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Investor's Eye-Nov03_10.pmd

VIEWS: 5 PAGES: 23

									Visit us at www.sharekhan.com                                                                     November 03, 2010




                                                         Index


                    Stock Idea >> Polaris Software Lab


                    Stock Update >> Aditya Birla Nuvo


                    Stock Update >> Maruti Suzuki


                    Stock Update >> GAIL India




For Private Circulation only
                                                  Sharekhan Ltd
          Lodha iThink Techno Campus, 10th Floor, Beta Building, Off. JVLR, Opp. Kanjurmarg Railway Station,
                                 Kanjurmarg (East), Mumbai – 400 042, Maharashtra.
investor’s eye                                                                                                                                      stock idea




 Polaris Software Lab                                                                                                                    Ugly Duckling

 Stock Idea

 Power of Intellect                                                                                                                      Buy; CMP: Rs164


                   Company details                                     Key points
                                                                         Play on traction in BFSI vertical: For the Indian IT services industry, the strong
 Price target:                                             Rs234
                                                                         revival in demand has been led by an increase in the IT spending by customers
 Market cap:                                    Rs1,628 cr               in the BFSI vertical. It started with merger and acquisition related activities
 52-week high/low:                              Rs215/142
                                                                         followed by the rise in both the “run the business” and “change the business”
                                                                         IT spending. Polaris Software Lab (Polaris) with its strong presence in the BFSI
 NSE volume:                                             7.8 lakh        space and offerings in both the service and solution segments is well poised to
 (No of shares)
                                                                         capitalise on the incremental spending from the sector.
 BSE code:                                                532254
                                                                          Intellect—a long-term game changer: Intellect, the flagship banking product of
 NSE code:                                               POLARIS          the company, would be a game changer on a longer-term perspective. Over the
                                                                          years, Intellect has been growing steadily with new client additions and increasing
 Sharekhan code:                                         POLARIS
                                                                          geographical reach. In the near term also, the revenue growth outlook from Intel-
 Free float:                                               7.0 cr         lect product sales has improved significantly with the deal pipeline pegged at
 (No of shares)                                                           $200 million as compared to just $65 million a year ago. The expected increase in
                 Shareholding pattern
                                                                          the revenue from the product business augurs well as it would help improve the
                                                                          margin dynamics as well as the overall profitability of the company.
                                Foreign                                   Well equipped to grow inorganically: In the last few years, Polaris has carried
   Public &                      18%
    Others
                                                                          out several mergers and acquisitions—it acquired SEEC Inc in 2008, Lasersoft
     33%                                                                  Infosystems in 2009 and Indigo TX in 2010. With all these acquisitions, Polaris
                                                                          has filled the gap in its product offerings, got new clients and entered newer
                                              Institutions
                                                                          geographies, thereby creating a strong presence in the BFSI space. Going for-
                                                 16%
                                                                          ward, we believe that the inorganic initiatives will continue to form an integral
                                           Non-promoter
                                                                          part of Polaris’ growth strategy and with a war chest of close to Rs500 crore any
    Promoters                                                             big inorganic move would take Polaris to a much higher growth trajectory.
                                            corporate
       29%
                                               4%                         Strong mascot, attractive valuation: Polaris is one of the few integrated mid-
                                                                          cap IT companies having a strong foothold in the BFSI vertical and offerings in
                             Price chart
                                                                          both the service and solution segments. We expect a compounded annual growth
  230                                                                     of 17% in its earnings over FY2010-13. At the current market price the stock
  220
  210
                                                                          trades at 7.9x FY2011E, 7.2x FY2012E and 5.8x FY2013E earnings. Incidentally,
  200                                                                     ex-cash (FY2010) the stock is trading at 5.4x FY2011E, 4.9x FY2012E and 4x
  190
  180                                                                     FY2013E earnings, which is a 15-18% discount to its peers. Notwithstanding the
  170
  160
                                                                          overhang of the stake sale by the Citigroup, the current valuation offers a
  150
  140
                                                                          highly favourable risk-reward ratio. We initiate coverage on the stock with a
  130                                                                     Buy rating and price target price of Rs234 (10x FY2012E and 8x FY2013E).
                    Feb-10




                                  May-10
        Nov-09




                                                              Nov-10
                                                Aug-10




                                                                       Key financials               FY2009      FY2010    FY2011E    FY2012E    FY2013E
                  Price performance                                    Net profit (Rs cr)             130.7       152.9      206.5      225.9       278.4
                                                                       EPS (Rs)                        13.2        15.4       20.9       22.8        28.1
                                                                       CEPS (Rs)                       18.3        19.1       24.4       27.4        33.6
 (%)                   1m          3m          6m 12m
                                                                       EV/EBITDA (x)                    5.4         5.0        4.7        3.1         2.0
 Absolute           -3.4         -4.6 -10.2                 4.6        P/E (x)                         12.4        10.6        7.9        7.2         5.8
                                                                       RoE (%)                         18.2        18.6       21.7       20.8        21.4
 Relative -3.1 -15.5 -23.4 -19.5
 to Sensex                                                             RoCE (%)                        21.0        21.7       25.7       27.0        28.3
                                                                       Dividend yield (%)               1.7         2.1        2.9        3.1         3.9




                                                                                    Sharekhan   2   November 03, 2010                    Home           Next
investor’s eye                                                                                                                    stock idea

Company background                                                     History and milestones

Polaris, founded in 1993, is an information technology                 Year     Particulars
(IT) services company focused on solutions and services                1993     Incorporated as Polaris Software Lab
for the banking and insurance industries. Polaris is one of            1994     End-to-end retail banking solution for Citibank India
the outsourcing partners for ten of the top 15 global banks            1995     SEI-CMM level 3 certified
and six of the top ten global insurance companies. Polaris             1996     Operations set up in the USA
offers solutions for core banking, corporate banking,                  1997     First overseas development centre commissioned for
wealth and asset management, and insurance.                                     Citibank;
                                                                       1998     SEI-CMM level 4 certified
The company, headquartered in Chennai, is present across                        Polaris Retail Infotech formed
15 countries with a consolidated headcount of 10,678.                  1999     Initial public offering, over-subscribed by 21 times
North America contributes 47% of its revenues; Europe,                 2000     "Foundation"—a state-of-the-art development centre
the Middle East and Africa (EMEA) contribute 30%; and                           inaugurated
Asia-Pacific contributes 23% of the revenues.                          2001     Commenced operations in Japan
                                                                                Gurgaon campus inaugurated
In 2003, Polaris took a big leap by merging with it OrbiTech                    World’s first CMMi level 5 company
Solutions (OrbiTech), a Citigroup subsidiary. The company              2002     Opened business continuity centre in Singapore
launched its flagship banking product, Intellect, in 2004.                      Adrenalin launched
Polaris has continued to invest in the Intellect platform              2003     Historic merger with OrbiTech (a Citigroup subsidiary)
and in 2009 it launched the global universal banking                            Birth of Optimus
Intellect 10.0. Intellect started its journey from Asia,               2004     Launch of Intellect suite of products for banking solutions
broke into Europe in 2007 and entered the USA in 2009.                 2005     Launch of next generation Intellect banking platforms
In the last three years, Polaris has made four acquisitions:           2006     Near Shore Centre in Belfast
It acquired SEEC Inc in September 2008, taking over the                2007     New corporate banking centre in Mumbai
insurance product; Lasersoft Infosystems in October 2009               2008     Acquired SEEC Inc, the worldwide SOA-based insurance
                                                                                solution provider
to strengthen its business in India and SAARC countries;
                                                                       2009     Launched Global Universal Banking Intellect 10.0
and Indigo TX in March 2010 to fill the gap in the capital
                                                                                Acquired Lasersoft Infosystems
market segment. Its latest acquisition is the 50-acre facility
                                                                       2010     Acquires Indigo TX, GO TX brokerage product
purchased to set up a residential talent development centre
                                                                                Acquires Catalytic Software, to set up residential talent
and to expand its delivery facilities in Hyderabad.                             centre and expand the offshore development centre
Management team                                                        Business of the company
Arun Jain, chairman and chief executive officer: Arun
                                                                       Polaris offers solutions and services for core banking,
Jain is the founder of Polaris. He holds a bachelor's degree
                                                                       corporate banking, wealth and asset management, and
in Electrical Engineering from the Delhi College of
                                                                       insurance businesses.
Engineering (1983).
                                                                       Services
Govind Singhal, partner, chief operating officer and head
- Global Delivery and Operations: Govind Singhal was part              In this segment, the company offers services in six areas:
of the very first batch of managers who had joined Mr                  Technology (Microsoft and IBM), enterprise solutions,
Jain in the early days. During his career of more than 23              testing, performance engineering, solutions in risk &
years in the IT industry, he has played critical roles in              treasury and managed services. The company offers
organisations such as Bank of America, Mahindra Satyam                 custom-made solutions (application development and
(formerly Satyam Computers Services) and EDS India.                    maintenance) and provides services around packaged
                                                                       software (implementation and maintenance).
Service offerings
Enterprise              Technology       Testing                  Performance                 Domain             Infrastructure
solutions                                                         engineering
Around Oracle, SAP      Microsoft .Net   Polaris Application       Diagnostics, Advisory,     Risk & Treasury    IT Enterprise
Siebal and Infor        and IBM          Certification            Measurement and                                Managed Services
BaaN                    Mainframe        Enterprise (PACE)        Process Consulting
Data Warehousing/
Business Intelligence
Enterprise content
management




                                                      Sharekhan    3    November 03, 2010                           Home              Next
investor’s eye                                                                                                                                                                                         stock idea


Products                                                                                                   Polaris has won quite a few deals for the Intellect suite.
In the product business, the company offers the Intellect                                                  An Australian bank has chosen Intellect GUB – Cash and
suite 10.0, Intellect SEEC insurance product, PRIL (a retail                                               Liquidity solution in a large deal. A central bank in the
product) and the recently added GO TX (Indigo) brokerage                                                   EMEA region has chosen Intellect Core Banking. Insurance
platform.                                                                                                  companies in America and Australia chosen Intellect
                                                                                                           Insurance CBX to automate their business processes. During
Intellect 10.0 suite                                                                                       the quarter, Intellect got successfully deployed in Mekong
Intellect is the flagship product of the company offering                                                  Housing Bank, Vietnam; Elavon in Germany and CRDB Bank
modules across the BFSI vertical. In the banking space, it                                                 in Tanzania.
encompasses retail banking, corporate banking and                                                          Intellect revenue contribution
investment banking.
It enables banking across business units, geographies and                                                    24.0
technologies. Intellect currently has eight target platforms
and 25 independent saleable modules. Web-enabled, multi-                                                     21.0
currency and multi-lingual, this platform gives banks the
capability to service markets in diverse geographies and                                                     18.0
cultures in a multi-channel context. Intellect is based on
the service-oriented architecture (SOA) using the J2EE                                                       15.0




                                                                                                                     Q1FY09

                                                                                                                              Q2FY09

                                                                                                                                       Q3FY09

                                                                                                                                                Q4FY09

                                                                                                                                                         Q1FY10

                                                                                                                                                                  Q2FY10

                                                                                                                                                                           Q3FY10

                                                                                                                                                                                     Q4FY10

                                                                                                                                                                                              Q1FY11

                                                                                                                                                                                                        Q2FY11
technology and is built with re-usable business applications
and components, which makes it highly modular and flexible.

Intellect deal wins                                                                                        Source: Sharekhan Research, company

   25                                                                                                      Geographical mix (%)
   20                                                                                                                                               Latin
                                                                                                                                                   America
   15
                                                                                                                                                     5%
   10                                                                                                                         EMEA
                                                                                                                              22%
     5
     0
                                                                                                                                                                            Asia
          Q1FY09

                   Q2FY09

                            Q3FY09

                                     Q4FY09

                                              Q1FY10

                                                       Q2FY10

                                                                   Q3FY10

                                                                            Q4FY10

                                                                                     Q1FY11

                                                                                              Q2FY11




                                                                                                                                                                           Pacific
                                                                                                                                                                            73%

Source: Sharekhan Research, company                                                                        Source: Sharekhan Research, company


Intellect suite of products
Particulars                                                     What it offers                                                     Target customer segment
Intellect universal banking                                     Integrated, scalable, flexible, secure and                         Banks operating across retail, small-to-medium
                                                                customer-centric core banking platform                             size enterprises (SME), and commercial and
                                                                                                                                   corporate segments
Intellect consumer finance                                      Loan lifecycle solution                                            Banks with loan products across different
                                                                                                                                   business lines
Intellect wealth                                                An integrated front, middle and back-office                        Wealth management
                                                                solution for managing complete wealth
                                                                management life cycle
Intellect cards                                                 Lifecycle management for card Issuing and                          Credit, debit, pre-paid and other major
                                                                merchant acquiring business                                        payment brands
Intellect portals                                               e-banking offerings                                                Interent banking
Intellect cash & liquidity                                      Automated fund transfers, multiple interest                        Banks and institutions such as hedge funds and
                                                                allocation, investment sweeps and liquidity                        custodians
                                                                management techniques
Intellect risk & treasury                                       Automation and seamless integration of                             Banks, financial institutions and corporate
                                                                treasury functions                                                 houses
Intellect business process studio                               Automating & archiving                                             Banks across all categories
Intellect securities services                                   Securities trading, custodial services,                            Depository & custodial services
                                                                clearing and settlement


                                                                                        Sharekhan      4     November 03, 2010                                                  Home                             Next
investor’s eye                                                                                                                                                                                                        stock idea


Optimus                                                                                                                         Polaris better placed to ride the growth…

Optimus was established in 2003 to offer back-office                                                                            Particulars                                                             BFSI (%)
services to the BFSI vertical. The company has been                                                                             Polaris Software                                                               94
restricted to providing business process outsourcing                                                                            NIIT Technologies                                                              42
services to the domestic clients and this business currently                                                                    KPIT Cummins                                                                      4
contributes 1.5% to its overall revenues.                                                                                       Zensar Technologies                                                            22
                                                                                                                                Hexaware Technologies                                                          36
Investments arguments
                                                                                                                                Infosys Technologies                                                           35
Play on traction in BFSI vertical
                                                                                                                                TCS                                                                            44
For the Indian IT services industry, the strong revival in                                                                      Wipro                                                                          27
demand is led by an increase in the IT spending by
                                                                                                                                HCL Technologies                                                               25
customers in the BFSI vertical. The BFSI vertical has been
the leading IT spender and contributes close to 30% of                                                                          Intellect—a long-term “game changer”
the total revenues of the Indian IT sector. The revival                                                                         Intellect, the flagship banking product of the company,
currently seen in the IT spending has been initiated by                                                                         would be a game changer for Polaris from a longer-term
the BFSI vertical. The IT spending that started with a pent-                                                                    perspective. Over the years, Intellect has been on a
up demand was pushed up further by the mergers and                                                                              growth path, adding new clients and increasing its
acquisitions in this space. To add to the above, the sector                                                                     geographical reach. Though the company had launched
is witnessing higher spending due to the regulatory changes                                                                     Intellect in 2005, but Intellect has started showing strong
taking place in the aftermath of the credit crisis. The                                                                         traction only recently with record numbers of deals wins.
spending is both “run the business” spending and “change                                                                        This is a strong testimony to the growing faith of the
the business” spending. In North America the spending is                                                                        company’s clients in its Intellect product suites.
towards transformation of systems whereas in Europe the
spending is more towards the rationalisation and reduction                                                                      Deal wins
of costs (aligning the different platforms to one integrated
                                                                                                                                                              Intellect (Polaris)      T24 (Temenos)      FinnOne (Nucleus)
platform). In the emerging markets, the spending is towards                                                                                          25
globalisation and entering new markets, meaning more of
“change the business” spending. We believe that the IT                                                                                               20
spending from the BFSI sector would increase in the coming
                                                                                                                                   no of deal wins




years mainly due to the high volumes of transactions and                                                                                             15

the increasing penetration into newer geographies and
                                                                                                                                                     10
complex compliance requirements.
The BFSI vertical has been showing a higher spend as                                                                                                 5

compared to the other industry verticals—the same can
                                                                                                                                                     0
be seen from the increase in the total contract value (TCV)                                                                                               Q1FY10     Q2FY10         Q3FY10   Q4FY10      Q1FY11       Q2FY11
as per the TPI Index. The TCV has shown an increasing
                                                                                                                                Source: Sharekhan Rsearch, company
trajectory for both the first nine months of the calendar
year and the third quarter of 2010.
                                                                                                                                As per the management, the deal funnel for Intellect has
Total contract values                                                                                                           been increasing quarter over quarter. The funnel size
                                                                                                                                currently is close to $200 million as against $65 million in
                                 9M08        9M09               9M10                    JA S09         JA S10
                                                                                                                                the same period of the last year. The other benefit of the
                 20
                                                                                                                                product-led business is the margin performance. The
                 15                                                                                                             Intellect business has an operating profit margin (OPM)
  TCV in $ bln




                                                                                                                                of 23% as against the services business’ margin of 14-
                 10
                                                                                                                                16%. The faster the growth in the product revenues, the
                  5                                                                                                             better would be the margin of the company.
                  0                                                                                                             At the end of Q2FY2011, Intellect contributes around 22%
                                                                                                    Telecom &
                                             Financial




                                                                                           Retail
                                                         Healthcare &
                                    Energy




                                                                        Manufacturing




                                                                                                                Transport
                      Business




                                             Services




                                                                                                                 Travel &
                      services




                                                                                                                                of the total revenues of the company. Going forward, the
                                                                                                      Media
                                                           Pharma




                                                                                                                                management is targeting 30% revenues from the Intellect
                                                                                                                                product suites in the next three years. This, we believe,
Source: Sharekhan Research, TPI




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investor’s eye                                                                                                                                                                                          stock idea



will help improve the margin dynamics and overall                                         Service revenue expected to remain steady…
profitability of the company. On the other hand, increasing
                                                                                          The service business of Polaris has been steady in the last
traction from the product business coupled with the
                                                                                          few quarters, with a compounded quarterly growth rate
improved margin profile would help Polaris‘ stock to get
                                                                                          (CQGR) of around 4% in the last six quarters. The top ten
re-rated from the current levels.
                                                                                          clients have shown a CQGR of 4.5% in the last six quarters.
Intellect revenues (Rs cr)                                                                Services’ revenue contribution
                                      Q1    Q2        Q3     Q4                                              83.0
                                                                                                             82.0
                     100.0                                                                                   81.0




                                                                                           % of revenues
                                                                                                             80.0
                      80.0
  Revenues (Rs cr)




                                                                                                             79.0
                                                                                                             78.0
                      60.0                                                                                   77.0
                                                                                                             76.0
                      40.0
                                                                                                             75.0
                                                                                                             74.0
                      20.0
                                                                                                                        Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11
                       0.0
                                                                                          Source: Sharekhan Research, company
                             FY2007   FY2008       FY2009     FY2010     FY2011
                                                                                          On the other hand, the Citigroup’s contribution to the
Source: Sharekhan Research, company
                                                                                          company’s revenues remains steady at around 40%, which
Successful history of managing inorganic growth, well                                     is expected to be maintained. Going forward, we believe
equipped for further growth…                                                              the service business will grow at a steady rate over
                                                                                          FY2010-13.
In the last few years, Polaris has been focusing on inorganic
growth with the acquisition of SEEC in 2008, of Lasersoft                                 Top client revenues growing
Infosystems in 2009 and of Indigo TX in 2010. With all                                                     50.0
these acquisitions, Polaris has filled the gap in its product                                              45.0
                                                                                                           40.0
portfolio, got new clients and entered newer geographies,                                                  35.0
thereby creating a strong foothold for itself. Going                                                       30.0
                                                                                                           25.0                            CQGR of 4.5% in last six quarters
forward, we believe that the inorganic initiatives will                                                    20.0
continue to form an integral part of Polaris’ growth                                                       15.0
                                                                                                           10.0
strategy and with a war chest of close to Rs500 crore any                                                   5.0
big inorganic move would take Polaris to a much higher                                                      0.0
                                                                                                                    Q1FY09

                                                                                                                             Q2FY09

                                                                                                                                      Q3FY09

                                                                                                                                                  Q4FY09

                                                                                                                                                           Q1FY10

                                                                                                                                                                    Q2FY10

                                                                                                                                                                             Q3FY10

                                                                                                                                                                                      Q4FY10

                                                                                                                                                                                               Q1FY11

                                                                                                                                                                                                         Q2FY11
growth trajectory.


                                                                                                                                               Top client revenues in Mn (USD)

                                                                                          Source: Sharekhan Research, company
M&A activity
Date                          Company name                  Acq. Cost                               Other details
Oct-2010                      Catalytic Software            NA                                      Acquisition of 50-acre facility to house residential talent
                                                                                                    development centre and expansion of ODC.
Mar-2010                      Indigo TX                     NA                                      GO TX is an enterprise brokerage solution for the securities
                                                                                                    market based on the SAAS model (pay per use model).
Oct-2009                      Lasersoft Infosystems         $11.2mn—upfront payment                 Established footprint in India with around 78 live installations
                                                            of $7.6mn and balance                   at the time of acquisition. Strong client base, particularly in
                                                            depending on performance                the co-operative and rural banks, with leading names, such as
                                                                                                    Corporation Bank, State Bank of India and ICICI Bank.
Sep-2008                      SEEC Inc.                     $8mn—of which $3mn                      Products in the insurance space, life and non-life. It had
                                                            upfront payment                         about 20 clients with marquee names such as New York Life,
                                                                                                    Country Financial and Prudential Financial.
Oct-2002                      OrbiTech Solutions            About Rs900-1,000 crore                 Acquired the business of OrbiTech which encompassed product
                                                            through issue of 4.56 crore             (Orbi suite of products) and service businesses with revenues
                                                            shares                                  of about $40mn for half year and cash of $7mn.
Source: Sharekhan Research, company




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CVC stake sale
Particulars                                     Citibank NA                          % stake              Orbitech Ltd                              % stake                                  Orbitech Employee                                              % stake
                                      (trustees of Orbitech)                                                                                                                                       Welfare Trust
Stake as on 30-06-2009                                    22,576,015                          22.88          20,179,606                                   20.45                                                      1,388,873                                       1.41
Sold in:
- Sept 2009 quarter                                                         -                                (2,729,004)                                  (2.77)                                                                              -
- Dec 2009 quarter                                        (9,901,089)                   (10.06)              (2,070,996)                                  (2.12)                                                             (19,148)                          (0.02)
- Mar 2010 quarter                                        (1,349,575)                         (1.38)                                -                                                                                           (3,000)                        (0.01)
- Jun 2010 quarter                                        (4,558,737)                         (4.61)                                -                                                                                    (26,600)                              (0.03)
- Sept 2010 quarter                                       (2,571,128)                         (2.60)                                -                                                                                           (9,600)                        (0.01)
Stake as on 30-09-2010                                        4,195,486                        4.23          15,379,606                                   15.52                                                      1,330,525                                       1.34
Source: Bloomberg


Citi sale concerns overdone, expect to phase out                                                                 utilisation ratio that is at 76%, a possible decrease in the
gradually…                                                                                                       general and administrative (G&A) expense as a percentage
In the last one year, Citigroup through its venture capital                                                      of the total revenues and a higher contribution from the
arm, Citigroup Venture Capital (CVC), has sold more than                                                         product business (licence revenues) would restrict the
half of its stake in Polaris. CVC held 44.1 million shares in                                                    margin contraction.
Polaris as of December 31, 2008, through Citigroup Global                                                        Room for improvement in utilisation
Market, OrbiTech Employees Welfare Trust and OrbiTech.
                                                                                                                                                                      Soft. Dev. Exp (%)                                                      Utilisation (%)
Its stake has now come down to 20.9 million shares as of
                                                                                                                    85.0
September 30 2010. In the last one year, Polaris’ stock
                                                                                                                    80.0
performance has been lukewarm with around 13% return
                                                                                                                    75.0
(with an intermediate high of Rs215 in July 2010) even                                                              70.0
though the BSE Sensex has gone up by 31% in the same
                                                                                                                    65.0
period. We believe that despite showing a decent financial                                                          60.0
performance in the last one year, Polaris has severely                                                              55.0
underperformed the broader market on account of the                                                                 50.0
Citigroup stake sale overhang. We expect the Citigroup
                                                                                                                                        Q1FY09

                                                                                                                                                          Q2FY09

                                                                                                                                                                            Q3FY09

                                                                                                                                                                                          Q4FY09

                                                                                                                                                                                                       Q1FY10

                                                                                                                                                                                                                    Q2FY10

                                                                                                                                                                                                                                   Q3FY10

                                                                                                                                                                                                                                                  Q4FY10

                                                                                                                                                                                                                                                            Q1FY11

                                                                                                                                                                                                                                                                        Q2FY11
stake sale to gradually phase out by 2011.
Financial positives
                                                                                                                 Source: Sharekhan Research, company
EBITDA margins to remain stable…
                                                                                                                 …PBT margin expected to improve
We expect Polaris’ earnings before interest, tax,
depreciation and amortisation (EBITDA) margin to remain                                                          We expect the profit before tax (PBT) margin of the
under pressure in the medium term and improve                                                                    company to improve by around 300 basis points over
marginally by 60 basis points over the next two years                                                            FY2010-13 on account of a higher foreign exchange (forex)
(FY2011-13) on account of the rupee’s appreciation.                                                              gain as compared to a forex related loss in FY2010. Polaris
Nevertheless, levers like room for improvement in the                                                            has hedged 60-70% of its net inflows at an average rate

G&A to remain stable at current absolute level                                                                   Comparing forex losses and average Rs/USD rate
                                                                                                                                                                                     Forex losses                               A vg rate
  22.0                                         G&A %               OPM (%)                                         10                                                                                                                                                  50.0
  20.0                                                                                                              5                                                                                                                                                  45.0
  18.0                                                                                                              0                                                                                                                                                  40.0
                                                                                                                                                                                                                                                                       35.0
  16.0                                                                                                              -5
                                                                                                                                                                                                                                                                       30.0
  14.0                                                                                                             -10
                                                                                                                                                                                                                                                                       25.0
                                                                                                                   -15
  12.0                                                                                                                                                                                                                                                                 20.0
                                                                                                                   -20
  10.0                                                                                                                                                                                                                                                                 15.0
                                                                                                                   -25                                                                                                                                                 10.0
   8.0
                                                                                                                   -30                                                                                                                                                 5.0
   6.0                                                                                                             -35                                                                                                                                                 0.0
           Q1FY09

                    Q2FY09

                             Q3FY09

                                      Q4FY09

                                                 Q1FY10


                                                          Q2FY10

                                                                   Q3FY10

                                                                            Q4FY10

                                                                                     Q1FY11

                                                                                                 Q2FY11




                                                                                                                           Q1FY09


                                                                                                                                                 Q2FY09


                                                                                                                                                                   Q3FY09


                                                                                                                                                                                 Q4FY09


                                                                                                                                                                                              Q1FY10


                                                                                                                                                                                                           Q2FY10


                                                                                                                                                                                                                       Q3FY10


                                                                                                                                                                                                                                     Q4FY10


                                                                                                                                                                                                                                                   Q1FY11


                                                                                                                                                                                                                                                            Q2FY11




Source: Sharekhan Research, company                                                                              Source: Sharekhan Research, company


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investor’s eye                                                                                                                                                                                                                                                                  stock idea



of Rs48.33 for FY2011, at Rs48.31 for FY2012 and at                                                                                                                                                                          virtually debt-free status; as a matter fact, 55% of the
Rs49.42 for FY2013. In a scenario of an appreciating rupee,                                                                                                                                                                  company’s total balance sheet is in cash. Polaris generates
the company is likely to gain on the hedging front owing                                                                                                                                                                     sufficient free cash to fund big-ticket merger and
to higher average hedge rates. On the other hand, its                                                                                                                                                                        acquisition activity. However, the optimal utilisation of
other income will increase owing to an increase in its                                                                                                                                                                       its cash and cash equivalents would be the key to
cash and cash equivalents over FY2011-13.                                                                                                                                                                                    generating higher interest among investors with regard
Margin trend
                                                                                                                                                                                                                             the company. We remain optimistic on the merger and
                                                                                                                                                                                                                             acquisition strategy of Polaris and expect it to utilise its
              25.0                                                                             OPM                                       PBT Margin                                                                          cash in the best possible manner to benefit its
              20.0                                                                                                                                                                                                           shareholders.
              15.0                                                                                                                                                                                                           Risks and concerns
 In (%)




              10.0                                                                                                                                                                                                           Tax holiday set to expire by March 2011
               5.0
                                                                                                                                                                                                                             Full tax holiday under the Software Technology Parks of
                                                                                                                                                                                                                             India (STPI) scheme is set to expire on March 2011; on
               0.0
                                                                                                                                                                                                                             account of this the effective tax incidence of the company
                                                                                                                                                                                              Q3FY11E

                                                                                                                                                                                                             Q4FY11E
                             Q1FY09

                                               Q2FY09

                                                             Q3FY09

                                                                            Q4FY09

                                                                                              Q1FY10

                                                                                                            Q2FY10

                                                                                                                              Q3FY10

                                                                                                                                                Q4FY10

                                                                                                                                                              Q1FY11

                                                                                                                                                                                Q2FY11




                                                                                                                                                                                                                             will increase to around 25% in FY2012 from the current
                                                                                                                                                                                                                             level of 16%. (Company has no presence in special
Source: Sharekhan Research, company                                                                                                                                                                                          economic zone.)

Strong balance sheet, impressive cash generation…                                                                                                                                                                            In the last union budget, the government remained silent
Polaris has shown excellent working capital management,                                                                                                                                                                      on the extension of the tax benefits under the STPI scheme
with one of the lowest debtors sales outstanding in the                                                                                                                                                                      beyond 2011. Nevertheless, there is a possibility of the
industry; the same is reflected in its strong cash kitty                                                                                                                                                                     government extending the STPI scheme for the smaller
with over Rs470 crore at the end of September 2010. On                                                                                                                                                                       companies by another three to four years in the next year’s
the other hand, Polaris has a strong balance sheet with a                                                                                                                                                                    budget. We have built in a 25% tax rate for FY2012 in our
                                                                                                                                                                                                                             estimates.
Improving cash and decreasing DSOs                                                                                                                                                                                           Currency headwinds
                                                                                     Cash                                              DSOs                                                                                  In the event of continuous appreciation of the rupee vis-
   600                                                                                                                                                                                                              70
                                                                                                                                                                                                                             à-vis the US Dollar there could be revision in our earnings
                                                                                                                                                                                                                    60
   500                                                                                                                                                                                                                       estimates for the company.
                                                                                                                                                                                                                    50
   400
                                                                                                                                                                                                                             Polaris will lose on the translation front; however, as the
                                                                                                                                                                                                                    40
   300                                                                                                                                                                                                                       company hedges approximately 70% of its net inflows, it
                                                                                                                                                                                                                    30
   200
                                                                                                                                                                                                                             will gain at the forex level.
                                                                                                                                                                                                                    20
   100                                                                                                                                                                                                              10
                                                                                                                                                                                                                             High exposure to single industry vertical
          0                                                                                                                                                                                                         0        It has a higher dependency on a single industry, the BFSI
                                                                                                                                                                                                                             vertical accounts for 93% of its revenues.
                   Q1FY09

                                      Q2FY09


                                                         Q3FY09

                                                                           Q4FY09

                                                                                                Q1FY10


                                                                                                                     Q2FY10

                                                                                                                                       Q3FY10

                                                                                                                                                            Q4FY10


                                                                                                                                                                                Q1FY11

                                                                                                                                                                                                  Q2FY11




                                                                                                                                                                                                                             Supply-side constraints
Source: Sharekhan Research, company                                                                                                                                                                                          Over the last three quarters, the sector has faced supply-
Trend in cash generations from operations                                                                                                                                                                                    side constraints which have led to higher attrition. Though
                                                                      Cash from Operations/EBITDA %
                                                                                                                                                                                                                             this would have an impact on the company’s margins but
          120                                                                                                                                                                                                                we believe attrition is something that would be factored
                                                                                                                                                                                                                             in the business model of the IT companies.
          100
              80                                                                                                                                                                                                             Anti-outsourcing rhetoric
  in %




              60                                                                                                                                                                                                             Regulatory changes like visa restrictions or similar
              40                                                                                                                                                                                                             restrictions may delay the decision-making process of the
                                                                                                                                                                                                                             clients. However, the recent blocking of the anti-
              20
                                                                                                                                                                                                                             offshoring bill in the US Senate indicates a lesser chance
               0
                                                                                                                                                                                                                             of such regulations happening.
                            Q1FY09

                                                Q2FY09

                                                                  Q3FY09

                                                                                     Q4FY09

                                                                                                         Q1FY10

                                                                                                                              Q2FY10

                                                                                                                                                   Q3FY10

                                                                                                                                                                       Q4FY10

                                                                                                                                                                                         Q1FY11

                                                                                                                                                                                                           Q2FY11




Source: Sharekhan Research, company

                                                                                                                                                                                         Sharekhan                       8     November 03, 2010                    Home            Next
investor’s eye                                                                                                                                                                                                                stock idea



Strong mascot, attractive valuation                               One-year forward PE chart

Polaris is one of the few integrated mid-cap IT compa-               400.0                                                                                                                                                                      17x
nies having a strong foothold in the BFSI vertical and of-           350.0
                                                                                                                                                                                                                                                14x
ferings in both the service and solution segments. We                300.0

expect a compounded annual growth of 17% in its earn-                250.0                                                                                                                                                                      11x
ings over FY2010-13. At the current market price the stock           200.0                                                                                                                                                                       8x
trades at 7.9x FY2011E, 7.2x FY2012E and 5.8x FY2013E                150.0
                                                                                                                                                                                                                                                 5x
earnings. Incidentally, ex-cash (FY2010) the stock is trad-          100.0
ing at 5.4x FY2011E, 4.9x FY2012E and 4x FY2013E earn-                50.0
                                                                                                                                                                                                                                                 2x
ings, which is a 15-18% discount to its peers. Notwith-
                                                                       0.0
standing the overhang of the stake sale by the Citigroup,




                                                                             Feb-02



                                                                                                Feb-03



                                                                                                                  Feb-04



                                                                                                                                    Feb-05


                                                                                                                                                      Feb-06



                                                                                                                                                                        Feb-07



                                                                                                                                                                                          Feb-08



                                                                                                                                                                                                            Feb-09



                                                                                                                                                                                                                              Feb-10
                                                                                       Aug-02



                                                                                                         Aug-03



                                                                                                                           Aug-04



                                                                                                                                             Aug-05



                                                                                                                                                               Aug-06



                                                                                                                                                                                 Aug-07



                                                                                                                                                                                                   Aug-08



                                                                                                                                                                                                                     Aug-09



                                                                                                                                                                                                                                       Aug-10
the current valuation offers a highly favourable risk-re-
ward ratio. We initiate coverage on the stock with a Buy
rating and price target price of Rs234 (10x FY2012E and           Source: Sharekhan Research, company

8x FY2013E).

Peer comparison
Particulars                   Price       Net Sales         EV/EBITDA                                        EPS (Rs)                                                             P/E (x)
                               (Rs)   FY2011E FY2012E    FY2011E FY2012E                                 FY2011E FY2012E                                                     FY2011E FY2012E
Polaris Software              164.0    1568.1   1865.9         4.6                     3.2                         20.9                                22.8                                7.9                                 7.2
Infotech Enterprises          160.5    1146.5   1411.7         7.4                     5.8                         13.3                                16.3                               12.1                                 9.9
NIIT Technologies             218.7    1207.7   1261.1         4.8                     4.3                         28.5                                29.5                                7.7                                 7.4
Persistent Systems            404.8     757.6    934.4         7.4                     5.8                         36.3                                38.0                               11.1                                10.7
KPIT Cummins                  159.7     877.7   1058.1         8.1                     6.4                         11.6                                14.4                               13.8                                11.1
Hexaware Tech                  87.5    1019.5   1224.2         9.2                     5.5                          5.4                                 9.2                               16.2                                 9.5
Oracle Financial             2254.8    3212.5   3601.4        14.9                    13.0                        120.1                               131.2                               18.8                                17.2
Source: Bloomberg, Company




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investor’s eye                                                                                                     stock idea


Financials
Profit & Loss a/c                                                                                                    Rs (cr)
Particulars                               FY2009          FY2010            FY2011E        FY2012E     FY2013E
Net sales                                 1378.0           1353.8              1568.1       1865.9      2240.7
Operating expenses                        1144.4           1131.7              1333.0       1578.4      1891.4
EBITDA                                     233.5            222.1               235.1        287.5       349.3
Depreciation                                50.5             35.0                35.5         46.6        56.0
EBIT                                       183.0            187.0               199.6        240.9       293.3
Other income                                24.8             19.1                23.8         28.8        34.4
Forex gain/loss                            -56.4            -26.4                22.2         30.5        39.4
Interest                                     0.7              0.9                 1.0          1.0         1.0
Profit before tax                          150.7            178.8               244.6        299.2       366.1
Tax                                         20.9             25.6                38.8         74.8        89.5
PAT                                        129.8            153.3               205.8        224.4       276.6
Net profit                                 130.7            152.9               206.5        225.9       278.4
Balance sheet                                                                                                        Rs (cr)
Particulars                               FY2009          FY2010            FY2011E        FY2012E     FY2013E
Share capital                                49.3            49.5                49.5          49.5        49.5
Reserves and surplus                        708.0           822.6               974.0        1139.0      1342.3
Net worth                                  772.7            872.5              1024.6        1191.1      1396.1
Total debt                                    0.4             2.5                 2.5           2.5         2.5
Deferred tax liabilities                      6.7             3.0                 3.0           3.0         3.0
Current iabilities                         250.9            302.6               352.4         441.2       530.6
Total liabilities                         1030.6           1180.6             1382.5        1637.7      1932.2
Gross block                                528.4            559.9               691.3         771.3       851.3
Less: Accumulated                          313.7            345.2               380.7         427.3       483.3
depreciation
Net block                                  214.6            214.7              310.6         344.0       367.9
Capital WIP                                  1.1             12.5               15.4          17.2        18.9
Goodwill                                    19.9             50.6               50.6          50.6        50.6
Investments                                244.3            389.7              448.1         515.3       592.6
Current assets                             435.6            383.0              435.0         491.8       562.6
Cash & cash equivalent                     105.4            123.7              116.4         212.5       333.1
Deferred tax assets                          9.7              6.5                6.5           6.5         6.5
Total assets                              1030.6           1180.6             1382.5        1637.7      1932.2
Cashflow statement                                                                                       Rs (cr)
Particulars                                FY09             FY10               FY11E        FY12E       FY13E
Cash flow from operating activities         266.7            292.2              239.8         304.5       353.0
Cash flow from investing activities         -38.7            -90.2             -134.3         -81.8       -81.8
Cash flow from financing activities        -199.4           -183.7             -112.8        -126.7      -150.6
Net inc/(dec) in cash & cash equivalent      28.6             18.3               -7.3          96.1      120.6
Cash & cash equivalent (opening)             76.8            105.4              123.7         116.4       212.5
Cash & cash equivalent (closing)           105.4            123.7              116.4         212.5       333.1
Key ratios (%)
Particulars                               FY2009          FY2010            FY2011E        FY2012E     FY2013E
OPM                                         16.9                16.4             15.0         15.4         15.6
NPM                                          9.4                11.3             13.1         12.0         12.3
ROA                                         18.1                18.4             21.6         20.3         21.4
ROCE                                        21.0                21.7             25.7         27.0         28.3
ROE                                         18.2                18.6             21.7         20.3         21.4
Valuation ratios (%)
Particulars                               FY2009          FY2010            FY2011E        FY2012E     FY2013E
PE (x)                                      12.4                10.6              7.9           7.2          5.8
P / BV (x)                                   2.1                 1.9              1.6           1.4          1.2
EV / EBITDA (x)                              5.4                 5.0              4.7           3.1          2.0
EV / Sales (x)                               0.9                 0.8              0.7           0.5          0.3


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investor’s eye                                                                                                                                                                                                                                                                                                                                                                                                                                                       stock idea



Annexure                                                                                                                                                                                                        Middle-East Asia. The acquisition of Lasersoft Infosystems
Global Core Banking Sales Ranking                                                                                                                                                                               in October 2009 gave it access to the co-operative banks
                                                                                                                                                                                                                in India, and the markets in Eastern Europe and Middle-
In the Global Core Banking Sales Ranking, on an overall
                                                                                                                                                                                                                East Asia. While the co-operative banks are numerous,
basis, Polaris is ranked ninth. In the Asia-Pacific ranking
                                                                                                                                                                                                                they are typically small, with less than $2 billion in assets.
it is placed at the third position whereas in Eastern Europe,
                                                                                                                                                                                                                Polaris had 17 wins, with five of them coming from the
Middle East Asia and Africa (EEMEA) it is placed at the
                                                                                                                                                                                                                Laser Panacea product. One of the interesting wins for
seventh position.
                                                                                                                                                                                                                Polaris was in Japan for an ACH/RTGS payment system
Big leagues                                                                                                                                                                                                     through its Intellect Core platform.
                                                                                                                                                                                                                Polaris modules implemented
                                                                                                                                                                                                                                                   9

                                                                                                                                                                                                                      7                                            7
                                                                                                                                                                                                                                                                                         6               6                                                                                                                                   6
                                                                                                                                                                                                                                                                                                                                                                      5

                                                                                                                                                                                                                                                                                                                                                                                                                         3


                                                                                                                                                                                                                                                                                                                        0                0          0                                     0            0                                                             0                   0




                                                                                                                                                                                                                                                                                      Payments ACH




                                                                                                                                                                                                                                                                                                                                                   Credit Card
                                                                                                                                                                                                                                               Retail Lending




                                                                                                                                                                                                                                                                                                                     Islamic Banking




                                                                                                                                                                                                                                                                                                                                                                                         Leasing




                                                                                                                                                                                                                                                                                                                                                                                                                                            Asset Based Lending

                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Syndicated Lending

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Factoring
                                                                                                                                                                                                                                                                                                                                                                                                   Bi-Lateral Lending
                                                                                                                                                                                                                                                                                                     Payments RTGS



                                                                                                                                                                                                                                                                                                                                        Mortgage
                                                                                                                                                                                                                   Customer Information File



                                                                                                                                                                                                                                                                Deposits




                                                                                                                                                                                                                                                                                                                                                                   Wealth Management




                                                                                                                                                                                                                                                                                                                                                                                                                        Letters of Credit
                                                                                                                                                     ERI



                                                                                                                                                                          OSI
                                                       Path




                                                                                                                                                             DataVision
                                 TCS




                                                                          ITS
                                            SAP
   Oracle

                     Temenos




                                                                                    Nucleus

                                                                                              Misys

                                                                                                                     Polaris




                                                                                                                                                                                            Systems
                                                                                                                                                                                      C&W
                                                                                                                                       Infrasoft
                                                                                                                                 JHA




                                                                                                                                                                                              Top




Source: Celent
Asia-Pacific rankings                                                                                                                                                                                           Source: Celent

                                                                                                                                                                                                                Magic quadrant
                                                                                                                                                                                                                Polaris has been recognised as the leader in Magic
                                                                                                                                                                                                                Quadrant for international retail core banking by Gartner.
                                                                                                                                                                                                                As per Gartner, leaders are vendors that demonstrate
                                                                                                                                                                                                                strong development methodologies and all of these
                                                                                                                                                                                                                vendors have a measurable strategy for disaggregating
                                                                                                                                                                                                                the core banking software functionality into component-
                                                                                                                                                                                                                based constructs. Many vendors possess methodologies
                                                                                                                                Path
                                                                                                        DataVision
                               TCS




                                                                                                                                              ITS




                                                                                                                                                                                            SAP
     Oracle




                                            Polaris




                                                                                    Nucleus




                                                                                                                                                           Misys


                                                                                                                                                                            C&W
                                                              Infrasoft




                                                                                                                                                                                                                for quality assurance or are executing a strategic roadmap
                                                                                                                                                                                                                to attain certification. Most of them maintain a strong
                                                                                               APAC                                                                                                             banking market understanding through methodical
Source: Celent                                                                                                                                                                                                  processes and have extensive marketing delivery and sales
EEMEA rankings                                                                                                                                                                                                  channels. Although there are many well-balanced
                                                                                                                                                                                                                vendors/products in this quadrant, yet some are in
                                                                                                                                                                                                                transition and possess evolving products, process maturity,
                                                                                                                                                                                                                or both.
                                                                                                                                                                                                                                                                                           challengers                                                      leaders
                                                                                                                                                                                                                                                                                                                                                                 Callatay & Wouters
                                                                                                                                                                                                                                                                                                                                                                                  Infosys

                                                                                                                                                                                                                                                                                                                                                                         TCS
                                                                                                                                                                                                                                                                                                                                                                           Oracle                                        SAP


                                                                                                                                                                                                                                                                                       Neptune Software (Rubikon)                                                 Temenos Group
                                                                                                                                                                                                                                                                 ability to execute




                                                                                                                                                                                                                                                                                                                                                                 Palaris Software
                                                                                                                                                                                                                                                                                                                                                    Misys (BankFusion Universal Banking
                                                                                                                                                                                                                                                                                                                                                                         Fiserv
                                                                                                                                                                                                                                                                                                                                                                       FIS
                                                                                                                                                                                ERI
                                     Path


                                                      ITS




                                                                                                                               SAP
            Oracle




                                                                            Misys


                                                                                              Nucleus




                                                                                                                                           Polaris


                                                                                                                                                            C&W




                                                                                                                                                                                               Infrasoft




                                                                                                                                                                                                                                                                                                              Open Solutions
                                                                                                                                                                                                                                                                                                                                                                                       Misys (Equation)
                                                                                                                                                                                                                                                                                                     BML Istisharat
                                                                                                                                                                                                                                                                                      Neptune Software (Equinox)
                                                                                                  EEMEA
                                                                                                                                                                                                                                                                                                    ICS                                                          Infrasoft Tech
Source: Celent
The majority of Polaris’ wins come from individual                                                                                                                                                                                                                                                                                     Cobiscorp

modules, ranging from wealth management to lending
                                                                                                                                                                                                                                                                                          niche players                                                      visionaries
and treasury modules, among mid-tier banks in India and
                                                                                                                                                                                                                                                                                                                                  completeness of vision




                                                                                                                                                                                Sharekhan                  11     November 03, 2010                                                                                                                                                                Home                                                                                 Next
investor’s eye                                                                                                                                             stock update



 Aditya Birla Nuvo                                                                                                                               Apple Green

 Stock Update

 Strong results, headwinds ahead                                                                                                            Hold; CMP: Rs835


                      Company details                                    Result highlights

 Price target:                                                Rs925            Aditya Birla Nuvo posted a strong set of Q2 results. The consolidated income
                                                                               from operations grew at 22.6% on a year-on-year (Y-o-Y) basis, led by a growth in
 Market cap:                                       Rs8,601 cr                  the garments (+40%), textiles (+34%) and financial services (+52%) division.
 52 week high/low:                                 Rs974/704
                                                                               On the back of a turnaround from life insurance, garments (branded apparel)
 NSE volume:                                                1.6 lakh           and financial services businesses, the operating profit grew at a stellar 66%
 (No of shares)
                                                                               year on year (YoY) to Rs568 crore for the quarter. The life insurance business
 BSE code:                                                   500303            witnessed a swing of Rs147 crore on an annual basis with a profit of Rs20 core in
 NSE code:                                        ABIRLANUV                    Q2FY2011 as against a net loss of Rs127 crore in the corresponding quarter of the
                                                                               previous year. Likewise, the garment operating profit swing was of Rs40 crore
 Sharekhan code:                                  ABIRLANUV
                                                                               (from a loss of Rs12.2 crore in Q2FY2010 to a profit of Rs28 crore in Q2FY2011).
 Free float:                                                  5.6 cr
 (No of shares)                                                                The reported profit after tax (PAT) grew manifold from Rs1.4 crore in Q2FY2010
                                                                               to Rs104.8 crore in Q2FY2011. Adjusting , for a one time exceptional loss of
                   Shareholding pattern                                        Rs103 crore on account of “certain trades of their clients.” the adjusted profit
                                                                               came in at Rs208 crore. The outlook for the two highest valuation contributing
                  Public &                                                     segments—telecom and life Insurance—continues to be marred by competitive
                   Others                      Foreign                         and regulatory pressures. In the telecom space, the headline tariff pressure
                    14%                         22%                            seems to have subsided, but now competition on the circle level and customer
                                                                               acquisition front is gaining precedence. Coupled with this, issues like the 3G
                                                                               rollout expenses, regulatory overhang (related to empowered group of ministers’
                                                 Institutions
                                                    14%
                                                                               decision on spectrum payouts at licence renewals) and mobile number portability
   Promoters                                   Non-promoter
                                                                               (MNP) rollout is likely to keep Idea’s earnings under pressure for the next 12
      46%                                        corporate                     months.
                                                    4%
                                                                               On the life insurance front, as expected, the new business premium collection
                                                                               plummeted down in September as a result of new norms. Further we believe
                                 Price chart


  1000                                                                   Results table                                                                          Rs (cr)
  950
  900
                                                                         Particulars                           Stand-alone                  Consolidated
  850
                                                                                                         Q2FY11 Q2FY10 % yoy          Q2FY11 Q2FY10 % yoy
  800                                                                    Total income from operations 1638.8        1227.9    33.5    4532.3     3697.8       22.6
  750
                                                                         Total expenditure                 1390.8    1014.1   37.2     3963.4    3355.1        18.1
  700
  650                                                                    Operating profit                  248.0      213.9   16.0     568.8      342.7       66.0
                        Feb-10




                                      May-10
         Nov-09




                                                                Nov-10
                                                   Aug-10




                                                                         Other income                        20.4      21.2    -4.0      51.8      70.3       -26.2
                                                                         Interest                            73.2      86.1   -15.1     135.1     166.9       -19.1

                     Price performance                                   Depreciation                        48.9      44.9    8.8      231.9     212.6         9.1
                                                                         PBT                                146.3     104.1   40.6     253.70     33.47      658.0
 (%)                      1m          3m           6m 12m                Tax                                 26.7      44.8   -40.3      39.3      65.5       -40.0
                                                                         Adjusted PAT                      119.6       59.2 101.9      214.4      -32.0 -770.2
 Absolute              -4.5           5.6          2.1         6.1       Exceptional item                                             -103.2           -
                                                                         Reported PAT                      119.6       59.2 101.9       104.8       1.4
 Relative -4.2                       -6.5 -12.9 -18.3
 to Sensex                                                               OPMs (%)                            15.1      17.4              12.6       9.3
                                                                         PATM (%)                             7.3       4.8               4.7      -0.9


                                                                                        Sharekhan   12   November 03, 2010                      Home             Next
investor’s eye                                                                                                                                   stock update


   that the entire life insurance industry would go through         Outlook: As expected, the new business premium
   a rough patch over the next 9-12 months, hence for               collection plummeted down in September (-39% YoY) as a
   the time being we continue with our 10% new business             result of new norms. Further we believe that the entire
   premium growth and a 16% NBAP margin assumption                  life insurance industry would go through a rough patch
   for Birla Insurance. At the backdrop of these                    over the next 9-12 months time frame, hence for the time
   developments, with a strong structural positive                  being we continue with our 10% new business premium
   turnaround witnessed in garments and the IT business,            growth and 16% NBAP margin assumption for Birla
   we continue with our hold stance on the stock with a             Insurance. We would continue to monitor the business
   target price of Rs925. We would continue to monitor
                                                                    environment closely. Any positive uplift on the margins front
   the insurance business environment closely. A positive
                                                                    or a growth in revenues would augur well for the stock.
   uplift in the margins or revenue growth on the
   insurance business front would augur well for the stock.         YoY September new business premium growth rates

Life insurance—headwinds ahead, pressure on margins                   50%
                                                                                                                                               39%
                                                                      40%
   During the quarter, the net premium income grew by                                                                 30%
                                                                      30%
   22% YoY to Rs1,451 crore backed by a strong 63% growth
                                                                      20%
   in the renewal premium. The new business premium
                                                                      10%
   collection was down 12% on a Y-o-Y basis in Q2FY2011
                                                                       0%
   as there was a significant deceleration in the business




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                                                                                      ING




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                                                                                                         SBI
                                                                                             Reliance
                                                                             Bajaj




                                                                                                                                                       Private
                                                                                                               Tata




                                                                                                                                       Birla

                                                                                                                                                Max
                                                                     -10%
   on account of new insurance guidelines coming into                                -11%               -11% -11%                                     -13%
                                                                     -20%                                                    -16%
   play.                                                                    -18%
                                                                     -30%

   The aggregate private life insurance industry witnessed           -40%
                                                                                                                                      -39%
                                                                     -50%                   -43%
   a 13% decline in premium collection for September,
   with individual players reporting declines varying
                                                                    Financial services—robust growth outpacing industry
   between 11-40%. For the month, Birla Sunlife’s new
   business premium fell by 39% on a YoY basis.                        At the back drop of a decline in industry’s asset under
                                                                       management (AUM) by 4% (on account of Rs15,000
   In a thrust towards building a balanced portfolio by                crore redemption), Aditya Birla Nuvo’s business saw a
   increasing the contribution of non ULIP products, the               7% YoY growth. Its market share improved by 100 basis
   company has launched three traditional plans as per                 points from 8.5% in September 2009, to 9.5% as on
   the new guidelines and has also introduced three ULIPs              date.
   adhering to the new guidelines during the quarter. Non
   ULIP policies accounted for 25% of the total policies               Its revenue grew by 53% on a Y-o-Y basis, while profit
   issued in H1FY2011.                                                 grew by 63% over the same period.

   For the quarter, the insurance business reported a                  The company completed its first real estate onshore
   profit of Rs20 crore for the quarter as against a loss of           fund collection of Rs635 crore, and is targeting a
   Rs127 crore in Q2FY2011 (a swing of Rs147 crore). The               second closure shortly.
   company maintained its guidance to infuse an
                                                                       In the other financial services business, the NBFC saw
   additional Rs200 crore in the business in FY2011. It
                                                                       its book size surge by 86% quarter on quarter (QoQ) to
   aims to attain a portfolio mix of 25:75 of traditional
                                                                       over Rs1,900 crore, while the private equity arm
   policies vs ULIP policies.
                                                                       completed its third acquisition (acquisition of a 4%
The management remains bullish on the long term growth                 stake in credit rating agency CARE for Rs64 crore).
potential for this sunrise sector, but expects the new
                                                                    Telecom—weak performance, marred by seasonality
norms and regulations (cap on surrender charges) to levy
some pressure on the margins in the short to medium                    The consolidated top line grew at 23% YoY to Rs3,636.7
term by the time product reallocation and cost                         crore, while it stood flat on a sequential basis.
optimisation and restructuring takes place. Post this, the             There was a 3.1% traffic growth seen during the
company expects margin compression to be limited to                    quarter, led by a 7.7% growth in the subscribers. The
150-200 basis points from the last declared level of 22%.




                                                 Sharekhan     13    November 03, 2010                                            Home                           Next
investor’s eye                                                                                                               stock update


   average realised rate (ARR) for the quarter stood at                   Branded garments— strong operating leverage played out
   42 paise as against 44 paise in Q1FY2011 (-4.5%).                          The segment registered a 40% Y-o-Y increase in its
   Minutes of usage (MoU) fell by 5.1% on a sequential                        revenues in Q2FY2011 to Rs479 crore on account of a
   basis to 394 from 415 in Q1FY2011, while average                           strong volume growth, led by upbeat consumer
   revenue per user (ARPU) showed a sequential fall of                        sentiments.
   8.2% at Rs167 for the quarter as against Rs182 in the
                                                                               Despite the high base effect of the corresponding
   previous quarter.
                                                                              quarter of the previous year, the company witnessed
Idea’s key performance indicators                                             a robust 18% same store sales growth in Q2FY2011.
Particulars               Q2       Q1        Q2        %      %               It added 29 exclusive brand outlets, taking the number
                        FY10     FY11      FY11      YoY    QoQ
                                                                              of outlets to 454 at the end of the quarter. The total
Subscriber base (mn)      46.8    68.9      74.2     58.5    7.7
                                                                              retail space under its direct coverage now stands at
Average revenue          209.0   182.0     167.0    -20.1   -8.2
                                                                              nine lakh square feet.
per user (Rs/user)
Average minutes of       375.0   415.0     394.0     5.1    -5.1              For the quarter, owing to the operating leverage
use per user (ARPU)                                                           playing out, the earnings before interest, tax,
Average Realised           0.6      0.4      0.4    -25.0   -4.5              depreciation and amortisation (EBITDA) showed a swing
rate (ARR)                                                                    of Rs81 crore from a loss of Rs17 crore in Q2FY2010,
Total minutes of          50.3    82.3      84.8    68.5    3.1               to moving into the green with a profit of Rs64 crore in
use (Traffic) bln minutes                                                     Q2FY2011.

   Despite a decent performance on the top line front,                    Outlook: We believe that the retail segment is expected
   the operating profit growth for the company was                        to report a good performance in the quarters to come,
   restricted at 8.6% on account of a contraction in the                  on the back of upbeat consumer sentiments, with the
   operating margin. The operating profit margin for the                  festive season approaching ahead and also on company’s
   quarter came in at 24.06%, a 320 basis points                          focus to remain asset light (expanding through opening
   contraction on a Y-o-Y basis and a 30 basis points                     franchisee outlets).
   contraction on a sequential basis. The margin                          Value Businesses
   contraction was largely on account of higher employee                  The value manufacturing business comprising carbon
   cost and increase in network operating cost.                           black, insulators, and rayon & textiles reported a strong
   The profit after tax (PAT) for the quarter came in at                  35%, 37% and 37% YoY growth respectively in revenues
   Rs179.7 crore as against Rs220 crore in Q2FY2010 (-                    and EBITDA.
   18.4% YoY), while it fell by -10.8% on a sequential basis.             Margin trend of value businesses                         Rs (cr)
   Idea would be launching its 3G services by Q4FY2011,                   Particulars      Q2   Q2      %    Highlights
                                                                                         FY10 FY11    YoY
   in 11 circles where it has won the licenses while for
   other circles it is tying up with other operators to                   Carbon black     84   67   -20.2   The EBITDA for the quarter
                                                                                                             came down on account of
   provide its customers with a pan India coverage.                                                          high base effect of the same
                                                                                                             quarter last year (Q2FY10
Idea’s consolidated financial results                   Rs (crore)                                           profitability reflects one
                                                                                                             time input price advantage)
Particulars              Q2        Q1         Q2       %      %
                       FY10      FY11       FY11     YoY    QoQ           Fertilizers      38   55    44.7   High sales of urea & agri-
                                                                                                             inputs and subsidy arrears
Total revenue       2,973.9 3,653.7       3,659.2     23       0                                             contributed
Operating profit      809.5   888.4         878.8      9      -1          Rayon            41   25    39.0   Sharp rise in wood-pulp and
OPM (%)                27.2    24.3          24.0                                                            fuel prices impacted the
                                                                                                             margin
PAT                   220.2   201.4         179.7    -18    -11
                                                                          Insulators       22   33    50.0   High sales volume &
                                                                                                             improved yield contributed
Outlook: In the telecom space, the headline tariff
                                                                          Textiles         16   26    62.5   Higher sales volume &
pressure seems to be have subsided, but now competition                                                      improved realization across
on the inter circle front and customer acquisition front is                                                  segments
gaining precedence. Coupled with this, issues like the 3G
                                                                          IT & ITES — Strong turnaround, robust order pipeline ahead
rollout expenses, regulatory overhang (related to
empowered group of ministers’ decision on spectrum                            For the quarter, the segment arrested its revenue
payouts at licence renewals) and MNP rollout is likely to                     decline and posted a top line growth of 4.6% YoY to
keep Idea’s earnings under pressure for the next 12 months.                   Rs405 crore.


                                                      Sharekhan      14     November 03, 2010                      Home             Next
investor’s eye                                                                                                                  stock update


   The profit before interest and tax (PBIT) improved                   Valuations
   significantly and grew three fold from Rs9.7 crore in                The Q2FY2011 earnings were strong on the back of stable
   Q2FY2010 to Rs27 crore in Q2FY2011. On the net level,                value businesses, marked turnaround in the garments and
   the segment posted a profit of Rs16 crore as against a               IT services businesses, and profit posting by the insurance
   loss of Rs5 crore in the same quarter previous year.
                                                                        arm. Going forward, the outlook of the two highest
   The management has indicated a strong order book                     valuation contributing segments—telecom and life
   status for the segment.                                              insurance (together these two segments contribute 56%
Outlook: We believe that the latest two acquisition done                to the equity valuation) continue to be marred by
by the company in the last six months, are in line with                 competitive and regulatory pressures. In the telecom
the company’s strategy of providing end to end solutions                space, the headline tariff pressures seem to have
to clients and also diversifying its revenue base from voice            subsided, but now competition on the inter circle front
towards the non voice space. Currently almost 70% of the                and customer acquisition front is gaining precedence.
revenues come from the voice domain. Aditya Birla Minacs                Coupled with this, the 3G rollout expenses, regulatory
currently has a robust order book position of $600 million              overhang (related to empowered group of ministers’
to be executable over the next three-four years, while a                decision on spectrum payouts at licence renewals) and
strong $1 billion worth of sales are in the pipeline at                 MNP rollout is likely to keep Idea’s earnings under pressure
various stages, All this provides a strong revenue visibility           for the next 12 months.
for the company.
                                                                        On the life insurance front, as expected, the new business
Segmental performance                                    Rs (cr)        premium collection plummeted down in September as a
Particulars             Q2FY11     Q2FY10        % yoy                  result of new regulatory norms. Further we believe that
Revenue                                                                 the entire life insurance industry would go through a rough
Garments                  478.5       341.6       40.1                  patch in the next 9-12 months time frame. Hence for the
Rayon Yarn                135.5       134.4        0.8                  time being we continue with our estimate of 10% new
Carbon Black              387.3       286.7       35.1                  business premium growth with a 16% NBAP margin
Insulators                128.3        91.0       40.9                  assumption for Birla Insurance. On the backdrop of all
Textiles                  185.4       138.0       34.3
                                                                        these developments, while strong structural positive
Fertilizers               334.3       281.2       18.9
Financial Services        150.1        97.3       54.2                  turnaround could be seen in garments and the IT business,
Life Insurance           1417.0      1146.3       23.6                  we continue with our Hold stance on the stock with a
Software                  404.9       387.0        4.6                  price target of Rs925. We would continue to monitor the
Telecom                   922.9       801.9       15.1                  insurance business environment closely. A positive uplift
Total revenue            4544.1      3705.3       22.6                  in the margins or on the revenue growth front would
Segmental PBIT
                                                                        provide positive lift to the stock.
Garments                   28.0       -12.2          -
Rayon Yarn                 16.4        32.8      -50.0                  SOTP valuation break-up
Carbon Black               57.4        78.2      -26.7
                                                                                                               Branded
Insulators                 28.3        17.2       64.8                                          Aditya Birla   Garments
Textiles                   20.4         9.9      106.8                                            Money          8%
Fertilizers                50.2        33.5       49.9                                       AMC    1%
Financial Services         29.4        15.5       90.4                                                               Rayon
                                                                                             8%
Life Insurance             22.5      -124.9          -                                                                4%
Software                   27.1         9.7      179.2                                                                    Carbon Black
Telecom                    78.0       102.2      -23.6                                                                        8%
Total PBIT                357.8       161.9      121.0
                                                                                                                             Textiles
PBIT margin (%)
                                                                          Insurance                                            3%
Garments                    5.9        -3.6
Rayon Yarn                 12.1        24.4                                  28%
                                                                                                                           Fertilisers
Carbon Black               14.8        27.3                                                                                   6%
Insulators                 22.1        18.9                                                                               Insulators
Textiles                   11.0         7.1                                                                                  4%
Fertilizers                15.0        11.9                                                                                    BPO
Financial Services         19.6        15.9                                                                                     1%
Life Insurance              1.6       -10.9                                                                         IT Services
Software                    6.7         2.5                                                          Telecom - Idea     1%
Telecom                     8.5        12.7                                                               28%
Total segmental PBIT        7.9         4.4


                                                  Sharekhan        15    November 03, 2010                          Home                 Next
investor’s eye                                                                                                              stock update


Valuation table (stand-alone)
Particulars                     FY2008            FY2009               FY2010            FY2011E             FY2012E
Net profit (Rs cr)               242.3               137.4               283.8              302.2                  367.5
Shares in issue (cr)               9.5                 9.5                11.4               11.4                   11.4
EPS (Rs)                          25.5                14.5                25.0               26.6                   32.4
  % YoY growth                       -               -43.3                72.8                6.5                   21.6
PER (x)                           32.8                57.8                33.4               31.4                   25.8
Book value (Rs)                  423.5               433.8               410.7              425.5                  457.9
P/BV (Rs)                          2.0                 1.9                 2.0                2.0                    1.8
EV/EBIDTA (x)                     18.1                23.5                16.0               14.1                   12.5
RoCE (%)                           7.1                 4.8                 7.7                8.2                    8.9
RoNW (%)                           6.0                 3.3                 6.1                6.3                    7.1




                        The author doesn’t hold any investment in any of the companies mentioned in the article.




                                                      Sharekhan   16    November 03, 2010                            Home         Next
investor’s eye                                                                                                                                stock update



 Maruti Suzuki                                                                                                                        Apple Green

 Stock Update

 Price target revised to Rs1,561                                                                                                  Hold; CMP: Rs1,499


                    Company details                              Result highlights

 Price target:                                     Rs1,561          Maruti Suzuki’s Q2FY2011 total income grew by 27% year on year (YoY) and was
                                                                    in line with our expectations. The income growth was largely driven by a 27.4%
 Market cap:                             Rs43,306 cr                year-on-year (Y-o-Y) growth in the volumes. The realisations declined by 0.3%
 52 week high/low:                      Rs1740/1171                 YoY but improved by 0.4% quarter on quarter (QoQ).
 NSE volume:                                       6.1 lakh         The domestic realisations were influenced by product mix changes. However,
 (No of shares)                                                     the export realisations are a function of the euro-non-euro mix and the relative
                                                                    currency movement vis-a-vis the Indian Rupee. With the dollar-denominated
 BSE code:                                          532500          earnings taking over the euro earnings by 60:40, the realisations may remain
 NSE code:                                         MARUTI           negatively impacted in the short term as the rupee strengthens against the
                                                                    dollar and weakens against the euro. The company has hedged 80% of its export
 Sharekhan code:                                   MARUTI           receivables.
 Free float:                                        13.2 cr         In Q2FY2011 the raw material/sales ratio at 79.2% increased by 180 basis points
 (No of shares)                                                     YoY but declined by 40 basis points QoQ. Though the outlook for steel remains
                                                                    stable, other commodities such as natural rubber and copper is exerting an
                  Shareholding pattern                              upward pressure on its costs.
                                                                    The biggest overhang on the stock is the yen-denominated imports. The total
                Public &                                            imports form 28% of the company’s sales of which 80% are yen denominated.
                 Others                                             Out of this 25% is hedged. We estimate yen vulnerability for 16-17% imports. A
         Foreign 3%                                                 5% appreciation in the yen would affect the earnings per share (EPS) of Maruti
          20%                                                       Suzuki by approximately 8%.
                                                                    After three quarters of declining contribution in the past, the contribution per
                                          Promoters                 vehicle improved by Rs1,765 QoQ but was down Rs4,916 YoY. Similarly, the
                                             54%                    staff cost as a percentage of sales was the lowest in three years at 1.7% (down
  Institutions                                                      30 basis points sequentially and ten basis points YoY). The operating profit
     23%                                                            margin improved by 90 basis points QoQ to 10.5%. The profit after tax was 4.3%
                                                                    higher than our estimate at Rs598 crore, reflecting a growth of 5% YoY.
                        Price chart                                 Maruti Suzuki is expected to operate at the peak utilisation rate over the next
                                                                    two years with the buoyancy in the domestic market, healthy exports and probable
  1700                                                              tie-up with Volkswagen. However, the yen is putting considerable pressure on its
  1600                                                              margins. We are lowering our EPS estimate for FY2011 by 6% and revising our
  1500                                                              price target to Rs1,561 per share. We recommend Hold on the stock.
  1400

  1300                                                           Results table                                                                     Rs (cr)
  1200
                                                                 Particulars                    Q2FY11       Q2FY10        %YoY     Q1FY11       %QoQ
  1100
                                                                 Total income                   9147.3        7202.6       27.0     8231.5        11.1
                     Feb-10




                               May-10
         Nov-09




                                                        Nov-10
                                          Aug-10




                                                                 Total expenditure               8186.9        6286.4      30.2      7439.0       10.1
                                                                 Operating profits                960.3         916.1       4.8       792.5       21.2
                   Price performance                             Other income                     134.0         110.0      21.8       100.2       33.7
                                                                 Interest                           9.7           6.0                   8.0
                                                                 Depreciation                     238.1         203.1      17.3       241.7        -1.5
 (%)                 1m        3m        6m 12m
                                                                 PBT                              846.3         817.0       3.6       643.0       31.6
                                                                 Tax                              248.1         247.0       0.4       177.7       39.7
 Absolute            0.9      24.0      17.3          6.9
                                                                 PAT                             598.2          570.0       5.0       465.3       28.6
 Relative            1.2       9.8       0.0 -17.6               EPS                               20.7          19.7                  16.1
 to Sensex                                                       OPM (%)                           10.5          13.0                   9.6
                                                                 Tax Rate                          29.3             30.2              27.6


                                                                               Sharekhan   17   November 03, 2010                   Home            Next
investor’s eye                                                                                                                                                                                                                                                                   stock update



 Maruti Suzuki has surprised yet again by increasing its production by 10% through de-bottlenecking. Overall, the
 company is targeting 1.7 million units by FY2013. The company’s management has also indicated a stable discount
 scenario at Rs8,500 per vehicle and royalty charges in the vicinity of 5.3-5.5% of the sales.


Maruti Expense Tracker                                                                 Q1FY09 Q2FY09 Q3FY09 Q4FY09                                                  Q1FY10              Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11E
% of Net Sales (Ratios)
Material Cost                                                                                   78.0                  79.3                   81.1          80.5          78.1                         77.4              76.2          77.9                     79.6                     79.2
Employee Cost                                                                                    2.4                   2.4                    2.5           2.1           2.1                          1.8               1.8           1.9                      2.0                      1.8
Selling & Distribution Cost                                                                      3.6                   4.1                    3.7           3.2           2.9                          2.9               3.0           3.7                      3.0                      2.6
Manufacturing Expenses                                                                           6.7                   7.4                    8.7           9.0           6.7                          7.1               5.8           5.3                      7.7                      8.1
 - Royalty                                                                                       2.9                   3.4                    3.5           3.4           3.6                          3.7               3.6           4.2                      5.1                      5.3
 - Power & Fuel                                                                                  1.0                   1.1                    1.2           0.6           0.8                          0.8               0.8           0.6                      0.8                      0.6

                                                                                                                                                                                                                                          Jump in royalty charges



Maruti Suzuki contribution and margin trend                                                                                                                     Compact car market share comparision (%)
      80000.0                                                                                                                                      18.0%          100%
      75000.0                                                                                            Stable contribution
                                                                                                                                                   16.0%          80%
      70000.0
      65000.0                                                                                                                                      14.0%
                                                                                                                                                                  60%
      60000.0                                                                                                                                      12.0%
      55000.0                                                                                                                                                     40%
      50000.0                                                                                                                                      10.0%
      45000.0                                                                                                                                                     20%
                                                                                                                                                   8.0%
      40000.0                                                                                                                                                      0%
                                                                                                                                                   6.0%
      35000.0
                                                                                                                                                                              Jan-10


                                                                                                                                                                                                    Feb-10


                                                                                                                                                                                                             Mar-10


                                                                                                                                                                                                                           Apr-10




                                                                                                                                                                                                                                                Jun-10


                                                                                                                                                                                                                                                                        Jul-10


                                                                                                                                                                                                                                                                                     Aug-10
                                                                                                                                                                                                                                     May-10
      30000.0                                                                                                                                      4.0%
                                  Q1FY09

                                            Q2FY09

                                                     Q3FY09

                                                               Q4FY09

                                                                        Q1FY10

                                                                                  Q2FY10

                                                                                           Q3FY10

                                                                                                    Q4FY10

                                                                                                             Q1FY11

                                                                                                                      Q2FY11

                                                                                                                                Q3FY11

                                                                                                                                          Q4FY11




                                                                                                                                                                         HyundaiMotor ( Santro, i10, i20)                            TataMotors ( Indica )
                                                                                                                                                                         MarutiSuzuki ( Wagon R, Swift, Alto etc )                   GeneralMotors ( Beat, UVA, Spark )
                                                              Contribution / vehicle                         OPM%                                                        Ford ( Figo )

Source: Sharekhan Research                                                                                                                                      Source: Sharekhan Research




 The company is facing cut-throat competition and is resisting any pricing action to protect its market share. Going
 overboard on CNG launches and maintaining its edge in diesel cars is a clever strategy of segmentation. However,
 relative competitiveness in petrol portfolio is witnessing stiff challenges.


Maruti Suzuki: Product Value Curve                                                                                                                              MSIL’s core ethos
                         900000                                                                                                                                                                                 Affordable after
                                                                                                                                                   SX4                                                              sales &
                         800000                                                                                                                                                                                  maintenance

                         700000
 Indian Car Price (Rs)




                         600000                                                                                                          Dzire
                                                                                                                                                                                                                                                         price points
                                                                                                                                                                                       Technology
                                                                                                                                                                                       Design and




                                                                                                                                                                                                                                                         Value at all




                                                                                                      Sw ift                                                                                                            Indian
                         500000                                                                                                Ritz
                                                                                                                                                                                                                       Consumer
                                                                                 Wagon R
                         400000
                                                                              Zen                   A-Star
                                                              Alto
                         300000                                              Estilo
                                           M800
                         200000                           Omni                                                                                                                                                        Entrenched
                                                                                                                                                                                                                      Distribution
                         100000

Source: Sharekhan Research                                                                                                                                      Source: Sharekhan Research




                                                                                                                                         Sharekhan         18     November 03, 2010                                                           Home                                       Next
investor’s eye                                                                                                                      stock update


Valuation
                                                                             Valuation parameter
Maruti Suzuki is expected to operate at the peak utilisation
rate over the next two years with the buoyancy in the                        Particulars                                          FY2012E
domestic market, healthy exports and probable tie-up                         Average P/E                                               1538
with Volkswagen. However, the yen is putting considerable                    Average P/B                                               1555
pressure on its margins. We are lowering our EPS estimate                    Average EV/Ebidta                                         1589
for FY2011 by 6% and revising our price target to Rs1,561                    Average Target Price Rs                                   1561
per share. We recommend Hold on the stock.                                   Upside (%)                                                  4.1
                                                                             Source: Sharekhan Research
Maruti model assumptions
Particulars          FY09       FY10    FY11E      FY12E      FY13E          Valuation table                                              (Rs cr)
Volume             792166 1018358 1235397 1425065 1597967                    Particular             FY09     FY10    FY11E     FY12E     FY13E
  % yoy chg           3.6    28.6    21.3    15.4    12.1                    Net sales          20358.3    28958.5 35361.8 42014.5 48525.5
Realisation/       256995  284365 286238   294825 303670                     Growth (%)            14.0       42.2    22.1    18.8    15.5
Vehicle (Rs)
                                                                             EBITDA              1892.0     3978.6 3754.9 4538.6 5155.5
Growth (%)           10.1       10.6       0.7        3.0        3.0
                                                                             OPM (%)                9.0       13.4    10.4    10.6    10.4
Raw Material/      205042     217705    226614     233412     240414
Vehicle (Rs)                                                                 Growth (%)           -29.1      110.3    -5.6    20.9    13.6
  % yoy chg           14.9        6.2      4.1        3.0        3.0         PAT                 1218.7     2497.6 2297.6 2802.1 3182.2
Operating Profit    1892.0     3978.6   3754.9     4538.6     5155.5         Growth (%)           -29.9      104.9    -8.0    22.0    13.6
Growth (%)           -29.1      110.3     -5.6       20.9       13.6         FD EPS (Rs)           42.2       86.5    79.5    97.0   110.1
OPM (%)                9.0       13.4     10.4       10.6       10.4         Growth (%)           -29.9      104.9    -8.0    22.0    13.6
Tax Rate (%)          27.3       30.5     28.8       29.0       29.0         BV(Rs)                 307        367     443     516     599
Source: Sharekhan Research                                                   P/E (x)               17.4       18.9    15.5    13.6    12.3
                                                                             P/B (x)                4.9        4.1     3.4     2.9     2.5
MSIL CAGR (%)                                                                EV/EBITDA (x)         22.3       11.1    11.1     8.8     7.3
Particulars              FY02-06        FY06-10       FY10-14E               Dividend yield (%)     0.2        0.4     0.8     1.3     1.5
Volume                        12.4          16.0              14.9           RoE (%)               13.7       23.6    17.9    18.8    18.4
Revenue                       14.3          25.2              17.7           RoCE (%)              12.0       27.4    20.5    22.6    22.6
Operating Profit              55.6          25.1               9.6
PBT                          110.2          24.2               8.5
PAT                           96.6          27.4               9.1
Average RoE (%)               11.3          20.0              19.3
Average RoCE (%)              12.5          23.1              23.1
*Average P/E (x)               NA           15.9              15.9
*Average P/B (x)               NA            3.0               3.0              The author doesn’t hold any investment in any of the companies
*Average EV/EBIDTA (x)         NA           10.1              10.1                                 mentioned in the article.
*one year forward




                                                            Sharekhan   19     November 03, 2010                          Home             Next
investor’s eye                                                                                                                                 stock update



 GAIL India                                                                                                                                Apple Green

 Stock Update

 Results in line with expectations                                                                                                    Buy; CMP: Rs487


                     Company details                                 Result highlights

 Price target:                                           Rs585          Results in line with estimates: GAIL India (GAIL)’s Q2FY2011 results were in
                                                                        line with our expectation. The company’s net income came in at Rs924 crore,
 Market cap:                                   Rs61775 cr               posting a year-on-year (Y-o-Y) growth of 29.5%. The net income is in line with
 52 week high/low:                             Rs520/333                our estimate of Rs919 crore despite higher than expected subsidy burden of
                                                                        Rs346 crore. We had expected the subsidy burden for GAIL at Rs258 crore for
 NSE volume:                                       14.7 lakh
 (No of shares)                                                         Q2FY2011. The subsidy burden however declined by 24.5% year on year (YoY)
                                                                        and 22.2% quarter on quarter (QoQ).
 BSE code:                                              532155

 NSE code:                                                GAIL
                                                                        Growth witnessed across segments: The net sales increased by 30.2% YoY to
                                                                        Rs8,104 crore during the quarter supported by a strong revenue growth in all
 Sharekhan code:                                          GAIL          the business segments. In terms of segments, the natural gas transmission
 Free float:                                            54.1 cr         segment’s revenues were up 16.2% YoY (transmission tariff up 8% YoY to Rs927/
 (No of shares)                                                         tscm and volume grew 8% YoY to 115mmscmd). Natural gas trading and LPG
                                                                        and liquid hydrocarbons segments’ top line revenue grew by 26.6% and 42.9%
                  Shareholding pattern                                  YoY respectively.
                 Public &                                               OPM improved by 133 basis points YoY: The operating profit margin (OPM)
                  Others            Foreign                             improved by 133 basis points YoY to 17.7%. Led by an increase in revenues and
                   9%                13%                                improved OPM, the operating profit also grew strongly by 40.9% YoY to Rs1,433
                                                                        crore, largely in line with our estimate of Rs1,451 crore.
                                             Institutions
                                                19%                     Net income up by 29.5% YoY: The net income grew by 29.5% YoY to Rs924
                                             Non-promoter
                                               corporate
                                                                        crore supported by higher operating profit and an increase in the other income.
 Promoters                                      holding                 However, higher income tax rate (35.5% in Q2FY2011 versus 30.5% in Q2FY2010)
    58%                                            1%                   limited the growth in the net income.

                                                                     Results table                                                                  Rs (cr)
                               Price chart
                                                                     Particulars                                Q2FY2011        Q2FY2010       % YoY
  525                                                                Net sales                                          8104        6223        30.2
  500                                                                (Increase)/decrease in stock in trade                -55         14
  475
  450
                                                                     Consumption of raw material                         494         588        -16.0
  425                                                                Purchase of traded goods                           5574        4012         38.9
  400
                                                                     Employee cost                                       154         127        21.2
  375
  350                                                                Other expenditure                                   505         466         8.4
  325
                                                                     Total expenditure                                  6671        5206        28.1
                      Feb-10




                                    May-10
        Nov-09




                                                            Nov-10
                                               Aug-10




                                                                     Operating profit                                   1433        1017        40.9
                                                                     Other income                                        174         169         3.0
                    Price performance                                Depreciation                                        163         142        14.8
                                                                     Interest                                             12          18        -34.2
 (%)                      1m        3m         6m 12m                PBT                                                1433        1027         39.5
                                                                     Total tax                                           509         314        62.4
 Absolute                 0.3      10.1       14.7       42.0        PAT                                                 924         713        29.5
                                                                     Margins (%)
 Relative                 0.6      -2.5       -2.2        9.4
                                                                     OPM                                                17.7        16.3
 to Sensex
                                                                     PATM                                               11.4        11.5



                                                                                   Sharekhan   20   November 03, 2010                 Home              Next
investor’s eye                                                                                                     stock update


   Business mix to improve; assured return provides                Petrochemicals—strong demand environment; but
   earnings visibility: GAIL’s plans to double its gas             margins under pressure
   transmission capacity to 300mmscmd at an investment             The segment registered a strong 13.3% YoY growth in top
   of around Rs30,000 crore in the next four to five years         line to Rs721 crore in Q2FY2011 driven mainly by a 22%
   would improve the company’s business mix. We expect             YoY rise in the sales volume to 107TMT. However, a decline
   the share of gas transmission segment in earnings before        in the realisation by 7% YoY limited the top-line growth
   interest, tax, depreciation and amortisation (EBITDA)           during the quarter.
   to increase to 65% in FY2012 from 52% in FY2010. This
   improved business mix and assured return on capital             PBIT margins were down by 560 basis points YoY to 37.7%
   employed in the pipeline business has reduced earnings          in Q2FY2011. Consequently, the PBIT declined marginally
   risk and provides long-term earnings visibility.                by 1.4% to Rs272 crore during the quarter.
   Upward revised FY2011 estimates: We have revised                LPG & liquid hydrocarbon—lower subsidy burden improves
   our FY2011 earnings estimate upwards to factor in               profitability
   higher than expected margins in natural gas trading
                                                                   The segment registered a good set of numbers for the
   segment and higher price realisation in LPG and liquid
                                                                   quarter on account of a decline in the subsidy share due
   hydrocarbon segment. We maintain our FY2012 and
                                                                   to full impact of petrol price de-regulation. The top line
   FY2013 estimates.
                                                                   grew strongly by 42.9% YoY to Rs737 crore in Q2FY2011.
   Maintain Buy with price target of Rs585: We maintain            The subsidy burden during the quarter stood at Rs346
   our Buy on the stock with a sum-of-the-parts (SOTP)             crore, which is a decline of 24.5% YoY and 22.2% QoQ.
   price target of Rs585. At the current market price,             The subsidy burden was well above our estimate Rs258
   the stock trades at a price/earnings ratio of 12.9x and         crore for the quarter.
   enterprise value (EV)/EBITDA of 8.4x based on our
   FY2012 estimates.                                               The volumes during the quarter declined by 8% YoY to
                                                                   347TMTs whereas blended realisations increased by a
Segment-wise performance                                           strong 56% due to lower subsidy burden during the quarter.
Natural gas transmission—tariff improves                           The PBIT stood at Rs175 crore versus loss of Rs73 crore in
The segment registered a strong 16.2% YoY growth in top            Q2FY2010.
line to Rs979 crore in Q2FY2011 driven mainly by an 8%
                                                                   Segmental performance                                (Rs cr)
YoY increase in transmission volumes to 115mmscmd and
8% YoY rise in its transmission tariffs to Rs927/tscm.             Particulars                   Q2FY11    Q2FY10      % YoY
                                                                   Revenues
The profit before interest and tax (PBIT) margin stood at          NG transmission                  979          843    16.2
73.6% versus 73% in Q2FY2011. The strong revenue growth            LPG transmission                 114          103    10.8
and slight margin expansion resulted in a 17% YoY increase
                                                                   NG trading                      6289        4969     26.6
in the segment’s PBIT to Rs721 crore.
                                                                   Petrochemicals                   721         636     13.3
LPG transmission—margin improves significantly                     LPG and liquid hydrocarbons      737          516    42.9
The segment registered a top-line growth of 10.8% YoY to           Others                            14           18     -19
Rs114 crore during Q2FY2011 largely on account of the              Total                           8855        7085       25
10% YoY increase in transmission volumes to 799TMT.                Less: Inter-segmental            751         861
Transmission tariffs also increased marginally by 1% YoY           Net sales                       8104        6223     30.2
to Rs1,428/MT.                                                     PBIT
                                                                   NG transmission                  721          616    17.0
The PBIT margin improved considerably by 1,173 basis               LPG transmission                  79           59    33.5
points YoY to 69% in Q2FY2011. Consequently, the PBIT              NG trading                       160          110    45.0
also increased by 33.5% YoY to Rs79 crore.
                                                                   Petrochemicals                   272          275    -1.4
Natural gas trading                                                LPG and liquid hydrocarbons      175          -73
                                                                   Others                           -48          -30    58.7
The segment registered a top line growth of 26.6% YoY to
                                                                   Total                           1358          957    41.9
Rs6,289 crore during Q2FY2011 largely on account of the
30% YoY increase in realisation to Rs8,649/tscm. However,          PBIT margins (%)
the trading volumes declined by 2% YoY to 79mmsmd.                 NG transmission                 73.6        73.0
                                                                   LPG transmission                69.0        57.2
The PBIT margin improved marginally by 32 basis points             NG trading                       2.5         2.2
YoY to 2.5% in Q2FY2011. On the back of a strong top-line          Petrochemicals                  37.7        43.3
growth coupled with slight margin expansion, the
                                                                   LPG and liquid hydrocarbons     23.8       -14.2
segment’s PBIT increased by 45% YoY to Rs160 crore.

                                                 Sharekhan    21     November 03, 2010                    Home           Next
investor’s eye                                                                                                           stock update


Operational performance                                            We have revised our FY2011 earnings estimate upwards
                                                                   to factor in higher than expected margins in natural gas
Volume                             Q2FY11    Q2FY10   % YoY
                                                                   trading segment and higher price realisation in LPG and
Natural Gas Transmission               115      107       8        liquid hydrocarbon segment. We maintain our FY2012 and
Services (mmscmd)                                                  FY2013 estimates. We maintain our Buy recommendation
LPG Transmission Services (TMTs)       799      728      10        on the stock with a sum-of-the-parts (SOTP) price target
Natural Gas Trading (mmscmd)            79       81      -2        of Rs585. At the current market price, the stock trades
Petrochemicals (TMTs)                  107       88      22        at a price/earnings ratio of 12.9x and EV/EBITDA of 8.4x
LPG & Liquid Hydrocarbons (TMTs)       347      379      -8        based on our FY2012 estimates.
Rate (Rs/ unit)                                                    Valuation table
Natural Gas Transmission               927      860       8        Particulars              FY09    FY10    FY11E   FY12E    FY13E
Services (Rs/'000scm)
                                                                   Net sales (Rs cr)        23898   24996   30017    35432    42022
LPG Transmission Services (Rs/MTs)   1428      1414       1
                                                                   Adj net profit (Rs cr)    2804    3140    3473     4184     4773
Natural Gas Trading (Rs/'000scm)      8649     6664      30        No of shares (crore)     126.8   126.8   126.8    126.8    126.8
Petro Chemicals (Rs/MTs)             67373    72301      -7        EPS (Rs)                  22.1    24.8    27.4     33.0     37.6
LPG & Liquid Hydrocarbons            21231    13605      56          % Y-o-Y growth         -28.2    12.0    10.6     20.5     14.1
ex subsidy burden (Rs/MTs)                                         PER(x)                    22.0    19.7    17.8     14.8     12.9
                                                                   Price/BV(x)                4.2     3.7     3.2      2.8      2.4
Valuation and view                                                 EV/EBITDA(x)              14.6    12.7    10.8      9.6      8.4
GAIL’s plans to double its gas transmission capacity to            RoCE(%)                   20.3    20.9    19.1     19.0     19.2
300mmscmd at an investment of around Rs30,000 crore                RoNW(%)                   19.0    18.7    18.1     18.8     18.4
in the next four to five years would improve the company’s
business mix. We expect the share of the gas transmission
segment in EBITDA to increase to 65% in FY2012 from 52%
in FY2010. This improved business mix and assured return
on capital employed in the pipeline business has reduced             The author doesn’t hold any investment in any of the companies
                                                                                        mentioned in the article.
earnings risk and provides long-term earnings visibility.




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