1. business and industrial

NOVEMBER 12, 2014
Economy News
 The Finance Ministry has called a meeting with the Reserve Bank of India
(RBI) and other departments concerned on Thursday to review the '80:20'
scheme for gold imports. The scheme prescribes that any entity importing
gold must re-export 20 per cent of it in value-added form. (BL)
 The centre and the states moved into the last mile of discussions ahead of
agreeing on a single goods and services tax (GST) after a panel proposed
to peg the rate at just under 27%. This is roughly the aggregate of centre
and states' indirect tax rates that prevail currently. (Mint)
 The Railways is opening up for investment by foreign and domestic players
sanctioned projects worth Rs120 bn. This amount would go up if one were
to add the high-speed rail link projects and the North-South freight
corridor and passenger terminal development of several stations - whose
costs are yet to be worked out. (BL)
 An inter-ministerial panel arrived at the formula to fix the floor price for
e-auction of coal blocks as well as the reserve price for allocation to public
sector companies. The price is expected to be announced within a
fortnight. (BL)
Corporate News
 Industry experts said according to current trend Indian Oil Corp, Bharat
Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd are likely to
reduce pump price of petrol and diesel by about Rs 1 per litre by the end
of this week. (ET)
Equity
% Chg
11 Nov 14
Indian Indices
SENSEX Index
NIFTY Index
BANKEX Index
BSET Index
BSETCG INDEX
BSEOIL INDEX
CNXMcap Index
BSESMCAP INDEX
27,910
8,363
19,895
10,774
15,883
10,959
12,091
11,162
0.1
0.2
0.7
(0.4)
0.6
0.4
0.8
0.2
6.1
6.4
12.4
0.9
10.7
1.9
7.7
5.2
7.8
8.2
15.4
9.8
9.8
2.6
11.8
12.2
World Indices
Dow Jones
Nasdaq
FTSE
NIKKEI
HANGSENG
17,615
4,661
6,627
17,124
23,808
0.0
0.2
0.2
2.0
0.3
6.5
9.0
4.5
12.9
3.4
6.4
6.2
(0.1)
13.9
(3.3)
Value traded (Rs cr)
 Tata Consultancy Services, the information technology unit of the Tata
Group, is more than a quarter of the way to its goal of garnering $1 billion
(more than Rs 61.50 bn) in revenue from the group's companies. (ET)
FII
FII
FII
FII
 The Securities Appellate Tribunal (SAT) admitted the plea of DLF's
promoters against a Securities and Exchange Board of India (Sebi) order
that had barred the real estate major and related entities from accessing
capital markets. (BS)
 Homegrown auto major Mahindra & Mahindra said it has increased
prices of its passenger and commercial vehicles from this month by an
average of 1 per cent, in the range of Rs 2,300 to Rs 11,500 (exshowroom), to partially offset the impact of rising input costs. (ET)
 Amtek Global Technologies, subsidiary of Delhi-based auto component
maker Amtek Auto, is set to raise 235 mn euros (about Rs 18 bn) from
global investment firm Kohlberg Kravis Roberts (KKR) to meet its longterm financing needs and consolidate its entire debt with a single entity.
(ET)
% Chg - Day
3,202
16,952
160,446
(15.0)
1.6
0.9
Net inflows (Rs cr)
 Starting afresh the issue of compensatory tariff charged by Ultra Mega
Power Projects (UMPP) operators Tata Power and Adani Group, the
Supreme Court stayed the proceedings in APTEL and has decided to hold
fresh hearing after November 25. (BS)
 Hinduja Group flagship company Ashok Leyland is in the process of
selling its stakes in some of the overseas joint ventures and associate
companies, and is looking for suitable buyer in this regard. (ET)
11 Nov 14
Cash BSE
Cash NSE
Derivatives
FII
Mutual Fund
 Anil Ambani-led Reliance Power commissioned its 100-megawatt
concentrated solar power (CSP) project at Jaisalmer, Rajasthan. This is the
biggest CSP in the world. Built at a cost of Rs 21 bn, the project has 25 per
cent reserve margin to meet 25-year power purchase agreement
obligations. (BS)
1 Day 1 Mth 3 Mths
10 Nov 14
% Chg
MTD
YTD
382
36
(87)
(133)
5,862
(769)
22,230
14,319
FII open interest (Rs cr)
Index
Index
Stock
Stock
10 Nov 14
% Chg
19,265
62,588
48,647
2,409
2.3
1.2
1.4
14.1
Futures
Options
Futures
Options
Advances / Declines (BSE)
11 Nov 14
Advances
Declines
Unchanged
A
B
T
179
117
3
1089
1,015
74
285
258
27
Total % total
1,553
1,390
104
Commodity
51
46
3
% Chg
11 Nov 14 1 Day 1 Mth 3 Mths
Crude (NYMEX) (US$/BBL) 77.5
Gold (US$/OZ)
1,162.4
Silver (US$/OZ)
15.7
(0.6)
0.1
0.3
(9.7)
(4.7)
(9.4)
(20.4)
(11.3)
(21.4)
Debt / forex market
11 Nov 14 1 Day 1 Mth 3 Mths
10 yr G-Sec yield %
Re/US$
8.2
61.6
8.2
61.5
8.5
61.1
8.6
61.2
Sensex
28,000
25,875
23,750
21,625
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,
BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange
19,500
O ct-13
Jan-14
Ap r-14
Jul-14
Oct-14
MORNING INSIGHT
November 12, 2014
BHARAT ELECTRONICS LTD (BEL)
RESULT UPDATE
Sanjeev Zarbade
sanjeev.zarbade@kotak.com
+91 22 6621 6305
PRICE: RS.2301
TARGET PRICE: RS.2545
Summary table
(Rs mn)
FY14
FY15E
FY16E
Sales
62,755
Growth (%)
1.5
EBITDA
8,911
EBITDA margin (%) 14.6
PBT
11,740
Net profit
9,309
EPS (Rs)
116.4
Growth (%)
3.9
CEPS (Rs)
134.1
BV (Rs/share)
867.2
Dividend / share (Rs) 25.0
ROE (%)
14.0
ROCE (%)
13.3
Net cash (debt)
45,644
NW Capital (Days)
90
EV/Sales (x)
2.3
EV/EBITDA (x)
15.5
P/E (x)
19.8
P/Cash Earnings
17.2
P/BV (x)
2.7
68,440
12.1
10,250
15.0
13,409
10,593
132.4
13.8
151.4
970.3
23.3
14.3
13.6
55,102
73
1.9
12.6
17.4
15.2
2.4
75,601
10.5
12,274
16.2
16,092
12,713
158.9
20.0
179.9
1100.0
25.0
15.2
14.6
63,894
73
1.6
9.8
14.5
12.8
2.1
 In a seasonally lean quarter, BEL reported improved order execution leading to significant margin gains and substantial profit beat.
 Strong order backlog at Rs 229 bn provides 42 months of revenue visibility. EBITDA margins have bounced back in FY14 and H1FY15 and if the
execution rate accelerates in the future, the margins can improve further.
 Valuations have inched up but continue to remain at a substantial discount to peer group (Capital Goods universe). If order execution rate
inches up in the coming quarters, then there could be further room for
valuations to rise.
 We remain positive on the stock and revise rating to ACCUMULATE (prior
rating was BUY) in view of the sharp rally in the stock and moderate
upside from current levels.
 Risk: Recent amendments to DPP could increase competition for BEL from
private sector
Quarterly performance
(Rs mn)
Q2FY15
Net Revenue
Other operating income
Q2FY14 YoY (%)
H1FY15
H1FY14 YoY (%)
12,657
10,093
25.4
22,624
18,939
19.5
283
355
-20.3
438
492
-10.9
revenue distribution (%)
17.0
20.0
-13.9
0.3
0.4
-16.3
Operating Expenditure
11,751
10,431
12.7
22,328
19,973
11.8
Raw Material costs
3,601
5,307
-32.1
9,263
10,205
-9.2
Purchase of stock in trad
3,767
880
327.9
4,619
1,598
189.0
Staff costs
2,976
2,767
7.6
5,953
5,783
2.9
Other expenditure
1,407
1,477
-4.7
2,494
2,387
4.5
Operating profit
1,189
17
6814.0
734
-543
-235.3
375
342
9.6
739
680
8.7
1,106
1,093
1.2
2,258
2,216
1.9
1,920
768
150.1
2,254
994
126.7
Depreciation
Other income
Source: Company, Kotak Securities - Private
Client Research
RECOMMENDATION: ACCUMULATE
FY16E P/E: 14.5X
EBIT
Interest
PBT
Tax
0
0
0.0
0.2
2.8
-92.9
1,920
768
150.1
2,254
991
127.4
447.5
173.3
158.2
525
225
133.3
1,472.6
594.4
147.7
1,729
766
125.6
18.4
7.4
21.6
9.6
9
0
3
(3)
Raw Matl costs to sales (%)
28
53
41
54
Trading items to sales (%)
30
9
20
8
Staff costs to sales (%)
24
27
26
31
Other exp to sales (%)
11
15
11
13
Tax rate (%)
23
23
23
23
Adjusted PAT
EPS Rs
EBITDA (%)
Source: Company
Earnings estimates
(Rs mn)
Reported
Estimated
Revenue
12657
11405
EBITDA (%)
9.0%
0.8%
PAT
1473
687
Comments
Improved order execution
Higher gross margins and fixed cost absorption
Significant profit beat
Source: Kotak Securities - Private Client Research
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
2
MORNING INSIGHT
November 12, 2014
Key Result Highlights
 In a seasonally weak quarter, BEL's revenues were ahead of our estimates. The
nature of business that BEL is into is highly unpredictable which results in quarterly volatility in revenues.
 Major orders delivered during the quarter were Akash Missile Systems, Passive
Night Vision Devices, Missile Warning system and Shipborne Electronic Warfare
System.
 Gross margins expanded to 42% from 38% in Q2FY15, likely due to changes in
revenue mix.
 Staff costs grew moderately which helped the company to keep costs under
check. EBITDA margins stood at 9% vs 0% in Q2FY14. Consequently, the company posted EBITDA profit of Rs 1.18 bn.
 Other income remained flat to Rs 1.1 bn due to stagnation in cash in balance
sheet at Rs 46.4 bn at end of Q2FY15 from Rs 45 bn at end of Q2FY14.
 Tax rate for the fiscal remained stable at 23%, lower likely due to higher R&D
spend during the quarter.
 Order book at the end of quarter stands at Rs 228 bn (down 8% and 2% yoy
and qoq respectively), providing revenue visibility of 42 months of trailing four
quarter revenues.
 Order intake in Q2FY15 was lower yoy at Rs 8.3 bn vs Rs 10.2 bn in Q2FY14.
Among the orders won include Mobile Communication Terminal, weapons locating radar, electronic warfare suites.
 The company has continued to emphasize on the immense opportunities from
Defence offsets. It expects that many foreign companies will source directly from
Indian companies or set up JVs to address the offset requirements. It is to be
noted that for MMRCA (Medium multi-role combat aircraft) projects, the offset is
at 50% of the contract value whereas it is at 30% for all contracts above Rs 3.0.
 The company has signed Memorandum of Understanding with GOI for revenue
of Rs 68.5 bn in FY15 to entitle for "Very Good" rating. This implies a marginal
growth over FY14 (FY14 MOU target was Rs 67.5 bn). Our revenue forecast is in
line as we take into account better performance in H1FY15.
We recommend
ACCUMULATE on Bharat
Electronics with a price
target of Rs.2545
Kotak Securities - Private Client Research
Valuation:
At the current price, BEL is trading at 17.4x and 14.5x FY15 and FY16 earnings respectively. On a forward EV/EBITDA basis, the company trades at 9.8x. In view of
the moderate upside of 11% to our DCF based target price of Rs 2545 (Rs 2338 earlier), we revise rating to "ACCUMULATE", thereby advising investors to buy on declines.
Please see the disclaimer on the last page
For Private Circulation
3
MORNING INSIGHT
November 12, 2014
VOLTAMP LTD
RESULT UPDATE
Sanjeev Zarbade
sanjeev.zarbade@kotak.com
+91 22 6621 6305
PRICE: RS.680
TARGET PRICE: RS.660
RECOMMENDATION: SELL
FY16E P/E: 15.1X
 Aided by other income, Voltamp's profit numbers are in line with our expectations but at the EBITDA levels, there is a significant slump in margins. We understand from the management that the market scenario remains dire and characterized by severe price pressures.
 We see scope for earnings trajectory improving in the next few years as
the industrial demand emerges from a downcycle. There is potential that
the company could surprise on margins as well as revenue side. However, in view of full valuation, we advise investors to look for better
price points to enter the stock. Hence recommend Sell.
 Risk: Weak industry outlook characterized by intense price undercutting.
Quarterly financial performance
Summary table
(Rs mn)
FY14
FY15E
FY16E
Sales
4,448
Growth (%)
-14
EBITDA
150
EBITDA margin (%)
3.4
PBT
342
Net profit
263
EPS (Rs)
26
Growth (%)
(20)
CEPS (Rs)
33
BV (Rs/share)
411
Dividend / share (Rs)
15
ROE (%)
6
ROCE (%)
6
Net cash (debt)
6
NW Capital (Days)
130
EV/Sales (x)
1.1
EV/EBITDA (x)
31.2
P/E (x)
26.1
P/Cash Earnings
20.5
P/BV (x)
1.7
4,786
8
232
4.9
439
353
35
34
42
434
10
8
8
152
125
0.9
19.5
19.5
16.1
1.6
5,263
10
385
7.3
617
456
45
29
53
468
10
10
10
428
116
0.8
11.0
15.1
12.8
1.5
Source: Company, Kotak Securities - Private
Client Research
(Rs mn)
Q2FY15
Volume MVA
Gross revenues per MVA
Gross sales
Excise
Q2FY14 YoY (%)
H1FY15
H1FY14 YoY (%)
2,049
1,417
45
3,348
2,886
16
727,477
764,996
-5
1426,822
1457,985
-2
1,491
1,084
38
2,399
2,102
14
146
104
40
221
193
14
Net Sales / Income from Opns 1,345
980
37
2,178
1,909
14
1,399
1,025
36
2,294
2,047
12
Consumption of Raw Materials 1,155
16
Total Income
815
42
1,797
1,550
47
46
1
96
95
1
117
105
12
219
215
1
1,319
966
37
2,112
1,860
14
PBDIT
26
14
83
66
49
36
Depreciation
20
18
15
40
35
13
Other Income
54
45
19
116
138
-16
EBIT
59
41
43
142
151
-6
Interest & Finance Charges
0.9
0.7
34
2
2
-8
Profit / (Loss) before tax
58
41
43
140
149
-6
Staff Cost
Other Expenditure
Operating Expenditures
Tax provision
Profit / (Loss) after tax
EPS (Rs)
9
1
917
24
30
-21
49
40
24
117
119
-2
4.87
3.94
24
12
12
-2
Ratios
Excise rate (%)
9.8
9.6
9.2
9.2
EBITDA (%)
1.9
1.4
3.1
2.6
Gross profit/MVA (Rs/MVA)
92,352
116,302
113,734
124,428
EBITDA/MVA (Rs/MVA)
12,460
9,852
19,857
16,965
563,919
575,300
536,879
537,041
85.9
83.2
82.5
81.2
RM cost per MVA (Rs/MVA)
RM cost to sales (%)
Other exp to sales (%)
8.7
10.7
10.0
11.3
Tax rate adj for ot income (%) 210.1
-19.6
95.3
252.1
2.2
16.9
20.1
Tax rate (%)
15.4
Source: Company
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
4
MORNING INSIGHT
November 12, 2014
Earnings estimates
(Rs mn)
Reported
Estimated
Revenue
Remark
1,345
917
Revenue growth ahead of estimate
EBITDA (%)
1.9
3.4
Low gross margins
PAT
49
48
PAT shored by other income
Source: Kotak Securities - Private Client Research
Erosion in profitability continues on delivery of low margin orders
 Net sales grew by 37% yoy as the company delivered a large order from the
Gujarat Electricity Board.
 EBITDA margin expanded by 50 bps to 1.9% in the quarter, far lower than expectations.
 Gross margins stood at 14.1% in Q2FY15 vs 16.8% in Q2FY14, which was partly
attributed to delivery of some low margins orders during the quarter.
 EBITDA margins have remained at depressed levels on account of lower throughput coupled with pricing pressure on electrical equipments.
 Order backlog stands at Rs 3.15 bn vs Rs 2.98 bn at the end of Q2 FY14.
 The management remains negative on the demand outlook and expects the subdued demand conditions to continue in the foreseeable future. In this scenario,
the company's focus remains on profit and cash preservation, which is the right
approach in our view.
 The company remains debt free and has sizeable investments worth ~ Rs 2.2 bn
in treasury instruments.
 Receivables turnover continue to be at elevated levels at 82 days of trailing four
quarter sales (63 days yoy).
EBITDA margin trend (%)
Source: Company
Outlook
Although there has been a perceptible improvement in sentiment corporate India, it
is yet to translate into order enquiries. The order pipeline is not adequate as yet and
after two years of contraction, the T&D equipment industry could at best report
marginal growth in 2014.
We recommend SELL on
Voltamp Ltd with a price
target of Rs.660
Valuation
The Voltamp stock is currently trading at 19.5x and 15.1x FY15 and FY16 earnings
respectively.
The stock appears fully valued based on foreseeable earnings. Hence maintain
SELL.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
5
MORNING INSIGHT
November 12, 2014
KALPATARU POWER TRANSMISSION LTD (KPTL)
RESULT UPDATE
Ruchir Khare
ruchir.khare@kotak.com
+91 22 6621 6448
PRICE: RS.166
TARGET PRICE: RS.183
RECOMMENDATION: ACCUMULATE
FY16E P/E: 10.9X
 KPTL reported Q2FY15 results above our estimates on back of superior
execution in T&D orders. Order intake remained weak in the quarter due
to muted activity in domestic market. Management believes that the ordering should pick up through Q4FY15-FY16 on back of increased public
spending in infrastructure space.
 In view of marginal upside to our unchanged target price of Rs 183, we
maintain 'Accumulate' (Buy on dips) rating on company's stock
Standalone Result
Summary table
(Rs mn)
FY14
FY15E
FY16E
(Rs mn)
Sales
40,552
Growth (%)
21.6
EBITDA
3,863
EBITDA margin (%)
9.5
PBT
2,190
Net profit (Adj)
1,463
EPS (Rs)
9.5
Growth (%)
6.3
CEPS (Rs)
14.1
BV (Rs/share)
125.3
Dividend/share (Rs)
1.3
ROE (%)
7.7
ROCE (%)
12.5
Net cash (debt)
(6,636)
NW Capital (Days)
151
EV/Sales (x)
0.8
EV/EBITDA (x)
8.3
P/E (x)
17.4
P/Cash Earnings (x)
11.8
P/BV (x)
1.3
44,669
10.2
4,395
9.8
2,527
1,794
11.7
22.6
17.0
135.5
1.3
8.8
13.0
(6,637)
146
0.7
7.3
14.2
9.7
1.2
50,633
13.4
5,245
10.4
3,298
2,342
15.3
30.5
21.4
147.9
1.3
10.6
14.6
(7,438)
146
0.7
6.3
10.9
7.7
1.1
Net Sales
Source: Company, Kotak Securities - Private
Client Research
Q2FY15
Q2FY14
YoY (%)
Q1FY15
QoQ (%)
11407
9622
18.6
10634
7.3
Other Income
195.7
141.2
38.6
105.6
85.3
Raw Material
5263.3
4758.6
10.6
4429.8
18.8
778
592.1
31.4
742
4.9
job charges
2926
2217.2
32.0
2855.4
2.5
Other expenditure
1402
1142.8
22.7
1544
(9.2)
Total Expenditure
10369
8711
19.0
9571
8.3
PBIDT
1038
911
13.9
1063
(2.4)
Staff costs
Finance cost
368
410
-10.2
328
12.2
PBDT
865
642
34.7
840
3.0
Depreciation
223
173.4
28.6
204.4
9.1
PBT
642
469
36.9
636
1.0
Tax
216
159.2
35.7
217.5
(0.7)
PAT
426
310
37.6
419
1.9
EPS (Rs)
2.8
2.0
37.6
2.7
1.9
EBDIT (%)
9.1
9.5
10.0
46.1
49.5
41.7
6.8
6.2
7.0
job charges to sales (%)
25.7
23.0
26.9
Other expenditure to sales (%)
12.3
11.9
14.5
Tax rate (%)
33.6
33.9
34.2
Raw material costs to sales (%)
Staff costs to sales (%)
Source: Company
Result Highlights
 KPTL reported strong revenue growth at Rs 11.4 Bn in Q2FY15, 18.6% YoY
growth driven by T&D business. Transmission business grew by 21% YoY in the
quarter.
 Company reported operating margin at 9.1% in the quarter vis-à-vis 9.5%.
While KPTL maintained margins in T&D business, EBIT margins in infrastructure
business continued to remain lackluster. Management has stated that the existing low margin orders now constitutes to a lower proportion in existing order
book. Staff cost and job charges increased by 31.4% and 32% YoY respectively
in the quarter.
 In T&D, management has stated that the domestic market could improve
through FY16 on back of increased spending on T&D projects. Overseas markets
(mainly African/SAARC regions) could also observe traction. We highlight that international revenues now contributed to over 55% of the revenue pie.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
6
MORNING INSIGHT
November 12, 2014
Segment reporting
Q2FY15
Q2FY15
YoY (%)
Q1FY15
QoQ (%)
10,805
8,906
21.3
9,928
8.8
440
556
-20.9
566
(22.3)
10.0
Standalone Revenues (Rs mn)
T& Dist business
Infrastructure
PBIT (Rs mn)
T& Dist business
Infrastructure
954
867
988
(3.4)
(124)
(145)
(135)
-
8.8
9.7
9.9
-
-
-
PBIT (%)
T& Dist business
Infrastructure
Source: Company
 Finance cost in Q2FY15 increased to Rs 368 mn in the quarter vis-à-vis Rs 410 mn
last year. Company reported Rs 216 mn of tax expense in the quarter that resulted in the reported PAT at Rs 426 mn in Q2FY15 vis-à-vis Rs 310 mn last year.
 Company has been deploying significant resources in its subsidiary JMC involved
in road construction projects. Margins so far, have been disappointing for the
subsidiary. JMC has reported revenues at Rs 5.8 Bn in Q2FY15 against Rs 6.1 Bn
in Q2FY14. PAT for JMC, stood at Rs 43 mn up 39% YoY.
 In Q2FY15, Shree Shubham Logistics (SSLL) has reported revenue at Rs 783 mn
against Rs 930 mn in the previous year. EBITDA for SSLL stood at Rs 114 mn visà-vis Rs 115 mn in Q2FY14.
 KPTL current standalone order book stands at close to Rs 55.5 Bn (flat YoY).
Order intake in the quarter stood at Rs 9.1 Bn. Management expect order flows
through 4QFY15-FY16.
We recommend
ACCUMULATE on Kalpataru
Power Transmission with a
price target of Rs.183
Valuation & Recommendation
 At CMP of Rs.166, KTPL stock is trading at 6.3x EV/EBITDA and 10.9x P/E based
on FY16E earnings.
 We factor in 1) improved medium/long term outlook and 2) increased market
value of KPTL's key subsidiary JMC projects in our DCF.
 In view of marginal upside to our unchanged target price of Rs 183, we maintain
'ACCUMULATE' (Buy on dips) rating on company's stock.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
7
MORNING INSIGHT
November 12, 2014
IL&FS TRANSPORTATION NETWORKS LTD
RESULT UPDATE
Teena Virmani
teena.virmani@kotak.com
+91 22 6621 6302
PRICE: RS.196
TARGET PRICE: RS.214
RECOMMENDATION: ACCUMULATE
FY16E P/E: 14.1X
IL&FS Transportation networks Ltd (ITNL) revenues for the quarter were in
line with our estimates and were boosted by claims received during the
quarter. Margins are also high on account of one time claims received
during the quarter. Based on current order book and portfolio of projects,
we expect construction revenues to start recovering in coming quarters
while completion of work on under construction projects is expected to
increase the toll revenues during this year and going forward. We maintain
our estimates and maintain ACCUMULATE on stock owing to limited upside
from the current levels. We recommend investors to buy the stock on
declines.
Summary table
(Rs mn)
FY14
FY15E
FY16E
Sales
65,870 71,665 71,737
Growth (%)
(0.9)
8.8
0.1
EBITDA
18,897 21,584 22,194
EBITDA margin (%) 28.7% 30.1% 30.9%
PBT
4,831
4,903
5,500
Net profit
4,631
3,169
3,429
EPS (Rs)
23.8
12.8
13.9
Growth (%)
(11.0)
(46.1)
8.2
CEPS(Rs)
31.6
20.6
24.5
BV (Rs/share)
257.6
230.8
238.6
DPS (Rs)
5.1
5.1
5.1
ROE (%)
10.7
5.9
5.9
ROCE (%)
9.3
8.4
7.5
Net debt
176,762 197,573 208,164
Net WCapital (Days)
54
58
61
P/E (x)
8.2
15.3
14.1
P/BV (x)
0.8
0.8
0.8
EV/Sales (x)
3.3
3.5
3.6
EV/EBITDA (x)
11.6
11.6
11.8
Result highlights
 Revenues of the company for Q2FY15 reported a growth of 12% led by compensation claims to the tune of Rs 2609 mn due to delays in handing over land for
project execution.
 Operating margins stood at 41% during Q2FY15 as against 37.2% in Q2FY14
and stood better than our estimates on account of claims received during the
quarter.
 Net profit reported a decline of 11% YoY for Q2FY15 and was impacted by increase in interest and depreciation charges but was boosted by higher other income and higher margins.
Financial highlights
DESCRIPTION
Q2FY15
Q2FY14
YoY (%)
Net Sales
15015.6
13407.0
12.0%
8859.6
8416.6
5.3%
-4.9
1.8
345.2
303.5
Total Expenditure
(Increase) / Decrease In Stocks
Cost of Services & Raw Materials
Purchase of Finished Goods
Source: Company, Kotak Securities - Private
Client Research
0.0
11.3
Operating & Manufacturing Expenses
7335.1
7049.4
Employee Cost
1184.2
1050.6
6156.0
4990.4
41%
37.2%
EBITDA
EBITDA %
Depreciation
EBIT
Interest
432.2
276.1
5723.8
4714.3
4939.6
3626.1
EBT(exc other income)
784.2
1088.2
Other Income
712.8
267.1
PBT
1497.0
1355.3
Tax
615.9
219.6
0.4
16.2%
881.1
1135.7
76.7
-38.7
Tax (%)
PAT
Minority Interest
Shares of Associates
Consolidated net profit
Equity Capital
EPS (Rs)
31.6
15.7
989.4
1112.7
2467.2
1942.7
4.0
5.7
23.4%
21.4%
-27.9%
10.5%
-22.4%
-11.1%
Source: Company
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
8
MORNING INSIGHT
November 12, 2014
 At current price of Rs 196, stock is trading at 15.3x and 14.1x P/E and 11.6x and
11.8x EV/EBITDA on FY15 and FY16 estimates respectively. We incorporate annual report details and arrive at a revised price target of Rs 214 on FY16 estimates. (Rs 217 earlier). Owing to limited upside from the current levels, we
maintain ACCUMULATE rating on the stock and would recommend investors to
buy the stock on declines.
Revenue growth boosted by claims
Revenues of the company for Q2FY15 reported a growth of 12% led by compensation claims to the tune of Rs 2609 mn due to delays in handing over land for project
execution. Adjusted with this, revenues were lower than our estimates and were
impacted by floods in J&K thereby impacting execution. Thus EPC revenues improved during the quarter by 19.6% YoY. Projects like Jharkhand CKC, Chandrapur
Warora and Chenani Nashri contributed to EPC revenues.
However, Elsamax revenues witnessed a decline of 4% YoY and toll revenues improved by 19% YoY led by commissioning of projects like Pune-Solapur,
Narkatpally-Addanki and some check posts of MPRDC. Fee income during the quarter has declined by 22% during the quarter as company had largely booked fee income in previous quarters.
During the quarter, Elsamex SA, has been awarded a contract by the Ethiopian
Roads Authority for Construction of Ambo-Wolliso Road Upgrading Project worth
approximately Rs 3.63 bn for a total length of 62.7 Km to be executed in a period of
36 months. ITNL has also been issued provisional completion certificate for SeoniNagpur Border check post by MPRDC Ltd. This is in addition to 7 check posts already
in operation by the company. During Oct,14, provisional completion certificate for
Chindwara - Nagpur & Kabir - Chabutara Border Check Posts was also given by
MPRDC Ltd.
Current order book of company stands at Rs 139 bn and we expect construction division revenues to grow to Rs 45 bn and Rs 41 bn for FY15 and FY16 respectively
Operating margins ahead of our estimates
Operating margins stood at 41% during Q2FY15 as against 37.2% in Q2FY14 and
stood better than our estimates on account of claims received during the quarter.
We maintain our estimates and expect margins to be 30.1% and 30.9% for FY15
and FY16 respectively. Margins for the full year are expected to increase in FY15
due to increase in proportion of toll revenues to the total revenues.
Net profits ahead of our estimates
Net profit reported a decline of 11% YoY for Q2FY15 and was impacted by increase
in interest and depreciation charges but was boosted by higher other income and
higher margins. During H1FY15, other income was high due to stake sale in GRICL.
On sequential basis, company witnessed an increase of 7% in debt at consolidated
level due to drawdown of already sanctioned debt on projects under construction. D/
E for Q2FY15 stood at 3.68x as compared to 3.49x for Q1FY15. Company expects
incremental equity requirement of Rs 8.97 bn for the existing projects.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
9
MORNING INSIGHT
November 12, 2014
Sum of the parts valuation
Sum of the parts valuation
EPS(FY16E)
Multiple
19
8
Core construction division
Toll projects
EV(Rs mn)
Stake(%)
Value per share
148
Cost of equity(%)
Noida Toll bridge
13.8%
Operational
3910
25%
4
West Gujarat Exp Ltd
13.8%
Operational
998
100%
4
Gujarat Roads
13.8%
Operational
10427
84%
36
RIDCOR Phase 1
13.8%
Operational
9998
50%
20
Beawer Gomti
13.8%
Operational
394
100%
2
Pune-Sholapur
13.8%
Operational
7714
100%
31
RIDCOR Phase 2
13.8%
Under Cons
1654
50%
3
Chandrapur Warora
13.8%
Under Cons
741
35%
1
Moradabad Bareilly
13.8%
Under Cons
8314
100%
34
Narkatpally Adanki
13.8%
Operational
3168
50%
6
Kiratpur Ner chowk
13.8%
Under Cons
2044
100%
8
Sikar Bikaner
13.8%
Under Cons
492
100%
2
Kharagpur Baleshwar
13.8%
Under Cons
382
100%
2
North Karnataka Exp
13.8%
Operational
383
88%
1
Andhra Pradesh Exp
13.8%
Operational
870
100%
4
Thiruvanantpuram Phase 1
13.8%
Operational
-23
50%
0
East Hyd Exp
13.8%
Operational
420
74%
1
Thiruvanantpuram Phase 2
13.8%
Under Cons
-767
50%
-2
Jharkhand roads -RRR,RPR1,RPR2
13.8%
Under Cons
1631
100%
8
Jharkhand roads -CKC,AK
13.8%
Operational
1278
100%
5
Hazaribag Ranchi
13.8%
Under Cons
1228
74%
4
Chenani Nashri
13.8%
Under Cons
4302
100%
17
Jorabat-Shillong
13.8%
Under Cons
982
50%
2
Elsamex
P/BV of 1.5 x
2700
100%
21
Gurgaon Metro Rail
P/BV of 1.5 x
1860
59.30%
9
MP border check post
P/BV of 1.5 x
1136
51%
4
Annuity Projects
Other projects
Bus transport system
P/BV of 1 x
156
90%
1
Yuhe Expressway
P/BV of 1 x
1100
49%
3
Net Debt at standalone level
32057
165
Total
214
Source: Kotak Securities - Private Client Research
Valuation and recommendation
 At current price of Rs 196, stock is trading at 15.3x and 14.1x P/E and 11.6x and
11.8x EV/EBITDA on FY15 and FY16 estimates respectively.
We recommend
ACCUMULATE on IL&FS
Transportation Networks with
a price target of Rs.214
Kotak Securities - Private Client Research
 We incorporate annual report details and arrive at a revised price target of Rs
214 on FY16 estimates. (Rs 217 earlier).
 Owing to limited upside from the current levels, we maintain ACCUMULATE
rating on the stock and would recommend investors to buy the stock on declines.
Please see the disclaimer on the last page
For Private Circulation
10
MORNING INSIGHT
November 12, 2014
ENIL
RESULT UPDATE
Ritwik Rai
ritwik.rai@kotak.com
+91 22 6621 6310
PRICE: RS.525
TARGET PRICE: RS.575
RECOMMENDATION: ACCUMULATE
FY16E P/E: 22.2X
ENIL reported a robust set of results for 2QFY15, on the back of strong
growth in radio industry, as also growth in the non-radio business of the
company. Management has indicated that the company continues to see
strong growth in revenues in October/ November so far, and sounded more
confident about near-term growth prospects - this also leads to improved
outlook on margins. We raise our EPS estimates 9%/9% for FY15/FY16. The
company stays well-placed to benefit from growth in radio industry, as also
upcoming regulatory changes (Phase -3 auctions), which are expected to
happen in the next 1-2 quarters. We believe the stock shall receive stronger
valuations going forward, and raise our price target to Rs 575 (earlier Rs
457). We retain ACCUMULATE, and would look to buy ENIL at lower prices.
Results Summary
Summary table
(Rs mn)
Rsmn, FY Ends Mar
FY14
FY15E
FY16E
Sales
3,848
Growth (%)
13.7
EBITDA
1,250
EBITDA margin (%) 32.5
PBT
1,155
Net profit
835
EPS (Rs)
17.5
Growth (%)
23.3
CEPS (Rs)
24.2
BV (Rs/share)
123.0
Dividend / share (Rs) 1.0
ROE (%)
15.3
ROCE (%)
15.3
Net cash (debt)
3,570
NW Capital (Days)
82
P/E (x)
30.0
P/BV (x)
4.3
EV/Sales (x)
5.6
EV/EBITDA (x)
17.2
4,368
13.5
1,465
33.6
1,417
950
19.9
13.8
26.6
142.0
1.0
15.0
15.0
4,467
82
26.4
3.7
4.7
14.0
4,935
13.0
1,708
34.6
1,710
1,128
23.7
18.8
30.3
164.6
1.0
15.4
15.4
5,532
83
22.2
3.2
4.0
11.4
Source: Company, Kotak Securities - Private
Client Research
Net Sales
Q2FY15
Q2FY14 % chg y/y
Q1FY15
% chg q/q
1040
855
22%
918
13%
3
10
-67%
15
-76%
Total Operating Income
1044
865
21%
933
12%
Expenses:
25%
Other Operating Income
727
613
19%
584
Production Expenses
45
41
11%
41
9%
License Fees
53
47
13%
47
13%
Employees cost
202
186
9%
204
-1%
Marketing Expenses
237
171
39%
120
97%
Administration and Other Exp
190
169
12%
171
11%
EBITDA
317
253
25%
349
-9%
Margin (%)
30.3
29.2
1.13ppt
37.4
-0.19ppt
Depreciation
26
24
7%
27
-4%
Amortisation
56
55
1%
55
1%
235
173
36%
267
-12%
79
55
43%
71
10%
EBIT
Other Income
Interest (net)
0
0
NM
0
PBT (Pre-exc)
313
228
37%
338
-7%
PBT Reported
313
228
37%
338
-7%
81
64
26%
95
-15%
Provision for Tax
Effective Tax Rate (%)
25.7
28.1
-2.35ppt
28.2
-0.09ppt
PAT
233
164
42%
243
-4%
Source: Company Reports
 ENIL has reported a strong set of financials for the quarter, led by topline growth.
The company's revenues came in 6% ahead of our expectations. The company
said that, during the quarter, radio industry continued to grow faster than print
and television. Categories that registered strong growth included Media and Entertainment (M&E), auto sector, retail, services, and FMCG. This quarter's results
do not include any impact from political advertising (ost of political advertising
happened in October), while government revenues actually registered a decline.
 In the quarter, growth in advertising revenues was largely aided by volume
growth, with some improvement in yields. Blended utilization for the quarter rose
to 101% (based on 13 minutes/ hour). Also, non-radio business of the company
registered strong growth (+32%, y/y), which helped topline growth.
 As guided by the management, marketing expenses of the company registered
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
11
MORNING INSIGHT
November 12, 2014
high growth (+39% y/y), due to campaigns in Mumbai and Delhi. The company
expects that the employee expenses and marketing expenses shall continue to
see high growth as the company aims to improve its capabilities and enhance
brand prior to Phase - 3 auctions.
 Other expenses followed the expected trend; EBITDA came in 8.5% ahead of
our expectations, largely due to strong growth in revenues.
 The provision for tax in the quarter includes a deferred tax charge of Rs 22mn.
 In the quarter, the company generated Rs 177.9mn cash. Free cash with the
company, at the end of the quarter, is Rs 4817mn.
 Management believes that Phase-3 auctions are likely to take place in the coming few months.
 On the conference call, the company has said that advertising in October/ November has been strong for radio industry as a whole. October has benefited to
an extent from political advertising in Maharashtra (and modestly in Delhi).
 Management has indicated that it expects that despite rise in personnel and
advertising and promotion spends, the company is likely to witness an improvement in margin for the year as a whole.
Outlook and Investment View
 The company has reported strong results in the quarter, and is likely to report
strong results in the coming quarters as well, as political advertising is likely to
support the topline growth. WE revise our estimates 9%/9% for FY15/FY16 following strong results.
 We remain positive on ENIL as we think: 1/ long-term driver of radio
outperformance, the relatively low ratio of advertising revenues given the time
spent, 2/ radio industry is likely to continue outperforming other media vehicles
as focus on customer promotions is likely to remain, 3/ we think that e-commerce, with fresh capital coming in, is likely to be a significant advertising category for radio industry; industry is likely to benefit disproportionately given high
concentration in urban areas and small size of radio industry.
We recommend
ACCUMULATE on ENIL with
a price target of Rs.575
Kotak Securities - Private Client Research
 We raise the target price of ENIL to 575 (Rs 454 earlier), as we believe ENIL is
likely to be rewarded for high visibility in earnings and potential for high longterm growth. We retain ACCUMULATE.
 Upcoming auctions for Phase - 3 of FM radio/ extension of licenses are the most
significant risk for ENIL.
Please see the disclaimer on the last page
For Private Circulation
12
MORNING INSIGHT
November 12, 2014
APOLLO TYRES (APTY)
RESULT UPDATE
Arun Agarwal
arun.agarwal@kotak.com
+91 22 6621 6143
PRICE: RS.233
TARGET PRICE: RS.251
RECOMMENDATION: ACCUMULATE
FY16E P/E: 10.2X
APTY's 2QFY15 consolidated revenue came in at Rs33,152mn and was down
by 3% YoY due to part sale of South African business in 2HFY14. EBITDA
margin benefitted from weak rubber prices and the same expanded by
172bps - both YoY and QoQ. PAT at Rs2,579mn was up by 18% YoY and
13% QoQ. After witnessing demand slowdown for the past two years, tyre
demand is expected to pick-up over the medium to long term. Weak natural
rubber prices and decline in crude oil price provide with comfort on the
EBITDA margin front. We marginally revise our FY15 and FY16 estimates
upward. We raise our target price on the stock to Rs251 (earlier Rs218) and
retain our ACCUMULATE (buy on decline) rating on the stock
Standalone result highlights
Quarterly performance (Standalone)
Summary table
(Rs mn)
FY14
FY15E
FY16E
(Rs mn)
Sales
134,120 137,286 154,917
Growth (%)
4.8
2.4
12.8
EBITDA
18,755 20,333 22,144
EBITDA margin (%) 14.0
14.8
14.3
PBT
12,319 14,853 16,427
Net profit
10,051 10,862 11,643
EPS (Rs)
19.9
21.3
22.8
Growth (%)
64.1
6.8
7.2
CEPS (Rs)
28.1
29.6
31.7
BV (Rs/share)
90.7
109.9
131.9
Dividend / share (Rs) 0.7
0.8
0.8
ROE (%)
26.0
21.3
18.9
ROCE (%)
23.7
23.7
21.2
Net cash (debt)
(9,704) (13,867) (19,036)
NW Capital (Days)
52.7
55.9
53.7
P/E (x)
11.7
10.9
10.2
P/BV (x)
2.6
2.1
1.8
EV/Sales (x)
0.9
1.0
0.9
EV/EBITDA (x)
6.8
6.5
6.2
Revenues
Source: Company, Kotak Securities - Private
Client Research
Reported PAT
2QFY15
2QFY14
YoY (%)
1QFY15
QoQ (%)
22,496
21,068
6.8
23,065
(2.5)
Total expenditure
19,231
18,338
4.9
20,185
(4.7)
RM consumed
14,170
14,254
(0.6)
15,413
(8.1)
Employee cost
1,407
1,145
22.9
1,475
(4.6)
Other expenses
3,654
2,939
24.3
3,297
10.8
EBITDA
3,265
2,730
19.6
2,881
13.3
EBITDA margin (%)
14.5
13.0
-
12.5
-
Depreciation
677
609
11.1
606
11.7
Interest cost
460
615
(25.2)
513
(10.4)
Other Income
154
158
(2.3)
217
(29)
2,283
1,614
41.4
1,978
15.4
PBT margins (%)
10.1
7.7
Tax
666
523
Exceptional item
PBT
Tax rate (%)
(50)
8.6
27.3
588
13.2
29.2
32.4
-
29.7
-
1,617
1,091
48.1
1,391
16.3
PAT margins (%)
7.2
5.2
-
6.0
-
Reported EPS (Rs)
3.2
2.2
46.5
2.7
16.3
Source: Company
 APTY's 2QFY15, standalone revenues came in at Rs22,496mn, 7% higher over
2QFY14 revenue of Rs21,068mn. Revenue growth came on 7% volume increase,
though there was negative 1% impact of price and mix. On a sequential basis,
the company reported 3% decline in revenues.
 Company benefitted from soft rubber prices. Gross margins of the company expanded by 467bps YoY and 383bps QoQ to 37%.
 Employee cost during the quarter was up by 23%, though the same was lower
by 5% QoQ. Other expenses during the quarter was on the higher side. Other expenses at Rs3,654mn increased by 24% YoY 11% QoQ. Management attributed
increase in freight cost and marketing/advertisement spend as the reason for rise
in other expenses.
 EBITDA during the quarter grew by 20% YoY and 13% QoQ and the same was
primarily on account of benefit from lower input cost. EBITDA margin at 14.5%
was higher by 150bps YoY and 200bps QoQ.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
13
MORNING INSIGHT
November 12, 2014
 Depreciation cost was higher by 11% YoY and 12% QoQ. Other income declined marginally YoY. Interest cost declined for third consecutive quarter. Interest cost declined by 25% YoY and 10% QoQ.
 APTY reported standalone PAT of Rs1,617mn, a growth of 48% YoY and 16%
QoQ.
Consolidated result highlights
Quarterly performance (Consolidated)
(Rs mn)
Revenues
2QFY15
2QFY14
YoY (%)
1QFY15
QoQ (%)
33,152
34,335
(3.4)
32,476
2.1
Total expenditure
28,218
29,815
(5.4)
28,188
0.1
RM consumed
18,475
20,213
(8.6)
18,329
0.8
Employee cost
4,264
4,227
0.9
4,320
(1.3)
Other expenses
5,479
5,376
1.9
5,539
(1.1)
EBITDA
4,935
4,520
9.2
4,287
15.1
14.9
13.2
-
13.2
-
EBITDA margin (%)
Depreciation
1,070
1,038
3.1
1,004
6.6
Interest cost
496
756
(34.4)
530
(6.3)
Other Income
196
290
(32.5)
186
5.2
(300)
-
3,564
2,611
36.5
10.8
7.6
Exceptional item
PBT
PBT margins (%)
3,044
17.1
9.4
Tax
985
417
136.4
764
28.9
Tax rate (%)
27.6
16.0
-
25.1
-
17.5
2,279
13.2
Reported PAT
2,579
2,195
PAT margins (%)
7.8
6.4
Reported EPS (Rs)
5.1
4.4
16.2
4.5
13.2
2QFY15
2QFY14
YoY%
1QFY15
QoQ%
22,651
21,227
6.7
23,282
(2.7)
1,903
3,752
(49.3)
1,598
19.1
10,544
10,609
(0.6)
9,503
11.0
12.1
10.7
-
10.7
-
0.7
2.2
-
1.1
-
13.0
11.8
-
11.3
-
7.0
Source: Company
Segmental performance
(Rs mn)
Segmental Revenues
India
South Africa
Europe
EBIT margins (%)
India
South Africa
Europe
Source: Company
 Consolidated revenues in 2QFY15 de-grew by 4% YoY and on a QoQ bias, reported marginal growth.
 India operations revenues inched up by 7% YoY and the same stood at
Rs22,651mn. As compared with 1QFY15, revenues declined marginally.
 Revenues from the South African operations are not strictly comparable on a YoY
basis. Company closed the deal with SRI in 3QFY14. So post 3QFY14, revenues
consist of only one plant. Accordingly revenues on a YoY basis are down significantly. On a sequential basis, revenues grew by 19% to Rs1,903mn.
 From European operations, revenue growth stood flat at Rs10,554mn. While volumes increased by around 2%, there was negative impact of price and mix. On
a QoQ basis, company reported 11% jump in revenues.
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MORNING INSIGHT
November 12, 2014
 On weak natural rubber prices, the company reported gross margin improvement
from 41.1% in 2QFY14 and 43.6% in 1QFY15 to 44.3% during the quarter under review. Gross margin expansion was primarily contributed by Indian operations.
 Despite sharp rise in standalone employee cost, on a consolidated basis, employee cost increased marginally by 1%. Similarly, even other expenses increased marginally by 2%, despite 24% rise in Indian operations. One of the
reason for the same is part sale of South African operations in 3QFY14.
 Consolidated EBITDA grew by 9% YoY and 15% QoQ to Rs4,935mn. EBITDA
margin increased from 13.2% in 2QFY14 and 1QFY15 to 14.9% in 2QFY15.
 EBIT margins improved both YoY and QoQ at Indian and European operations. In
India, 2QFY15 EBIT margins stood at 12.1%, as against 10.7% in 2QFY14 and
1QFY15. Similarly, European operations reported EBIT margin at 13%, up from
11.8% in 2QFY14 and 11.3% in 1QFY15. In Europe, EBITDA margin increased
from 15% to 17% in 2QFY15.
 In line with standalone operations, interest cost at the consolidated basis witnessed sharp YoY decline.
 APTY reported consolidated PAT of Rs2,579mn, 18% higher over 2QFY14 PAT of
Rs2,195mn. Sequentially, profits were up by 13%.
Conference Call Highlights
 Management said that in India, there are signs of demand pick-up but they are
still weak. Industry is not witnessing significant price cuts but there is some discounting and there no increase in discounting levels in the past 3-6 months.
 In 2QFY15, APTY witnessed volume growth in the truck segment, slightly below
10%. Passenger car volumes grew by 15% but there was de-growth in farm segment volumes. MHCV replacement demand is growing in low single digit. Management expects economic recovery will see good pick-up in MHCV replacement demand.
 Capacity utilization at Indian operations increased from ~75% to more than
80%. Capacity utilization in the truck bias segment has remained same between
70-75%, but in the truck radial side, the company has witnessed improvement in
capacity utilization. Truck Bias and Truck Radial capacity stands at 800MTPD and
600MTPD respectively.
 In Europe, management said that despite worries on European economy, the
passenger car industry demand continues to be in positive territory. In 2QFY15,
the company operated at 90% capacity utilization. With 3Q being the best period, capacity utilization will reach its peak.
 In the South African operations, the company initiated Business Rescue Proceedings in order to re-structure its operations there. In 2QFY15, South African operations achieved break-even levels.
 On the raw material side, the management believes that natural rubber prices
have bottomed out. Going forward, there could be marginal increase in natural
rubber and other raw material prices. Crude oil price decline benefit generally
comes after a lag of two quarters. Management cautioned that, crude oil price
decline may necessarily not lead to decrease in crude derivatives as they have
their own dynamics.
 Average raw material cost for the quarter was - Natural Rubber Rs150/kg, Synthetic Rubber Rs140/kg, Carbon Black - Rs87/kg.
 In 2QFY15, at the standalone operations, 23% revenues came from OEM sales
and 77% from replacement and exports. At the consolidated level, replacement
accounted for 79% of revenues and OEM contributed 21% of revenues.
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MORNING INSIGHT
November 12, 2014
 In standalone operations, revenues from truck tyre sales were 64%, passenger
car tyre accounted for 17% and balance was from LCV/farm/OHT. At the consolidated level, revenue from truck tyre sale stood at 46%, while passenger car
tyre revenues accounted for 36% of the overall revenues.
 In FY15, capex includes maintenance capex of Rs2bn and certain advances for
plant and machinery towards Chennai expansion and industrial tyre conversion.
For FY16 and FY17, the company plans to put invest Euro300mn for its Europe
greenfield plant, Rs1.5bn for Chennai expansion and majority of Rs5bn earmarked for capacity conversion to OHT/Industrial tyres. Apart from this there
would be annual maintenance capex.
 As of end September 2014, standalone net debt and consolidated net debt stood
at Rs12bn and Rs9.3bn respectively. Gross debt at end 2QFY15 was Rs16.5bn.
Outlook
 After witnessing demand slowdown for the past two years, tyre demand is expected to pick-up over the medium to long term. Demand for automobiles is
expected to grow on a strong note over the course of net couple of years. In the
domestic market, we expect strong growth in passenger vehicle and commercial
vehicle segment over the course of next 2-3 years. Given significant exposure in
the PV and CV segment, we expect APTY to benefit from expected demand
revival in these two critical segments.
We recommend ACCUMULATE
on Apollo Tyres with a price
target of Rs.251
 Natural rubber price has seen further correction in recent months and that bodes
well for tyre producing companies. Apart from natural rubber price decline, fall in
crude oil prices has come as an added advantage. Significant portion of raw material are crude oil derivatives and fall in crude oil prices could potentially further
lower the raw material cost basket for tyre manufacturers.
 In the near term, lower input cost will continue to support earnings and over the
medium to long term, we expect earnings to receive boost from growth in revenues.
 We marginally revise our FY15 and FY16 estimates upward. We raise our target
price on the stock to Rs251 (earlier Rs218) and retain our ACCUMULATE (buy on
decline) rating on the stock.
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MORNING INSIGHT
Bulk deals
November 12, 2014
Trade details of bulk deals
Date
Scrip name
Name of client
Buy/
Sell
Quantity
of shares
Avg.
price
(Rs)
11-Nov
Berldrg
11-Nov
Deltaltd
Saurabh Rasiklal Gandhi
S
30,581
31.7
Sanjay Kumar Patwari
S
75,000
11-Nov
74.3
Deltaltd
Sandeep Kumar
B
100,750
74.2
11-Nov
Ecoplast-$
Manakchand Motilal Daga
S
48,914
56.5
11-Nov
Ecoplast-$
Shanaz Shukkoor
B
20,000
56.9
11-Nov
Ecoplast-$
Jayesh M Parekh
B
50,027
56.9
11-Nov
FCL
Shah Atul
B
62,500
156.2
11-Nov
FCL
Ajay Multi Projects Ltd
S
75,000
154.6
11-Nov
Feindialtd
Ajay Gupta
B
58,000
19.4
11-Nov
Gaganpo
Chitalia Stock Trading Pvt Ltd
S
100,000
5.9
11-Nov
Gaganpo
Anju R Maheshwari
B
98,500
5.9
11-Nov
Indocity-$
Indo-Castle Shares & Stocks Ltd
B
100,300
6.3
11-Nov
Indovation
Kirit Ramanlal Shah
B
20,000
92.0
11-Nov
Indovation
Sabina Anilkumar Sanghvi
B
20,000
92.0
11-Nov
Indovation
Rama Krishna Bhashyam
S
44,721
92.1
11-Nov
Jindalsaw
Valiant Mauritius Partners Ltd
S
2,014,000
80.5
11-Nov
Jindalsaw
Valiant Mauritius Partners Offshore
S
1,786,000
80.5
11-Nov
Mahavirind
Raja Ram Ladha
B
65,000
15.0
11-Nov
Mahavirind
Pankaj Ladha
B
153,196
15.0
11-Nov
Mahavirind
Shobhita Kapoor
S
200,000
15.0
11-Nov
Naisarg
Savitaben Tarachand Shah
B
50,000
12.4
11-Nov
Naisarg
Ald Promoters Pvt Ltd
S
40,000
12.4
11-Nov
Naisarg
Jilesh Navin Chheda (Huf)
B
40,000
12.4
11-Nov
Naisarg
Paresh Ramjibhai Chauhan
S
109,831
12.4
11-Nov
Naisarg
Jyoti Singh Vishwakarma
B
49,404
12.4
11-Nov
Obil
Vck Share & Stock Broking Services
S
40,000
12.0
11-Nov
Prerinfra
Vijay Shah
S
59,935
22.9
11-Nov
Primapla
Pioneer Holdings Pvt Ltd
S
75,000
52.0
11-Nov
Primapla
Dipak Kanayalal Shah
S
215,000
52.5
11-Nov
Ramappr-B
Meenu Gupta
S
84,000
9.3
11-Nov
Ramappr-B
Divya Mansharamani
B
70,708
9.6
11-Nov
Skpsec
Laxmipat Dudheria
B
28,111
22.1
11-Nov
Starlit
Ajay Prakash Jhunjhunwala
S
48,000
19.0
11-Nov
Starpaper
New Millenium Tech Management
B
100,993
14.8
11-Nov
Starpaper
IFCI Ltd
S
127,394
14.9
11-Nov
Sunrajdi
Gunial Investment & Trading Pvt Ltd
S
639,100
8.3
11-Nov
Sunrajdi
Sunny Sunil Gandhi
B
639,100
8.3
11-Nov
Thirinfra
Century Finvest Pvt Ltd
S
29,595
26.2
11-Nov
Upsurge
Ivory Consultants Pvt Ltd
B
200,000
51.0
11-Nov
Upsurge
Soma Gavandhe
B
200,000
51.0
11-Nov
Upsurge
Anurag Gupta Huf
S
275,000
51.0
11-Nov
Vgcl
Hem Chand Jain
S
132,000
19.1
11-Nov
Vinrklb
Manoj Kumar Jain
S
35,000
17.0
11-Nov
Vinrklb
Shatbhisha Trading Pvt Ltd
B
35,500
17.0
11-Nov
VMS
Abhinandan Jain
B
200,000
21.8
11-Nov
VMS
Priteshkumar H Shah
S
200,000
21.8
11-Nov
Voracon
Vinayak Trimbak Sarkhot
S
10,000
10.0
11-Nov
Yogisung
Euro Plus Capital Ltd
B
92,252
13.9
11-Nov
Yogisung
Parkfield Developers & Builders
S
100,100
13.1
11-Nov
Zentec
Ashish Rameshchandra Kacholia
B
88,636
413.2
Source: BSE
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MORNING INSIGHT
Gainers & Losers
November 12, 2014
Nifty Gainers & Losers
Price (Rs)
chg (%)
Index points
Volume (mn)
Gainers
Punjab National Bank
954
3.4
NA
0.9
1,012
2.7
NA
1.7
155
2.7
NA
7.6
BHEL
245
(2.2)
NA
3.3
ITC
364
(2.0)
NA
4.8
Bharti Airtel
385
(1.6)
NA
4.2
Bank of Baroda
IDFC Ltd
Losers
Source: Bloomberg
Forthcoming events
Company/Market
Date
Event
12-Nov
Apollo Hosp, BPCL, Creative Eye, Datamatics, DCM Shriram, DCW, Dishman,
Eicher Mot, FDC, HEG, ICRA, IGL, India Cement, J&K Bank, JP Associates, MT
Educare, Natco Pharma, Nalco, Oil, Orbit Corp, RCF, Reliance Infra, Renuka, Rolta,
Rel power, Sobha Dev, STC India, Subex, Tata Steel, Time Techno, TNPL earnings
expected
13-Nov
Arvind Remedy, Bajaj Electricals, Balkrishna Ind, Bombay Dyeing, Cipla, DLF,
Elantas, Finolex Ind, Fortis, GIC Housing Finance, Gujarat Gas, Hathway, Hindalco,
HPCL, Hindcopper, IOC, ITI, IVRCL Infra, Magnum, Merck, Modi Rubber, NCC,
SAIL, SCI, Sun Pharma, Tata Power, Voltas earnings expected
14-Nov
ABG, Aegis Logistics, BEML, BHEL, Britannia Industries, CESC, Essar ports,
GE Shipping, GMR Infra, Gujarat Apollo, HDIL, JBF Ind, JK Tyre, Madhucon,
Mangalam Cement, Megasoft, Nalco, ONGC, Patel Engg, PTC, Punj Lloyd,
Rajesh Exports, Rcom, Rel Capital, SBI, Sunil Hitech, Tata Motors, TVS Motors
UB Holdings, earnings expected
Source: Bloomberg
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MORNING INSIGHT
November 12, 2014
Fundamental Research Team
Dipen Shah
IT
dipen.shah@kotak.com
+91 22 6621 6301
Saday Sinha
Banking, NBFC, Economy
saday.sinha@kotak.com
+91 22 6621 6312
Ritwik Rai
FMCG, Media
ritwik.rai@kotak.com
+91 22 6621 6310
Jayesh Kumar
Economy
kumar.jayesh@kotak.com
+91 22 6652 9172
Sanjeev Zarbade
Capital Goods, Engineering
sanjeev.zarbade@kotak.com
+91 22 6621 6305
Arun Agarwal
Auto & Auto Ancillary
arun.agarwal@kotak.com
+91 22 6621 6143
Sumit Pokharna
Oil and Gas
sumit.pokharna@kotak.com
+91 22 6621 6313
K. Kathirvelu
Production
k.kathirvelu@kotak.com
+91 22 6621 6311
Teena Virmani
Construction, Cement
teena.virmani@kotak.com
+91 22 6621 6302
Ruchir Khare
Capital Goods, Engineering
ruchir.khare@kotak.com
+91 22 6621 6448
Amit Agarwal
Logistics, Transportation
agarwal.amit@kotak.com
+91 22 6621 6222
Technical Research Team
Shrikant Chouhan
shrikant.chouhan@kotak.com
+91 22 6621 6360
Amol Athawale
amol.athawale@kotak.com
+91 20 6620 3350
Derivatives Research Team
Sahaj Agrawal
sahaj.agrawal@kotak.com
+91 79 6607 2231
Rahul Sharma
sharma.rahul@kotak.com
+91 22 6621 6198
Malay Gandhi
malay.gandhi@kotak.com
+91 22 6621 6350
Prashanth Lalu
prashanth.lalu@kotak.com
+91 22 6621 6110
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