Indra. Hold July 2009 LAST PRICE CHANGE IN RECOMMENDATION

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1 20 July 2009 Indra LAST PRICE Hold CHANGE IN RECOMMENDATION Bloomberg IDR SM Reuters IDR.MC Share price Target price Market Cap N. Shares 2.68bn 164.1m Main Shareholders CajaMadrid 19.8% CF ALBA 10.0% Casa Grande de Cartagena 6.5% Gas Natural 5.0% Caja Astur 5.0% Free-float 52.7% Analyst Adrian Zunzunegui Share Price (3-yr) Basic Data E 2010E 2011E Revenues ( m) 2,168 2,380 2,520 2,658 2,801 EBITDA ( m) EBIT ( m) Net profit ( m) EPS ( ) DPS ( ) BVPS ( ) EBITA margin (%) 10.3% 11.4% 11.3% 11.3% 11.5% Gearing (%) 20.2% 17.9% 19.7% 17.0% 13.8% Main Ratios E 2010E 2011E P/E (x) P/BV (x) Dividend Yield (%) 3.1% 3.9% 4.0% 4.4% 4.8% EV/Sales (x) EV/EBITDA (x) EV/EBITA (x) Q results to come out next week Indra will release 1H 09 results next week, Wednesday July 29th at the market closing. We look for 2Q 09 revenues to grow by 5.7% y-o-y to 703m (below the 10% growth seen to March, and within the FY 09E provided guidance of between 5% and 7% growth). At the EBIT level, we look for 4% y-o-y growth to 82.3m (+7% to March). EBIT margin in the quarter should stand at 11.7%, slightly below the 11.9% seen in the same period last year, although higher than the 10.8% seen in 1Q 09 (which was flat y-o-y). Finally, we expect net profit to grow by 4.8% to 60.8m /07/2006 Indra 03/11/ /02/ /06/ /09/ /12/ /04/ /07/ /11/ /02/ /06/2009 Gas overhang risk over Gas Natural (which owned 18.5% of Indra) sold a 10% stake to ALBA (Spanish holding company), kept a 5% stake (contrary to initial plans of selling its whole stake), and placed the balance (c. 3% stake) in the market among institutional investors, everything at 15 per share (c. 4% discount to previous closing price). This almost puts an end to Gas overhang risk, which has been a drag to Indra s recent share price performance. Share Price Relative to IBEX (5-yr) though we disliked Indra selling treasury stock Reportedly, and due to the high demand levels when placing the 3% stake sold by Gas Natural, JP Morgan offered Indra the possibility to include some of its own shares. Indra sold 2.5m shares, or 1.52% of its capital at 15 per share. Total proceeds of 37.5m (moving down its treasury stock position from 4.1m to 1.6m shares, or c. 1% of capital). Despite non sizeable, from a qualitative standpoint we disliked the move: no reason (Indra does not need the proceeds for cutting down debt, no major impact in the stock liquidity) for selling 1.5% stake at a 4% discount (with a limited capital gain, if not a loss, considering the share price recent performance), rather than cancelling the shares /07/ /09/ /12/2006 Indra relative to IBEX-35 16/02/ /04/ /07/ /09/ /11/ /02/ /04/ /06/ /08/ /11/ /01/ /03/ /06/2009 Please refer to important disclosures at the end of this report Limited upside, downgrade from Buy to Hold Since we last upgraded Indra to Buy, in June 08, the shares have outperformed the Ibex 35 Index by c. 20%. Outperformance is nevertheless less evident since March 09 (in fact the shares have underperformed since then). Recent good news (Telvent sale process now over, Gas overhang risk behind) have led share price to get closer to our 17 target price (c. 6% upside potential). We continue to like Indra s fundamentals, but considering limited upside potential and current trading multiples (13X PER and 8X EBITDA 09E), we are no longer buyers of the stock.

2 Downgrade to Hold on valuation We are downgrading our recommendation on Indra from Buy to Hold, on valuation grounds. Our target price offers less than 10% upside from current share prices. Under our estimates, the stock trades at 8X EBITDA and 13X PER 2009E, not attractive enough multiples to remain buyers. Since we upgraded our recommendation on Indra to Buy, in June 08, the shares have outperformed the Ibex 35 Index by c. 20%. Nevertheless, and as we feared in our March 09 report, outperformance has been less evident since then (in fact Indra shares have underperformed the market since the beginning of March), on Fenosa s overhang, Telvent risk, and an overall poor relative performance from Indra on rising markets. Both Fenosa and Telvent risks are now gone, and seems that most of good news are behind us. Indra has proven a defensive stock within weak markets, which seems not to be the case now. Indra: Share price performance relative to Ibex 35 since upgrade /05/ /08/ /10/ /12/ /03/ /05/2009 Indra relative to IBEX-35 Source: Bloomberg We continue to like Indra from a fundamental standpoint, though we are downgrading the stock to Hold on valuation multiples: Limited upside to our 17 target price: Our target price of per share offers 6.7% upside from current share prices, not enough to keep a Buy recommendation. Not cheap anymore: The stock is trading at c. 13X PER and 8X EBITDA 09E, not undemanding multiples. Should the shares trade at our target price of per share, they would trade at 14X PER and 8.5X EBITDA 09E Recent underperformance likely to continue: We believe Indra will continue to underperform the market, following a sharp outperformance during the last 18 months. 2 Indra

3 2Q results out July 29th Indra will release its 1H 09 results next Wednesday July 29 th. We look for 2Q 09 revenues to grow by 5.7% y-o-y to 703m, which would be below the 10% growth seen to March, and within the FY 09E provided guidance of between 5% and 7% growth. By verticals, we see Transport & Traffic sales growing by 8.7% in 2Q 09 to 133m (+8% growth seen to March), Telecom & Media also growing above the average, by 9.6% y-o-y to 74m (+10% in 1Q), Public Administrations to grow 6.9% (+8% to March) to 93m, Financial Services to grow by 9.5% (roughly in line with what seen in 1Q), and Energy & Industry to show growth of c. 2% (below the 6% growth seen to March). Finally, we look for Defence & Security sales to show growth in the quarter of 2.1% (Defence should be one of the verticals to show below average growth by year-end). At the EBIT level, we look for 4% y-o-y growth to 82.3m, which would compare with the c. 7% growth seen to March. EBIT margin in the quarter should stand at 11.7%, slightly below the 11.9% seen in the same period last year, although higher than the 10.8% seen in 1Q 09 (which was flat y-o-y). Finally, we expect net profit to grow by 4.8% to 60.8m. Indra: 2Q'09 results' preview m 2Q'08 change 2Q'09E Total Sales % Transport & traffic % Telecommunications & Media % 73.9 Public Administrations & Sanity % 92.9 Finance & Insurance % Industry & Energy % Defence, Security & Logistics % EBIT % 82.3 EBIT margin 11.9% 11.7% Net profit % Indra

4 Indra: Summary of Financial Statements P&L ( m) Total revenues ,079 1,202 1,407 2,168 2,380 2,520 2,658 2,801 Operating expenses ,042-1,222-1,910-2,071-2,194-2,309-2,425 EBITDA Depreciation EBIT Net financial items Exceptional items Corporate tax Affiliates Goodwill amortisation Minorities Net atr. Profit Ratios RoCE 33% 23% 26% 34% 35% 35% 26% 19% 21% 21% 21% 21% Return on Equity 27% 22% 22% 21% 20% 37% 33% 21% 23% 22% 22% 22% EV/EBITDA EV/EBIT Net debt/ebitda Gearing (%) -56% -34% -14% -37% -47% -18% 16% 20% 18% 20% 17% 14% Balance sheet ( m) Equity ,019 Minority items Provisions Net debt (cash) Capital invested ,199 1,304 1,332 1,429 1,529 Goodwill Intangible assets Tangible assets Financial assets Other Working capital Capital employed ,199 1,304 1,332 1,429 1,529 Cash Flow ( m) Net profit Depreciation Other provisions Minorities Goodwill & other Cash Flow Investments in fixed assets Financial investments Changes in work. cap Operating Cash Flow Others (includes buyback) FCF ex-dividends Dividends FCF after dividends Indra

5 Iberian Equities was ranked 4th in 2008 for the quality of its recommendations on Spanish stocks (Ibex-35). This is the 4th year in a row that Iberian Equities has been ranked in the top ten by StarMine. Rating definitions BUY: The stock is expected to outperform its market main Index by at least 10% over a 12- month investment horizon. HOLD: The stock is expected to perform in line (+/- 10%) with its market main Index over a 12-month investment horizon. SELL: The stock is expected to underperform its market main Index by at least 10% over a 12-month investment horizon. Statement of risk Our target price is based on assumptions for all Indra s business lines, which are subject to change depending on company or other industry sources information. With some 65% of sales being generated in Spain, Indra s earnings are dependent on the Spanish macro cycle, and a faster than expected slowdown might affect our estimates. In addition, increased competition in the Spanish market could add pressure on industry pricing, which could have a negative impact on margins. LatAm accounts for a big proportion of the group s revenue growth, thus macroeconomic troubles in the region might also well affect the company s outlook. Indra is also exposed to public spending, and to a certain extent depends on the Spanish government spending in Transport, Defense, Public Administrations and Healthcare. Iberian Equities is regulated by the Comisión Nacional del Mercado de Valores ( Disclaimer This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Iberian Equities SA, AV from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Iberian Equities SA, AV- or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Iberian Equities SA, AV as of the date of this report only and are subject to change without notice. Neither Iberian Equities SA, AV nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith 5 Indra