Economy News. Corporate News APRIL 11, 2013

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1 APRIL 11, 2013 Economy News With about 24,000 MW power capacity stranded due to acute fuel crunch, Power Ministry has made a pitch for allocation of priority status to generation plants at par with fertiliser units, and will take up this matter for discussion at a high-level ministerial meeting. (BL) As per SIAM passenger car sales in India are forecasted to grow 3-5 percent in the ongoing fiscal on expectations of an improvement in overall macro-economic conditions, despite witnessing a fall of 6.69 per cent during (ET) As with wheat, the Commission for Agricultural Costs and Prices (CACP) has recommended no more than a five per cent increase in the Minimum Support Price (MSP) for paddy for the kharif crop marketing year, starting October. (BS) The Centre and states have crossed another hurdle in the way of Goods & Services Tax (GST) by agreeing on an annual turnover threshold of Rs 25 lakh. (BS) Corporate News Tata Steel Ltd will merge wholly-owned subsidiary companies Tata Metaliks Ltd (TML) and Tata Metaliks Kubota Pipes Ltd (TMKPL) with itself through a scheme of amalgamation, which will be sanctioned through a court approval process. (Mint) In yet another effort to restart operations, Vijay Mallya-promoted Kingfisher Airlines, on Wednesday, submitted a fresh revival plan to the Directorate-General of Civil Aviation. (BL) Shasun Pharmaceuticals and Switzerland-based biopharmaceutical group Debiopharm Group have entered into a licensing agreement for the manufacture and commercialisation of a drug for treating memory deficit and Alzheimer's diseases. (BL) Tata Communications Ltd (TCL) has bagged a USD 20 million deal for 5 years from consultancy Mott MacDonald for redesigning its telecom infrastructure and related services. (ET) Mahindra Holidays & Resorts India board has fixed the price band for institutional placement programme at Rs 255 per share. (BL) M&M would launch Vibe hatchback priced at Rs 6 lakh next month to take on Maruti Swift, Hyundai i20. (ET) Petronet LNG Ltd, India's biggest importer of liquefied natural gas, will take 26 per cent stake in a shipping venture planned to haul gas to its new terminal at Kochi in Kerala. (ET) NTPC and Coal India Ltd have resolved their differences over the alleged poor quality of coal supplied by the country's monopoly coal miner to India's largest power generator. (Mint) Jindal Stainless Ltd (JSL) and Posco has signed a strategic pact that includes cooperation in South Korean major's $ 12 billion steel mill project in Odisha and joint exploration for a nickel facility in Indonesia. (ET) Shipping Corporation of India will diversify into the lucrative dredging sector and partner port authorities and finance companies to form a joint venture company to undertake dredging at ports, signaling a move from its traditional shipping business. (ET) Etihad Airways' purchase of a stake in Jet Airways could be delayed until at least August as the Abu Dhabi carrier seeks assurances following setbacks for several Gulf investors in India. (Mint) Maruti Suzuki India has signed an agreement with RPG Life Sciences to acquire a land parcel in Mumbai for an undisclosed amount to set up its regional office. (ET) Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange Equity % Chg 10 Apr 13 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 18, (6.3) (6.4) NIFTY Index 5, (6.5) (6.6) BANKEX Index 12, (8.5) (12.0) BSET Index 6, (4.4) 6.5 BSETCG INDEX 8, (10.1) (15.6) BSEOIL INDEX 8, (7.1) (5.0) CNXMcap Index 7, (5.4) (13.0) BSESMCAP INDEX 5, (7.8) (21.4) World Indices Dow Jones 14, Nasdaq 3, FTSE 6, (1.8) 4.3 NIKKEI 13, HANGSENG 22, (3.9) (4.6) Value traded (Rs cr) 10 Apr 13 % Chg - Day Cash BSE 1, Cash NSE 9, Derivatives 144,660 (9.0) Net inflows (Rs cr) 9 Apr 13 % Chg MTD YTD FII (619) (207) 54,545 Mutual Fund 148 (496.8) (34) (7,202) FII open interest (Rs cr) 9 Apr 13 % Chg FII Index Futures 11, FII Index Options 49, FII Stock Futures 22, FII Stock Options 1, Advances / Declines (BSE) 10 Apr 13 A B T Total % total Advances Declines Unchanged Commodity % Chg 10 Apr 13 1 Day 1 Mth 3 Mths Crude (NYMEX) (US$/BBL) 94.5 (0.1) Gold (US$/OZ) 1,559.2 (1.7) (1.2) (5.9) Silver (US$/OZ) 27.6 (1.3) (4.5) (9.1) Debt / forex market 10 Apr 13 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ Sensex 21,000 19,500 18,000 16,500 15,000 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

2 COMPANY UPDATE Ruchir Khare Summary table (Rs mn) FY12 FY13E FY14E Sales 37,234 31,120 34,090 Growth (%) 30.7 (16.4) 9.5 EBITDA 7,165 6,535 7,329 EBITDA margin (%) PBT Net profit 6,447 5,922 6,455 EPS (Rs) Growth (%) 21.3 (8.1) 9.0 CEPS (Rs) BV (Rs/share) DPS (Rs) ROE (%) ROCE (%) Net cash (debt) 17,161 20,605 25,789 NW Capital (Days) (75.8) (82.4) (85.0) EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings (x) P/BV (x) Source: Company, Kotak Securities - Private Client Research ENGINEERS INDIA LTD (EIL) PRICE: RS.154 RECOMMENDATION: BUY TARGET PRICE: RS.225 FY14E P/E: 8.3X EIL stock has corrected significantly in the past few trading sessions partly on expectations of probable equity dilution through FPO and possible delays in key refinery projects that would likely defer earning accretion in the current year. Order inflows have remained weak for the company mainly due to the cyclical slowdown in Hydrocarbon space and sluggish activity from major PSUs. However, from historical perspective we infer that the order booking in Indian hydrocarbon space has been unevenly spread. We believe that in future, company shall inevitably benefit from MoPNG huge target of nearly Rs 1.2 trillion envisaged for various projects in XII five year plan. Company has been observing pick up in order inflows/revenue booking in consultancy business space which enjoys healthy margins. Growth in LSTP division is likely to remain moderate in FY14E. We believe that the stock is attractively valued at current level but would likely underperform the broader market until clarity on probable equity dilution/fpo is received. However, we continue to remain positive on the long term business prospects of the company. Tweak our estimates and continue to value the company using DCF valuation methodology and maintain 'BUY' recommendation on company's stock with one year revised price target of Rs 225 (Rs 265 earlier). Concall Highlights We interacted with with the management of EIL to get a perspective on the overall business environment unfolding in the domestic markets. Below are the key highlights of our interaction. Company has been observing moderation in LSTP segment; consultancy business in hydrocarbon segment likely to drive revenue growth in FY14 Currently company has been observing continued momentum in the consultancy business and expects the division to drive revenues over FY14. We highlight that the margins in consultancy business are higher than the LSTP (Lumpsum Turnkey Projects segment) division. Management has indicated that pickup in Capex in hydrocarbon sector by various PSUs would drive company's revenue growth from FY14 onwards. We highlight that the company has bagged majority of orders in consultancy division in FY13. Company has reported increased proportion of revenues from consultancy business in the revenue pie through 9MFY13. We expect the trend to continue and infer that this would likely result in YoY margin expansion in FY14 due to higher degree of operating leverage in consultancy business. Quarterly revenue mix trend Consultancy (Rs mn) 8000 LSTP (Rs mn) Q FY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13 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 2

3 Segment EBIT margin trend Source: Company We highlight that over the past few decades; EIL has established a near monopoly position in the industry and has developed strong relationship with major Hydrocarbon players like HPCL, BPCL, IOCL etc. Company has commendably developed indigenous technology and expertise for offshore platforms, oil and gas processing, oil refining, petrochemicals and pipeline project. Management expects that the company to benefit from several pending orders from various PSU refineries over the next few years. Company believes that HPCL Ratnagiri refinery and petrochemical project (estimated cost Rs 350 bn might flow Q4FY14 or FY15. Management believes that this could entail consultancy opportunity of nearly Rs 15 to Rs 20 bn for the company. We believe that HPCL would likely give priority to the Barmer refinery over Ratnagiri plant and have therefore not built this in our FY14 earnings estimate. EIL has recently secured Rs 7.2 bn Consultancy service contract from BPCL for Integrated refinery expansion project, Kochi. The project involves enhancing crude oil refining capacity of the refinery from the present level of 9.5 MMTPA to 15.5 MMTPA. Key PSUs 12th Five Year Plan refining capacity addition (MMTPA) PSU IOC BPCL(Mumbai) Kochi (BPCL) BORL Bina HPCL (Mumbai+Visakhapatnam) MRPL CPCL Source: MPONG Consultancy (%) LSTP (%) 1Q FY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13 Company continues to win orders in international geographies mainly Middle East and expects further momentum through FY14. Management has stated that the company enjoys margins similar to domestic jobs in the international projects. Currently company derives nearly 10-12% of revenues from international jobs and expects it to maintain going ahead. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3

4 EIL currently employs nearly 3400 employees including close to 2750 personnel's with technical credentials. Leveraging on its diverse skillset, company has successfully developed commercial applications of various process technologies for petroleum refining and oil and gas processing. We believe that the company has flexible, comprehensive and competent compensation structure and this is substantiated by its relatively lower attrition rate of 2.5%. Order book offers visibility for next eighteen months; meaningful investment in XII year plan in Hydrocarbon space offers immense business opportunity Company's order book at the end of Q3FY13 stood at Rs 38 bn comprising of Rs 22 bn of consultancy and Rs 16 bn of turnkey projects. Management has stated that majority of order flows in FY14 are likely to be in consultancy space. From historical perspective we infer that the order booking in Indian hydrocarbon space has been unevenly spread with majority of orders getting booked in the second half of respective five year plans. Company to maintain moderate growth in financials; asset light business model likely to result in value accretion We believe that company would likely report moderate revenue growth in FY14E due to slower growth in LSTP division. We project 9.5% YoY growth in revenues in FY14 from Rs. 31 bn in FY13E to Rs. 34 bn in FY14E mainly driven by consultancy business. In FY14 we forecast consultancy segment to report 13% YoY growth in revenues leading to margin expansion by nearly 50 bps. In our projected financials we build 21.5% EBITDA margins for FY14E. Segment Revenues (Rs bn) Consultancy & Engineering LTPLSTP FY10 FY11 FY12 FY13(E) FY14(E) Source: Company, Kotak Securities - Private Client Research EBITDA 8 EBITDA Rs bn (x axis) EBITDA% (Y axis) FY10 FY11 FY12 FY13(E) FY14(E) 10 Source: Company, Kotak Securities - Private Client Research We highlight that the company has a strong debt free balance sheet with net cash amounting to nearly Rs 60 per share. Lower capex and negative working capital would boost free cash flow generation in future. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4

5 Change in estimates Change in estimates FY14 (Rs mn) New Old Change % Revenues (21.9) EBITDA (28.0) PAT (18.0) EPS (18.0) Source: Kotak Securities - Private Client Research We reduce our FY14 earnings estimates for the company to factor in moderate growth in LSTP demand. However we build margin expansion on account of increasing proportion of consultancy business revenue share. We arrive at one year DCF based target price of Rs 225 (Rs 265 earlier) on company's stock. We maintain BUY on Engineers India Ltd with a price target of Rs.225 Valuation and recommendation EIL stock has corrected significantly in the past few trading sessions partly on expectation of probable equity dilution through FPO and possible delays in key refinery projects that would likely defer earning accretion in the current year. We reduce our earnings estimate for FY14 to factor in moderate growth in LSTP demand. At current price of Rs.155, stock is trading at 8.3x P/E and 4.9x EV/EBITDA multiples on FY14E earnings. We believe that the stock is attractively valued at the current price but would likely underperform the broader market until clarity on the probable equity dilution/fpo is received. We continue to remain positive on the long term business prospects of the company. We value the company using DCF valuation methodology and maintain 'BUY' recommendation on company's stock with one year revised price target of Rs 225 (Rs 265 earlier). Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5

6 Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price 10-Apr Amrit Corp-$ Amrit Steels Pvt Ltd S 50, Apr Amrit Corp-$ Navjyoti Residency Pvt Ltd B 50, Apr Bafna Spinning Archana Goenka B 1,330, Apr Boston Bio Geetaben Radheshyam Mundra B 40, Apr C. Mahendra LTS Investment Fund Ltd B 315, Apr C. Mahendra Taib Bank E C S 315, Apr Commex Tech IT People Pvt Ltd B 1,104, Apr Commex Tech Ram V Alamchandani S 875, Apr Deep Inds Avani Dharen Savla B 179, Apr Drillco Metal LA Tim Sourcing (India) Pvt Ltd B 35, Apr Drillco Metal Ncm International Pvt Ltd S 25, Apr Eurofinmart Manjeet Rana B 78, Apr Eurofinmart Garima Agarwal S 49, Apr Eurofinmart Ratul Puri B 25, Apr Eurofinmart Ashok Khandelwal S 65, Apr Focus Ind Lata Agrawal S 95, Apr Greenply Inds Laburnum Capital Advisors Pvt Ltd S 127, Apr Greenply Inds Jwalamukhi Investment Holdings B 140, Apr Jay Mahesh Infra Satyanarayana Thota B 56, Apr Sawaca Bsns Persistent Commodities Tradlink S 156, Apr Smilax Naga Subhashini Ilaparti B 65, Apr Svartcorp Choice Equity Broking Pvt Ltd B 269, Apr Tatamotors-Dvr Merrill Lynch Cap Mkts Espana Sa Sv B 6,340, Apr Tatamotors-Dvr The Royal Bank Of Scotland Asia Merchant Bank Singapore Ltd S 6,340, Apr Wagend Som Arora S 330, Apr Wagend Praveen Kumar Arora S 350, Source: BSE (Rs) Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6

7 Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers HDFC Infosys 2, HDFC Bank Losers ITC Ltd 285 (0.8) (4.0) 9.0 Hindustan Unilever 468 (0.9) (1.3) 2.0 Sun Pharma 857 (1.2) (1.2) 1.0 Source: Bloomberg Fundamental Research Team Dipen Shah IT Sanjeev Zarbade Capital Goods, Engineering Teena Virmani Construction, Cement Saurabh Agrawal Metals, Mining Saday Sinha Banking, NBFC, Economy Arun Agarwal Auto & Auto Ancillary Ruchir Khare Capital Goods, Engineering Ritwik Rai FMCG, Media Sumit Pokharna Oil and Gas Amit Agarwal Logistics, Transportation Jayesh Kumar Economy K. Kathirvelu Production Technical Research Team Shrikant Chouhan Amol Athawale Premshankar Ladha Derivatives Research Team Sahaj Agrawal Rahul Sharma Malay Gandhi Prashanth Lalu Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. 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