent HDFC Source: Bloomberg, Ambit Capital research
The current term of GRUHs Managing Director, Mr. Sudhin Choksey, ends in
FY18. Given that GRUH enjoys strong management support from HDFC (HDFCs
vice chairman and managing director are GRUHs Chairman and non-executive
director respectively), HDFC would ensure a competent successor to Mr. Choksey.
Diversification would drive sustainable growth over the long term
A well-calibrated and judicious diversification would bear fruit in the long term in
terms of a more sustainable growth and lower asset quality geographical risks.
With low penetration and lower capacity utilisation in newer geographies
(penetration at ~10-30% and new branches under-utilised by ~35-60%), its
newer branches offer considerable room for growth and operating leverage.
Key financials (` mn) Analyst Details
Year to March FY10 FY11 FY12 FY13 FY14 Aadesh Mehta, CFA
Total income 1,270 1,570 1,960 2,400 2,980 +91 22 3043 3239
PAT 690 920 1,200 1,460 1,770 aadeshmehta@ambitcapital.com
RoA (%) 2.7% 3.1% 3.2% 3.0% 2.8% Pankaj Agarwal, CFA
RoE (%) 28.4% 31.6% 34.1% 33.3% 32.2% +91 22 3043 3206
EPS (`) 1.9 2.5 3.3 4.0 4.9 pankajagarwal@ambitcapital.com
BVPS (`) 7.3 8.8 10.6 13.5 16.7 Ravi Singh
P/E (x) 122.2 91.6 70.2 57.7 47.6 +91 22 3043 3181
P/B (x) 31.8 26.5 21.8 17.2 13.9 ravisingh@ambitcapital.com
Source: Company, Ambit Capital research
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.
GRUH Finance
Exhibit 1: NIMs and loan growth over the past ten years Exhibit 2: RoA and RoE over the past ten years
45% 5.0% 36% 3.5%
40% 4.7% 34%
3.1%
32%
35% 4.4%
30% 2.7%
30% 4.1%
28% 2.3%
25% 3.8%
26%
20% 3.5% 1.9%
24%
15% 3.2% 22% 1.5%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Loan growth (%) (LHS) NIMs (%) (RHS) RoE (%) (LHS) RoA (%) (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Sources of funds FY14 Exhibit 4: Geographical mix of loan book FY14
2% 2%
9%
5% Maharashtra
7%
16% NHB Gujarat
37%
46% Bank loans Madhya Pradesh
12%
Public deposits Karnataka
Others Rajasthan
30% Chhatisgarh
36% Tamil Nadu
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the past five years Exhibit 6: Forward P/B evolution over the past five years
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Balance sheet
Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Stockholders Equity 2,650 3,180 3,860 4,910 6,070
Borrowed Funds 23,230 29,660 38,330 49,150 64,470
Total liabilities 25,880 32,840 42,190 54,060 70,540
Loan Assets 24,490 31,720 40,670 54,380 70,090
Other assets 1,390 1,120 1,520 (320) 450
Total assets 25,880 32,840 42,190 54,060 70,540
Source: Company, Ambit Capital research
Income statement
Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Net Interest Income 1,150 1,430 1,790 2,180 2,710
Fees & Other Charges 120 140 170 220 270
Total income 1,270 1,570 1,960 2,400 2,980
Operating Cost 250 320 390 460 560
Operating Profit 1,030 1,270 1,590 1,980 2,460
Provisions & Write Offs (net) 80 10 (40) 10 20
Profit Before Tax 940 1,260 1,630 1,970 2,440
Tax 250 340 430 510 670
Profit After Tax 690 920 1,200 1,460 1,770
Source: Company, Ambit Capital research
Ratio analysis
Year to March (%) FY10 FY11 FY12 FY13 FY14
Capital Adequacy Ratio (%) 16.6 13.3 14.0 14.6 16.4
Debt Equity Ratio (times) 9.0 9.0 10.0 10.0 11.0
Gross NPAs (%) 1.1 0.8 0.5 0.3 0.3
Net NPAs (%) - - - 0.1 -
Net Interest Margin (%) 4.6 4.9 4.8 4.5 4.3
Opex to Avg Assets (%) 1.0 1.1 1.0 1.0 0.9
Cost to Income Ratio (%) 20.0 20.0 20.0 19.0 19.0
RoAs (%) 2.7 3.1 3.2 3.0 2.8
RoEs (%) 28.4 31.6 34.1 33.3 32.2
Source: Company, Ambit Capital research
Valuation parameters
Year to March FY10 FY11 FY12 FY13 FY14
Diluted EPS (`) 1.9 2.5 3.3 4.0 4.9
Book value per share (`) 7.3 8.8 10.6 13.5 16.7
P/E (x) 122.2 91.6 70.2 57.7 47.6
P/BV (x) 31.8 26.5 21.8 17.2 13.9
Source: Company, Ambit Capital research
Jul-14
Nov-13
Jan-14
Mar-14
Sep-14
Nov-14
Second generation in charge; third generations role increasing
BKT is a promoter-driven company. Whilst there is no explicitly stated succession
plan, it appears that Rajiv Poddar (Managing Director and Arvind Poddars son), who
Sensex Balkrishna (Rs)
joined the company in January 2009 and recently became a Joint Managing Director,
will take over as the third generation promoter to run the company. Note, however
that Arvind Poddar is just 57 years old. Source: Bloomberg, Ambit Capital research
Exhibit 1: Strong revenue growth and EBITDA margin over Exhibit 2: Improving profitability led to an improvement
the years in return ratios
35,000 26.0%
35%
24.0%
30,000
30%
22.0%
25,000
20.0% 25%
20,000
18.0%
20%
15,000
16.0%
10,000 15%
14.0%
5,000 12.0% 10%
FY09 FY10 FY11 FY12 FY13 FY14 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Geographical spread Exhibit 4: BKT uses funds mainly for capex to fund its
strong underlying growth
Others,
15%
India, 12%
Europe,
54%
America,
19%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY05-14.
Exhibit 5: On P/E, Balkrishna trades at a premium of 73% Exhibit 6: On EV/EBITDA, Balkrishna trades at a premium
to its historical four-year average of 134% to its historical four-year average
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Nov-08
Mar-09
Nov-09
Mar-10
Nov-10
Mar-11
Nov-11
Mar-12
Nov-12
Mar-13
Nov-13
Mar-14
Oct-14
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Oct-14
BKT P/E 6 year average 4 year average EV/EBITDA 6 year average 4 year average
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
May-14
Jul-14
Nov-13
Sep-14
Jan-14
Mar-14
Nov-14
Dr. N. Kamakodi was appointed as the MD & CEO of the bank in 2011. He is
40 years old and runs the bank with the support of many families that have a
stake in the bank. Earlier, his father, Mr. V. Narayanan, was the MD & CEO of Sensex City Union Bank
the bank over 1980-2004. The bank has a highly diffused ownership held
across a large number of families.
Source: Bloomberg, Ambit Capital research
Well primed for a macro-economic recovery
CUBK is likely to continue focusing on its home market in Tamil Nadu due to
the banks small size and better opportunities within the state itself. The bank
has historically been proactive in upgrading its technology and has invested in
expanding its branch network to strengthen its liability base. A strong capital
base, steady profitability and expanded branch network (number of branches
up 73% in the last three years) place the bank well to benefit from any recovery
in the macro-economic climate.
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.
City Union Bank
Exhibit 1: Loan growth and net interest margins Exhibit 2: RoA and RoE
Loan growth - LHS Net interest margins - RHS RoA - LHS RoE - RHS
40% 5.0% 1.75% 30%
35% 1.70%
4.0% 25%
30% 1.65%
25% 1.60% 20%
3.0%
1.55%
20% 15%
1.50%
15% 2.0%
1.45% 10%
10% 1.40%
1.0% 5%
5% 1.35%
0% 0.0% 1.30% 0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Gross NPA and provision coverage ratio Exhibit 4: Tier-1 capital ratio
Gross NPA - LHS
Provision coverage ratio - RHS Tier-1 capital ratio
5.0% 70% 16%
60% 14%
4.0%
50% 12%
3.0% 10%
40%
14.4%
13.3%
8%
12.4%
11.8%
11.7%
11.5%
11.2%
10.9%
10.8%
2.0% 30%
6%
20% 4%
1.0%
10% 2%
0.0% 0% 0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the long term Exhibit 6: Forward P/B evolution over the long term
100 90
90 80 1.59x
80 70
70 8.5x 1.26x
60
60 6.7x 50 0.93x
50
4.9x 40
40
30 30
20 20
10 10
0 0
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Source: Company, Ambit Capital research. Note: Trading band=Mean+1SD Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD
Exhibit 8: City Union Bank - Three quarters of the pie on our STAR* framework
Criteria Score (%) Comment
Competitive advantage A business model with pricing power yet conservative lending
Accounting quality Nothing unusual in the accounting
Capital allocation Strong capital position; made investments in network expansion
City Union Bank is not part of Ambits Connected Companies Index and does not appear to
Centrality of political connect
have any questionable political connections.
Treatment of minorities Except for last QIP, the bank has raised capital through rights
Succession planning CEO has support of promoter families and has a long tenure ahead
Total (%)
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Aug-14
eClerxs promoters, Anjan Malik and PD Mundhra, are young (in their 40s) and
hence, the company has no stated succession policy. Senior management like
Mr. Mistry (Principal, Digital) and Mr. Gupta (CFO) have been with the
organisation for more than 10 years. Our discussions with the management Sensex (LHS) eClerx (Rs) (RHS)
suggest that the company is making an effort to promote talent internally.
Further improving the franchise Source: Bloomberg, Ambit Capital research.
Exhibit 1: eClerxs margins have been steady in the last Exhibit 2: Its return ratios have not dipped below 40%
five years since listing
160 60% 210%
140 50%
120 160%
40%
100
80 30% 110%
60
20%
40 60%
10%
20
- 0% 10%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue(US$mn) (LHS) EBIT margins (RHS) RoE RoCE
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Cumulative funds raised (FY05-14) Cumulative funds spent (FY05-14)
Non op-
Proceeds income
from IPO in 6% Capex
2008 14%
10%
Dividend
paid
38%
Increase in
cash
24%
Acquisitions
CFO 24%
84%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: Forward P/E evolution over the past five years Exhibit 6: Forward EV/EBITDA evolution over the past five
years
18 P/E 16 EV/ EBITDA
16 14
14
12
12
10
10
8
8
6 6
4 4
May-10
Sep-10
May-11
Sep-11
May-12
Sep-12
May-13
Sep-13
May-14
Sep-14
May-10
Sep-10
May-11
Sep-11
May-12
Sep-12
May-13
Sep-13
May-14
Sep-14
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Balance sheet
Balance sheet (` mn) FY11 FY12 FY13 FY14
Net Worth 2,384 3,432.0 4,383.3 5,890
Other Liabilities - 1.7 9.9 19
Capital Employed 2,384 3,433.7 4,393.2 5,908
Net Block 370 488.7 1,355.2 1,559
Other Non current Assets 70 88.4 144.8 216
Curr. Assets 3,088 4,038.8 4,521.3 6,138
Debtors 659 421.8 654.8 996
Cash & Bank Balance 1,794 2,685.4 2,700.1 3,560
Other Current Assets 635 931.5 1,166.5 1,581
Current Liab. & Prov 1,144 1,182.2 1,628.2 2,005
Net Current Assets 1,943 2,856.6 2,893.2 4,133
Application of Funds 2,384 3,433.7 4,393.2 5,908
Source: Company, Ambit Capital research
Income statement
Income statement (` mn) FY11 FY12 FY13 FY14
Revenue (US$ mn) 76 98 122 138
Revenue 3,420 4,729 6,605 8,410
EBITDA 1,345 1,899 2,546 3,535
Depreciation 91 129 256 331
EBIT 1,254 1,770 2,291 3,204
EBIT Margin 36.7% 37.4% 34.7% 38.1%
Other Income 240 223 (181) 110
PBT 1,494 1,993 2,109 3,314
Tax 166 394 393 759
Reported PAT 1,328 1,599 1,716 2,555
PAT Margin 38.8% 33.8% 26.0% 30.4%
Diluted EPS 41.1 53.0 56.9 83.7
DPS 29.0 23.0 25.0 35.0
Source: Company, Ambit Capital research
Financial ratios
FY11 FY12 FY13 FY14
Growth
Revenue (US$) 37% 29% 25% 14%
EPS 64% 29% 7% 47%
Return Ratios (%)
RoE 61% 55% 44% 50%
RoCE 51% 49% 48% 48%
Turnover Ratios
Receivable days (Days) 71 31 36 44
Fixed Asset Turnover (x) 9.9 11.0 7.2 5.8
Source: Company, Ambit Capital research
Valuations
FY11 FY12 FY13 FY14
P/E 31.4 24.3 22.7 15.4
EV/EBITDA 26.9 19.1 14.2 10.2
EV/Sales 10.6 7.7 5.5 4.3
Price/Book Value 16.7 11.6 9.1 6.7
Dividend Yield (%) 2.2% 1.8% 1.9% 2.7%
Source: Company, Ambit Capital research
Aug-14
Jun-14
Oct-14
Chittilappilly (son of Kochouseph Chittilappilly, V-Guards founder) who joined in
FY06 is only 33 years old. In FY12, Mithun took over from his father as the
Managing Director. Since he joined in FY06, V-Guard's revenues have grown at V-Guard Sensex on RHS
a robust 37% CAGR. V-Guard has also attracted talent from leading companies
in the consumer durables and light electrical space.
Source: Bloomberg, Ambit Capital research
What is being done to strengthen the franchise further?
To strengthen the franchise further the company has done the following: (a) It
has consistently added new products to its portfolio and grown them successfully.
The latest successful addition is fans, which has reached a turnover of `1bn in
FY14 (launched in FY10). (b) It has a consistently high spend on advertisement.
V-Guards FY14 advertisement spends to sales at 3.9% in FY14 was higher than
Havells 2.4% and Bajajs 2.2%. Consequent to an ad spend CAGR of 29% over
FY11-14, V-Guard has gained market share in all the products under its portfolio
over FY12-14. (c) It recruited senior marketing employees from leading
competitors to attain a smooth expansion of the franchise into non-South market.
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Net Sales 13,602 15,176 18,342 22,194 25,967
EBITDA 1,099 1,226 1,651 2,108 2,532
Analyst Details
EBITDA (%) 8.1 8.1 9.0 9.5 9.8 Bhargav Buddhadev
+91 3043 3252
EPS (`) 21.1 23.6 33.0 42.5 53.8
bhargavbuddhadev@ambitcapital.com
RoE (%) 26.7 24.3 27.8 29.6 30.1
Deepesh Agarwal
RoCE (%) 20.6 19.9 24.4 27.0 28.4
+91 3043 3275
P/E (x) 42.7 38.3 27.3 21.2 16.7 deepeshagarwal@ambitcapital.com
Source: Company, Ambit Capital research
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.
V-Guard Industries
Exhibit 1: Strong revenue CAGR of 31% over FY05-14 Exhibit 2: led to V-Guard achieving pre-tax RoCE and RoE
alongside robust average EBITDA margin of 10.3% over of 27.1% and 31.3% respectively over FY05-14
FY05-14
16,000 13.0 60
14,000 12.0
50
12,000 11.0
10,000 40
10.0
8,000
9.0 30
6,000
4,000 8.0 20
2,000 7.0
10
- 6.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
-
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Sales (Rsmn) EBITDA margin (%) on RHS
Pre-tax ROCE (%) ROE (%)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: CFO forms the largest component of funds raised Exhibit 4: High spend on capex to fund rising growth
over the past decade (FY05-14) momentum (FY05-14)
Investmen
ts (net),
3% Others, 5%
Dividend,
Debt, 25% CFO, 56%
25%
Interest,
dividend
capex,
recd, 2%
45%
Capital Interest,
raised, 25%
17%
Source: Company, Ambit Capital research. Note: Size of the pie represents Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt, cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in
the past 10 years the past 10 years
Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
1,200 1,200
29x 7.0x
1,000 1,000
24x 5.5x
800 800
19x
4.0x
600 600
14x
400 9x 400 2.5x
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 8: V-Guard Industries gets three-quarters of the pie on our STAR (Sustainable and Tenable Advantages Rank)
framework
Criteria Score (%) Comment
Whilst V-Guard is ranked 1 in light electricals in Kerala, it is still not ranked among the top-five players
Competitive advantage
in the non-south market. Competition in the sector remains tough.
Accounting quality V-Guard is in the second quartile; expansion beyond south India has kept its CFO/EBITDA low.
V-Guard is a cash-generative company with low capex and high RoCEs; the management has
Capital allocation
maintained healthy payout ratios (average ~33% since listing in 2008).
V-Guard is not part of Ambits Connected Companies Index and does not appear to have any
Centrality of political connect
questionable political connections.
Treatment of minorities The promoter family has other unrelated businesses; no major anti-minority transactions so far.
Succession planning Business remains promoter driven, with the second generation currently in charge.
Total (%)
Use of stabilisers could become redundant in the future, and beyond stabilisers, V-Guards newer
Weaknesses
products are more competitive. V-Guard remains a regional player.
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on
Jan-14
May-14
Jul-14
Nov-14
Mar-14
Exhibit 1: Sharp revenue growth and margin expansion Exhibit 2: translated into sharp RoCE and RoE expansion
over the last ten years
(` mn) 80% 60%
5,000 25%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Revenue (LHS) EBITDA margin (RHS) FY14 RoCE (LHS) RoE (RHS)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 3: CFO accounted for 79% of the cash source over Exhibit 4: Almost two-thirds of cash generated/raised was
the last ten years deployed for capacity expansions
Purchase Increase in
of cash/ cash
Interest, Debt Investment equivalents
dividend Proceeds, s 5% , 4% Dividend
recd, 4% 16% paid, 19%
Proceeds Interest
from paid, 4%
shares, 1%
Net Capex
CFO, 79% , 68%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: P/E multiples have re-rated several times over Exhibit 6: Mayur is trading at peak P/
the last three years
(X)
(X)
5
30
25 4
20 3
15 2
10 1
5
0
0
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.
Sell <5%
Disclaimer
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in some cases, in printed form.
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