05 FEB 2016 Quarterly Update HOLD Target Price: Rs 1,213 Q4 earnings beat but order backlog flat s Q4CY15revenue at Rs24bnwasin line withour expectation of Rs24bn. EBITDA margin improved 290 bps YoYand beat our estimate by 180 bps. PAT at Rs1.3bn was 17% above our estimate on higher EBITDA (20% beat)offset somewhat by higher tax rate (38%) during the quarter. Order inflow at Rs20.6bndeclined by17% YoYdue to lack of large orders from conventional sectors, however base orders grew by ~10% YoY. Management indicated that demandfrom conventional sectors (steel, cement, etc.) and exports remainedweak (declined to ~12% of sales from ~17% in CY14), however impact was offset by growth from new sectors such as renewables, railways, etc. as well as growth in opexdriven services business (~Rs 10 bn in CY15). CMP : Rs 1,148 Potential Upside : 6% MARKET DATA. of Shares : 212mn Free Float : 25% Market Cap : Rs243bn 52-week High / Low : Rs1,525 / Rs963 Avg. Daily vol. (6mth) : 59,040 shares Bloomberg Code : IB Equity Promoters Holding : 75% FII / DII : 5% / 12% Renewable and railways to drive growth in CY16: is focusing on renewable energy (~14% of sales), especially Solar to offset the weakness in conventional sectors. s offerings in Solar are invertors (~50% market share), power electronics and T&D, which have highest margin in the entire value chain. Further, is one of the key beneficiaries of increase in railway capex (refer our detailed report on Railway 360 0 : ACTUALLY what will happen) and it should benefit the company with increased sales of turbochargers, traction motors and convertors. is present in both diesel as well as electric locos. CutCY16E EPS; downgrade toholdas positives priced in:we cut our CY16 revenue growth to 10% (vs14% earlier) due to lower than expected order inflow in Q4 and flat order backlog YoY. Accordingly, we cutour CY16 EPS to Rs24 (Rs27 earlier).we introduce our CY17E EPS at Rs 30. Our TP stands atrs 1,213 (40x CY17E). Financial summary (Standalone) Sales (Rs mn) 76,307 80,152 88,365 100,661 EBITDA (Rs mn) 5,592 7,125 8,504 10,225 Adj PAT (Rs mn) 2,280 2,999 4,999 6,427 Consensus EPS* (Rs) - - 19.6 25.4 EPS (Rs) 10.8 14.2 23.6 30.3 Change YoY (%) 15.5 31.5 66.7 28.6 P/E (x) 94.3 71.7 43.0 33.5 RoE (%) 8.3 10.3 15.8 18.6 EV/E (x) 38.7 30.2 25.0 20.7 DPS (Rs) 4.4 4.3 9.7 16.0 Source: *Consensus broker estimates, Company, Axis Capital Key drivers (Rsbn) CY15 CY16E CY17E Order Inflow 81 96 110 Order Backlog 79 85 93 Margin (%) 8.8 9.5 10.0 Price performance 140 120 Sensex 100 80 60 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 01
Exhibit 1: Results update(rsmn) 05 FEB 2016 Quarterly Update Quarter ended 12 months ended Dec-15 Dec-14 % Chg Sep-15 % Chg CY16E CY15 % Chg Total Income 24,251 22,384 8.3 19,690 23.2 89,766 81,403 10.3 EBITDA 2,632 1,800 46.2 1,557 69.0 8,504 7,125 19.4 Other income 108 37 192.1 5 1,973.1 650 130 398.5 PBIDT 2,739 1,837 49.1 1,563 75.3 9,154 7,255 26.2 Depreciation 442 292 51.3 359 23.1 1,612 1,598 0.9 Interest 207 300 (30.8) 250 (17.0) 400 912 (56.1) PBT 2,090 1,245 67.8 954 119.1 7,142 4,746 50.5 Tax 796 481 65.6 366 117.3 2,142 1,747 22.6 Adjusted PAT 1,294 765 69.2 587 120.3 4,999 2,999 66.7 Extra ordinary income/ (exp.) 0 77-0 - (296) (206) - Reported PAT 1,294 842 53.8 587 120.3 4,999 2,999 66.7. of shares (mn) 212 212-212 - 212 212 - EBITDA margins (%) 10.9 8.0-7.9-9.5 8.8 - PBIDT margins (%) 11.3 8.2-7.9-10.2 8.9 - EPS - annualized (Rs.) 24.4 14.4 69.2 11.1 120.3 23.6 14.2 66.7 Source: Company, Axis Capital 02
Financial summary (Standalone) Profit &loss (Rsmn) Net sales 76,307 80,152 88,365 100,661 Other operating income 1,026 1,251 1,401 1,570 Total operating income 77,333 81,403 89,766 102,230 Cost of goods sold (53,053) (53,422) (57,653) (65,222) Gross profit 24,280 27,981 32,114 37,008 Gross margin (%) 31.8 34.9 36.3 36.8 Total operating expenses (18,688) (20,856) (23,610) (26,784) EBITDA 5,592 7,125 8,504 10,225 EBITDA margin (%) 7.3 8.9 9.6 10.2 Depreciation (1,128) (1,598) (1,612) (1,744) EBIT 4,464 5,527 6,892 8,481 Net interest (1,050) (912) (400) (100) Other income 133 130 650 800 Profit before tax 3,547 4,746 7,142 9,181 Total taxation (1,267) (1,747) (2,142) (2,754) Tax rate (%) 35.7 36.8 30.0 30.0 Profit after tax 2,280 2,999 4,999 6,427 Minorities - - - - Profit/ Loss associate co(s) - - - - Adjusted net profit 2,280 2,999 4,999 6,427 Adj. PAT margin (%) 3.0 3.7 5.7 6.4 Net non-recurring items 30 - - - Reported net profit 2,310 2,999 4,999 6,427 Balance sheet (Rsmn) Paid-up capital 424 424 424 424 Reserves & surplus 27,696 29,662 32,608 35,643 Net worth 28,120 30,086 33,032 36,067 Borrowing 3,711 6,000 1,000 - Other non-current liabilities - - - - Total liabilities 68,217 74,088 75,656 83,101 Gross fixed assets 19,718 20,748 22,248 24,248 Less: Depreciation (5,723) (7,321) (8,933) (10,677) Net fixed assets 13,995 13,427 13,315 13,571 Add: Capital WIP 319 - - - Total fixed assets 14,315 13,427 13,315 13,571 Total Investment 165 164 164 164 Inventory 8,938 9,396 10,894 12,410 Debtors 31,575 33,909 35,851 39,578 Cash & bank 2,260 5,736 3,321 3,651 Loans & advances 6,790 7,003 7,263 8,273 Current liabilities 36,386 38,003 41,623 47,034 Net current assets 17,199 22,005 20,064 21,842 Other non-current assets 152 490 490 490 Total assets 68,217 74,088 75,656 83,101 Source: Company, Axis Capital Cash flow (Rsmn) 05 FEB 2016 Quarterly Update Profit before tax 3,547 4,746 7,142 9,181 Depreciation & Amortisation (1,128) (1,598) (1,612) (1,744) Chg in working capital 37 (1,330) (474) (1,449) Cash flow from operations 4,525 4,178 6,538 6,822 Capital expenditure (935) (710) (1,500) (2,000) Cash flow from investing (1,984) (1,621) (1,900) (2,100) Equity raised/ (repaid) - - - - Debt raised/ (repaid) (2,490) 2,289 (5,000) (1,000) Dividend paid (941) (920) (2,052) (3,392) Cash flow from financing (3,446) 919 (7,052) (4,392) Net chg in cash (906) 3,476 (2,415) 329 Key ratios OPERATIOL FDEPS (Rs) 10.8 14.2 23.6 30.3 CEPS (Rs) 16.2 21.7 31.2 38.6 DPS (Rs) 4.4 4.3 9.7 16.0 Dividend payout ratio (%) 40.7 30.7 41.1 52.8 GROWTH Net sales (%) - 5.0 10.2 13.9 EBITDA (%) 8.9 27.4 19.4 20.2 Adj net profit (%) 15.5 31.5 66.7 28.6 FDEPS (%) 15.5 31.5 66.7 28.6 PERFORMANCE RoE (%) 8.3 10.3 15.8 18.6 RoCE (%) 14.2 16.7 21.5 26.5 EFFICIENCY Asset turnover (x) 2.6 2.7 2.9 3.2 Sales/ total assets (x) 1.1 1.1 1.2 1.3 Working capital/ sales (x) 0.2 0.2 0.2 0.2 Receivable days 151.0 154.4 148.1 143.5 Inventory days 45.5 46.2 48.9 49.2 Payable days 167.2 165.8 163.5 163.9 FINCIAL STABILITY Total debt/ equity (x) 0.1 0.2 - - Net debt/ equity (x) - - (0.1) (0.1) VALUATION PE (x) 94.3 71.7 43.0 33.5 EV/ EBITDA (x) 38.7 30.2 25.0 20.7 EV/ Net sales (x) 2.8 2.7 2.4 2.1 PB (x) 7.6 7.1 6.5 6.0 Dividend yield (%) 0.4 0.4 1.0 1.6 Free cash flow yield (%) 1.7 1.6 2.3 2.2 Dividend yield (%) 0.6 0.6 0.6 0.6 Free cash flow yield (%) (0.1) 0.2 0.4 0.4 Source: Company, Axis Capital 03
05 FEB 2016 Quarterly Update Disclosures: 1. Business Activity: Axis Securities Limited (ASL) is engaged in the business of providing Retail broking services & distribution of various financial products. ASL is also registered with SEBI as Research Analyst under SEBI regn.no.inh000000297 2. Disciplinary History: There has been no instance of any Disciplinary action, penalty/stricture etc. levied/passed by any regulators/administrative agencies against ASL and its Directors. Pursuant to SEBI inspection of books and records of ASL as a Stock Broker, SEBI has issued an Administrative warning to ASL in 2014. 3. Terms & Conditions of issuance of Research Report: The Research report is issued to the registered clients. The Research Report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The information is obtained from publicly available media or other sources believed to be reliable. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. 4. Details of Associates: ASL is a 100% subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company. The following are the SEBI Registration s. Particulars Merchant Banking (Category 1) Bankers to the Issue Debenture Trustee Custodian of Securities NSDL CDSL Clearing Member (MCX-SX Futures & Option) Clearing Member (NSE Future & Options) Clearing Member (BSE - Future & Options) Trading Clearing Member (NSE Currency Futures) Trading Clearing Member (MCX Currency Futures Trading Clearing Member (BSE Currency Futures) Trading Clearing Member (USE Currency Futures) Portfolio Manager Other Associates are as follows: Sr. Name of the Associates 1 Axis Private Equity Limited 2 Axis Trustee Services Ltd Particulars Axis Infrastructure Fund. It is registered with SEBI as a Domestic Venture Capital Fund under SEBI (Venture Capital Funds) Regulations 1996. It is registered with SEBI as a Debenture Trustee under Securities and Exchange Board of India (Debenture Trustees) Rules, 1993. 3 Axis Asset Management Company Limited Portfolio Management Services 4 5 Axis Mutual Fund Trustee Limited- It is registered with SEBI as a Mutual Fund and is Investment Manager to Axis Mutual Fund. Axis Capital Limited - It is engaged in the business of providing stock broking services mainly to Institutional clients and HNIs and also into distribution of financial products. It is also a SEBI registered entity. It is registered with SEBI as a Mutual Fund and is Investment Manager to Axis Mutual Fund. BSE - Stock Broking (Cash Segment) BSE - Stock Broking (Derivatives Segment) NSE - Stock Broking (Equity Segment) NSE - Stock Broking (Future & Options) NSE - Stock Broking (Currency Derivatives) BSE - Stock Broking (Wholesale Debt Market) Association of Mutual Funds of India (AMFI) Merchant Banker 04
05 FEB 2016 Quarterly Update 5. Disclosures with regard to ownership and material conflicts of interest: Sr.. Disclosures Yes/ Details, if applicable 1 ASL or its research analyst, his/her associate or relative has any direct or indirect financial interest in the subject company and the nature of such financial interest. 2 ASL or its associates, research analyst, his/her relatives have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report. 3 ASL or its Research analyst, his/her associate or relative, has any other material conflict of interest at the time of publication of the research report. 6. Disclosures with regard to receipt of compensation: Sr.. Disclosures Yes/ Details if applicable 1 ASL or its associates have received any compensation from the subject company in the past twelve months. Axis Bank is a scheduled commercial bank offering banking services to various companies and receiving fee etc. 2 ASL or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months. Axis Capital Ltd., has managed or co-managed public offering of securities for various companies in the past twelve months 3 ASL or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months. Axis Bank is a scheduled commercial bank offering banking services to various companies and receiving fee etc. 4 5 ASL or its associates have received any compensation for investment banking or merchant banking or brokerage services from subject company in the past twelve months. ASL or its associates have received any compensation or other benefits from the subject company or third party in connection with the research report. Axis Capital Ltd., has provided investment banking or merchant banking or brokerage services to various companies and received compensation in the past twelve months from such companies. 7. Other Disclosures: Sr.. Disclosures Yes/ Details, if applicable 1 The research analyst has served as an officer, director or employee of the subject company. 2 ASL or its research analyst has been engaged in market making activity for the subject company. 05
05 FEB 2016 Quarterly Update Disclaimer: The views expressed / recommendations made in this report are based on fundamental research and other inputs and could be at variance with the company s / group s views based on technical analysis. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of Axis Securities Limited (ASL). The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. thing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities and strategies discussed and opinions expressed, if any, in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This report may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. Certain transactions, including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for all investors. representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. 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