WEEKENDER REPORT Macro / political commentary SINCE 1989 With over a 100 crore Aadhaar enrolments completed & empowered by a new law, Unique Identification Authority of India (UIDAI) is looking to scale up operations & prepare for its next phase, one involving constant updates of data & ramping up capacity to eventually validate up to 50 crore transactions daily, according to UIDAI chief executive A.B. Pandey. UIDAI has issued more than 1.03 billion Aadhaar cards, covering more than 85% of India s population. It is now the mainstay of the government s direct benefit transfer programme after the enactment of the The Aadhaar (Targeted Delivery of Financial & Other Subsidies, Benefits & Services) Act, 2016. All state benefits will now be directly transferred to intended beneficiaries bank accounts linked to the 12- digit biometric identity number provided by UIDAI, a step that is aimed at plugging leaks. Constant updates on biometrics, photographs, demography will happen every year. New enrolments will be made every year as children get enrolled. UIDAI anticipates that the larger move towards a cashless economy will increase the need for Aadhaar-based authentications wherein UIDAI will help the government & financial institutions identify a beneficiary using biometrics like fingerprint & iris recognition. Authentication will become a major job. Every day 40-50 lakh people are biometrically authenticated through Aadhaar & we have the capacity to scale it up to 10 crore authentications. But then tomorrow if we require 50 crore authentications, then we should be able to achieve it. This will become our major activity as payment banks come in. Then there will be ticket reservations, attendance, & Bharat Bill Payment System that will be dependent on this. It will become a very critical infrastructure, Pandey said. As of now, this entire authentication process is fully funded by the government. We have decided no institution will be charged anything for a service till December 2017. Pandey said, pointing out that imposing fee on individuals will be equivalent to denying people the right to have Aadhaar. The deep sea transhipment port proposed to be developed at Colachel in Tamil Nadu will entail a cost of Rs.27,570 crore, Parliament was informed. The aim is to develop a deep sea transhipment port at Colachel (Enayam), very close to the great east-west shipping route, minister of state for shipping P. Radhakrishnan said in a written reply in the Lok Sabha. As per the techno-economic feasibility report, the estimated project cost is Rs.27,570 crore. The port is proposed to be developed through investment by government & public-private partnership (PPP) mode. The development of the major port will start in 2017 & go on till 2030, the minister said. In a separate query, Radhakrishnan said Sagarmala is a long-term programme, which was approved by the cabinet. The programme involves drawing up a national perspective plan for port modernization & development, port connectivity enhancement, port-led industrial development & coastal community development, he added. To exploit the potential of India s 7,500-km-long coastline & 14,500 km of potentially navigable waterways, the Sagarmala programme aims to promote port-led development. Sagarmala will entail an estimated infrastructure investment of more than Rs.2 trillion. As part of the national perspective plan, a total 173 projects have been initially identified across the programme objectives, which will result in significant investment in the maritime infrastructure, create employment, reduce logistics costs & boost merchandise exports over the next decade. A projection has been made that identified industrial cluster projects once implemented will enable creation of approximately one crore jobs, including 40 lakh direct & 60 lakh indirect jobs in the next 10 years, Radhakrishnan said. Page 1 / 9
The Indian government will introduce the long-awaited goods & services tax (GST) constitutional amendment bill in Parliament next week, as almost all political parties have agreed on the proposed law. The GST bill will be introduced in the upper house of Parliament next week, junior parliamentary affairs minister Mukhtar Abbas Naqvi told lawmakers. The proposed tax reform, the biggest since India s independence from Britain in 1947, seeks to replace a slew of federal taxes & levies in 29 states, transforming the nation of near 1.3 billion people into a customs union. It is estimated that the move could boost India s economic growth by up to 2%. Equity market performance Sensex gained by 90 bps during the last week, whereas small cap index gained by 170 bps and mid cap index by 310 bps. Auto was the best performing sector index, gaining by 2.2% and cap goods was the laggard, declining by 0.5%. Maruti Suzuki was the best performing stock, gaining by ~8% while Dr. Reddy s Labs was the worst performer declining by 18.5%. Index Value Weekly % Mid Cap index 12,661 3.1 Auto 21,091 2.2 Power 2,077 2.0 Small Cap index 12,310 1.7 IT 10,813 1.5 Oil & Gas 10,595 1.4 Bankex 21,679 1.4 FMCG 8,725 1.1 Sensex 28,052 0.9 Metals 9,406 (0.3) Healthcare 16,299 (0.4) Cap Goods 15,478 (0.5) Stock INR Weekly % Gainers Maruti Suzuki 4,758 7.8 Zee Entertainment 497 7.1 Asian Paint 1,114 6.4 Power Grid 176 5.8 Sun Pharma 830 5.5 Losers Tech Mahindra 488 (2.2) Vedanta 165 (2.8) Tata Steel 355 (2.9) GAIL 382 (3.3) Dr. Reddy's 2,935 (18.5) Currency, commodity & interest rates INR moved by a little against $, & during the last week. However, it declined by 2% against. Gold & aluminium were stable amongst the key commodities. Silver gained by ~2% while copper lost by 2.4%. Brent crude fell by ~8% during the week. Government bond yields corrected further for longer tenors, while yield for 1-year paper hardened slightly but remained below 7%. Currency Value Weekly % INR / $ 67.0 0.2 INR / 74.3 (0.3) INR / 88.3 0.7 INR / * 64.7 (2.0) * per 100 Yen Commodity INR Weekly % Crude (1 barrel) 2,863 (7.8) Gold (10 gm) 30,938 0.6 Silver (1 kg) 46,976 2.1 Copper (1 kg) 327 (2.4) Aluminium (1 kg) 108 0.1 GoI Bond Yield Weekly % 10-year 7.2% (0.8) 5-year 7.1% (0.5) 1-year 6.9% 0.2 Key economic events next week New home sales in US clocked better run rate than expected at 592,000 for the month of June 2016. US Federal Reserve left its policy interest rate unchanged at 0.5%. Next week will not have lot of key economic data being released. Some of the data points that will be released would be UK s monetary policy decision and employment related data from US. Page 2 / 9
Date Event Forecast Previous Europe Thursday, August 04, 2016 UK monetary policy decision 0.25% 0.5% US Friday, August 05, 2016 Unemployment rate (July) 4.9% 4.9% Friday, August 05, 2016 Non-farm payrolls (July) 190,000 287,000 Earnings calendar Date Company Date Company Monday, August 01, 2016 Alphageo Wednesday, August 03, 2016 Shemaroo Entertainment Monday, August 01, 2016 Interglobe Aviation Wednesday, August 03, 2016 Titan Company Monday, August 01, 2016 Mold-Tek Packaging Thursday, August 04, 2016 3M India Tuesday, August 02, 2016 Century Plyboard Thursday, August 04, 2016 Hawkins Cooker Tuesday, August 02, 2016 UFO Moviez Thursday, August 04, 2016 Triveni Turbine Wednesday, August 03, 2016 Bata India Friday, August 05, 2016 Aegis Logistics Wednesday, August 03, 2016 HCL Tech Friday, August 05, 2016 Apar Industries Sector / company specific news Dabur India is planning to invest about Rs.500 crore in this fiscal. The company is pursuing a prudent growth strategy to manage risks and challenges and protect its turf in the face of intensifying competitive pressures. It will also continue to focus on brand-building and leverage on its position of science-based Ayurveda specialist. Dabur India is one of the largest FMCG Company in India. Building on a legacy of quality and experience of over 125 years, Dabur operates in key consumer products categories like Hair Care, Oral Care, Health Care, Skin Care, Home Care & Foods. NHPC (formerly National Hydroelectric Power Corporation) has restored Unit 1 of Parbati-III power station on July 26, 2016 which was shut down since March 28, 2015. It has recently inked a Memorandum of Understanding with Ministry of Power, Government of India for FY17. NHPC is an Indian Hydro Power Generation company that was incorporated with an objective to plan, promote and organize an integrated and efficient development of hydroelectric power in all aspects. Tech Mahindra, has launched its 17th Delivery Center in Cincinnati Blue Ash Area, US to primarily serve its customers with export control services within the A&D Sector. It is registered with the Department of Defense & would be Tech Mahindra's first ITAR capable center in US. It will primarily be leveraged to provide Engineering, Big Data and Analytics services to a large conglomerate in the region and also other customers in the US. This move also aligns with the Company's strategy to build partnerships with local schools / local talent. Tech Mahindra is a leading provider of solutions and services to the telecommunications industry with a majority stake owned by M&M. L&T Infotech (LTI) has entered into a strategic partnership with GE Digital combining LTI's diverse industrial capabilities with GE's Predix cloud-based operating system for the Industrial Internet. Both will collaborate to develop innovative digital-industrial solutions powered by Predix analytics & real-time insights to enhance competitiveness & transform the way companies manage assets & workforce. LTI's Industrial IoT Practice develops comprehensive solutions & applications encompassing smart sensors, connected machinery, real-time visualization & advanced analytics. Muthoot Finance has infused Rs.40 crore as fresh capital acquiring 38.23% of the expanded equity share capital of Belstar Investment and Finance (BIFPL), thereby holding 46.83% in the company. Page 3 / 9
Further acquisition of 10.32% from the existing shareholders is expected to be completed soon thereby taking the total holding to 57.15% making it a subsidiary. Belstar is a registered NBFC-MFI while Muthoot Finance is the largest gold financing company in India in terms of loan portfolio. Zen Technologies, has bagged the biggest export order till date, of about Rs.30 crore. The Ministry of Defence (MoD), Government of Egypt has chosen Zen to provide range of training equipment including Smart Target Systems. It emerged as the front runner against tough competition from global companies. Zen has developed expertise in designing, developing & manufacturing various types of simulators. Its products meet all qualitative standards & are cost-effective too. Greenlam Industries has received an approval for expansion of manufacturing capacity of laminate at the unit located at Nalagarh, HP, in order to manufacture additional 2 million laminate sheets per annum. The capital cost of this brownfield expansion would be approximately Rs.25 crore. The expanded capacity is expected to be operationalized within a period of 15 months. Greenlam is one of the leading laminate manufacturers and Asian market leader in decorative laminates. Ambuja Cements has participated in the auction of coal linkages for cement sector and secured a linkage of 96,000 tons of coal at a premium of Rs 80 per ton over the base price of Rs 970 per ton from Junadih siding of South Eastern Coalfields. It is a part of a global conglomerate Holcim & has 5 integrated cement manufacturing plants & 8 cement grinding units across the country. Future outlook As liquidity is flush globally, it could keep global markets in an up move, including India s. Further possible stimulus from Japan could support this. In the meanwhile all eyes next week will be on the Parliament functioning as BJP may introduce the GST bill. Sensex Chart 30,000 28,500 27,000 25,500 24,000 22,500 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Page 4 / 9
Weekender Stock Idea Wabco India Ltd. (Rating: Buy; Price: Rs.6,345; Target: Rs.7,500; Upside: 18%) Shareholding Stock performance Key data Category Stake Perf. 1M 6M 1Y Particulars FY15 FY16 FY17e FY18e Promoter 75.0% Company 10.5% 12.5% 17.2% P/E (x) 99.7 58.7 41.5 32.7 Institutions 10.6% Sensex 4.9% 12.8% 1.8% EPS growth 3% 70% 41% 27% Non-institutions 14.5% Auto 8.3% 24.5% 13.2% ROE 14% 19% 22% 22% Govt. 0.0% Dividend yield 0.1% 0.1% 0.2% 0.2% Background Wabco India Ltd. (mkt. cap Rs.12,059 crs) is a subsidiary of Wabco Vehicle Control Systems, based in Brussels, Belgium. It designs, manufactures and markets conventional and advanced braking products and related systems. Investment Argument Parent and business presence in India Globally Wabco group is a leading supplier of safety and control systems for commercial vehicles. For over 140 years, it has pioneered breakthrough electronic, mechanical & mechatronic technologies for braking, stability, & transmission automation systems supplied to the world s leading commercial truck, trailer, & bus manufacturers. It has a monopoly for products like electronic air suspension (ECAS), electronic braking system (EBS), anti-lock braking system (ABS) and Lift axle control valve. Wabco India has 5 manufacturing facilities, a software design centre and a test track in India. The major customers are OEMs for trucks, buses and trailers. Besides, Wabco also caters to aftermarket customers through its wide distribution network. Business environment India s GDP has hit decade low during FY13 & FY14, before gaining strength in FY15 & FY16. A major drag has been the tepid growth of industrial sector. Industrial slowdown resulted into weak demand and investment in the economy Chart 1: GDP growth along with higher borrowing costs badly 7.6 impacted the demand for commercial (% YoY) 7.2 6.6 vehicles. Besides trucking industry is faced several problems of its own like surplus 5.6 fleet capacity, rising diesel prices due to de-regulation, increase in driver salaries and toll charges, etc. Many of these cost rises are not a pass-through for truck operators thus putting pressure on their viability. All these factors combined together don t augur well for the CV demand. CV sales in FY14 witnessed a drop of 22%, before getting back into positive growth trajectory in FY15 & FY16. FY13 FY14 FY15 FY16 Page 5 / 9
Chart 2: M&HCV volume data 400,000 Volume Volume growth (YoY; RHS) 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 FY10 FY11 FY12 FY13 FY14 FY15 10MFY16 40% 30% 20% 10% 0% -10% -20% -30% Better GDP outlook due to increase in industrial output will favour the trucking sector FY17 GDP growth is forecasted at 7.5%+. This upgrade is mainly led by pickup in exports, easing of current account deficit, clearance of stalled projects, and lowering of inflation. Simultaneously, the Indian rupee has also been stable for some time now. These factors would lead to rise in industrial output. Also a lot of reform effort has been made towards clearance and re-allocation of coal block and lifting of mining ban. If GST gets passed and implemented, it would eventually lead to seamless movement of traffic through the country, meaning better utilization of trucks. This means demand for transport and freight should inch up, which will absorb the over capacity of the trucking industry and further create demand for new trucks. New mandatory safety requirements for heavy vehicles a key business driver The transport ministry is making installation of ABS (anti lock braking system) compulsory for all new heavy vehicles; buses with seating capacity of 9 passengers and above and trucks with capacity of 12 tonnes and above. The enforcement for this requirement is from 1 April 2016 onwards. Wabco has a monopoly for this product in India. With CV cycle picking up, this would be a big trigger for top line going forward. Robust financials Wabco is a debt free company. All business funding is carried out through internal accruals. Business is a positive free cash generator and consequently the cash balance has been rising. Working capital cycle has ranged between 2-3 months. Here the inventory days are almost equal to the payable days. In short the company enjoys good credit period from its suppliers to the extent that till the finished goods are produced and sold, it is not required to pay its suppliers. The receivables collection days are around 2 3 months and this number has stayed well under control despite tight credit situation in the time of slowdown. EBITDA margin is healthy at mid-teens and with more and more technologically intensive products become mandatory and Wabco having monopoly in those products, we believe the margins should improve from here on. Page 6 / 9
Chart 3: Working capital cycle (days) 84 54 56 68 58 63 65 53 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Chart 4: EBITDA margin trend 22.5% 21.0% 20.1% 19.8% 19.9% 19.4% 12.6% 15.0% 15.1% 16.0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 1QFY17 Recent results: Wabco reported revenue growth of 39% for 1QFY17. EBITDA margin improved sharply from 16% for full year FY16 to 19.4% for 1QFY17 on the back of strong cost controls. This led to a strong growth in EBITDA at 49% YoY and earnings growth of 55% YoY. View & valuation: Lot of factors are in favour of Wabco, like having patented technology, support from parent for newer technologies, mandatory norms intensifying, debt free balance sheet, improving margin, manageable working capital cycle etc. All this should translate to improving return ratios. At current price of Rs.6,345 we recommend buying Wabco India Ltd. with a target price of Rs.7,500 implying an upside of 18% from the current price. Page 7 / 9
Income statement & balance sheet data & ratios INR crs FY15 FY16 FY17e FY18e Ratios FY15 FY16 FY17e FY18e Sales 1,348 1,838 2,342 2,928 EBITDA margin 15.1% 16.0% 17.6% 18.0% EBITDA 203 293 413 527 PAT margin 9.0% 11.1% 12.4% 12.6% Net Profit 121 205 290 368 Dividend payout 9% 8% 8% 6% Networth 863 1,053 1,321 1,666 RoCE 19.7% 25.1% 28.9% 29.2% Fixed assets 338 373 420 461 Net Debt / Equity -26% -38% -38% -43% Capital employed 898 1,083 1,353 1,701 Working capital (days) 65 53 59 59 Net Debt -227-404 -508-716 Company price chart Page 8 / 9
Disclosures: (a) The research analyst or research entity or his/their associates or his/their relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company or any financial interest in the subject company (b) The research analyst or research entity or his/their associates or his/their relatives do not have any other material conflict of interest at the time of publication of the research report or at the time of public appearance (c) The research analyst or research entity or its associates have not received any compensation for investment banking or merchant banking or brokerage services nor received any compensation for products or services from the subject company in the past twelve months (d) The research analyst or research entity or its associates have not received any other benefits from the subject company or third party in connection with the research report (e) The subject company is not or was not a client during twelve months preceding the date of distribution of the research report & the types of services provided by the research analyst or research entity or his/their associates or his/their relatives (f) The research analyst has not served as an officer, director or employee of the subject company (g) The research analyst or research entity has not been engaged in market making activity for the subject company Happy investing & have a good weekend! THANK YOU Disclaimer: This report has been prepared by Securities Pvt Ltd. The information & opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information & opinions are subject to change without notice. This document is for information purposes only. Securities Pvt Ltd. may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail &/or its attachments. Securities Pvt Ltd., its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares & bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Neither Securities Pvt Ltd. nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052. Tel. (022) 4082 4082, Fax (022) 2649 7997. research@lmspl.com, www.latinmanharlal.com LMSPL Network : Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana), Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh). Registered Office: 124 Viraj, S.V Road, Khar (W), Mumbai 400 052. Follow Us On: Page 9 / 9