Download - Morning Insight - Kotak Securities · RIL’s Rs.100bn shopping spree for Reliance Jio, Reliance Retail.Over the past 11 months, RIL has spent nearly 100bn for acquisitions and Rs.

NOVEMBER 5, 2018

Morning Insight

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.

News Highlights The broad outline of a new revival plan for Air India is ready, the second

such rescue bid in the state-run carrier’s recent history which includes a failed divestment effort earlier this year. The new strategy will involve the government transferring the airline’s working capital debt of about Rs 290bn to a SPV known as Air India Assets Holding (AIAHL). (ET)

FPI outflow hits 2 year high in Oct; total withdrawal crosses Rs.1 trillion mark in 2018.FPIs have been net sellers almost throughout this year barring some months such as January, March, July and August. In these four months, overseas investors put in funds totalling over Rs.320bn. (Mint)

CIC issues show-cause notice to RBI governor for non-disclosure of wilful defaulters’ list. (Mint)

The Finance Ministry is likely to finalise the capital infusion of about Rs540bn by November-end or by the first half of the next month taking into account the latest quarter’s performance. (Mint)

SBI has put up 11 non-performing assets (NPAs) for sale to ARCs and financial companies to recover dues of nearly Rs10.19bn. The country’s largest lender said the e-auction of these NPA accounts will take place on 22 November. (Mint)

Aurobindo Pharma Limited has initiated voluntary recall of 22 batches of drug substance Irbesartan, used in treatment of hypertension,from the US market due to the presence of an impurity, which is believed to cause cancer. (Mint)

Hindalco to invest $180 million in Brazil, close Aleris deal by April. Hindalco to expand its rolling capacity in Brazil by 100 kilo tonne. (Mint)

Adani Transmission has signed a share purchase agreement with KEC International for acquisition of its entire stake in KEC Bikaner Sikar Transmission. (Mint)

RIL’s Rs.100bn shopping spree for Reliance Jio, Reliance Retail.Over the past 11 months, RIL has spent nearly Rs.100bn for acquisitions and partnerships to further its new businesses—Reliance Jio and Reliance Retail. (Mint)

Troubled infrastructure developer and lender Infrastructure Leasing & Financial Services Ltd has shortlisted Indian arms of Belgium-based BDO and Chicago-headquartered Grant Thornton to investigate alleged irregularities in its operations.(ET)

Vodafone Idea, Bharti Airtel and Reliance Jio Infocomm are sharply divided over the timing of spectrum auctions and the pricing of airwaves, setting the stage for intense lobbying as the Department of Telecommunications prepares the roadmap for the next sale. (et)

Amazon is set to acquire a minority stake in Future Retail next week, potentially giving the ecommerce platform access to nearly a third of the country’s organised food and grocery market through the Big Bazaar and Nilgiris supermarket chains and other outlets.(ET)

What’s Inside Result Update: Amber Enterprises Ltd, Aksharchem (India) Ltd, Arvind

Ltd, Greaves Cotton

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange, MC = Moneycontrol

1-Nov 1 Day 1 Mth 3 Mths

Indian Indices SENSEX Index 35,012 1.7 (4.1) (5.8) NIFTY Index 10,553 1.7 (4.1) (6.2) NSEBANK Index 25,702 1.5 1.3 (6.0) NIFTY 500 Index 8,899 1.4 (2.9) (7.2) CNXMcap Index 17,431 0.5 0.8 (7.9) BSESMCAP Index 14,465 0.8 0.5 (13.1)

World IndicesDow Jones 25,271 (0.4) (4.4) (0.8) Nasdaq 7,357 (1.0) (5.5) (5.8) FTSE 7,094 (0.3) (3.1) (7.4) NIKKEI 22,244 2.6 (7.4) (2.2) Hangseng 22,244 2.6 (7.4) (2.2) Shanghai 26,486 4.2 (2.1) (6.0)

Value traded (Rs cr)Cash BSE 87.8 Cash NSE 12.4 Derivatives (61.4)

Net inflows (Rs cr) 31-Oct MTD YTDFII 941 (26,682) (41,744)Mutual Fund (428) 17,971 106,226

Nifty Gainers & Losers Price Chg Vol1-Nov (Rs) (%) (mn)

GainersBPCL 302 6.7 17.1 Maruti Suzuki 7,135 6.3 1.8 Vedanta Ltd 226 6.2 19.7

LosersTech Mahindra 691 (4.1) 4.5 Wipro 318 (3.4) 3.7 Dr Reddy's 2,423 (1.6) 0.9

Advances / Declines (BSE)1-Nov A B T Total % totalAdvances 283 703 50 1,036 100 Declines 146 352 55 553 53 Unchanged 2 15 13 30 3

Commodity1-Nov 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 72.4 (0.5) (13.9) (1.1) Gold (US$/OZ) 1,233.0 (0.0) 2.5 1.6 Silver (US$/OZ) 14.7 0.0 0.6 (4.4)

Debt / forex market 1-Nov 1 Day 1 Mth 3 Mths10 yr G-Sec yield % 7.8 7.8 8.0 7.7 Re/US$ 72.4 73.5 72.9 68.7

Nifty

Source: Bloomberg

% Chg

700,968

% Chg

% Chg Day1-Nov6,246

41,785

9,800

10,300

10,800

11,300

11,800

Nov-17 Feb-18 May-18 Aug-18 Nov-18

Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

NOVEMBER 5, 2018

AMBER ENTERPRISES LTD (AEL) PRICE RS.856 TARGET RS.1070 BUY

AEL reported weak set of numbers as above-normal inventory of room ACs in the industry led to brands curtailing their procurement plans from the company.

Key Highlights

Weak revenue due to excess inventory in the distribution/manufacturer end

In a seasonally weak quarter, EBITDA margin declined due to under-absorption of fixed costs

The management believes that demand conditions are improving and hence it is possible for the company to meet its original guidance.

Valuation and Outlook

In terms of valuation, the stock is trading at 27x and 18x FY19 and FY20 earnings. We see the company as a very good play on India’s fast-growing RAC industry. AEL enjoys the highest two year earnings cagr among peer group. ROCE has been moderate due to capex in past years in building capacities, which are yet to be optimally utilized. With sustained demand trends and modest capex, we see asset turnover to rise in coming years leading to enhanced ROE/ROCE. We value the stock at 23x Consol EPS of FY20E, 10% discount to our target multiple of 26x ascribed to Blue Star, and arrive at a target price of Rs 1070 (Rs 1150 earlier).

Q2FY19 Results

(Rs mn) Q2FY19 Q2FY18 YoY (%) Q1FY19 QoQ (%)

Net Sales 2263 2650 -15 6021 -62

Raw Material Consumed 1859 2350 -21 4997 -63

Stock Adjustment 2 -185 -101 24 -91

Employee Expenses 105 99 7 115 -8

Other Expenses 208 167 25 335 -38

TOTAL EXPENDITURE 2174 2430 -11 5471 -60

PBIDT 89 220 -60 550 -84

Other Income 28 18 58 11 164

Interest 33 102 -68 29 14

PBDT 84 136 -38 532 -84

Depreciation 123 105 17 120 3

PBT -39 31 -224 412 -109

Tax -16 -89 -82 94 -117

Deferred Tax -6 95 -107 28 -122

Reported Profit After Tax -17 25 -168 289 -106

EBITDA % 3.9 8.3 9.1

Material cost to sales % 82 89 83

Employee cost to sales % 4.6 3.7 1.9

Other expenditure to sales % 9.2 6.3 5.6

Tax rate % 56.3 19.9 29.8

EPS (Rs) -0.5 0.8 9.2

Source: Company

Result Update

Stock Details

Market cap (Rs mn) : 27102

52-wk Hi/Lo (Rs) : 1329 / 821

Face Value (Rs) : 10

3M Avg. daily vol (Nos) : 19,170

Shares o/s (mn) : 31

Source: Bloomberg

Financial Summary

Y/E Mar (Rs mn) FY18 FY19E FY20E

Revenue 21,281 25,858 31,577

Growth (%) 29.4 21.5 22.1

EBITDA 1,835 2,028 2,700

EBITDA margin (%) 8.6 7.8 8.6

PAT 623 994 1,459

EPS 19.8 31.7 46.5

EPS Growth (%) 123.3 59.5 46.8

BV (Rs/share) 284.3 316.0 362.5

Dividend/share (Rs) 0 0 0

ROE (%) 9.9 10.5 13.7

ROCE (%) 16.0 14.4 18.5

P/E (x) 43.1 27.0 18.4

EV/EBITDA (x) 15.6 13.9 10.1

P/BV (x) 3.0 2.7 2.4

Source: Company, Kotak Securities - PCG

Shareholding Pattern (%)

(%) Sep-18 Jun-18 Mar-18

Promoters 44.0 50.5 50.5

FII 10.7 1.6 1.6

DII 7.7 8.0 8.0

Others 37.6 40.0 40.0

Source: Company

Price Performance (%)

(%) 1M 3M 6M

Amber Enterprises (5.6) (13.5) (23.4)

Nifty (4.1) (6.2) (1.5)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Sanjeev Zarbade [email protected] +91 22 6218 6424

800

1,000

1,200

1,400

Jan-18 Apr-18 Jul-18 Oct-18


NOVEMBER 5, 2018

Reported Vs Estimated performance

Rs mn Reported Estimated

Revenue 2262 2550

EBITDA % 3.9% 9.0%

Adj PAT -17.0 25.0

Source: Company and Kotak Securities – Private Client Research

Result Highlights

Weak revenue due to excess inventory in the distribution/manufacturer end

AEL reported revenues of Rs 2.3 bn in Q2FY19, down 15% on a yoy basis. Reasons for weak revenue was attributed to 1) Weak demand conditions in Q2FY19 and 2) The room AC market contracted by ~ 10-12% in Q1FY19, which led to above-normal inventory in the system in Q2FY19. As a result, brands/retailers curtailed their procurement plans and instead focused on liquidating the excess inventory.

In a seasonally weak quarter, EBITDA margin declined due to under-absorption of fixed costs

Gross margins for the quarter declined to 17.8% as compared to 18.3% in the corresponding quarter of the previous fiscal.

Decline in EBITDA margins was higher at 440 bps as decline in revenue led to adverse operating cost leverage.

Subsidiary/Associate company performance in H1FY19

Revenue at its subsidiaries was muted in line with the weak demand conditions for room ACs.

On the positive side, two customers of AEL have extended their relationship to EL GIN as well.

Performance in H1FY19

Subsidiary/Associate companies performance IL JIN PICL Ever

AEL's stake 70% 100% 19%

Revenue Rs mn na 500 1340

EBITDA margin 4.50% na 3.20%

PAT margin 1.30% 1% 1.30%

Source: Companies

Decline in cash coupled with increase in borrowings

AEL reported decline in cash in H1FY19, which now stands at Rs 282 mn as compared to Rs 1.2 bn at the end of FY18.

Gross borrowings also rose to Rs 736 mn in H1FY19 as compared to Rs 405 mn at the end of FY18.

The management attributed the decrease in cash and equivalents to capex of Rs 300 mn and higher working capital engagement. Apart from this, the management indicated that the drawdown of cash in first half is seasonal due to weak seasonal demand leading to lower customer advances. The cash situation should turn favourable by the end of FY19, the management indicated.


NOVEMBER 5, 2018

Management guidance

The management retains the guidance of increasing RAC unit production from 1.9mn units in FY18 to 2.2-2.3mn units in FY19, implying a significant strong 2HFY19.

The management believes that demand conditions are improving and hence it is possible for the company to meet its original guidance.

With new customer additions, increase in wallet share of existing customer, product expansion and increasing sales trend in Ac & Non AC Components the management expects margins to improve in the latter half of the year.

Customs duty hike on room ACs

With a view to promote domestic manufacturing, the government recently hiked custom duty from 10% to 20% on Air Conditioners.

Increase in custom duty will increase procurement of ACs from within India. This is positive for AEL. However, some brands were importing only the indoor units (IDUs) instead of the complete AC unit. There are differential duties on imports of complete units and that of only the IDUs. Given this, we are not clear on how positive the import duty hike is for AEL. The management however believes that it is well placed in terms of costs and manufacturing to provide a comparable offering on IDUs vis-a-vis imports.

Conference call highlights

Notwithstanding the intermittent blips in room AC demand due to weather patterns, AEL remains bullish given low penetration and shortening replacement cycle of the product.

Despite the headwinds from the industry in the first half of the year, AEL is optimistic that the demand momentum will pick up in the second half on the back of the festive season.

Earnings Revision

FY19 FY20 (Rs mn) Earlier Revised Earlier Revised

Revenue 26,342.0 25,857.5 31,577.0 31,577.2

EBITDA % 8.0 7.8 8.6 8.6

EPS 33.5 31.7 46.5 46.5

-5.5% -0.1%

Source: Company and Kotak Securities – Private Client Research

Reiterate BUY

In terms of valuation, the stock is trading at 27x and 18x FY19 and FY20 earnings. We see the company as a very good play on India’s fast-growing RAC industry. AEL enjoys the highest two year earnings cagr among peer group. ROCE has been moderate due to capex in past years in building capacities, which are yet to be optimally utilized. With sustained demand trends and modest capex, we see asset turnover to rise in coming years leading to enhanced ROE/ROCE. We value the stock at 23x Consol EPS of FY20E, 10% discount to our target multiple of 26x ascribed to Blue Star.


NOVEMBER 5, 2018

Company background

Amber Enterprises Ltd was incorporated as Amber Enterprises India Private Limited and set up its first factory in Rajpura, Punjab, which commenced operations in 1994. Since then, the company has today grown to 10 manufacturing facilities across seven locations in India. The company’s manufacturing facilities have a high degree of backward integration and are strategically located in proximity to our customers' requirements. The company’s key customers include leading RAC brands such as Daikin, Hitachi, LG, Panasonic, Voltas and Whirlpool. Its customers commanded around 75% share in the Indian RAC market in Fiscal 2017.


NOVEMBER 5, 2018

Financials: Consolidated Balance sheet (Rs mn)

(Year-end Mar) FY17 FY18 FY19E FY20E

Cash and cash equivalents 352 1,339 1,507 2,255 Accounts receivable 3,101 3,786 4,467 5,271 Stocks 2,685 3,956 4,669 5,509 Loans and Advances 140 283 283 283 Others 233 276 276 276 Current Assets 6,511 9,640 11,202 13,595 LT investments 108 144 144 144 Net fixed assets 4,629 5,629 5,637 5,890 Intangible assets 1,059 1,674 1,674 1,674 Deferred tax assets 2 - - - CWIP 93 95 95 95 Other non-current assets 105 104 104 104 Total Assets 12,507 17,285 18,856 21,501 Payables 4,979 6,874 7,906 9,091 Provisions 31 9 9 9 Current liabilities 5,010 6,884 7,915 9,100 LT debt 3,741 1,055 600 600 Other liabilities 129 419 419 419 Equity & reserves 3,627 8,928 9,922 11,381 Total Liabilities 12,507 17,285 18,856 21,501 BVPS (Rs) 115 284 316 362

Source: Company, Kotak Securities – Private Client Research

Ratio Analysis


EBITDA margin (%) 7.8 8.6 7.8 8.6 EBIT margin (%) 5.4 6.3 5.6 6.5 Net profit margin (%) 1.7 2.9 3.8 4.6 Adjusted EPS growth (%) 15.8 123.3 59.5 46.8 Receivables (days) 68.4 63.7 69.1 65.5 Inventory (days) 57.6 62.2 67.5 64.0 Sales / Net Fixed Assets (x) 3.6 3.8 4.6 5.4 ROE (%) 8.9 9.9 10.5 13.7 ROCE (%) 17.4 16.0 14.4 18.5 EV/ Sales 2.0 1.3 1.1 0.9 EV/EBITDA 25.2 15.6 13.9 10.1 Price to earnings (P/E) 96.3 43.1 27.0 18.4 Price to book value (P/B) 7.4 3.0 2.7 2.4

Price to cash earnings 44.6 25.6 19.7 14.8


Profit and Loss Statement (Rs mn)


Revenues 16,444 21,281 25,858 31,577 % change yoy 51.0 29.4 21.5 22.1 EBITDA 1,286 1,835 2,028 2,700 % change yoy (44.2) 42.7 10.5 33.2 Depreciation 397 490 592 648 EBIT 889 1,345 1,436 2,053 % change yoy (61.4) 51.4 6.8 42.9 Net Interest 583 538 116 78 Other Income 79 87 100 110 Earnings Before Tax 384 894 1,420 2,085 % change yoy (83.3) 132.8 58.9 46.8 Tax 105 271 426 625 as % of EBT 27.3 30.3 30.0 30.0 Net Income adj 279 623 994 1,459 % change yoy 15.8 123.3 59.5 46.8 Exceptional items 0.0 0.0 0.0 0.0 Reported Net Income 279 623 994 1,459 Shares outstanding (m) 31.4 31.4 31.4 31.4 EPS (Rs) 8.9 19.8 31.7 46.5 DPS (Rs) 1.6 0.0 0.0 0.0 CEPS 19.2 33.5 43.4 57.9


Cash flow Statement (Rs mn)


PBDIT 1,286 1,835 2,028 2,700 Tax and adjustments 358 (1,640) (426) (625) Cash flow from operations 1,643 195 1,602 2,075 Net Change in Working Capital (443) (104) (362) (459) Net Cash from Operations 1,200 92 1,239 1,616 Capital Expenditure (820) (734) (600) (900) Cash from investing (127) 80 100 110 Net Cash from Investing (946) (654) (500) (790) Interest paid (583) (538) (116) (78) Issue of Shares 500 4,776 - - Dividends Paid (60) - - - Debt Raised 57 (2,689) (455) - Net cash from financing (87) 1,549 (571) (78) Net change in cash 167 986 168 748

Free cash flow 380 (643) 639 716 Cash at end 352 1,339 1,507 2,255



NOVEMBER 5, 2018

AKSHARCHEM (INDIA) LTD PRICE RS.460 TARGET RS.485 REDUCE

AksharChem Q2FY19 operating performance was above estimates, driven by better than expected realisation. However, due to Rs16mn loss in other income, PAT came in at Rs74mn, below estimates. Management expects benefit of H-Acid and CPC Green expansion to start flowing in from Q4FY19 onwards.

Key Highlights

Revenue during the quarter grew 30% YoY and 13.1% QoQ to Rs853mn, driven by strong volume growth. Volume in Q2FY19 stood at 2,254 tonnes, up 4.3% YoY (down 2.4% QoQ). The YoY growth in volume was supported by higher capacity. Total installed capacity at the end of 1HFY18 stands at 11,400 tonnes.

The capex plan is on track, 480 tonnes of CPC Green capacity is completed and is expected to come on stream in the coming quarter and 1,200 tonnes of H-Acid commercial production will begin from 4QFY19. The benefit of the same would start to accrue from Q4FY19 onwards. 3QFY19, volume will largely remain flat.

Valuation & outlook The completion of capex plan, will transform AksharChem business to more stable earnings from FY20E onwards. However, in the near term till the new unit get stabilized and the company is able to pass on the rise in input costs, we believe that the earnings are likely to remain under pressure. We believe, given the supply disruption in China (environmental concern), should keep the final product prices firm over the medium term. However, in the near term, due to decline in intermediate realisation (seasonal factor) margin will remain under pressure. The volatility in the raw material prices, will be the key variable to monitor. The stock has corrected further, since our last update dated 14th Aug (Reduce). At CMP, the stock is trading at 10.8x/10.1X FY19E/FY20E which in our view is fairly valued and offers a limited upside. Hence, we recommend REDUCE with a revised target price of Rs485 (earlier Rs533), valuing it at 11x (earlier 12x), as benefit of new capacity will take some more time.

Quarterly performance table

Particulars (Rs Mn) 2QFY19 2QFY18 % YoY 1QFY19 % QoQ

Net sales 853 656 30.0 755 13.1

Materials & subcontracting 480 395 488

Employee Expenses 25 16 20

Total Expenditure 697 545 669

EBITDA 156 112 39.8 85 83.0

EBITDA Margin (%) 18.3 17.0 11.3

Depreciation 13 12 11

Interest 2 4 2

EBT 141 95 72

Other income -16 40 31

PBT 125 135 (7.1) 103 21.7

Provision for tax 51 32 27

-effective tax rate 40.6 23.9 26.5

PAT (reported) 74 103 (27.6) 76 (1.7)

NPM (%) 8.7 15.6 10.0


Result Update

Stock Details


52-wk Hi/Lo (Rs) : 791 / 401


3M Avg. daily vol (nos) : 5,283

Shares o/s (mn) : 8.2

Source: Bloomberg

Financial Summary


Revenue 2,647 3,181 3,537

Growth (%) 5.8 20.2 11.2

EBITDA 417 509 566

EBITDA margin (%) 15.7 16.0 16.0

PAT 306 348 375

EPS 37.3 42.5 45.8

EPS Growth (%) -42.1 13.8 7.7

BV (Rs/share) 290 326 366

Dividend/share (Rs) 3.5 3.5 3.5

ROE (%) 12.9 13.0 12.5

ROCE (%) 16.3 18.0 17.4

P/E (x) 12.3 10.8 10.1

EV/EBITDA (x) 9.4 7.6 6.9

P/BV (x) 1.6 1.4 1.3



(%) Sep-18 Jun-18 Mar-18

Promoters 62.7 62.7 62.7

FII 5.0 4.8 4.6

DII 6.3 5.1 5.1

Others 25.9 27.5 27.6

Source: Company


(%) 1M 3M 6M

Aksharchem India (2.7) (14.0) (25.8)

Nifty (4.1) (6.2) (1.5)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Jatin Damania [email protected] +91 22 6218 6440

400

500

600

700

800

Oct-17 Feb-18 Jun-18 Oct-18


NOVEMBER 5, 2018

Higher realisation supported EBITDA margin

Overall revenue mix during the quarter continues to remain in the favour of Dye intermediates with a contribution of 69%, Pigment contribution stood at 31%. Given the uptick in the Dye intermediate prices in 2QFY19, operating performance during the quarter grew 39.8% and 83% YoY and QoQ, respectively to Rs156mn, with an EBITDA margin of 18.3%.

We believe, EBITDA margin will remain under pressure in the 2HFY19, as raw material prices get passed on with a 3-6 months lag effect. Besides this, the decline in intermediates realisation will also weigh on operating performance. Vinyl Sulphone realisation declined to Rs275/kg currently from Rs326/kg in 2QFY19. Pigment prices are stable, but the benefit of an increase in pigment contribution would start flowing in from Q4FY19 onwards. Though, we feel that higher contribution from pigment will strengthen the margin in FY20E, but due to delays in approval for Violet pigment, commercial production of CPC and increase in raw material prices, we expect EBITDA margin to remain at 16% for FY19E and FY20E.

The management expects the EBITDA margin will be ~15% in 2HFY19, lower than 18.3% in 2QFY19 as higher raw material prices and a decline in realisation, will suppressed operating performance.

Quarterly volume trend (tonnes) Revenue and Revenue growth

Source: Company Source: Company

Recommend Reduce

Expansion into CPC green and commercial operation of H-Acid, would help the company to report improvement in EBITDA margin, but benefit of the same will get offset by increase in raw material cost, in our view. We expect EBITDA margin of 16% both in FY19E and FY20E, supported by stable business (Upside Risk: Higher than expected volume of CPC Green in FY20 and Precipitated Silica, can result in better than expected margin). At CMP, the stock is trading at 10.8x/10.1X FY19E/FY20E, which in our view is fairly valued and offers a limited upside. Hence, we recommend REDUCE with a revised target price of Rs485 (earlier Rs533).

2,023

2,241

1,4761,645

2,1612,264

1,843

2,545

2,310 2254

-40.0%

0.0%

40.0%

80.0%

250

500

750

1,000 Revenue (Rs Mn) Growth (%)


NOVEMBER 5, 2018

Company background

AksharChem (India) Limited (AIL), is engaged in the production of dye intermediates (Vinyl Sulphone) and pigments (CPC Green). AIL manufactures and exports Vinyl Sulphone and CPC Green. The current installed capacity stands at 9,720 tonnes (including pigments). AIL is the largest exporter of VINYL SULPHONE in India with~ 45% share in exports of this product. The company is One of the largest exporters from India and among the largest players globally for CPC GREEN PIGMENT with a global market share of ~10%Large scale of production enables the company to ensure optimum utilisation of resources and reduce overhead costs, making AIL one of the most competitive dyes and pigments manufacturers globally. The company has presence in more than 20 countries with overseas market operations (exports) accounting for over 80% of the overall revenue.


NOVEMBER 5, 2018



Cash & Bank balances 43 47 28 29 Other Current assets 901 1,040 769 839 Investments 511 771 771 771 Net fixed assets 736 1,134 1,831 2,154 Intangible assets 0 0 0 0 Other non-current assets 0 0 0 0 Total assets 2,190 2,992 3,399 3,793 Current liabilities 350 314 466 533 Borrowings 317 185 139 139 Other non-current liab 120 116 116 116 Total liabilities 786 615 721 787 Share capital 73 82 82 82 Reserves & surplus 1,331 2,295 2,596 2,924 Shareholders' funds 1,404 2,377 2,678 3,006 Minority interest 0 0 0 0 Total equity & liabilities 2,190 2,992 3,399 3,793


Ratio Analysis


Profitability & Return Ratios (%) EBITDAM (%) 31.0 15.7 16.0 16.0 EBITM (%) 29.1 14.0 14.4 14.0 NPM (%) 21.1 11.6 11.0 10.6 RoE (%) 37.7 12.9 13.0 12.5 RoCE (%) 43.9 16.3 18.0 17.4 Per Share (Rs) EPS 72.4 37.3 42.5 45.8 CEPS 78.8 42.9 48.8 54.3 BV 192.0 289.8 326.5 366.4 DPS 3.5 3.5 3.5 3.5 Valuation Ratios (x) PE (x) 6.4 12.3 10.8 10.1 P/CEPS (x) 5.8 10.7 9.4 8.5 P/BV (x) 2.4 1.6 1.4 1.3 EV/EBITDA (x) 4.7 9.4 7.6 6.9 Other Key Ratios D/E (x) 0.2 0.1 0.1 0.1 DSO (Days) 19.4 38.0 38.0 38.0




Net sales 2,503 2,647 3,181 3,537 growth (%) 33.3 5.8 20.2 11.2 Operating expenses 1,728 2,230 2,672 2,971 EBITDA 775 417 509 566 growth (%) 140.5 (46.2) 22.1 11.2 Depreciation 47 46 52 70 EBIT 728 371 457 496 Other income 91 71 72 74 Interest paid 30 15 10 10 Exceptional Items 0 0 0 0 PBT 788 426 520 560 Tax 259 120 172 185 Effective tax rate (%) 32.9 28.2 33.0 33.0 Net profit 529 306 348 375 Minority interest 0 0 0 0 Reported Net profit 529 306 348 375 growth (%) 218.1 (42.1) 13.8 7.7




Pre-tax profit 788 426 520 560 Depreciation 47 46 52 70 Chg in working capital (145) (175) 424 (4) Other operating activities (229) (105) (162) (175) Operating CF 461 192 834 451 Capital expenditure (178) (444) (748) (394) Chg in investments (286) (261) 0 0 Other investing activities 94 21 0 0 Investing CF (370) (684) (748) (394) Equity raised/(repaid) 0 690 0 0 Debt raised/(repaid) 6 (132) (46) 0 Dividend (incl. tax) (30) (48) (48) (48) Other financing activities (30) (15) (10) (8) Financing CF (54) 495 (104) (56) Net chg in cash & bank bal. 37 4 (18) 1

Closing cash & bank bal 43 47 28 29



NOVEMBER 5, 2018

ARVIND LTD PRICE RS.340 TARGET RS.452 BUY

Arvind reported inline Q2FY19 results on like to like basis with margin in advance materials and apparel business improved on yoy.

Key Highlights

Consolidated Net Sales (including discontinued operations of branded apparel & engineering) grew by 11.6% to Rs 30.5 bn as compared to our expectation of Rs 28.6 bn, driven by 6% yoy growth in textiles segment, 21% yoy growth in advance material business segment and 13% yoy in branded apparel (on like to like basis, adjusted for Ind AS changes).

Textiles business grew at slower pace due to decline in denim volume on back of lower demand while growth in Branded apparel business was slower at 13% due to shift in festive season.

EBITDA margins for the quarter grew by 110 bps yoy on like to like basis to 9.1% driven by sharp improvement in the margin of advance materials by 800 bps, 60 bps improvement in EBITDA margins of branded apparel, etc.

The company has broadly maintained its guidance at consolidated level including discontinued operations.

Outlook & valuation

We have updated our estimates based on restated segmental breakup given by the company for all entities.

The stock is presently trading at FY19E/20E PE of 19.0x/13.5x based on revised EPS of Rs. 17.2/24.2 respectively. We maintain BUY recommendation on the stock with revised SOTP based target price of Rs 452 (Vs Rs 450 earlier).

Quarterly performance table

Year to March (INR Mn.) Q2FY19 Q2FY18 %Change Q1FY19 %Change

Net Revenues 17,929 18,096 (0.9) 15,857 13.1

Raw Materials Cost 7,857 8,355 (6.0) 7,314 7.4

Gross Profit 10,072 9,741 3.4 8,543 17.9

Employee Expenses 2,328 2,332 (0.2) 2,256 3.2

Other Expenses 5,922 5,398 9.7 4,882 21.3

Operating Expenses 16,106 16,085 0.1 14,452 11.4

EBITDA 1,823 2,012 (9.4) 1,406 29.7

EBITDA margin 10.2% 11.1% 8.9%

Depreciation 588 552 6.5 531 10.8

Other income 231 144 60.0 234 (1.3)

Net finance expense 539 488 10.5 419 28.7

Profit before tax 928 1,116 (16.9) 690 34.4

Exceptional/Others 132 84 58.1 44 197.7

Profit before tax (aft Exp) 795 1,033 (23.0) 646 23.1

Provision for taxes 234 280 (16.4) 161 45.3

Reported net profit 561 753 (25.4) 485 15.8

As % of net revenues

COGS 43.8 46.2 46.1

Operating expenses 89.8 88.9 91.1

Reported net profit 3.1 4.2 3.1

Tax rate (% of PBT) 25.2 25.1 23.3

Source: Company

Result Update

Stock Details


52-wk Hi/Lo (Rs) : 479 / 289


3M Avg. daily vol (nos) : 2,375,262


Source: Bloomberg

Financial Summary


Revenue 108261 124654 142684

Growth (%) 17.2 15.1 14.5

EBITDA 9650 12124 15528

EBITDA margin (%) 8.9 9.7 10.9

PAT 3158 4459 6271

EPS 12.2 17.2 24.2

EPS Growth(%) (1) 41 41

Book value (Rs/share) 158 173 194

Dividend per share (Rs) 2.4 2.4 2.4

ROCE (%) 8.8 10.9 14.0

ROE (%) 8.1 10.4 13.2

P/E (x) 26.8 19.0 13.5

EV/EBITDA (x) 11.9 9.6 7.5

P/BV (x) 2.1 1.9 1.7



(%) Sep-18 Jun-18 Mar-18

Promoters 43.0 42.9 42.9

FII 21.6 27.1 27.1

DII 16.7 13.8 14.1

Others 18.7 13.8 15.9

Source: Company


(%) 1M 3M 6M

Arvind Ltd 0.5 (20.9) (19.8)

Nifty (4.1) (6.2) (1.5)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Pankaj Kumar [email protected] +91 22 6218 6434

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NOVEMBER 5, 2018

Q2FY19 including discontinued operations (AFL & AEL)

(Rs.mn) Q2-FY19 Q2-FY18 % YoY Q1-FY19 % QoQ

Net Sales 30528 27348 11.6% 28610 6.7%

EBITDA 2768 2176 27.2% 2463 12.4%

EBITA margin 9.1% 8.0% 8.6%

Net Profit 730 620 17.7% 643 13.5%

Source: Company

Q2FY19 revenue grew by 11.6%, better than estimates

Consolidated Net Sales (including discontinued operation of branded apparel & engineering) grew by 11.6% to Rs 30.5 bn as compared to our expectation of Rs 28.6 bn, driven by 6% yoy growth in textiles segment, 21% yoy growth in advance material business segment, 9% yoy growth in branded apparel (13% on like to like basis, adjusted for Ind AS changes) and 2% in engineering segment and 161% in others segment. Textiles business grew at slower 6% yoy rate led by decline in denim volume while garments segment grew by 15% on yoy basis. Decline in denim business is due to lower consumer demand faced by its customers in the quarter led by high base of last year due to festive season. Further, the industry is facing over supply, aggression in pricing and higher credit offered by some of the peers (who have surplus capacity) which impacted the volumes in the segment.

Branded apparel business remained strong

Branded apparel business grew by 13% yoy on like to like basis to Rs 11.6 bn (Vs reported Rs 12.3 bn). The segmental reported revenue for the quarter stated higher due to IndAS and GST related adjustment. Adjusted EBITDA for the segment grew by 21% to Rs 760 mn. Power brands for the quarter grew at 13% yoy, Unlimited grew by 4% and other brands grew by 20%. In the quarter, the growth in branded apparel business was impacted due to shift in festival season to Q3 from Q2 in last year. As per management, LTL (like to like) was double digit in July, with tepid August and negative LTL in September 2018. The growth in branded apparel business is expected to be strong in H2FY19 particularly in Q3FY19 due to major festivals in the month of October and November 2018. Growth in unlimited is expected to pickup in coming quarter as the company is focusing on increasing sales after rolling out stores aggressively in the previous quarters. The company expects 12% LTL growth in 5 week of festival season as LTL has improved in Dusshera.

Revenue breakup of Branded Apparel Power brand EBITDA & Margin

Source: Company Source: Company

6570 7420

16101670

21402570

0

2000

4000

6000

8000

10000

12000

14000

Q2FY18 Q2FY19

Power Brand Unlimited Other Brands

12.7%

12.7%

12.8%

12.8%

12.9%

12.9%

13.0%

13.0%

13.1%

13.1%

13.2%

800

820

840

860

880

900

920

940

960

Q2FY18 Q2FY19

EBITDA (Rs mn, LHS) EBITDA Margins (%, RHS)


NOVEMBER 5, 2018

EBITDA margins improved in apparel segment

EBITDA margins for the quarter grew by 110 bps yoy to 9.1% resulting EBITDA growth of 27.2% on yoy. This was driven by sharp improvement in the margin of advance materials segment (by 800 bps), 60 bps improvement in EBITDA margins of branded apparel and other segment reporting positive margins as against loss in the last year same quarter. Branded apparel business reported improved margins on account improvement in margins in other brands and unlimited business. The margins in power brand was 30 bps lower in the quarter due to increased ad spend by 90 bps while sales grew at slower pace for the segment. But the management is positive on improving margins in power brand to ~15% by FY20E in the longer run. The company has maintained its guidance of 100bps improvement in margins in branded apparel segment with its brands turning profitable or breaking even at operating level, except GAP which is reporting losses.

The margins in the textiles segment declined by 70 bps yoy on account of lower drawback rate, decline in volume of denim segment and lower margins in Euthopia due to low price currency hedge. As per management, the margins in H2FY19 in the textiles segment would improve as realization would be near to market rate.

Maintained FY19E guidance at broader level

The company has maintained revenue guidance of ~10% for Arvind Ltd (the continued business of textiles, advance materials and others) with slower growth rate of 5-6% in textiles due to lower denim sales. On the other hand, Advance materials segment is expected to grow at 24% on yoy. The company has maintained 100bps improvement in EBITDA margins in Arvind led by sharp improvement in margins of advance material segment (from -1% in FY18 to 9% in FY19E) while textiles margins is expected to be lower by 80bps.

The company has guided for ~20% growth in branded apparel business (Arvind Fashions) as against earlier guidance of 20-24% yoy growth driven by Power Brands to maintain momentum, improved sales in Unlimited and traction in Innerwear business on full year basis. The company expects 100 bps improvement in margins in the business despite increase in marketing investment by about 0.5%. Revenue growth guidance for engineering business is maintained at 10-12% with flattish margins.


NOVEMBER 5, 2018

Segmental finance

(Rs mn) Q2FY19 Q2FY18 YoY Grth (%)

Revenue

Textiles 14880 13990 6%

Branded Apparels 12270 11280 9%

Advance Materials 1450 1200 21%

Engineering 480 470 2%

Others 1670 640 161%

Intersegment 220 220 0%

EBITDA

Textiles 1840 1830 1%

Branded Apparels 760 630 21%

Advance Materials 140 20 600%

Engineering 180 110 64%

Others 110 -180 -161%

EBITDA Margin (%)

Textiles 12.4% 13.1%

Branded Apparels 6.2% 5.6%

Advance Materials 9.7% 1.7%

Engineering 37.5% 23.4%

Others 6.6% -28.1%

Source: Company

Other highlights

As per company, Certified order from NCLT expected in 1st week of November 18 and expect the demerger to become effective by end of November 18 with 29th November likely to be the record date. Likely listing of Arvind Fashions & Anup Engineering is expected in early February 2019.

The company has reported strong performance in advance material which was earlier part of textiles and others segment. The segment is expected to grow at over 20% in the longer run and has potential to achieve Rs 10 bn revenue.

The company has net debt of Rs 35.6 bn at the end of Q2FY19. As per management, the debt across businesses is expected to remain at these level by the end of FY19 on consolidated basis.

The company has maintained capex guidance of Rs 15 bn for continued operations.

Outlook and valuation

We have updated our estimates based on restated segmental breakup given by the company for all entities. In our projections, we have included performance/ estimates of discontinued operation for like to like comparison based on the breakup given by the company for discontinued operations of branded apparel and engineering. We will come out with separate financial numbers for each of the businesses once demerger process gets completed and branded retail business under Arvind Fashions Ltd and engineering business under Anup Engineering Ltd gets listed.

We expect company’s revenue and PAT to grow at a CAGR of 14.8% and 40.9%, respectively in FY18-20E driven by revenue CAGR of 9.1% CAGR in Arvind (continued operations), 18% in Arvind Fashions and 12.5% in Anup Engineering with EBITDA CAGR of 11.9% in Arvind, 38% in Arvind Fashions and 8.3% in Anup Engineering.


NOVEMBER 5, 2018

The stock is presently trading at FY19E/20E PE of 19.0x/13.5x based on revised EPS of Rs. 17.2/24.2 respectively. We have valued Arvind on sum of the parts basis (SOTP) where we have assigned FY20E EV/EBITDA multiple of 15x to the branded apparel business, 8x to the textile business and 12x to the engineering business. We maintain BUY recommendation on the stock with revised SOTP based target price of Rs 452 (Vs Rs 450 earlier).

Financials (Entity wise)

FY18 FY19E FY20E

Revenue 112900 125191 143221

Arvind 68000 72775 80997

Arvind Fashions 42660 49952 59391

Anup Engineering 2240 2464 2834

Revenue Growth%

Arvind 10.4% 7.0% 11.3%

Arvind Fashions 47.2% 17.1% 18.9%

Anup Engineering 25.1% 10.0% 15.0%

EBITDA 10380 11955 14431

Arvind 7510 8151 9396

Arvind Fashions 2290 3212 4355

Anup Engineering 580 591 680

EBITDA Margin% 9.2% 9.5% 10.1%

Arvind 11.0% 11.2% 11.6%



EBITDA Growth%

Arvind -8.3% 8.5% 15.3%



Source: Company, Kotak PCG Research

SOTP Valuation

Segment Parameter FY20E Multiple Value Per Share

Textiles EV/EBITDA 9396 8 75165 291

Apparels EV/EBITDA 4355 15 65328 253

Engineering EV/EBITDA 680 12 8161 32

Net Debt 31798 123

Value 116855 452

Source: Kotak Securities – Private Client Research

Revision in estimates

Particulars (Rs Mn) Previous Revised % Chg FY19E FY20E FY19E FY20E FY19E FY20E

Revenue 1,18,735 1,35,018 1,24,654 1,42,684 5.0 5.7

EBITDA 10,888 13,713 12,124 15,528 11.4 13.2

EBITDA margin (%) 9.2 10.2 9.7 10.9 50 bps 70 bps

PAT 3,771 5,735 4,459 6,271 18.2 9.3

EPS (Rs) 14.6 22.2 17.2 24.2 18.1 9.2



NOVEMBER 5, 2018

Company background

Arvind Ltd, founded in 1931 by Lalbhai family, is a leading textiles company with interest in Textiles, Branded Apparel and Accessories, Engineering, etc. The company manufactures and sells about 300 million meters (mn mtr) of fabrics and over 30 mn pieces of garments (FY18). In branded apparels business, the company’s own brands such as Flying Machine, Colt, Ruggers and Excalibur, etc. It also has a portfolio of licensed brands which includes US Polo Association, Arrow, Tommy Hilfiger (TH), Gap, Calvin Klein (CK), Hanes, Gant, Nautica, Izod, Ed Hardy, Elle, Cherokee, The Children’s Place, Aeropostale, etc. It also owns the value chain ‘Unlimited’ and is the franchise partner of the world’s largest beauty retailer ‘Sephora’. In engineering business, it designs and manufactures critical process equipment for petrochemical, fertilizer, power and other process industries.


NOVEMBER 5, 2018



Equity 37,184 40,881 44,614 50,159 Equity Share Capital 2,584 2,586 2,586 2,586 Other Equity 33,086 35,242 38,975 44,520 Liabilities 49,496 61,703 61,065 64,937 Non-current liabilities 10,207 10,655 11,655 11,655 Financial Liabilities 8,016 8,927 9,927 9,927 Provisions 407 618 618 618 Other non-current liabilities 355 402 402 402 Current liabilities 39,289 51,048 49,410 53,282 Financial Liabilities 37,892 48,800 46,821 50,319 Provisions 168 258 297 340 Other current liabilities 1,229 1,990 2,292 2,623 Total Equities & Liabilities 86,680 102,584 105,679 115,096 Non-current assets 45,846 47,190 48,325 49,076 Property, Plant and Equipment 34,801 36,255 37,260 37,874 Capital work-in-progress 497 897 897 897 Goodwill, intangible & Others 2,381 3,632 3,632 3,632 Investment & other financial assets 5,183 3,392 3,522 3,659 Deferred Tax Assets (Net) 2,242 2,205 2,205 2,205 Other non-current tax assets (Net) 742 808 808 808

Current assets 40,834 55,394 57,354 66,019 Inventories 23,828 26,194 30,395 35,573 Financial Assets 12,622 22,220 25,076 28,291 Receivable 7,948 17,670 20,345 23,288 Cash & Bank Balance 209 395 327 327 Others 4,465 4,156 4,403 4,676 Other current assets 4,384 6,980 1,883 2,156 Total Assets 86,680 102,584 105,679 115,096


Ratio Analysis


Profitability Ratios EBITDA margin (%) 10.2 8.9 9.7 10.9 EBIT margin (%) 7.0 5.6 6.5 7.8 Net profit margin (%) 3.5 2.9 3.6 4.4 Adjusted EPS growth (%) 1.2 (1.3) 41.2 40.6 Balance Sheet Ratios: Receivables (days) 31 60 60 60 Inventory (days) 94 88 89 91

Payable (days) 56 72 55 55 Working capital (days) 97 105 104 105 Asset Turnover 2.0 2.2 2.3 2.4 Net Debt/ Equity 0.7 0.8 0.7 0.6 Return Ratios: RoCE (%) 10.2 8.8 10.9 14.0 RoE (%) 10.0 8.1 10.4 13.2 Valuation Ratios: P/E (x) 26.4 26.8 19.0 13.5 P/BV (x) 2.3 2.1 1.9 1.7 EV/EBITDA (x) 11.9 11.9 9.6 7.5 EV/Sales (x) 1.2 1.1 0.9 0.8



Revenues 92,355 108,261 124,654 142,684 % change yoy 15.3 17.2 15.1 14.5 Raw Materials 42,094 52,738 59,975 68,650 Employees expenses 10,963 12,647 13,912 15,303 Other Expenses 29,893 33,227 38,643 43,203 Total Expenditure 82,950 98,612 112,530 127,156 EBITDA 9,406 9,650 12,124 15,528 % change yoy (1) 3 26 28 Depreciation 2,943 3,593 3,995 4,386 EBIT 6,463 6,056 8,129 11,142 Other Income 780 626 726 826 Interest 2,884 2,579 2,811 2,811 Profit Before Tax 4,197 3,904 5,844 8,958 % change yoy (4.8) (7.0) 49.7 53.3 Tax 997 746 1,385 2,687 as % of EBT 23.7 19.1 23.7 30.0 PAT 3,201 3,158 4,459 6,271 % change yoy 1.2 (1.3) 41.2 40.6 Shares outstanding (mn) 258 259 259 259

EPS (Rs) 12.4 12.2 17.2 24.2 DPS (Rs) 2.4 2.4 2.4 2.4 CEPS (Rs) 23.8 26.1 32.7 41.2 BVPS (Rs) 143.8 158.1 172.5 193.9




Pre-Tax Profit 4,197 3,904 5,844 8,958 Depreciation 2,971 3,593 3,995 4,386 Change in WC (3,137) (4,141) (2,796) (4,930) Other operating activities 1,404 1,833 1,426 123 Operating Cash Flow 5,435 5,189 8,469 8,537 Capex (4,426) (5,509) (5,000) (5,000) Free Cash Flow 854 (320) 3,469 3,537 Change in Investments 4,720 - - - Investment cash flow 294 (5,509) (5,000) (5,000) Equity Raised 6,347 3 - - Debt Raised/Repaid (8,536) 2,384 - - Dividend (740) (726) (726) (726)

Interest & Others (2,885) (1,156) (2,811) (2,811) CF from Financing (5,815) 505 (3,537) (3,537) Change in Cash (86) 185 (68) (0) Opening Cash 296 209 395 327 Closing Cash 209 395 327 327



NOVEMBER 5, 2018

GREAVES COTTON LTD PRICE RS.120 TARGET RS.146 BUY

Greaves Cotton (GCL) reported good numbers, which were a tad ahead of our estimates. A notable highlight is that this was the highest profit growth in last seven quarters.

Key Highlights

After three quarters of double digit growth, revenue slackened in Q2FY19. The management indicated that OEMs slowed down procurement of engines from the company due to excess inventory.

EBITDA margins largely stable despite commodity cost pressures

Valuation and Outlook

The company’s largest revenue segment (ie three-wheeler engines business) has been going through a prolonged phase of slowdown due to 1) Shift from diesel to CNG engines and 2) Emergence of electric vehicles. GCL is responding to this challenge by positioning itself as a fuel-agnostic engine maker including electric mobility.

GCL is currently trading at 13.5x and 12.4x FY19 and FY20 earnings respectively, which is attractive compared to peers in the capital goods and manufacturing sector. However, considering the moderate growth profile of the business, we are according it a lower target PE. We now value the stock at 15x FY20E (earlier 16x FY20E), thus arriving at a price target of Rs 146 (Rs 165 earlier). However, due to good upside, we upgrade the stock to BUY.

Quarterly performance

Rs mn Q2FY19 Q2FY18 YoY (%) Q1FY19 QoQ (%)

Net Revenues 4951 4524 9.4 4582 8.1

Expenditure 4218 3846 9.7 3972 6.2

Raw Material costs 3113 2870 8.4 2873 8.3

Purchase of traded goods 233 170 36.9 219 6.2

Staff costs 434 452 -4.1 466 -6.9

Other costs 439 353 24.4 414 6.1

Operating profit 733 679 8.0 609 20.3

Depreciation 125 141 -11.2 125 -0.1

Other income 127 110 15.5 103 22.7

EBIT 734 647 13.4 587 25.0

Interest 13 -2 -794.7 5 169.4

PBT 721 649 11.1 582 23.8

Tax 227 220 3.5 184 23.7

PAT before exc items 493.6 429.4 15.0 398.4 23.9

Exceptional items 0 63 -100.0 0

Reported PAT 494 492 0.3 398 23.9

EBITDA (%) 14.8 15.0 13.3

Raw Material costs to sales (%) 67.6 67.2 67.5

Other exp to sales (%) 8.9 7.8 9.0

Tax rate (%) 31.5 33.8 31.6

EPS Rs 2.0 1.8 1.6

Source: Company

Result Update

Stock Details


52-wk Hi/Lo (Rs) : 165 / 111

Face Value (Rs) : 2

3M Avg. daily vol (Nos) : 837,787


Source: Bloomberg

Financial Summary


Revenue 17,921 19,707 21,388

Growth (%) 9.6 10.0 8.5

EBITDA 2,553 2,974 3,255

EBITDA margin (%) 14.2 15.1 15.2

PAT 1,536 2,164 2,370

EPS 6.3 8.9 9.7

EPS Growth (%) (13.9) 40.9 9.6

BV (Rs/share) 37.3 39.8 43.0

Dividend/share (Rs) 5.5 5.5 5.5

ROE (%) 16.3 21.9 22.4

ROCE (%) 17.1 20.0 20.5

P/E (x) 19.1 13.5 12.4

EV/EBITDA (x) 9.4 7.9 6.9

P/BV (x) 3.2 3.0 2.8



(%) Sep-18 Jun-18 Mar-18

Promoters 51.0 51.0 51.0

FII 12.2 7.3 7.3

DII 17.5 13.8 16.9

Others 19.3 27.9 24.8

Source: Company


(%) 1M 3M 6M

Greaves Cotton (6.8) (19.1) (4.6)

Nifty (4.1) (6.2) (1.5)

Source: Bloomberg

Price chart (Rs)

Source: Bloomberg

Sanjeev Zarbade [email protected] +91 22 6218 6424

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NOVEMBER 5, 2018

Reported Vs Estimated performance

Rs mn Reported Estimated

Revenue 4951 5000

EBITDA % 14.8 14.5

PAT 494 475


Result Highlights

Revenue growth showing signs of upturn

The company reported 9.4% y-o-y growth in revenue, aided by modest growth in engine volumes and accompanied by 3-4% price hikes.

This was the highest quarterly revenue since FY2014. This indicates that although the company is not growing at a robust pace but there is a definite recovery after years of stagnation.

The company’s revenue mix comprises of automotive engines for 3W and 4W Light commercial vehicles (~70%), DG sets (15%) and Agriculture products (15%).

In terms of product mix, engines/spares/others accounted for 50%/25%/25% of revenues in Q2FY19.

The company had been posting tepid/contraction in revenue in the past several quarters mainly due to stagnation in domestic three-wheeler market.

However, in recent quarters, there has been definite signs of upturn in demand for 3W. This product segment is bouncing back from the twin effects of demonetization and GST implementation. In the second quarter, the company indicated that there was surplus inventory with the OEMs, consequently, there was some reduction in engine procurement from Greaves’ clients.

The demand for 3W has a correlation with the Commercial Vehicles (CV) segment due to the need for last mile connectivity. In recent months, the monthly volumes of CVs has shown a strong upturn, which has started to reflect on the demand for 3W.

Engine volumes

(Nos) Q2FY19 Q2FY18 YoY (%)

3W Engine 77988 78450 -0.6%

4W Engines 8932 6294 41.9%

DG sets 1338 1084 23.4%

Pumpsets 16691 16000 4.3%

Tillers 1000 800 25.0%

Source: Company

Client OEMs of GCL in 3W

Corporate Brand Fuel Engine

Piaggio Ape Xtra and City CNG, Diesel, LPG 4 stroke single cylinder

M&M Alfa and Champion Diesel and CNG 4 stroke single cylinder

TVS King Diesel 4 stroke single cylinder

Atul Auto Shakti, Gem and Gemini Diesel 4 stroke single cylinder

Source: Company


NOVEMBER 5, 2018

EBITDA margins largely stable despite commodity cost pressures

EBITDA margins contracted by 50 bps on a y-o-y basis to 14.8%, mainly due to 4% y-o-y increase in commodity cost inflation.

Although the company had taken price hikes of 3-4% in Q2FY19 to accommodate the commodity price inflation, it has not been able to completely offset the cost increase.

Efficient currency hedging and value engineering also helped the company contain the decline in margins.

PAT before exceptional items rose 15% y-o-y

PAT before exceptional items rose 15% on a y-o-y basis led by moderate growth in revenues but partly offset by minor contraction in margins.

The notable thing is that this is the highest profit growth achieved by the company in the past eight quarters.

Fuel mix shifting towards CNG engines from diesel/petrol engines:

In the Automotive Engine segment, the Company provides fuel agnostic powertrain solutions to three-wheeled passenger and cargo vehicles and four-wheeled mini-trucks.

The company has a 75% market share in the 3-wheeler Diesel engines market. While earlier, diesel engines were the preferred mode for last mile connectivity, stricter environmental norms is driving sales of CNG engines even as the share of diesel engines have been reducing in recent years. In urban markets, replacement demand has been an important growth driver wherein improving network of CNG fuel stations is driving replacement of older petrol or diesel powered 3Ws with ones based on CNG. In FY18, around 50% of the three wheeler sales were of CNG engines.

As the Government has set April 2020 deadline for the implementation of BS-VI norms, demand for conventional 3W diesel engines is likely to be affected in the future, the management opines.

GCL’s weak product positioning in CNG 3W engines has led to underperformance in the 3W sales growth

GCL’s focus as well as its forte has been on light diesel engines (75% market share in light diesel engines), which is also aligned with the positioning of its prime client Piaggio Vehicles (PVPL), who is a leader in the 3W cargo segment. In Cargo, diesel engines are better suited than their CNG counterparts on account of higher load carrying capacity and lack of CNG pump infrastructure in rural/semi rural areas. Given the focus of GCL on diesel engine segment, it appears that the company has been late in having a strong product in the CNG engine space.

GCL currently has a larger engine (400 cc) in CNG 3W market which is mainly being used in the 5+1 passenger 3W segment. However, the major market for passenger 3W is in the 2+1 category where a smaller engine (200-230 cc) is fitted. GCL has been largely missing in this segment and even its existing diesel engine customers like Atul/Piaggio are not fully sourcing CNG engines from the company.

With a view to address the weakness on CNG engine, GCL is offering the Pinnacle engine


NOVEMBER 5, 2018

GCL has entered into technical collaboration with Pinnacle Engines for CNG and Petrol segments. The Pinnacle engine are BS-VI compliant and come with revolutionary piston technology that offers 25-30% fuel efficiency over the conventional ones.

Brief on Pinnacle Engines - Pinnacle Engines Inc manufactures and sells combustion engines and controllers for automotive, motorcycle, marine, and power sports industries, as well as industrial and commercial markets in the United States and internationally. The engine is based around an opposed piston design. In most engines, a cylinder contains a single piston. In these engines, two pistons face each other from opposite ends of the same cylinder. The change effectively gives these engines a dynamic, more efficient compression chamber for burning fuel.

However, success depends on the outcome of the simulation tests

Greaves Cotton Limited had entered into an agreement with Pinnacle Engines, Inc. for the purpose of grant of licenses to the company for manufacture and sale of internal combustion engines. Size of agreement: USD 7.5 million linked payment plus 5% Royalty to Pinnacle. The advantage with tying up with Pinnacle is that it significantly reduces the “Go to Market” time for GCL, if it had decided to develop its own CNG engine.

The Pinnacle engine would be in the 200-250 cc range, which will be suitable for the 2+1 passenger 3W segment.

The company will start making prototypes in the coming days and simulation tests will be completed by Dec 2018. If the simulation results are successful, then the company can look forward to outsourcing deals from 3W makers.

What can possibly go wrong?

Although the Pinnacle engine comes with a strong technology platform, there are two factors that need to be watched out

1) While the engine offers 25-30% fuel efficiency, the ultimate cost of engine needs to be competitive for the customer as there are royalty payments to be made. Having said that, the GCL management is convinced about the value proposition.

2) The Pinnacle engine has not been commercially produced anywhere in the world hence does not have a performance track record.

Conference call highlights

Greaves Cotton recently announced that they have entered into definitive agreements as per which it will acquire a majority stake in Electric Vehicle manufacturer - Ampere Vehicles Pvt. Ltd. Ampere is one of the leading brands in the last mile mobility electric vehicles segment. It has strong in-house capabilities in designing, developing, manufacturing & marketing electric vehicles with a wide range of applications. Through this acquisition, Ampere can benefit from Greaves’ distribution, aftermarket and service strengths to grow more rapidly. The company completed acquisition of majority stake in Oct 2018. The financial numbers of Ampere will be shared in the future investor interactions.

The company’s after market (spares) business accounted for around ~ 25% of revenues (including spares for Auto, DG sets and Farm). Apart from the ongoing aftermarket sales (including Auto, DG and Farm) through the company’s distribution outlets, GCL has also forayed into sale of multibrand spares through “Greaves care” outlets. It works on a franchise based model


NOVEMBER 5, 2018

as per which Greaves Cotton collects fee from the franchisee. In addition to this, Greaves benefits from manufacturing of spare parts sold through Greaves Care.

The company share in the addressable market in DG sets has increased by 0.5% to 6%. It has recently launched 500 kva engine in the DG set market.

The company continues to be debt free and had cash and equivalents of Rs 4.4 bn at the end of Q2FY19 (15% of market cap).

In the current fiscal, the company has planned for capex of Rs 1.0 bn, which will be mainly for meeting R&D/product development expenses for BS VI compliant engine.

The company expects employee costs to rise 6% in the current fiscal.

Valuation and Target price

GCL is currently trading at 13.5x and 12.4x FY19 and FY20 earnings respectively, which is attractive compared to peers in the capital goods and manufacturing sector stocks. However, considering the moderate growth profile of the business, we are according it a lower target PE. We now value the stock at 15x FY20E (earlier 16x FY20E), thus arriving at a price target of Rs 146 (Rs 165 earlier). We upgrade the stock to BUY.

Company background

Greaves Cotton Limited, established in 1859, is into manufacturing of Diesel / Petrol Engines, Gensets and Pumpsets. Greaves has a strong knowledge base in single cylinder diesel engines used for low cost transportation and its engines are extensively used in the three wheeler segment. Mr. Karan Thapar, who is Non-Executive Chairman of the company. The day-to-day management is vested with Mr. Mr. Nagesh Basavanhalli, Managing Director and CEO of the company, who is a professional and has joined the company in 2016.

The Business Divisions are:

Business Division Product Lines

Agricultural Equipment Petrol / Kerosene Engines: 1 to 5 HP, Pumpsets and Power Tillers

Automotive Light Diesel Engines:

Auxiliary Power Large Diesel Generating Sets Range: 2.5 KVA to 500 kVA single unit

and upto 2500 kVA in parallel running

Industrial Engines Diesel Engines: 1.4 to 1000 HP range

Source: Company


NOVEMBER 5, 2018

Financials: Consolidated

Balance sheet (Rs mn)


Cash and cash equivalents 100 298 812 1,715 Accounts receivable 2,702 2,527 2,969 3,223 Inventories 1,294 1,094 1,346 1,461 Loans and Adv & Others 303 152 152 152 Current assets 4,399 4,071 5,280 6,551 Intangible assets 446 536 536 536 Other assets 394 419 420 421 LT investments 4,228 5,186 5,186 5,186 Net fixed assets 2,583 2,475 2,925 2,825 Def tax assets 0 0 0 0 Total assets 6,187 7,396 8,502 9,651 Payables 2,862 3,304 4,370 4,741 Others 0 0 0 0 Current liabilities 2,862 3,304 4,370 4,741 Provisions 189 233 233 233 LT debt 0 0 0 0 Other liabilities 175 275 276 277 Equity 488 488 488 488 Reserves 8,721 9,116 9,708 10,508

Total liabilities 6,187 7,396 8,502 9,651 BVPS (Rs) 36 37 40 43


Ratio Analysis


EBITDA margin (%) 14.9 14.2 15.1 15.2 EBIT margin (%) 12.0 11.3 12.3 12.4 Net profit margin (%) 10.9 8.6 11.0 11.1 Receivables (days) 60.3 51.5 55.0 55.0 Inventory (days) 28.9 22.3 24.9 24.9 Sales/gross assets(x) 4.9 5.2 4.4 4.3 Interest coverage (x) 300.7 315.2 270.3 295.9 Debt/equity ratio(x) - - - - ROE (%) 19.7 16.3 21.9 22.4 ROCE (%) 17.7 17.1 20.0 20.5 EV/ Sales 1.7 1.4 1.2 1.1 EV/EBITDA 10.3 9.4 7.9 6.9

Price to earnings (P/E) 16.4 19.1 13.5 12.4 Price to book value (P/B) 3.4 3.2 3.0 2.8




Revenues 16,344 17,921 19,707 21,388 % change YoY 1.3 9.6 10.0 8.5 EBITDA 2,436 2,553 2,974 3,255 % change YoY -8.8 4.8 16.5 9.5 Other Income 501.9 452.6 634.9 694.9 Depreciation 466.6 523.5 550.0 600.0 EBIT 2,471 2,482 3,059 3,350 % change YoY -11.2 3.1 19.4 9.5 Net interest 8.1 8.1 11.0 11.0 Profit before tax 2,463 2,474 3,048 3,339 % change YoY -8.2 0.5 23.2 9.6 Tax 680 939 884 968 as % of PBT 27.6 37.9 29.0 29.0 Profit after tax bef exep items 1,783 1,536 2,164 2,370 % change YoY 2.0 -13.9 40.9 9.6 Exceptional items 59.8 481.7 0 0 Reported PAT 1,842 2,017 2,164 2,370 Shares outstanding (m) 244.2 244.2 244.2 244.2 EPS (before exp items) (Rs) 7.3 6.3 8.9 9.7 CEPS (Rs) 9.2 8.4 11.1 12.2 DPS (Rs) 5.5 5.5 5.5 5.5




PBDIT 2,436 2,553 2,974 3,255 Direct tax paid (736) (919) (884) (968) Adjustments 41 28 - - Cash flow from operations 1,740 1,663 2,090 2,287 Net Change in Working Capital 301 689 372 3 Net Cash from Operations 2,040 2,352 2,462 2,290 Capital Expenditure (271) (241) (1,000) (500) Cash from investing (43) (505) 634 694 Net Cash from Investing (314) (746) (366) 194 Interest paid (8) (8) (11) (11) Issue of Shares/(buyback) - - - - Dividends Paid (1,617) (1,472) (1,571) (1,571) Debt Raised (74) 72 1 1 Net cash from financing (1,699) (1,408) (1,581) (1,581) Net change in cash 27 198 514 902 Free cash flow 1,769 2,111 1,462 1,790 cash at end 100 298 812 1,715



NOVEMBER 5, 2018

RATING SCALE

Definitions of ratings

BUY – We expect the stock to deliver more than 12% returns over the next 12 months

ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 12 months

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 12 months

SELL – We expect the stock to deliver negative returns over the next 12 months

NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.

SUBSCRIBE - We advise investor to subscribe to the IPO.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded.

NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM

Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6423

Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 7021

Teena Virmani Sumit Pokharna Pankaj Kumar Jayesh Kumar Krishna Nain Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap Economist M&A, Corporate actions [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 5373 +91 22 6218 7907

K. Kathirvelu Support Executive [email protected] +91 22 6218 6427

TECHNICAL RESEARCH TEAM

Shrikant Chouhan Amol Athawale [email protected] [email protected] +91 22 6218 5408 +91 20 6620 3350

DERIVATIVES RESEARCH TEAM

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

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