CRISIL IER Independent Equity Research

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1 CRISIL IER Independent Equity Research Bhartiya International Ltd Q3FY14 Results Update Enhancing investment decisions

2 CRISIL IER Independent Equity Research Explanation of CRISIL Fundamental and Valuation (CFV) matrix The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP). CRISIL Fundamental Grade Assessment CRISIL Valuation Grade Assessment 5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP) 4/5 Superior fundamentals 4/5 Upside (1-25% from CMP) 3/5 Good fundamentals 3/5 Align (+-1% from CMP) 2/5 Moderate fundamentals 2/5 Downside (negative 1-25% from CMP) 1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP) About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India s leading ratings agency. We are also the foremost provider of high-end research to the world s largest banks and leading corporations. About CRISIL Research CRISIL Research is India's largest independent and integrated research house. We provide insights, opinions, and analysis on the Indian economy, industries, capital markets and companies. We are India's most credible provider of economy and industry research. Our industry research covers 7 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 4,5 primary sources, including industry experts, industry associations, and trade channels. We play a key role in India's fixed income markets. We are India's largest provider of valuations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today India's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of the macroeconomy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages. We deliver our research through an innovative web-based research platform. Our talent pool comprises economists, sector experts, company analysts, and information management specialists. CRISIL Privacy CRISIL respects your privacy. We use your contact information, such as your name, address, and id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of McGraw Hill Financial you may find of interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit You can view McGraw Hill Financial s Customer Privacy Policy at Last updated: May, 213 Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. Disclaimer: This Company commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assume the entire risk of any use made of this data / report. CRISIL especially states that, it has no financial liability whatsoever, to the subscribers / users of this report. This report is for the personal information only of the authorised recipient in India only. This report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

3 Strong Downside Strong Upside Fundamental Grade Bhartiya International Ltd Real estate: healthy bookings; fashion business: muted performance Fundamental Grade Valuation Grade Industry 3/5 (Good fundamentals) 5/5 (CMP has strong upside) Textiles, Apparels and Luxury Goods February 18, 214 Fair Value 285 CMP 161 Bhartiya International Ltd s (Bhartiya s) Q3FY14 standalone (fashion business) results were below CRISIL Research s expectations due to lower-than-expected revenues and margins. Its 3% associate company - Bhartiya Urban Infrastructure & Land Development Company Pvt. Ltd (BUILDCO) reported bookings of 2.6 mn sq ft as of Q3FY14 (9% of the launched area). Construction of the residential project is also progressing well. The management is still evaluating different options and is yet to finalise on the PE investor s exit; this is a key monitorable. We retain the fundamental grade of 3/5. Fashion business earnings below expectations due to lower-than-expected margin Revenues grew by 16.8% y-o-y (down 18.9% q-o-q) to 856 mn driven by growth in the leather products business. Revenues from the textile apparels business declined 8% y- o-y to 19.9 mn. While gross margin improved 33 bps y-o-y and 41 bps q-o-q to 33.7%, EBITDA margin declined 78 bps y-o-y and 119 bps q-o-q to 6.9% due to increase in other expense as the new plant at Tada, Andhra Pradesh commenced operations. As the new plant scales up production, we expect Bhartiya to get operating leverage benefits. Owing to decline in margins, PAT recorded a lower growth of 11.9% y-o-y to 24 mn..2 mn sq ft of residential space booked, expect launch of another 1 mn sq ft During Q3FY14,.2 mn sq ft of residential space was booked; cumulative booking for the project is 2.55 mn sq ft (9% of the launched area). Construction of the project is on track; as of Q3FY14, it spent 4,9 mn (excluding land cost), funded through debt and customer advances of 3,14 mn. Since 9% of the project is booked, the company intends to launch 1 mn sq ft of residential project in the next five-six months. Phase I of IT SEZ to be completed by Q2FY15, discussion for lease on Apart from residential project, work is on for construction of phase I of IT SEZ (.6 mn sq ft). We expect construction to be completed by Q2FY15. The company is in talks with various companies for the space to be leased; we expect lease rentals of 45-5 per sq ft for IT SEZ. Evaluating options for exit of the PE investor - a monitorable In FY8, a PE investor had invested 1,5 mn in BUILDCO for a 26% stake. In Q1FY14, BUILDCO bought back 3.4% equity for 5 mn; the next significant tranche to the PE investor is due in March 214. As highlighted in earlier result updates, the management is still evaluating options they might bring in a new investor or promoter entities may provide an exit. In the eventuality of buyback of shares, BUILDCO (unlisted) will be subject to distribution tax of 22.7%. We will revisit our fair value once the exit plan of the PE investor is finalised. Earnings estimates revised downwards; fair value retained at 285 per share Factoring in lower-than-expected volumes and margins in both the businesses, leather products and textile, we have lowered our earnings estimates by 8% for FY14 and 5% for FY15. We continue to use the sum-of-the-parts (SOTP) method to value Bhartiya but have retained the fair value of 285 per share as more than 7% of the valuation is derived from the real estate business, whose value is unchanged. KEY FORECAST (CONSOLIDATED) ( mn) FY11 FY12 FY13 FY14E FY15E Operating income 1,952 2,57 3,39 3,728 4,474 EBITDA Adj net income Adj EPS ( ) EPS growth (%) (16.6) Dividend yield (%) RoCE (%) RoE (%) PE (x) P/BV (x) EV/EBITDA (x) NM: Not meaningful; CMP: Current market price Source: Company, CRISIL Research estimates CFV MATRIX KEY STOCK STATISTICS NIFTY/SENSEX 6127/2634 NSE/BSE ticker BIL Face value ( per share) 1 Shares outstanding (mn) 11.1 Market cap ( mn)/(us$ mn) 1,778/29 Enterprise value ( mn)/(us$ mn) 2,695/43 52-week range ( )/(H/L) 245/19 Beta 1.3 Free float (%) 54.% Avg daily volumes (3-days) 7,989 Avg daily value (3-days) ( mn) 1.3 SHAREHOLDING PATTERN 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Excellent Fundamentals PERFORMANCE VIS-À-VIS MARKET Returns 1-m 3-m 6-m 12-m Bhartiya -9% -11% 15% -6% CNX 5-2% -1% 12% 2% ANALYTICAL CONTACT Mohit Modi (Director) Ravi Dodhia [email protected] [email protected] Bhaskar Bukrediwala [email protected] Client servicing desk Poor Fundamentals Valuation Grade 54.5% 54.5% 54.% 53.7%.2%.3%.4%.4%.4% 45.5% 45.5% 46.% 46.% Mar-13 Jun-13 Sep-13 Dec-13 Promoter FII DII Others [email protected] For detailed initiating coverage report please visit: CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters. 1

4 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 CRISIL IER Independent Equity Research Q3FY14 Results Summary (Standalone) ( mn) Q3FY14 Q2FY14 Q3FY13 q-o-q (%) y-o-y (%) 9MFY14 9MFY13 y-o-y (%) Net sales 856 1, (18.9) ,59 1, Raw materials cost (26.2) 8.7 1,588 1, Raw materials cost (% of net sales) 6.7% 66.7% 65.2% -6bps -456bps 61.3% 62.2% -92bps Employees cost Other expenses EBITDA (3.7) EBITDA margin 6.9% 8.1% 7.7% -119bps -78bps 7.6% 9.% -149bps Depreciation (2.3) (12.5) EBIT (31.6) Interest and finance charges (.3) Operating PBT (47.1) Other Income (22.) PBT (44.1) Tax (28.6) PAT (48.7) Adj PAT (48.7) Adj PAT margin 2.8% 4.4% 2.9% -161bps -12bps 3.5% 4.1% -55bps No of equity shares (mn) Adj EPS ( ) (48.7) Source: Company, CRISIL Research Revenue increased y-o-y but margin was under pressure which led to moderate growth in PAT ( mn) 1,2 1, % 9.5% 1.1% 7.7% 6.7% 7.5% 6.9% 5.6% , % 1% 8% 6% 4% 2% % ( mn) % % % 4.4% 2.9% 3.1% 2.8% 1.% % 5% 4% 3% 2% 1% % -1% -2% Net Sales EBITDA Margin (RHS) PAT PAT Margin (RHS) Source: Company, CRISIL Research Source: Company, CRISIL Research 2

5 Sep-9 Jan-1 May-1 Sep-1 Jan-11 Jun-11 Oct-11 Jan-12 Jun-12 Oct-12 Jan-13 Jun-13 Oct-13 Feb-14 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Nov-13 Dec-13 Jan-14 Feb-14 Bhartiya International Ltd Share price movement Fair value movement since initiation ( ) (') Indexed to 1 Source: NSE, CRISIL Research Bhartiya CNX 5 Total Traded Quantity (RHS) CRISIL Fair Value Bhartiya Source: NSE, BSE, CRISIL Research Earnings Estimates Revised Downwards FY14E FY15E Particulars Unit Old New % change Old New % change Revenues ( mn) 3,918 3, % 4,616 4, % EBITDA ( mn) % % EBITDA margin % 9.% 8.3% -68bps 9.2% 8.7% -5bps PAT ( mn) % % PAT margin % 3.5% 3.4% -13bps 3.7% 3.7% -7bps EPS % % Source: CRISIL Research estimates Reasons for changes in estimates Line item FY14E FY15E Revenues Revised downwards factoring in lower-than-expected volumes and realisations in both the leather products and textile business EBITDA margins Lowered factoring in lower-than-expected realisations PAT margins Lowered in line with revision in revenue and margin estimates 3

6 Apr-9 Sep-9 Mar-1 Aug-1 Jan-11 Jun-11 Nov-11 May-12 Oct-12 Mar-13 Aug-13 Feb-14 Apr-9 Sep-9 Mar-1 Aug-1 Jan-11 Jun-11 Dec-11 May-12 Oct-12 Mar-13 Sep-13 Feb-14 Apr-9 Sep-9 Mar-1 Aug-1 Jan-11 Jun-11 Dec-11 May-12 Oct-12 Mar-13 Sep-13 Feb-14 Apr-9 Sep-9 Mar-1 Aug-1 Jan-11 Jun-11 Dec-11 May-12 Oct-12 Mar-13 Sep-13 Feb-14 CRISIL IER Independent Equity Research Valuation Grade: 5/5 We have lowered our earnings estimates by 8.4% for FY14 and 5% for FY15 factoring in lower-than-expected volumes and realisations in the leather accessories and textiles Retained fair value of 285 per share businesses. We continue to use the SOTP method to value Bhartiya but have retained our fair value of 285 per share as more than 7% of the valuation is derived from the real estate business, whose value is unchanged. At the current market price of 16, the valuation grade is 5/5. The fashion business value is retained at 79 per share based on the DCF method. We continue to value the SEZ business at 1 per share at investment value. The real estate business value is retained at 196 per share based on the net asset value (NAV) approach. Businesses Fair value ( per share) Valuation method Fashion 79 DCF SEZ 1 Investment value Real estate 196 NAV Total fair value 285 One-year forward P/E band ( ) One-year forward EV/EBITDA band ( mn) 4, 3,5 3, 2,5 2, 1,5 1, 5 Source: NSE, CRISIL Research Bhartiya 3x 6x P/E premium / discount to CNX 5 Source: NSE, CRISIL Research P/E movement EV 2x 4x 6x 8x 1% 8% 6% 4% 2% % -2% -4% -6% -8% (Times) std dev -1 std dev Source: NSE, CRISIL Research Premium/Discount to CNX 5 Median premium/discount to CNX 5 1yr Fwd PE (x) Source: NSE, CRISIL Research Median PE 4

7 Bhartiya International Ltd CRISIL IER reports released on Bhartiya International Ltd Fundamental Valuation CMP Date Nature of report grade Fair value grade (on the date of report) 11-Oct-212 Initiating Coverage 3/ / Nov-212 Q2FY13 Result update 3/5 18 5/ Feb-213 Q3FY13 Result update 3/ / May-213 Event Update 3/ / Jun-213 Q4FY13 Result Update 3/ / Sep-213 Q1FY14 Result Update 3/ / Dec-213 Q2FY14 Result Update 3/ / Feb-214 Q3FY14 Result Update 3/ /

8 CRISIL IER Independent Equity Research Annexure: Financials (Consolidated) Income statement Balance Sheet ( mn) FY11 FY12 FY13 FY14E FY15E ( mn) FY11 FY12 FY13 FY14E FY15E Operating income 1,952 2,57 3,39 3,728 4,474 Liabilities EBITDA Equity share capital EBITDA margin 9.5% 1.8% 9.% 8.3% 8.7% Reserves 1,99 1,224 1,328 1,466 1,614 Depreciation Minorities EBIT Net worth 1,194 1,329 1,438 1,581 1,729 Interest Convertible debt Operating PBT Other debt ,38 1,88 1,213 Other income Total debt ,38 1,88 1,213 Exceptional inc/(exp) (4) (3) (3) - - Deferred tax liability (net) PBT Total liabilities 1,835 2,113 2,499 2,697 2,974 Tax provision Assets Minority interest Net fixed assets PAT (Reported) Capital WIP Less: Exceptionals (4) (3) (3) - - Total fixed assets Adjusted PAT Investments Current assets Ratios Inventory ,81 1,277 1,532 FY11 FY12 FY13 FY14E FY15E Sundry debtors Grow th Loans and advances Operating income (%) (5.7) Cash & bank balance EBITDA (%) Marketable securities Adj PAT (%) (11.8) Total current assets 1,267 1,515 1,831 2,13 2,52 Adj EPS (%) (16.6) Total current liabilities Net current assets 956 1,126 1,428 1,543 1,81 Profitability Intangibles/Misc. expenditure EBITDA margin (%) Total assets 1,835 2,113 2,499 2,697 2,974 Adj PAT Margin (%) RoE (%) Cash flow RoCE (%) ( mn) FY11 FY12 FY13 FY14E FY15E RoIC (%) Pre-tax profit Total tax paid (25) (38) (34) (55) (74) Valuations Depreciation Price-earnings (x) Working capital changes (275) (188) (27) (151) (281) Price-book (x) Net cash from operations (175) (37) (128) 17 (72) EV/EBITDA (x) Cash from investments EV/Sales (x) Capital expenditure (87) (116) (115) (12) (5) Dividend payout ratio (%) Investments and others 22 (17) Dividend yield (%) Net cash from investments (65) (133) (11) (12) (5) Cash from financing B/S ratios Equity raised/(repaid) Inventory days Debt raised/(repaid) Creditors days Dividend (incl. tax) (11) (13) (14) (13) (16) Debtor days Others (incl extraordinaries) 29 (2) (17) - - Working capital days Net cash from financing Gross asset turnover (x) Change in cash position (25) (13) 38 (36) (14) Net asset turnover (x) Closing cash Sales/operating assets (x) Current ratio (x) Quarterly financials (standalone) Debt-equity (x) ( mn) Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Net debt/equity (x) Net Sales , Interest coverage Change (q-o-q) 2% -19% 15% 56% -19% EBITDA Per share Change (q-o-q) -23% -42% 54% 69% -31% FY11 FY12 FY13 FY14E FY15E EBITDA margin 8% 6% 7% 8% 7% Adj EPS ( ) PAT CEPS Adj PAT Book value Change (q-o-q) -45% -71% 247% 118% -49% Dividend ( ) Adj PAT margin 3% 1% 3% 4% 3% Actual o/s shares (mn) Adj EPS Note: BUILDCO is not consolidated as it is an associate company Source: CRISIL Research 6

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10 CRISIL IER Independent Equity Research CRISIL Research Team President Mukesh Agarwal CRISIL Research Analytical Contacts Sandeep Sabharwal Senior Director, Capital Markets Prasad Koparkar Senior Director, Industry & Customised Research Binaifer Jehani Director, Customised Research Manoj Mohta Director, Customised Research Sudhir Nair Director, Customised Research Mohit Modi Director, Equity Research Jiju Vidyadharan Director, Funds & Fixed Income Research Ajay D'Souza Director, Industry Research Ajay Srinivasan Director, Industry Research Rahul Prithiani Director, Industry Research Business Development Hani Jalan Director, Capital Markets Prosenjit Ghosh Director, Industry & Customised Research Business Development Equity Research Vishal Shah Regional Manager [email protected] Phone : Priyanka Murarka Regional Manager [email protected] Phone : Shweta Adukia Regional Manager [email protected] Phone : Ankur Nehra Regional Manager [email protected] Phone :

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