ITD CementationTurnaround in sight
Analyst: Alok Deora
Kaushalya Narendran
Stock Data
Sensex: 24,659
52 Week h/l (Rs): 118 / 57
Market cap (Rscr) : 1599
6m Avg t/o (Rscr): 2.7
Bloomberg code: ITCE IN
BSE code: 509496
NSE code: ITDCEM
FV (Rs): 1
Div yield (%): ‐
Prices as on March 08, 2016
Company Rating Grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Shareholding Pattern
Jun‐15 Sep‐15 Dec‐15
Promoters 51.6 51.6 51.6
FII+DII 27.5 27.8 28.0
Others 20.9 20.6 20.4
Share Price Trend
50
150
250
Feb‐15 Jun‐15 Oct‐15 Feb‐16
ITD Sensex
CMP: Rs101 1‐yr Target: Rs134 Upside: 33%
This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices,
estimates and views on sectors and markets… (Read the complete disclaimer at the back of this report)
Company Report
March 09, 2016
BUY Sector: Infrastructure Sector View: Positive
ITD Cementation India Ltd Turnaround story; strong bet on construction play
ITD Cementation (ITDC), an eight decade old company has built strong expertise in marine, urban infra and other infrastructure segments and is one of the few EPC players owned by a construction MNC. The strong parentage provides comfort with regards to execution (achieving pre‐qualification, technology transfer from parent etc), while ensuring transparency in operations. Mumbai‐based ITDC has always focused on the asset light EPC space and never ventured into BOT. Diversifying into multiple segments provides ITDC an edge over peers in terms of achieving regular EPC order inflows. It was therefore able to refrain from bidding for BOT projects. This proved beneficial from ITDC’s perspective, as many EPC players had ventured into the BOT space during last few years to secure orders only to later switch back to EPC after a bitter experience. ITDC intends to continue with its EPC focused strategy, which we believe would prove beneficial from a long‐term perspective. ITDC currently sits on an order book of ~Rs.5,200cr (excludes strong L1 position of ~Rs.3,500cr). ITDC expects conversion of L1 projects soon, which would further augment its position. ITDC did experience pressures over the past few years as certain receivables were stuck in litigation. However, recent settlement from NHAI (major portion) provided a strong boost. Additionally, ITDC raised Rs.140cr via QIP during 2014 to bolster its balance sheet. ITDC does not intend to bid for NHAI orders till it is certain of payment not being an issue. It would focus on state government and private sector for road projects.
Backed by larger size of operations (~2x FY14 topline), execution of certain high‐margin orders and diminished concerns on receivables, we expect ITDC to have an operating profit growth of whopping 42% CAGR over CY15‐17E, with margins reaching ~10% (~6% currently) by CY17E. With an improving operating performance and comfortable balance sheet position, ROE is likely to spike to more than 20% by CY17E, higher than most other EPC players. Despite strong growth prospects, the scrip is trading at 10.6x its CY17E EPS. We believe re‐rating is on the cards for ITDC, which we expect to be one of the best bets in the construction space. We recommend BUY for a target price of Rs.134, implying a target P/E of 14x.
Financial Highlights Y/e 31 Dec (Rs cr) CY14 CY15 CY16E CY17E Revenues 1,719 3,071 3,532 3,955 yoy growth (%) 8.5 78.7 15.0 12.0 Operating profit 91 192 267 384 OPM (%) 5.3 6.2 7.6 9.7 Pre‐exceptional PAT (76) 65 84 149 Reported PAT 19 (59) 84 149 yoy growth (%) 108.4 NA NA 77.2 EPS (Rs) (4.9) 4.2 5.4 9.6 P/E (x) NA 24.2 18.7 10.6 EV/EBITDA (x) 24.8 10.4 7.8 5.7 Debt/Equity (x) 1.3 1.1 1.0 0.9 RoE (%) (15.6) 12.0 15.3 22.4 RoCE (%) 5.6 14.9 21.3 26.7
Source: Company, India Infoline Research
Page 2 of 24
ITD Cementation India Ltd
Strong parentage provides comfort on execution capabilities and transparency in operations ITDC is the one of the very few EPC companies that is owned by an MNC construction Company. ITDC has undergone ownership changes few times before it was acquired by the Italian‐Thai Development Company (ITD) in 2005. ITD, the parent is engaged in civil construction in Thailand and has decades of experience in executing infrastructure jobs. The strong parentage provides significant comfort on execution capability as ITDC can leverage on the parent’s strong position (achieving pre‐qualification, technology transfer etc). Being associated with an MNC Company also ensures transparency in operations.
Presence across multiple segments to ensure strong order inflows ITDC is one of the few players with presence across multiple segments, including Marine, MRTS, and roads. The company has a strong order pipeline for setting up the metro network as well as developing and upgrading ports; also the roads segment is likely to see huge opportunities unfolding in terms of order awards. This would provide ITDC an opportunity to increase its order book significantly and enable realization of higher margins, backed by lower competitive intensity in segments such as MRTS and marine. Also presence across segments would help the Company to tackle the slowdown in any particular segment. Operates with an asset light model; focus purely on EPC segment ITDC has always been focused on EPC space and operates with an asset light model. Having diversified into multiple segments like marine and urban infra, ITDC has been able to maintain regular order inflows and refrain from bidding for BOT. Unlike other EPC players who ventured into BOT and eventually paid the price, ITDC was able to tackle the challenging times with its stable EPC model and multiple order flow streams. ITDC intends to continue bidding only for EPC projects which is likely to be beneficial over the long term as it would keep leverage under check.
Sitting on decent order book and strong L1 pipeline; conversion of L1 to augment order book ITDCs current order book stands at ~Rs.5,200cr (~1.7x CY15 revenues), which provides visibility of strong revenue growth. Additionally, the company has been declared L1 in projects worth ~Rs.3,500cr, which includes Mumbai Metro 3 (MM3) project worth ~Rs.1,130cr, Udangudi project worth ~Rs.1,800cr, construction of fifth oil berth at Mumbai Port Trust worth ~Rs.320cr, and construction of multi‐purpose terminal for Vishakhapatnam Port Trust worth ~Rs.180cr. Considering the current order book, robust pipeline, and strong execution capabilities, ITDC is expected to deliver topline CAGR of ~14% over CY15‐17E.
Page 3 of 24
ITD Cementation India Ltd
Settlement of major outstanding claims and fund raising via QIP aid financial position ITDC faced some pressure as sizeable receivables were stuck in litigation, which led to a stretched balance sheet. However, during CY15 ITDC settled claims worth Rs.300 cr with NHAI, the largest debtor (received Rs.180 cr and wrote off Rs.120 cr in CY15). In addition, during September 2014, ITDC raised Rs.140 cr via QIP and utilized the proceeds to reduce debt and fund working capital requirement. While ITDC still has pending claims (worth ~Rs 100 cr) for irrigation projects, it is hopeful of receiving a majority of these in the near future. With majority of its claims settled and QIP funds used to pay off a portion of debt, ITDC is much better placed to capitalize on future growth opportunities and be in a position to bid for more projects.
With major debtors claims settled and execution of legacy orders largely complete, operating performance set to improve ITDC’s margins have come under severe pressure, owing to slow execution of certain low‐margin legacy orders. In addition, large amount of receivables were stuck in litigation, which stretched the company’s balance sheet and affected its order bidding capacity. However, legacy orders have now been largely executed and majority of receivables have been settled. Inline with this, we expect ITDC to deliver EBITDA CAGR of ~42% over CY15‐17E with OPM’s reaching pre‐CY14 levels of ~10% (~6% currently) by CY17E
Strong balance sheet and negligible capex requirement to enhance return ratios As ITDC is focused only on the asset light EPC segment, it would not incur any significant capex for executing the current order book and future inflows. Thus, we do not envisage any significant rise in leverage for the company, barring working capital debt. With improvement in operating performance and comfortable balance sheet position, ITDC is all set to witness its ROE spike to more than 20% by CY17E which is higher than most other EPC players in the industry.
Page 4 of 24
ITD Cementation India Ltd
EPC is the flavor in the current market scenario; players like ITD focusing only on EPC well placed to grab the opportunity EPC (also known as cash contract) is the preferred mode currently as against BOT. While in the EPC space payments are made at regular intervals to the contractor by authorities like NHAI, BOT requires investment to be made by contractors and later recover it through mechanism like toll collections. Here the contractor is exposed to risk of traffic and toll growth which is typically linked to performance of the economy. ITDC has always focused only on the EPC space and never ventured into BOT space. While this seemed like a concern initially considering lot of projects especially in Roads were awarded through BOT route during the last few years, it actually proved to be beneficial. EPC players who ventured into BOT had a bitter experience owing to volatile traffic in toll projects, public outcry against toll collections etc. These players now largely want to focus on EPC model now and some have or are looking to monetize their BOT assets. ITDC owing to its diversification across segments was able to manage order inflows during challenging times. Today it is in a much stronger position as against its peers, some of whom are witnessing stretched balance sheets. ITDC which focuses only on EPC space in strong position
The order flow in coming years is likely to be driven by the EPC route owing to sheer lack of interest by bidders for BOT due to viability concerns. While this would be beneficial to the industry as a whole, it would significantly benefit ITDC which has a strong foothold in the EPC space and supportive balance sheet to bid for large contracts. ITDC intends to continue bidding only for EPC projects which is likely to be beneficial over the long term as it would keep leverage under check while ensuring strong order inflows. Owing to light balance sheet, ITDC would also be in a position to bid for large orders which may be difficult for other EPC players who are operating with slightly stretched balance sheets.
EPC clearly holds the edge over BOT route; ITDC strongly placed to benefit
BOT EPC
Viability of project highly dependent on traffic and toll
growth Light Balance Sheet provides flexibility to bid for more
orders
High Debt requirement leads to stretched Balance
sheet Controlled leverage as these are cash contracts
Higher order flow in coming years through EPC route
Page 5 of 24
ITD Cementation India Ltd
Well-diversified order book across different segments; ITDC now in a comfortable position to ride the upmove ITDC has a presence across multiple segments such as marine, transportation, urban infrastructure, and irrigation. This is in stark contrast to many other players in the industry whose presence is confined to a select few segments. ITDC’s diversification strategy has ensured order inflows on a consistent basis. It has also allowed ITDC to focus on EPC space (not venture into BOT segment) unlike its peers. ITDS intends to remain an EPC player which we believe would be beneficial from long term perspective. The company has been declared L1 in the MM3 project (apart from L1 position in projects worth Rs.2,300 cr), where it has a share of Rs.1,130 cr. Additionally, the current order book of ITDC stands at ~Rs.5,200 cr, which is spread across multiple segments dominated by marine. The company remains focused on securing orders from different segments, which allows capturing a larger market and cushion it from slowdown in a given segment. As the company had some issues with NHAI, owing to certain receivables (have been settled in 2015), it does not intend to bid for more NHAI orders in the near to medium term. However, it would continue to bid for state road and private projects. This is likely to reduce the portion of roads in the overall order book in the near term. While this could have near‐term implications considering the significant awards in the road segment (largely dominated by the NHAI), the company has a strong order pipeline from other segments such as urban infra. We therefore envisage order inflows to be robust during the next few years. Well‐diversified order book
53%
17%
9%
9%
5%7%
Marine
Irrigation
Transportation
Urban infra
Buildings
Others
Source: Company, Order book breakup as on December 2015 Roads included under transportation segment
Major sectors where ITDC has a presence are likely to see huge investments in the coming years, which will benefit the company immensely.
Page 6 of 24
ITD Cementation India Ltd
Set to capitalize on opportunities in key infrastructure verticals; significant opportunity in the marine space which constitutes more than half of the order book for ITDC Increasing cargo traffic to give a big push to development of ports India is one of the world’s fastest growing economies and is expected to clock a GDP of 7‐7.5% in FY17. There has been a quantum leap development in trading activities in the country, which is largely supported by India’s port infrastructure. The country has a coastline of more than 7,500 km and more than 200 ports. The country has 12 major ports and 187 non‐major ports that are differentiated in terms of administration. While the major ports are administered by the central government’s shipping ministry, the non‐major ports are administered by relevant ministries in the respective states. Major Ports in India Name State
Kandla Port Gujarat
Mumbai Port Maharashtra
JNPT Maharashtra
Marmugoa Port Goa
Mangalore Port Karnataka
Paradip Port Odisha
Visakhapatnam Port Andhra Pradesh
Chennai Port Tamil Nadu
Kolkata Port West Bengal
Tuticorin port Tamil Nadu
Ennore Port Tamil Nadu
Kochi port Kerala
Cargo traffic at major ports stood at ~581 MT, whereas the cargo traffic at non‐major ports was ~471 MT in FY15. During H1 FY16, the total cargo throughput in major and non‐major ports recorded ~2% growth yoy to ~526 MT. There has been a significant shift in cargo traffic from major ports to non‐major ones due to excessive congestion at major ports. The contribution of non‐major ports to aggregate cargo traffic has increased from ~26% in FY05 to ~45% in FY15. The cargo traffic at major and non‐major ports between FY05‐15 clocked a CAGR of ~4% and ~13% respectively.
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ITD Cementation India Ltd
Cargo Traffic at Major and Non‐Major Ports
200
300
400
500
600
700
2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15
(Mn Tonnes)
Cargo Traffic at Major Ports Cargo Traffic at Non Major Ports
Source: Indian Ports Association The government has taken active interest in the development of ports and has allowed 100% FDI via the automatic route for projects related to construction of ports and harbors. The government has established the National Maritime Development Program in an effort to develop the maritime sector. Three new port projects in Maharashtra, West Bengal, and Tamil Nadu, entailing an investment of ~Rs.20,000 cr are on the anvil. Tenders for the same will be floated by March 2016 according to the Shipping and Road, Transport and Highways ministry.
Approved Outlay for Ports
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
(Rs. Cr)
Source: Ministry of Shipping
In the Union Budget 2016, the Government has allocated close to Rs.800 cr for modernizing ports and increasing their efficiency. The funds would also be used in developing new greenfield ports in the eastern and western coasts.
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ITD Cementation India Ltd
Ongoing Projects at Major Ports (as of 30 September, 2015) Port Name Scope of Work Capacity Project Cost
(Rs. Cr)
JNPT Development of fourth container terminal at JNP
60 MTPA 7,915
Mumbai Port Construction of two new offshore container berths and development of container terminal berth
9.60 MTPA 1461
Kamarajar Port Ltd
Development of container terminal on DBFOT basis
16.8 MT 1,270
Visakhapatnam Upgrading of the existing facility (OHC) and creating new facility (WQ‐1) for iron ore handling
23 MT 845.41
JNPT Development of standalone handling facility with a quay length of 330 m to the North at JNPT
10 MTPA 600
New Mangalore Port Trust
Setting up of mechanized iron ore handling facilities at berth No. 14
6.62 MTPA (Capacity of
Jetty)
296
Source: Ministry of Shipping
Projects under Formulation for Major Ports (as on 30 September, 2015) Port Name Scope of Work Capacity Project Cost
(Rs. Cr)
Kamarajar Port Ltd
Development of LNG terminal 5 MT 5,151
Chennai Port Trust
Development of mega container terminal (Development of a new outer harbour on BOT basis)
48 MTPA 5100
Kandla Construction of T shape Jetty at Tekra (Phase‐II)
14 MT 1500
Paradip Port Mechanization of EQ 1 to EQ 3 berths at Paradip Port on BOT basis
30 MT 1438
Kandla 8 Development of port‐based multi product SEZ
N.A. 1095
Paradip Port
Development of deep draught iron ore berth on BOT basis at Paradip port
10 MT 740
Source: Ministry of Shipping ITDC is an active player in the marine sector; more than 50% of the company’s order book comprises of orders from this segment. There is immense scope for expansion and modernization of ports in India, which encourages private players to foray into port building activity. Considering the relatively lower competition in the segment and several port projects on the anvil, the company could be one of the largest beneficiaries of opportunities emerging in the marine segment.
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ITD Cementation India Ltd
Recent policy initiatives in irrigation segment a shot in the arm The government is focused on providing the required fillip to the sagging agriculture sector. Irrigation has assumed a pivotal role in supporting the sector. Adequate irrigation infrastructure assures year‐round water supply and provides immunity to farmers from a poor monsoon. This necessitates the government to infuse adequate investment into the irrigation segment to build a sturdy support system for the agriculture sector.
In the recent budget, the irrigation segment received special emphasis with the finance minister laying out elaborate measures to give the irrigation sector a push. In addition to bringing 28.5 hectares of land under irrigation, close to 89 languishing irrigation projects will be fast‐tracked. Moreover, a dedicated long‐term irrigation fund will be created in NABARD with an initial corpus of Rs.200bn.
With ~17% of ITDC’s order book accounting for dams and irrigation projects, the recent initiatives by the government will boost the irrigation segment and are the much needed shot in the arm for the company. ITDC has executed a number of large, medium, and small hydroelectric and irrigation projects, such as pumping stations, powerhouses, tunnels, intake structures, headrace tunnels, pressure shafts, and penstock pipes, and plans to participate actively in the sector. Projects under consideration of Ministry of Water Resources, River Development and Ganga Rejuvenation Name of Project State Project Cost
(Rs.Cr)
Andhra Pradesh community‐based water management project, Phase II
Andhra Pradesh 1,600
Tamil Nadu irrigated agriculture modernization and water resources management project, Phase‐II
Tamil Nadu 2,950
Kundaliya major irrigation project under NWUEISP Madhya Pradesh 3,448
Telangana irrigation and livelihood improvement project Phase‐II
Telangana 673
Project for restoring irrigation potential of Sarda Sahayak and Sarda Canal System
Uttar Pradesh 4,192
Extension, renovation, and modernization work of Tawa irrigation project
Madhya Pradesh 2,600
Source: Ministry of Water Resources, River Development & Ganga Rejuvenation, India Infoline Research
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ITD Cementation India Ltd
Spotlight on urban infrastructure development; gamut of opportunities on the anvil ITDC is focused on the urban infrastructure development segment; metro rail projects constitute ~11% of the order book. This segment is rapidly expanding in India with several metro rail projects being planned across states in order to enhance connectivity within cities. Metro rail projects are operational in seven cities; nonetheless, several metros are under construction. Operational Metro Projects Metro Project Total Length (Km) Completion
Bangalore Metro 25.5 October 2011
Chennai Metro 10 June 2015
Delhi Metro 193.1 December 2002
Gurgaon Metro 5.1 November 2013
Jaipur Metro 9.6 June 2015
Kolkata Metro 28.1 October 1984
Mumbai Metro 11.4 June 2014
Under Construction/Planning Metro Project Total Length (Km) Completion
Hyderabad Metro 72.2 2017
Noida Metro 29.1 2017
Kochi Metro 25.6 2016
Navi Mumbai Metro 106.4 2017
Lucknow Metro 35 2016
Ahmedabad Metro 39.3 2018
Nagpur Metro 38.2 2018
Apart from the above metros, metros have been proposed for the following cities. While this may take time to materialize, the opportunity remains strong for players such as ITDC. Proposed Metro Projects
Metro Project
Bhopal Metro Gwalior Metro
Chandigarh Metro Vishakhapatnam Metro
Ludhiana Metro Vijayawada Metro
Indore Metro Indore Metro
Patna Metro
Urban infrastructure, including metro rail, monorail, and smart cities, has assumed paramount importance in the recent past. The government plans to usher in large‐scale investments in the urban infrastructure sector; the sector offers huge business opportunities for private players in the long term.
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ITD Cementation India Ltd
Significant opportunities are likely to emerge, which could benefit ITDC, especially considering the low intensity of competition in this space compared with the highway segment. Moreover, the company possesses extensive experience in the metro rail segment; it has successfully executed several projects. Metro Projects bagged by ITDC
Metro Scope of Work
Bangalore Metro Supply and installation of track work
Kolkata Metro Construction of 3 under ground stations and tunnels
Delhi Metro Design and construction of elevated viaduct including entry exit line, ramp to depot and 8 elevated stations
Delhi Metro Design and Construction of Tunnels by Shield TBM
Chennai Metro Construction of Ramps, Cut and Cover Tunnel
Noida Metro Piling Works at Contract Package NC‐02
Jaipur Metro Construction of elevated road and metro viaduct for stage I of Jaipur metro
Source: Company, India Infoline Research
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ITD Cementation India Ltd
Topline growth to pick up backed by healthy order book and strong execution capabilities The company’s order book as of December 31, 2015 stood at ~Rs.5,200 cr, ~1.7x of CY15 revenue, excluding L1 projects worth ~Rs.3,500 cr. The company’s order book and revenue had a CAGR of ~16% over CY11‐CY15. Considering the opportunities that are likely to unravel in the marine and urban infrastructure segments and the company’s long‐standing experience in successfully executing projects, ITDC’s order book will likely get stronger in the coming years. The company is committed to maintain bidding discipline and has no plans to bid for NHAI road projects (owing to not so good experience with NHAI) in the near‐term. It would however bid for state road and private projects. Although this limits the growth potential, opportunities in other segments could play out favorably. We expect ITDC’s order book to clock a CAGR of ~19% over CY15‐17E. ITDC emerged as the L1 bidder for the MM3 project worth ~Rs.2,830 cr. The project will be executed in a consortium with Tata Projects and Continental Engineering where ITDC’s share would be ~Rs.1,130 cr. The company has not received the LOA for this project; on receipt, this will further augment its order book. ITDC expects to receive the LOA for the project in the near future. However, revenues will likely kick in six months after the LOA is received. ITDC’s revenues during CY15 stood at ~Rs.3,071cr, up ~79% yoy. Despite robust execution, the existing order book is reasonable. Nonetheless, fresh order inflows could provide further momentum to topline. We expect ITDC to register strong revenue growth, clocking a CAGR of ~14% over CY15‐17E.
Robust order book; strong bid pipeline Topline to witness strong growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
‐
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
CY11 CY12 CY13 CY14 CY15 CY16E CY17E
(x)(Rs. Cr)
Order Book Order Book/Sales (RHS)
‐20
0
20
40
60
80
100
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
CY12 CY13 CY14 CY15 CY16E CY17E
(%)(Rs. Cr)
Topline Topline Growth
Source: Company, India Infoline Research
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ITD Cementation India Ltd
Execution of low-margin orders largely complete; operating margins to see an uptrend ITDC has historically operated at an operating margin of ~10%. However, during CY14, the operating margin slipped to ~5% because of ~Rs.400 cr worth pending claim settlements from clients, which restricted the company’s ability to bid for fresh orders. Lack of accretion to order book restricted topline growth, resulting in tepid operating margins. Moreover, ITDC was executing a bunch of low‐margin legacy orders that further pressurized margins. Operating performance set to move to historical levels
0
2
4
6
8
10
12
14
16
0
50
100
150
200
250
300
350
400
450
CY11 CY12 CY13 CY14 CY15 CY16E CY17E
(%)(Rs. Cr)
Operating profit Operarting Margin (RHS)
Source: Company, India Infoline Research
The operating margins have shown signs of recovery during the past few quarters. The settlement of ~Rs.180cr from NHAI, out of the outstanding claims of ~Rs.300cr, was the company’s inflection point; the company wrote off the remaining ~Rs.120cr. Furthermore, ITDC has pending claims from two irrigation projects worth ~Rs.100cr, one in Telangana and the other in AP. The company expects the majority of receivables through an amicable settlement in the near term. Moreover, the fact that legacy projects are almost approaching completion is a source of comfort.
Low competitive intensity in key segments such as marine and urban infrastructure compared with the highway segment could significantly benefit the company. The company provides specialized engineering services and is an established player in the marine segment. Marine orders accounted for over 50% of the company’s order book as of December 2015. Considering the plethora of available opportunities in this segment, sustained recovery in operating margins is on the cards.
The company is firm on maintaining bidding discipline; it would not foray into segments plagued by aggressive bidding. Although this limits the bidding universe, the company will not land up in projects that have the potential to shrink operating margins. ITDC’s EBITDA margin is likely to recover and reach historical levels of ~10% by CY17. We envisage ~42% CAGR in EBITDA over CY15‐17E.
Page 14 of 24
ITD Cementation India Ltd
Balance sheet easing underway; net profit to see gradual recovery Deleveraging of balance sheet has taken center stage in the company’s overall plans. The company’s bottomline took a severe hit because of the ballooning debt fueling higher interest costs. However, with the deleveraging exercise, ITDC’s debt levels have come down from ~Rs.722cr at the end of CY14 to ~Rs.574cr at the end of CY15. Consequently, the company’s debt to equity ratio improved from ~1.3x at the end of CY14 to ~1.1x at the end of CY15. In September 2014, the company raised ~Rs.140cr through QIP, which was utilized to pay off a portion of the debt and fund working capital requirement. Notwithstanding the management’s aim to cut debt levels in the coming years, considering the working capital required to execute the huge orders, we expect the debt to equity ratio to remain largely flat at ~0.9x in CY17E.
Inflated debt levels coupled with pending settlements from clients has eaten into the company’s profitability and stretched the working capital cycle. NHAI settled ~Rs.180cr, of the outstanding claims of ~Rs.300cr, which partially eased the balance sheet position. Recovery of pending claims could provide further respite. The company has outstanding claims worth ~Rs.100cr from two irrigation projects, one in Telangana and the other in Andhra Pradesh. ITDC expects to receive ~Rs.75cr from the Telangana Irrigation project through an amicable settlement in the near term.
The company expects a capex of ~Rs.20 cr every year for the next two years. Nevertheless, the MM3 project will require one new TBM, which the company plans to procure on lease. It has tied up with a financial services firm for funding purposes. This will help avoid a lump sum upfront investment, improving the firm’s balance sheet position.
We expect operating performance to improve and drive net profit growth. Further, decline in interest costs should provide an additional push.
Net Profit to witness strong growth in CY17E Balance sheet deleveraging underway
‐100
‐50
0
50
100
150
200
CY11 CY12 CY13 CY14 CY15 CY16E CY17E
(Rs. Cr)
0.0
0.5
1.0
1.5
2.0
2.5
0
100
200
300
400
500
600
700
800
900
CY11 CY12 CY13 CY14 CY15 CY16E CY17E
(x)(Rs.Cr)
Debt Debt/Equity (RHS)
Source: Company, India Infoline Research
Page 15 of 24
ITD Cementation India Ltd
Improved operating performance and lower gearing to aid recovery of return ratios ITDC’s return ratios have been frail, owing to lower profitability. The ROCE, which was at ~14% during CY13, fell to ~6% in CY14. ROE declined from ~2% in CY13 to ~‐16% in CY14. The decline essentially stems from significant amount of receivables (worth ~Rs.400cr) being stuck with litigation. This stretches the balance sheet and restricts the company’s ability to bid for larger orders.
Return ratios to improve from CY16
‐20
‐10
0
10
20
30
40
CY11 CY12 CY13 CY14 CY15 CY16E CY17E
(%)
ROCE ROE
Source: Company, India Infoline Research
However, the scenario will likely change for the better for ITDC. The company has settled majority of its receivables, which has significantly improved the balance sheet position. It received Rs.180 cr from NHAI as a full and final settlement for Rs.300 cr. It wrote off the remaining debt during CY15. Further, during September 2014, the company raised Rs 140 cr via QIP and used it to reduce debt and fund working capital requirement. The company expects to receive a large sum from the balance receivables under litigation (to the tune of ~Rs.100 cr) through amicable settlement in the near to medium term. This would further improve the balance sheet position. The company’s ROE and ROCE improved to ~12% and ~15%, respectively, in CY15. With a strong topline and earnings growth, limited capex requirement and comfortable debt position, we expect the return ratios to see sharp improvement over the next few years.
Page 16 of 24
ITD Cementation India Ltd
Comparative analysis
Company Name
Mkt Cap
Order book
(Dec 15) EBITDA Margin (%) PAT (Rs.Bn) CAGR (FY15‐18E)
(Rs Bn) (Rs Bn) FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E Sales EBITDA PAT
EPC Focused
ITDC*# 15.9 52.0 5.3 6.2 7.6 9.7 (0.8) 0.6 0.8 1.5 32.0 61.5 NA
JKumar* 22.1 33.8 18.8 18.4 18.5 18.6 1.0 1.1 1.3 1.9 18.7 18.2 23.8
KNR* 14.6 34.7 14.4 15.0 13.2 14.2 0.7 0.9 0.9 1.2 15.5 15.0 18.0
PNC Infra 25.2 30.6 15.5 11.1 13.2 13.3 0.9 1.3 1.6 2.0 15.6 10.0 29.2
MBL Infra 5.7 47.5 12.1 11.2 11.1 11.2 0.8 0.9 1.0 1.2 13.1 10.1 13.6
BOT focused
IRB 80.2 173.2 58.1 53.8 54.4 55.7 5.4 6.3 6.8 7.3 19.9 18.2 10.3
Ashoka Buildcon 34.5 41.9 20.4 28.1 27.9 27.1 0.8 1.0 1.3 1.4 16.3 27.9 19.7
Sadbhav Engg 42.5 82.7 17.3 21.9 25.5 26.8 ‐1.8 ‐0.4 0.3 1.3 20.5 39.5 NA #As ITDC follows calendar year, Data provided above for FY15, FY16, FY17, FY18 corresponds to CY14, CY15, CY16, CY17 in case of ITDC
Company Name
P/E (x) EV/EBITDA (x) ROE % D/E (x)
FY15
Promoter Holding (%)
As on Dec 31 Key Segments FY17E FY18E FY17E FY18E FY15 FY16E FY17E FY18E
EPC Focused
ITDC*# 18.8 10.6 7.8 5.7 (15.6) 12.0 15.3 22.4 1.1 52 Marine, Roads
JKumar* 16.8 12.0 7.0 6.0 14.3 10.4 9.8 12.5 0.7 44 Roads, Metro
KNR* 13.8 10.6 10.0 7.7 13.5 14.6 13.1 14.9 1.0 61 Roads, Irrigation
PNC Infra 14.8 12.1 8.0 6.7 NA 12.6 11.7 13.2 1.9 56 Roads
MBL Infra 5.1 4.1 4.8 4.2 14.5 14.0 12.9 13.5 1.6 47 Roads, Housing
BOT focused
IRB 10.6 9.8 5.7 5.0 13.7 13.5 12.9 12.5 2.6 58 Roads
Ashoka Buildcon 26.3 22.6 8.3 7.5 6.2 5.5 5.9 7.1 2.8 57 Roads, Power
Sadbhav Engg 45.9 20.1 8.4 6.5 (12.5) 0.2 4.4 10.5 4.4 47 Roads, Irrigation
Source: Bloomberg, India Infoline Research *IIFL estimate, Price as on 08 March 2016 #As ITDC follows calendar year, Data provided above for FY15, FY16, FY17, FY18 corresponds to CY14, CY15, CY16, CY17 in case of ITDC D/E provided above is as end of CY15 for ITDC
Valuation is attractive, considering the improving balance sheet position and expected turnaround in margins The company’s topline had a strong growth of ~79% yoy during CY15. Despite robust execution, order book is at ~1.7x its CY15 consolidated revenues. Additionally, ITDC is L1 in orders worth nearly Rs.3,500 cr, majority of which will be converted into orders in the next few months. With the order flow likely to be strong across marine and urban infrastructure segments, players with a strong balance sheet would be key beneficiaries. ITDC struggled with a stretched balance sheet because of receivables being stuck in litigation. However, it is better placed now. ITDC raised nearly Rs.140 cr via the QIP route during 2014 and paid off portion of the debt with the proceeds. With these measures, the D/E of the company has come down to ~1.0x by the end of CY15 from ~1.7x during 2013.
Page 17 of 24
ITD Cementation India Ltd
Turnaround in business to lead to strong return on equity; potential for re-rating
Trading at cheaper valuations despite strong ROE
0
5
10
15
20
25
30
35
40
45
4.0 9.0 14.0 19.0 24.0
FY18E P/E (x)
FY18E ROE (%)
PNC
MBL JKumar
Ashoka Buildcon
KNR
ITD
Sadbhav Engg
IRB
Source: Company, India Infoline Research As ITDC follows calendar year, Data provided above for FY18E corresponds to CY17E in case of ITDC
ITDC is a pure play EPC player with no exposure to asset heavy BOT space. During the past few years, ITDC suffered from various receivables being stuck in litigation. However, measures taken by the company such as one‐time settlement of major receivables and raising funds via the QIP route have further strengthened the balance sheet position. ITDC today is operating with a decent order book and has a healthy balance sheet. Its operating margins halved during 2014, but we expect the same to reach pre‐2014 levels by CY17E. ITDC is trading at relatively cheaper valuations (10.6x CY17E EPS) than most peers despite higher expected ROE. It is well diversified across infrastructure segments, which provides additional comfort in terms of future order inflows. Therefore, we believe re‐rating is on the cards. We value ITDC with a target multiple of 14x, implying a target price of Rs.134 per share.
Page 18 of 24
ITD Cementation India Ltd
Key Risks Dependence on Government Projects
With marine projects and urban infrastructure accounting for over ~60% of the order book, ITDC remains largely dependent on the government. A slowdown in rolling out projects by the government in these segments could have severe implications on the company’s order inflow and lead to a weak topline.
Strong growth in topline to nullify management’s attempts to reduce debt levels
ITDC has a comfortable balance sheet position and intends to reduce debt levels further in the coming years. Even though the company’s capex requirements will likely be lower, robust growth in order book and topline may necessitate more working capital. Although we do not anticipate an increase in debt from current levels, major reduction in the same is unlikely.
Undue delays in conversion of L1 could impact topline
The company has emerged as the lowest bidder for a few large orders such as the MM3 project, Udangudi breakwater project and dredging and reclamation work at JNPT. Undue delay in conversion of L1 status on these projects is likely to affect the topline.
Relapse of high receivable position could dampen recovery
ITDC had pending claim settlements aggregating to ~Rs.400cr, which halved its operating margins to ~5% in CY14. The company has recovered most of its claims from NHAI, which is likely to aid margin expansion in the coming years. ITDC expects to recover ~Rs.75cr from the two Telangana Irrigation projects out of the outstanding claim of ~Rs.100cr. Therefore, the company will need to ensure speedy recovery of claims because a relapse of the past situation will restrict its ability to bid for orders and affect its financial health.
Page 19 of 24
ITD Cementation India Ltd
Company Background
ITDC is a subsidiary of Italian‐Thai Development Public Company Limited (ITD), which owns ~52% in ITDC. ITDC is one of the leading infrastructure players in India with a strong foothold in key infrastructure verticals and is well diversified across sectors. The company is a pure EPC player and has no exposure to BOT projects.
The company has a long‐standing experience of over eight decades of providing construction services in India. The company has changed hands several times, from its inception, before being acquired by Thai Development Public Company Limited.
Events Timeline
Set up as Cemindia Company Limited by The Cementation Company Limited, United Kingdom
Company acquired by Trafalgar House Plc.; Rechristened as Trafalgar House Construction India Limited
Trafalgar House Plc. acquired by Kvaerner ASA in 1996; Rechristened as Kvaerner Cementation India Limited in 1998
Renamed as Skanska Cementation India Limited pursuant to acquisition of entire issued share capital of Kvaerner Construction Group Limited by Skanska AB
Acquired by Italian‐Thai Development Public Company Limited, Thailand in 2004 and renamed as ITD Cementation India Limited in 2005
1931‐1978
1994
1998
2001
2005
Marine
Buildings
Highways, Bridges and Flyovers
Airports Industrial Structures
Dams, Tunnels, Hydro‐power and Irrigation
Mass Rapid Transportation System
Key Segments
Page 20 of 24
ITD Cementation India Ltd
Typical scope of work undertaken by ITDC Areas of Operation Scope of Work
Marine Construction of maritime structures such as jetties, dolphins, quays, service platforms, berths, dry dock, wet basin, land reclamation, coastal erosion protection etc.
Mass Rapid Transit Systems Construction of tunnels, underground railway stations and installation of train system
Dams, Tunnels, Hydro‐power and Irrigation
Execution of large, medium and small hydroelectric and irrigation projects like pumping stations, power houses, tunnels, intake structures, headrace tunnels, pressure shafts and penstock pipes
Industrial Structures Execution and construction of civil structures for refineries, petrochemicals, power, steel and fertilizer plants
Airports Design and construction of runway, hangar, passenger terminal and various utilities at airports
Highways, Bridges and Flyovers
ITDC has completed five road projects under the Golden Quadrilateral and has carried out road projects and construction of flyovers and bridges
Buildings Full service delivery of all types of buildings, from conceptual design to final decoration and fitting ranging from residential buildings to sports stadiums and gymnasiums to industrial structures
Source: Company, India Infoline Research In addition, the company is also engaged in manufacturing steel structures, installation of public telephone network, mining and pipeline projects. Catering to diverse Clients Clientele
JNPT Chennai Metro Rail Corporation Limited
NTPC
Ennore Port Bangalore Metro Rail Corporation Limited
Samsung
PIPAVAV Kolkata Metro Rail Corporation Limited
Indian Farmers Fertilizer Cooperative Ltd
Kandla Port Rail Vikas Nigam Limited Airport Authority of India
PSA Marine Konkan Railway Corporation Limited
NHAI
Delhi Metro Rail Corporation Limited
Tata Power Company Limited
West Bengal Housing Infrastructure Development Corp. Ltd.
Source: Company, India Infoline Research An experienced and able team manages the company. Backed by strong expertise and experience of ~1,809 employees and an additional labor force of ~3,017, ITDC has executed a several projects of varying complexities.
Page 21 of 24
ITD Cementation India Ltd
Management Profile
‐ Chairman of the Company since 2004‐ Also serves as the President and Director of ITD‐ Hasmore than three decades of experience in the Infrastructure Construction Industry
Mr. PremchaiKarnasuta (Chairman)
‐ Director of the Company since 2004 and also the Vice Chairman
‐ Hasmore than four decades of experience in the Construction industry
‐ Also a Director and Senior Executive Vice President of ITD
Mr. PathaiChakornbundit(Vice Chairman)
‐ Senior most Director of the Company and has been on the board since 1983
‐ Solicitor and Advocate of Bombay High Court and Solicitor of the Supreme Court of
England
Mr. Darius ErachUdwadia
(Independent Director)
‐ Director of the Company since 2009 and Managing Director of the Company since 2010
‐ Has more than three decades of experience in Civil Engineering and Construction
ProjectManagement
Mr. Adun Saraban(Managing Director)
‐ Joined the Company in 1979.
‐ Apart from being a qualified CS, he holds a bachelor’s degree in law from Mumbai
University.
‐ He has over 35 years of experience in handling company law and related legislations.
Mr.Rameshwardas C Daga
Sr. Vice President and Company Secretary
‐ Joined the Company in 2011.
‐ Graduate in Commerce fromMumbai University and qualified Chartered Accountant
‐ He is responsible for the overall accounting, finance, and audit and taxation areas.
‐ He has over 35 years’ experience in accounting, corporate finance, investment banking,
and equity research.
Mr.S.Ramnath(Executive Vice President
and CFO)
Page 22 of 24
ITD Cementation India Ltd
Financials Income statement (Consolidated) Y/e 31 Dec (Rs cr) CY14 CY15 CY16E CY17E
Revenue 1,719 3,071 3,532 3,955
Operating profit 91 192 267 384
Depreciation (43) (37) (48) (64)
Interest expense (136) (138) (120) (127)
Other income 18 22 22 22
Profit before tax (69) 39 122 215
Taxes (7) 25 (38) (67)
Adj. profit (76) 65 84 149
Exceptional items 96 (124) 0 0
Net profit 19 (59) 84 149
Balance sheet (Consolidated) Y/e 31 Dec (Rs cr) CY14 CY15 CY16E CY17E
Equity capital 16 16 16 16
Reserves 552 493 576 722
Net worth 568 508 591 738
Debt 722 574 594 644
Other LT Liabilities 0 0 0 0
Total liabilities 1,289 1,082 1,185 1,382
Fixed assets 339 352 370 397
Deferred tax asset (net) 15 44 44 44
Investments 0 0 0 0
Net working capital 909 539 703 920
Inventories 1,131 1,175 1,403 1,626
Sundry debtors 413 338 406 509
Other current assets 270 388 464 542
Sundry creditors (889) (1,340) (1,548) (1,734)
Other curr liabilities (17) (23) (23) (23)
Cash 27 148 68 21
Total assets 1,289 1,082 1,185 1,382
Cash flow (Consolidated) Y/e 31 Dec (Rs cr) CY14 CY15 CY16E CY17E
Profit before tax (69) 39 122 215
Depreciation 43 37 48 64
Tax paid (7) 25 (38) (67)
Working capital ∆ (87) 370 (164) (217)
Operating cash flow (121) 472 (32) (5)
Capital expenditure (151) (50) (67) (91)
Free cash flow (272) 422 (98) (96)
Equity raised 141 ‐ ‐ ‐
Investments ‐ ‐ ‐ ‐
Debt fin/disposal 25 (148) 20 50
Dividends paid (1) ‐ (1) (2)
Other items 102 (153) ‐ ‐
Net ∆ in cash (5) 120 (79) (47)
Key ratios (Consolidated) Y/e 31 Dec CY14 CY15 CY16E CY17E
Growth matrix (%)
Revenue growth 8.5 78.7 15.0 12.0
Op profit growth ‐ 110.4 39.6 43.4
EBIT growth ‐ 165.0 36.2 41.9
Net profit growth ‐ ‐ 29.6 77.2
Profitability ratios (%)
OPM 5.3 6.2 7.6 9.7
EBIT margin 3.9 5.8 6.8 8.7
Net margin (4.4) 2.1 2.4 3.8
RoCE 5.6 14.9 21.3 26.7
RoNW (15.6) 12.0 15.3 22.4
RoA (3.8) 2.8 3.2 5.0
Per share ratios
EPS (4.9) 4.2 5.4 9.6
Dividend per share 0.1 0.0 0.1 0.1
Cash EPS (2.2) 6.5 8.5 13.7
Book value per share 36.6 32.7 38.1 47.5
Valuation ratios (x)
P/E ‐ 24.2 18.7 10.6
P/CEPS ‐ 15.5 11.9 7.4
P/B 2.8 3.1 2.7 2.1
EV/EBIDTA 24.8 10.4 7.8 5.7
Payout (%)
Dividend Payout ‐ ‐ 1.1 1.2
Tax payout ‐ ‐ 31.0 31.0
Liquidity ratios
Debtor days 88 40 42 47
Inventory days 240 140 145 150
Creditor days 189 159 160 160
Leverage ratios
Interest coverage 0.5 1.3 2.0 2.7
Net debt / equity 1.2 0.8 0.9 0.8
Net debt / op. profit 7.6 2.2 2.0 1.6
Du‐Pont Analysis Y/e 31 Dec (Rs cr) CY14 CY15 CY16E CY17E
Tax burden (x) 1.1 1.6 0.7 0.7
Interest burden (x) (1.0) 0.2 0.5 0.6
EBIT margin (x) 0.0 0.1 0.1 0.1
Asset turnover (x) 0.8 1.3 1.4 1.3
Financial leverage (x) 4.2 4.3 4.7 4.4
RoE (%) (15.6) 12.0 15.3 22.4
Page 23 of 24
‘Best Broker of the Year’ – by Zee Business for contribution to broking Nirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.
Recommendation parameters for fundamental reports:
Buy – Absolute return of over +15%
Accumulate – Absolute return between 0% to +15%
Reduce – Absolute return between 0% to ‐10%
Sell – Absolute return below ‐10%
Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst
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