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 2012-13. (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 2013-14 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 18,414 1.0 (6.3) (6.4) NIFTY Index 5,559 1.2 (6.5) (6.6) BANKEX Index 12,756 1.7 (8.5) (12.0) BSET Index 6,658 2.0 (4.4) 6.5 BSETCG INDEX 8,891 1.4 (10.1) (15.6) BSEOIL INDEX 8,345 0.3 (7.1) (5.0) CNXMcap Index 7,435 0.9 (5.4) (13.0) BSESMCAP INDEX 5,858 0.0 (7.8) (21.4) World Indices Dow Jones 14,802 0.9 2.5 9.7 Nasdaq 3,297 1.8 1.4 5.5 FTSE 6,387 1.2 (1.8) 4.3 NIKKEI 13,288 0.7 8.5 24.0 HANGSENG 22,035 0.8 (3.9) (4.6) Value traded (Rs cr) 10 Apr 13 % Chg - Day Cash BSE 1,712 2.1 Cash NSE 9,616 1.0 Derivatives 144,660 (9.0) Net inflows (Rs cr) 9 Apr 13 % Chg MTD YTD FII (619) 494.0 (207) 54,545 Mutual Fund 148 (496.8) (34) (7,202) FII open interest (Rs cr) 9 Apr 13 % Chg FII Index Futures 11,666 7.1 FII Index Options 49,170 3.0 FII Stock Futures 22,356 1.8 FII Stock Options 1,979 7.8 Advances / Declines (BSE) 10 Apr 13 A B T Total % total Advances 141 652 49 842 34 Declines 64 694 66 824 34 Unchanged 2 624 167 793 32 Commodity % Chg 10 Apr 13 1 Day 1 Mth 3 Mths Crude (NYMEX) (US$/BBL) 94.5 (0.1) 2.7 1.0 Gold (US$/OZ) 1,559.2 (1.7) (1.2) (5.9) Silver (US$/OZ) 27.6 (1.3) (4.5) (9.1) Debt / forex market 10 Apr 13 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % 8.0 8.0 8.0 8.0 Re/US$ 54.5 54.6 54.4 54.6 Sensex 21,000 19,500 18,000 16,500 15,000 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
COMPANY UPDATE Ruchir Khare ruchir.khare@kotak.com +91 22 6621 6448 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 (%) 19.2 21.0 21.5 PBT 9279 8892 9780 Net profit 6,447 5,922 6,455 EPS (Rs) 19.1 17.6 19.2 Growth (%) 21.3 (8.1) 9.0 CEPS (Rs) 19.7 18.0 19.6 BV (Rs/share) 56.4 67.3 79.9 DPS (Rs) 5.3 5.6 5.6 ROE (%) 38.0 28.4 26.0 ROCE (%) 37.6 28.3 26.1 Net cash (debt) 17,161 20,605 25,789 NW Capital (Days) (75.8) (82.4) (85.0) EV/Sales (x) 1.0 1.2 1.1 EV/EBITDA (x) 5.0 5.5 4.9 P/E (x) 8.3 9.0 8.3 P/Cash Earnings (x) 8.1 8.8 8.1 P/BV (x) 2.8 2.4 2.0 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 10000 Consultancy (Rs mn) 8000 LSTP (Rs mn) 6000 4000 2000 0 1Q 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
Segment EBIT margin trend 50.0 40.0 30.0 20.0 10.0 0.0 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 2013 2014 2015 2016 2017 IOC 69.2 69.2 69.2 60.7 74 BPCL(Mumbai) 12 12 12 13.5 13.5 Kochi (BPCL) 9.5 9.5 9.5 15.5 15.5 BORL Bina 6 6 6 7.5 7.5 HPCL (Mumbai+Visakhapatnam) 16.5 18.2 18.5 18.5 23.5 MRPL 14.5 15.5 16 16.5 18 CPCL 11.5 12.1 12.1 12.1 18.3 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
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) 30 25 20 15 10 5 0 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) 30 6 25 4 20 2 15 0 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
Change in estimates Change in estimates FY14 (Rs mn) New Old Change % Revenues 34090 41551 (21.9) EBITDA 7329 9381 (28.0) PAT 6455 7614 (18.0) EPS 19.2 22.6 (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
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 50,000 335.0 10-Apr Amrit Corp-$ Navjyoti Residency Pvt Ltd B 50,077 335.0 10-Apr Bafna Spinning Archana Goenka B 1,330,115 0.1 10-Apr Boston Bio Geetaben Radheshyam Mundra B 40,000 3.5 10-Apr C. Mahendra LTS Investment Fund Ltd B 315,000 90.1 10-Apr C. Mahendra Taib Bank E C S 315,000 90.1 10-Apr Commex Tech IT People Pvt Ltd B 1,104,000 13.0 10-Apr Commex Tech Ram V Alamchandani S 875,000 12.9 10-Apr Deep Inds Avani Dharen Savla B 179,235 35.5 10-Apr Drillco Metal LA Tim Sourcing (India) Pvt Ltd B 35,000 26.5 10-Apr Drillco Metal Ncm International Pvt Ltd S 25,000 26.5 10-Apr Eurofinmart Manjeet Rana B 78,465 76.9 10-Apr Eurofinmart Garima Agarwal S 49,000 79.0 10-Apr Eurofinmart Ratul Puri B 25,100 79.0 10-Apr Eurofinmart Ashok Khandelwal S 65,000 76.9 10-Apr Focus Ind Lata Agrawal S 95,000 55.7 10-Apr Greenply Inds Laburnum Capital Advisors Pvt Ltd S 127,970 450.0 10-Apr Greenply Inds Jwalamukhi Investment Holdings B 140,000 450.0 10-Apr Jay Mahesh Infra Satyanarayana Thota B 56,483 51.6 10-Apr Sawaca Bsns Persistent Commodities Tradlink S 156,000 29.4 10-Apr Smilax Naga Subhashini Ilaparti B 65,000 9.4 10-Apr Svartcorp Choice Equity Broking Pvt Ltd B 269,105 3.2 10-Apr Tatamotors-Dvr Merrill Lynch Cap Mkts Espana Sa Sv B 6,340,959 151.9 10-Apr Tatamotors-Dvr The Royal Bank Of Scotland Asia Merchant Bank Singapore Ltd S 6,340,959 151.9 10-Apr Wagend Som Arora S 330,000 36.9 10-Apr Wagend Praveen Kumar Arora S 350,000 36.8 Source: BSE (Rs) Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6
Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers HDFC 783 4.0 14.6 3.3 Infosys 2,816 1.8 7.4 0.8 HDFC Bank 632 1.8 6.5 3.8 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 dipen.shah@kotak.com +91 22 6621 6301 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6621 6305 Teena Virmani Construction, Cement teena.virmani@kotak.com +91 22 6621 6302 Saurabh Agrawal Metals, Mining agrawal.saurabh@kotak.com +91 22 6621 6309 Saday Sinha Banking, NBFC, Economy saday.sinha@kotak.com +91 22 6621 6312 Arun Agarwal Auto & Auto Ancillary arun.agarwal@kotak.com +91 22 6621 6143 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6621 6448 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6621 6310 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6621 6313 Amit Agarwal Logistics, Transportation agarwal.amit@kotak.com +91 22 6621 6222 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6652 9172 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311 Technical Research Team Shrikant Chouhan shrikant.chouhan@kotak.com +91 22 6621 6360 Amol Athawale amol.athawale@kotak.com +91 20 6620 3350 Premshankar Ladha premshankar.ladha@kotak.com +91 22 6621 6261 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 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. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. 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. Reports based on technical analysis centers on studying charts of a stock s price movement and trading volume, as opposed to focusing on a company s fundamentals and as such, may not match with a report on a company s fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. 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. We and our affiliates, officers, directors, and employees world wide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Kotak Securities prior written consent. Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India. Correspondence address: Infinity IT Park, Bldg. No 21, Opp Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Tel No : 66056825. Securities and Exchange Board Of India: Registration No's: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230/ INE 011207251, OTC INB 200808136, MCXSX INE 260808130. AMFI No: 0164. Investment in securities market is subject to market risk, please read the combined risk disclosure document prior to investing. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 7