EQCR Iberia News. Reduce (Reduce)

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1 EQCR Iberia News SM 8.50 Equity Research Espresso IDR comment F Full report Indra Reduce (Reduce) Spain IT software & services MCAP EUR 1.7bn Target Price EUR November 2015 Current Price Up/downside Change in TP Change in EPS EUR % none down nm 2015E Waiting for additional cleaning Adjusted EBIT in Q3 was in line with consensus (EUR23.4m, 3.5% margin) despite better revenues. Still, we cut our EPS (-2.8% in 2016E, -2.9% in 2017E, -1.9% in 2018E) on weaker sales as, despite Q3, sales are expected to go down by c.4% in Q4 and 2016 following a weak order intake, repositioning and currency. More importantly, Indra has stated that there will be new non-recurrent effects related to Brazil in Q4 (nonquantified) which increase the risk of a need to reinforce capital, in our view. Reduce maintained. Q3 Adjusted EBIT in line with consensus Q3 adjusted EBIT was in line with consensus despite stronger sales (up 8%, +4% excluding seasonality) on a very strong performance of Spain (+20%, driven by the public sector). Adjusted EBIT margins were slightly below our estimates, reaching 3.5% (we were forecasting 4%), although still above H1, as expected. As a result of all, adjusted EBIT was 23.4EURm, in line with consensus and net losses reached EUR125m, higher than expected as Indra booked a EUR160m provision for restructuring (above the initial indications EUR150m). Conservative indications for year-end, we fine tune EPS For the FY, Indra estimates that sales will go down by c. 2% (implying -4% for Q4) and that FCF ex-restructuring would be zero in H2. This implies a FCF generation of c. EUR14m in Q4, which is looks feasible. Order intake was down by 5% in 9M and Q3 due to Brazil and delays in contracts in some countries dependent on the oil price. This, together with the company repositioning and currencies explain the low expectations for sales in Q4 and 2016 despite some large awards are expected in Spain and other markets. As a result, we cut our adjusted EPS by 2.8% in 2016, 2.9% in 2017 and 1.9% in We have not included new one-offs from Brazil. Our EUR8.5 TP is untouched as we have cut capex and we have extended the calendar of restructuring costs payments as guided by Indra yesterday. Additional cleaning ahead, we reiterate our Reduce rating Finally, Indra has announced has stated that there will be new nonrecurrent effects related to Brazil in Q4 (non-quantified). The company continues to revise the problematic projects and is working with an external firm to determine the magnitude of the problem. This obviously creates new uncertainties and increases the risk of a need to reinforce capital considering current equity is c. EUR390m and we expect net debt to reach c. EUR1.1bn by 2015 (including factoring). Reduce reiterated. Natalia Bobo nbobo@keplercheuvreux.com Market data Bloomberg: IDR SM Reuters: IDR.MC Market cap (EURm) 1,722 Free float 65% No. of shares outstanding (m) 164 Avg. daily volume('000) 1,167 YTD abs performance 30.0% 52-week high/low (EUR) 11.52/7.57 FY to 31/12 (EUR) 12/16E 12/17E 12/18E Sales (m) 2, , ,017.9 EBITDA adj (m) EBIT adj (m) Net profit adj (m) Net fin. debt (m) FCF (m) EPS adj. and fully dil Consensus EPS na Net dividend FY to 31/12 (EUR) 12/16E 12/17E 12/18E P/E adj and ful. dil EV/EBITDA EV/EBIT FCF yield 4.1% 8.6% 9.0% Dividend yield 0.0% 0.0% 0.0% Net fin.debt/ebitda Gearing 161.7% 102.8% 62.4% ROIC 15.4% 19.6% 21.4% EV/IC Nov 14 Feb 15 May 15 Aug 15 Nov 1 Price DJ Stoxx 600 (rebased) IMPORTANT. Please refer to keplercheuvreux.com\disclaimer for Important disclosures and analyst certification(s). keplercheuvreux.com

2 Some highlights of Q earnings Q3 sales were up 8%, 4% excluding seasonality, above our estimates (+5%, +2.5% excluding seasonality). Spain was up 20.3%, mainly due to the Public Sector (+31%), partly on Elections in Cataluña, but not only. By verticals, key drivers were financial services (+21%) mainly in Spain, Security and Defence (+32%) on Spain and Transport and Traffic (+6.5%), also linked to Spain (high speed train). Lower order intake (-5% in Q3 and in 9M) on Brazil and delays in some regions dependent on the oil price. Adjusted EBIT margins were slightly below our estimates (3.5% versus -1.8% in Q2 and versus our 4% estimate). Indra had already anticipated that H2 would be better for margins on lower overruns in projects (Brazil and Lithuania) and first cost savings (mainly in Q4). As a result, adjusted EBIT was 23.4EURm, in line with consensus and slightly below our estimates. Indra has booked a EUR160m provision for restructuring (above the EUR150m guidance) and has detailed the restructuring payments: EUR70m- EUR80m in 2015, EUR40-50m in 2016 and the remaining in 2018, linked to the early retirements. Before we were assuming EUR100m in 2015 and EUR50m in Full cost savings (EUR120m) are expected for As a result, net losses reached EUR125m in Q3, higher than expected. Negative FCF was EUR23m versus our -EUR3.4m (-EUR14m excluding cash restructuring costs). Working capital improved (DOS decreased from 64 days in Q2 to 61 days), but due to currency impacts. Net debt reached EUR837m, versus EUR825m in June, also benefiting from a currency impact of c. EUR15m (10% of gross debt in Brazilian real). Including factoring, net debt was c. EUR1.01bn. For the FY, the company guided for a 2% decrease in sales, implying a c. 4% drop in Q4 (despite some large awards expected in mainly Defence in Spain and Europe and Transport and Traffic in Middle East) and still expects a neutral FCF generation in H2 excluding restructuring (which implies a EUR14m FCF generation in Q4). For 2016 a decrease in sales is also expected following the weak order intake, Brazil and the company repositioning to focus on the most profitable projects. Currencies won t help either in coming months. 2 keplercheuvreux.com

3 Table 1: Q figures versus consensus EURm Q3 2015R Q Increase Increase Q3 KE Consensus (mean) Q3 vs. consensus Sales % % Recurrent EBIT nm % % margin 3.5% 6.9% 4.0% 3.8% EBIT nm nm nm % margin -21.7% 6.3% -19.9% Net profit reported nm nm nm FCF NA Source: Kepler Cheuvreux We cut our EPS, maintain our TP We cut our adjusted EPS by 2.8% in 2016, 2.9% in 2017 and 1.9% in 2018 on lower sales. For 2015, we cut our estimated sales, margins and we have assumed a higher restructuring cost while the cut in our adjusted net profit is also due to tax affects. We have not included any additional one-off from Brazil as we do not have any visibility on the potential amount. Thus, this would come on top. Our EUR8.5 TP remains untouched as we have cut capex (capex was below expectations in 9M) and we have extended the calendar of restructuring costs payments as guided by Indra yesterday. Table 2:Change in our estimates 2015E 2016E 2017E 2018E Old sales New sales % change -1.3% -1.3% -1.3% -1.3% Old adjusted EBIT New adjusted EBIT % change -10.2% 0.0% -1.5% -1.0% Old adjusted EBIT margin 1.7% 6.8% 8.7% 9.3% New adjusted EBIT margin 1.5% 6.9% 8.7% 9.3% Old adjusted net profit New adjusted net profit % change nm -2.8% -2.9% -1.9% Old adjusted EPS New adjusted EPS % change nm -2.8% -2.9% -1.9% Source: Kepler Cheuvreux 3 keplercheuvreux.com

4 More cleaning to come in Brazil Together with the Q3 release Indra announced that more restructuring/one offs are expected in Brazil for Q4 (the figure is undisclosed) as some of the assumptions used to do the business review in June have deviated from reality. In addition, the macro situation continues to deteriorate and the budget restriction is affecting its business (70% of their portfolio is linked to the public sector). Thus, the company has decided to used external firms to complement is analysis and to review the projects deviations, pending costs and financial or legal alternatives. Indra insisted in the call that this is only linked to Brazil (and to the 7-8 most problematic projects) and that they feel comfortable with the revision done in other areas. In our view, this announcement highlights once more the lack of visibility on the company s portfolio (initially the company had hoped that there would not be additional cleaning in Brazil) and creates new uncertainties. In our view, this situation increases the risk of a need to reinforce capital. We expect the company to end up 2015 with a net debt of c. EUR900 (close to EUR1.1bn including factoring) while current equity is EUR390m, before any additional writeoff. Although the company states in the note that cost of debt has come down slightly (10bps to 4.4%) and that maturities are comfortable, we believe the size of the equity matters and that the new restructuring in Brazil could be an excuse to announce a capital increase. We reiterate our Reduce rating We reiterate our Reduce rating based on our belief that the company s business repositioning has many risks, the fact that earnings visibility may be weaker than expected and the risk of a capital increase which could be more likely in case of additional write-offs. 4 keplercheuvreux.com

5 Key financials FY to 31/12 (EUR) E 2016E 2017E 2018E Per share data EPS adjusted EPS adj and fully diluted EPS reported Cash flow per share Book value per share Dividend per share Number of shares, YE (m) Valuation P/E adjusted na P/E adjusted and fully diluted na P/BV P/CF na Dividend yield (%) 5.3% 4.0% 3.2% 0.0% 0.0% 0.0% 0.0% 0.0% FCF yield (%) -0.2% 1.9% 3.0% 2.4% -13.7% 4.1% 8.6% 9.0% EV/Sales EV/EBITDA EV/EBIT Income Statement (EURm) Sales 2, , , , , , , ,017.9 EBITDA adjusted EBIT adjusted Net financial items & associates Others Tax Net profit from continuing operations Net profit from discontinuing activities Net profit before minorities Net profit reported Net profit adjusted Cash Flow Statement (EURm) Cash flow from operating activities Capex Free cash flow Acquisitions & Divestments Dividend paid Others Change in net financial debt Balance Sheet (EURm) Intangible assets Tangible assets Financial & other non-current assets Total shareholders' equity 1, , , Pension provisions Liabilities and provisions 2, , , , , , , ,263.3 Net debt , , Working capital requirement Invested Capital 1, , , , ,001.4 Ratios ROE (%) 19.7% 14.7% 12.5% 10.1% -5.6% 22.5% 26.0% 24.2% ROIC (%) 14.7% 11.7% 10.6% 10.7% 3.0% 15.4% 19.6% 21.4% Net fin. debt / EBITDA (x) Gearing (%) 48.0% 57.1% 54.9% 69.5% 218.2% 161.7% 102.8% 62.4% 5 keplercheuvreux.com

6 Equity Research Local insight, European scale Amsterdam Kepler Cheuvreux Benelux Johannes Vermeerstraat DK Amsterdam Frankfurt Kepler Cheuvreux Germany Taunusanlage Frankfurt Geneva Kepler Cheuvreux SA Route de Crassier Eysins Switzerland London Kepler Cheuvreux UK 12th Floor, Moorhouse 120 London Wall London EC2Y 5ET Madrid Kepler Cheuvreux Espana Alcala Madrid Milan Kepler Cheuvreux Italia Via C. Cornaggia Milano Paris Kepler Cheuvreux France 112 Avenue Kleber Paris Stockholm Kepler Cheuvreux Nordic Regeringsgatan Stockholm Vienna Kepler Cheuvreux Vienna Schottenring 16/2 Vienna Zurich Kepler Cheuvreux Switzerland Stadelhoferstrasse 22 Postfach 8024 Zurich Kepler Cheuvreux has exclusive international distribution rights for UniCredit s CEE product. North America Boston Kepler Capital Markets, Inc 225 Franklin Street, Floor 26 Boston, MA New York Kepler Capital Markets, Inc. 600 Lexington Avenue, Floor New York, NY USA San Francisco Kepler Capital Markets, Inc 50 California Street, Suite 1500 San Francisco, CA keplercheuvreux.com