Cummins Kotak

8/12/2019 Cummins Kotak

http://slidepdf.com/reader/full/cummins-kotak 1/22

MAY 26, 2014

Economy News

The Finance Ministry has imposed provisional anti-dumping duty on allphenol imports from the US and Chinese Taipei.(BL)

The banking division of the finance ministry is likely to pitch for strictermeasures to deal with non-performing loans and suggest consolidation ofpublic sector banks to create stronger lenders in its presentation toNarendra Modi. (ET)

Power Finance Corporation (PFC) is likely to bail Reliance Infrastructure'sDelhi power distribution companies (discoms) out of a payment crisis thatis threatening to pull the plug on power supply in Delhi. (BS)

Goa Government is expected to come up with a transparent mining policyby end of June 2014. (BS)

Corporate News State Bank of India (SBI) may float a holding company to facilitate

funding of capital required by its subsidiaries.(BL)

Hindustan Motors Ltd, maker of the iconic Ambassador car, declared"suspension of work" at its Uttarpara plant in West Bengal onSaturday.(BL)

The proposal to merge the three telecom public sector undertakings -BSNL, MTNL and ITI - could be one of the first things that the newGovernment could be undertaking.(BL)

Housing Development and Infrastructure Ltd (HDIL) plans to raise

up to Rs 18 bn this fiscal by selling stakes in some of its assets to partlyrepay its debt by around Rs 6 to 7 bn in FY15. (ET)

UK-based Vodafone Group may sell its 4.4 percent stake in Bharti Airtelif rules no longer permit telecom operators to keep share in competitors.(Mint)

ONGC Videsh Ltd (OVL), the international exploration arm of ONGC Ltd(ONGC), and Russia's biggest integrated oil and gas producer Rosnefthave signed a deal to jointly scout for hydrocarbon opportunities in theoffshore Arctic. (BS)

The Andhra Pradesh high court on Saturday vacated the stay and status-quo on the proposed merger between the Sun PharmaceuticalIndustries Ltd and Ranbaxy Laboratories Ltd. (Mint)

Having taken the board's nod for Rs 100 bn fund raising, HDFC Bank isexpected to soon go for a mega follow-on public offer (FPO). (BS)

The Tatas have reached an understanding with NTT DoCo-Mo to use theTata DoCoMo brand name for the GSM services offered by TataTeleservices for at least a year after the Japanese company exits thetelecom joint venture. (ET)

Salary payments at the Naresh Goyal- run Jet Airways continue to bedelayed despite the Rs 20.6 bn infusion by Etihad,(ET)

Eicher Motors, which owns Royal Enfield, has planned for a capex ofaround Rs 6 bn in the motorcycle business over the next two years. (BS)

Equity

% Chg23 May 14 1 Day 1 Mth 3 Mths

Indian Indices

SENSEX Index 24,693 1.3 8.8 17.7

NIFTY Index 7,367 1.2 8.6 18.1

BANKEX Index 17,523 1.6 17.5 43.0

BSET Index 8,440 0.1 (3.9) (12.6)

BSETCG INDEX 14,775 2.1 17.4 44.1

BSEOIL INDEX 11,545 2.2 20.2 37.0

CNXMcap Index 10,459 2.0 17.6 35.6

BSESMCAP INDEX 9,128 1.9 20.1 41.8

World Indices

Dow Jones 16,606 0.4 1.5 2.5

Nasdaq 4,186 0.8 2.7 (2.5)

FTSE 6,816 (0.1) 1.9 0.2NIKKEI 14,462 0.9 0.9 (2.7)

HANGSENG 22,966 0.1 3.8 2.8

Value traded (Rs cr)

23 May 14 % Chg - Day

Cash BSE 3,140 (9.7)

Cash NSE 18,285 (7.9)

Derivatives NA NA

Net inflows (Rs cr)

22 May 14 % Chg MTD YTD

FII (113) (48) 13,644 22,230

Mutual Fund 245 (192) (1,200) (11,890)

FII open interest (Rs cr)

22 May 14 % Chg

FII Index Futures 19,741 5.3

FII Index Options 94,037 2.0

FII Stock Futures 52,447 3.5

FII Stock Options 4,943 7.5

Advances / Declines (BSE)

23 May 14 A B T Total % total

Advances

Declines

Unchanged

Commodity % Chg

23 May 14 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 104.1 (0.2) 3.5 1.5

Gold (US$/OZ) 1,291.3 (0.3) (0.6) (2.7)

Silver (US$/OZ) 19.4 (0.4) (1.2) (8.7)

Debt / forex market

23 May 14 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 8.6 8.7 8.9 8.8

Re/US$ 58.51 58.46 61.09 62.06

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,

BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

17,500

19,125

20,750

22,375

24,000

May-13 Aug-13 Nov-13 Feb-14 May-14



Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT May 26, 2014

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been pre-pared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

STATE BANK OF INDIA (SBI)

PRICE: RS.2755 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.2987 FY16E P/E: 14.2X; P/ABV: 2.1X

Q4FY14: Earnings aided by strong non-interest incomeand containment of opex; strong recovery & up-grada-tion supported decline in headline NPL.

NII growth (16.5% YoY) came a shade below our expectations onback of margin pressure; net profit came higher on back of strongnon-interest income, containment of opex and ~Rs.6.0 bn write-back of investment depreciation. NIM pressure during Q4FY14pulled down the cumulative margin from 3.19% during 9MFY14to 3.17% during FY14.

Positive surprise came on strong up-gradation as well as cash re-covery which stood at 106% of gross slippage seen during

Q4FY14 (24% in Q3FY14). In absolute terms, both GNPA andNNPA declined by 9.1% and 16.3%, respectively, while provisioncoverage ratio improved QoQ to 62.86% (Q4FY14; 450bps). How-ever, addition to impaired assets (gross slippage + new restruc-turing) remained at elevated levels (Rs.155.8 bn; 6.0% on annual-ized basis).

Stock trades at reasonable valuation (1.3x its FY16E ABV) afterstripping the value of its subsidiaries. We are rolling over TP onFY16 estimates and revise its TP upward to Rs.2987 (core busi-ness: Rs.2000; 1.5x FY16E ABV) but downgrade the stock to ACCU-MULATE from BUY earlier, with recent stock outperformance. Webelieve SBI being the largest bank (comfortable tier-I: 9.72%)

would be one of the biggest beneficiaries of any likely improve-ment in macro-economic environment.

Result Performance

(Rs bn) Q3FY14 Q3FY13 YoY (%)

Interest on advances 269.5 230.6 16.8

Interest on Investment 82.3 70.4 17.0

Interest on RBI/ banks' balances 1.0 1.7 -40.8

Other interest 5.8 5.2 12.1

Total interest earned 358.6 307.8 16.5

Interest expense 229.5 197.1 16.5

Net interest income 129.0 110.8 16.5

Other Income 65.9 55.5 18.7

Net Revenue (NII + Other income) 194.9 166.3 17.2

Total Operating Expenses 88.6 88.6 0.0

Payments to / Provisions for employees 52.8 56.1 -5.9

Other operating expenses 35.8 32.5 10.1

Operating profit 106.3 77.6 36.9

Provisions & contingencies 58.9 41.8 40.9

Provision for taxes 17.0 2.8 504.8

Net profit 30.4 33.0 -7.8

EPS (Rs.) 40.65 49.13 -17.3

Source: Company

RESULT UPDATE

Saday Sinha

[email protected]+91 22 6621 6312





NII growth came a shade below our expectations on back of mar-gin pressure; net profit came higher on back of strong non-inter-est income & containment of opex.

NII grew 16.5% YoY (Rs.129.0 bn), a shade below our expectations, on back oflower than expected margin, while loan book continued to expand at healthy pace(15.7% YoY). NIM pressure during Q4FY14 pulled down the cumulative margin from

3.19% during 9MFY14 to 3.17% during FY14. However, we believe downwardpressure on its margin is likely to recede as bank has raised lending rates by 30bpsin two tranches (10bps in September and 20bps in November), while recent freshcapital mobilization (~Rs.100 bn) through QIP as well as GOI infusion would reducethe debt funding requirement. Bank has also cut the card rates by 25-50bps on de-posits mobilized for 3-10 years bucket.

Nonetheless, net profit came above our expectations (Rs.30.4 bn; decline of 7.8%YoY) due to strong non-interest income (18.7%YoY), containment of operating ex-pense (flat YoY) and ~Rs.6.0 bn write-back of investment depreciation. Robust non-interest income has come on the back of strong treasury gains (75% YoY) as well asrecovery from W/O accounts (66.3% YoY) while core fee continued to grow athealthy pace (17.6% YoY). Opex has remained flat YoY on back of reversal of

Rs.4.75 bn worth of existing provision towards sick & casual leave.

Domestic loan book grew largely in line with the system; liabil-ity franchise remained healthy.

Although total loan book grew at 15.7% (YoY) mainly aided by overseas advances(26.8% YoY), domestic book grew in line with the system. In domestic operation,large corporate groups continued to witness strong growth (38.0% YoY) while mort-gage and auto loans in retail segment, grew at healthy pace - 17.8% and 12.6%,respectively. Management has consciously moderated the growth of SME segment,as it remains one of the highest stress segment for the bank.

Break-up of loan book

Rs. Bn 4Q 20131Q 20142Q 20143Q 20144Q 2014 YoY QoQ

Corporate Account Group 1756 1689 1988 1997 2427 38.2% 21.6%

SME 1730 1639 1579 1600 1798 3.9% 12.4%

Mid Corporates Group 1999 2027 2198 2193 2284 14.2% 4.1%

Retail 2097 2166 2242 2308 2377 13.3% 3.0%

International Banking 1691 1862 1892 2177 2143 26.8% -1.6%

Agriculture 1248 1261 1216 1234 1234 -1.1% 0.0%

Total 10,456 10,607 11,031 11,489 12,09815.7% 5.3%

Source: Company

Break up of Retail book(%) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

Housing loan 56.0% 57.0% 57.0% 58.0% 58.0% 58.0% 59.0%

Education 7.0% 7.0% 6.0% 6.0% 7.0% 6.0% 6.0%

Auto loan 11.0% 11.0% 12.0% 12.0% 12.0% 12.0% 12.0%

Others 26.0% 25.0% 25.0% 24.0% 23.0% 24.0% 23.0%

Source: Company

SBI has been more aggressive in secured retail segment in recent past which has ledto strong traction in both mortgage and auto loan books. The share of retail book intotal advances is one of the highest amongst the PSU banks, providing more flexibil-ity in shifting focus on various segments of advances in changing macro-economicenvironment. We have modeled loan book to grow at 17%/18% during FY15/16Eas compared to 15.7% growth achieved during FY14, with the expected improve-ment in macro environment.





On liability side, deposit mobilization came at relatively faster pace (15.9% YoY)with marginal QoQ improvement in CASA share to 44.4% of domestic deposits(Q4FY14). Its saving deposits continued to grow at healthy pace (13.1% YoY), betterthan PSU banking pack while current account floats witnessed muted growth (0.3%YoY). Liability franchise of SBI fares better than its peers with CASA & retail TDconstituting ~90% of domestic deposits, which in turn cushions the bank against thevolatility in the funding environment.

Trend in deposits

(Rs. Bn) 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 4Q 2014

Total Deposits (Rs. Bn) 11,029 11,336 11567 12027 12574 12,925 13,499 13,944

Savings 3,904 3,965 4109 4149 4386 4,454 4,658 4,693

Current 835 797 801 1106 890 809 866 1109

CASA 4,739 4,762 4910 5255 5276 5,263 5,524 5,802

CASA (%) as a % of global deposits 43.0% 42.0% 42.4% 43.7% 42.0% 40.7% 40.9% 41.6%

Time Deposits 5,532 5,832 5872 6046 6536 6,813 7,062 7,258

CASA (% of Domestic deposits) 46.14% 44.95% 45.54% 46.50% 44.67% 43.58% 43.89% 44.43%

Source: Company

Robust treasury gains & recovery from W/O accounts aided in thehealthy non-interest income; opex remained flat due to an ex-ceptional item.

Non-interest income grew 18.7% YoY on back of robust trading profit (75% YoY) aswell as strong recovery from W/O accounts (66.3% YoY), while core fee continuedto grow at healthy pace (17.6% YoY). Except muted performance on governmentbusiness and moderate growth in loan processing charges, all other components offee income grew at healthy pace. Fees from transaction business grew at strongpace (38.4% YoY) mainly aided by robust performance on "exchange on remit-tances" as well as "ATM fees".

Trend in non-interest income

(Rs. Bn) 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 4Q 2014

Commission, Exchange & Brokerage 26.0 24.5 25.6 38.7 25.6 26.1 29.7 44.7

Profit on sale of Investment 2.2 2.3 4.2 2.3 12.0 2.4 2.4 4.0

Forex Income 4.6 3.2 4.2 4.8 3.8 1.5 6.4 6.5

Dividend 0.1 0.7 0.0 6.4 0.3 0.0 0.1 4.5

Income from Leasing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Others 2.0 2.8 2.3 3.3 3.0 2.7 3.3 6.2

Other income ex-treasury 32.7 31.2 32.1 53.2 32.7 30.4 39.5 61.8

Core Fee Income 30.6 27.7 29.8 43.5 29.4 27.6 36.1 51.1

Source: Company

Total operating expense remained flat YoY during Q4FY14 due to reversal of Rs.4.75bn worth of existing provision towards sick & casual leave (one-off item). SBI hasbeen providing Rs.6.0 bn / quarter during previous 4 quarters, due to revision inmortality table. C/I ratio has jumped to 52.7% during FY14, much ahead of numbersreported during FY13 (48.5%) due to higher provisions for wage revision and retire-ment related benefits. As we believe, SBI has been conservative in recognizing thetransition cost earlier than many of its peers; it is likely to reap the benefits of oper-ating leverage from FY15 onwards. We are modeling opex to rise by ~16% CAGRduring FY14-16E on high base.





Strong recovery & up-gradation supported decline in headlineNPL; improvement in coverage ratio is positive for the stock

SBI saw marginal improvement on the gross slippage front which improved to 2.95%in Q4FY14 as compared to 4.24% in Q3FY14. However, we note that three seg-ments - agriculture, SME and mid-corporate contributed ~85% of total GNPA(Q4FY14). While retail & large corporate portfolios have performed largely similar to

its peers, its agri portfolio which saw its GNPA remaining at >11% during 9MFY14,witnessed marginal decline to 9.2% in Q4FY14. It is mainly due to shift in bank'sapproach to take gold as second collateral against agriculture loans (~1/3 of agribook). This strategic shift has enhanced the recoverability of overdue agri loans andas a result fresh slippage from agri portfolio has declined sharply - last 3 quarterscontributed only ~50% of delinquencies witnessed during Q1FY14.

Sector wise slippage

(Rs. Bn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

Corporate 36.3 22.9 43.8 28.2 47.3 55.5 79.9 65.3

International 8.9 0.7 2.2 1.3 5.3 8.4 2.2 0.8

SMEs 30.5 28.7 21.1 15.7 39.3 11.6 22.9 4.3

Agriculture 19.1 9.9 8.7 10.4 32.5 6.8 4.4 5.4

Retail 13.7 8.9 5.9 3.0 13.3 1.4 5.0 3.6

Total 108.4 71.1 81.8 58.7 137.7 83.6 114.4 79.5

Source: Company

Sector wise movement of NPA

(Rs. Bn) - Q4FY14 Cash Recovery Up-gradation W/O Gross Reduction Slippages Net Increase

Large Corporate 1.0 12.3 - 13.2 0.7 (12.6)

Mid Corporate 17.0 28.4 18.6 64.0 64.6 0.7

SMEs 5.7 1.3 16.5 23.5 4.3 (19.2)

Agriculture 5.1 3.2 16.2 24.5 5.4 (19.1)

Retail 3.9 5.4 5.1 14.3 3.6 (10.7)

International 1.3 0.0 0.6 1.9 0.8 (1.1)

Total 33.9 50.5 57.0 141.4 79.5 (61.9)

Source: Company

Positive surprise came on strong up-gradation as well as cash recovery which stoodat 106% of gross slippage seen during Q4FY14 (24% in Q3FY14). Although grossslippage was lower during Q4FY14 (Rs.79.5 bn) as compared to Rs.114.4 bn duringprevious quarter, restructuring came higher to Rs.76.4 bn in Q4FY14 as compared toRs.39.0 bn in Q3FY14. This implies addition to impaired assets (gross slippage + newrestructuring) remained at elevated levels (Rs.155.8 bn; 6.0% on annualized basis).Mid corporate segment continued to report higher gross slippage (Rs.65.3 bn), al-most 82% of fresh delinquencies seen during Q4FY14.

In absolute terms, both GNPA and NNPA declined by 9.1% and 16.3%, respec-tively. However, they remained high in percentage terms at 4.95% and 2.57% at

the end of Q4FY14. Its outstanding restructured book stands at Rs.430.5 bn (3.6% ofadvances), much better than its peers on back of lower exposure to SEBs. We opinethat lower restructured portfolio vis-à-vis its peers reduces the provisioning require-

Trends in NPAs

(Rs bn) 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 4Q 2014

Gross NPA 492.0 534.6 511.9 608.9 642.1 678.0 616.1

Gross (%) 5.15 5.30 4.75 5.56 5.64 5.73 4.95

Net NPA 226.1 253.7 219.6 299.9 321.5 371.7 311.1

Net (%) 2.44 2.59 2.10 2.83 2.91 3.24 2.57

Provision Coverage (%) - inc W/O A/c 62.78 61.49 66.58 60.60 60.16 58.32 62.86

Source: Company





Sum of Parts Valuation

Sum of Parts Valuation Basis Multiple Year Value/Share

Core Banking Business (standalone) ABV 1.50 FY16 2,000

Associate Banks ABV 1.10 FY16 912

Life Insurance Business NBAP 8 FY16 149SBI Capital Market P/E 8 FY16 35

Asset Management AUM 5% FY16 29

SBI DFHI P/E 6 FY16 9

SBI Factors P/E 10 FY16 5

SBI Cards & Payment services P/E 10 FY16 35

Other Investments (UTI MF, NSE, GTF etc.) 60

Total Value of subsidiaries 1,234

After 20% Holding company discount 987

Total Value 2,987

Source: Kotak Securities - Private Client Research

ment, going forward, as accounting treatment for restructured portfolio convergeswith that of sub-standard category. Another positive takeaway was rise in the provi-sion coverage ratio which improved QoQ to 62.86% at the end of Q4FY14 from58.3% at the end of Q3FY14.

Valuation & Recommendation

We believe SBI being the largest bank would be one of the biggest beneficiaries of anylikely improvement in macro-economic environment. With the recent fresh capital

mobilization (~Rs.100 bn) through QIP as well as GOI infusion, its tier-I capital is com-

fortable at 9.72% (FY14). With the improving revenue growth and moderate rise ex-

pected on the cost front, as bank has been aggressive in recognizing stressed portfolio

as well as transition cost as compared to its peers, SBI is likely to report earnings to

grow 15.6% CAGR during FY14-16E. We are modeling its return profile to remain

muted (RoE: ~11%, RoA: ~0.7% during FY16E), post recent capital mobilization. How-

ever, we like its robust liability franchise, comfortable tier-I equity and lower risk on its

future earnings with operating leverage likely to support from FY15 while credit cost is

likely to be lower with likely improvement in the economic cycle.

At CMP, stock is trading at reasonable valuation (1.3x its FY16E ABV and 9.1x its

FY16E earnings), after stripping the value of its subsidiaries. We are rolling over TP on

FY16 estimates and revise its TP upward to Rs.2987 but downgrade the stock to AC-

CUMULATE from BUY earlier, with recent stock outperformance. The fair value is

based on SOTP methodology where core business is valued at Rs.2000 (1.5x FY16E

ABV) and subsidiaries are valued at Rs.987 (post 20% holding company discount).

We recommend Accumulate onSBI with a price target of Rs.2987






Key data

Rs. Bn 2013 2014 2015E 2016E

Interest income 1,196.6 1,363.5 1,564.8 1,812.5

Interest expense 753.3 870.7 1,018.5 1,194.2

Net interest income 443.3 492.8 546.3 618.4

Growth (%) 2.4% 11.2% 10.8% 13.2%

Other income 160.3 185.5 200.0 234.8

Gross profit 310.8 321.1 331.5 371.4

Net profit 141.0 108.9 123.3 145.5

Growth (%) 20.5% -22.8% 13.2% 18.0%

Gross NPA (%) 4.8 5.1 4.7 4.6

Net NPA (%) 2.1 2.6 2.2 2.2

NIM (%) 3.3 3.2 3.1 3.0

CAR (%) 12.9 12.4 12.4 12.2

RoE (%) 15.4 10.1 10.2 11.1

RoA (%) 1.0 0.6 0.6 0.7

DPS (Rs) 41.5 30.0 35.0 40.0

EPS (Rs) 206.2 145.6 164.8 194.5

Adjusted BVPS (Rs) 1,124.6 1,131.5 1,254.1 1,333.1

P/E (x) 13.4 18.9 16.7 14.2

P/ABV (x) 2.4 2.4 2.2 2.1

Source: Company, Kotak Securities - Private Client Research





CUMMINS INDIA LIMITED

PRICE: RS.627 RECOMMENDATION: ACCUMULATE

TARGET PRICE: RS.680 FY16E P/E 22.1

NII growth (16.5% YoY) came a shade below our expectations onback of margin pressure; net profit came higher on back ofstrong non-interest income, containment of opex and ~Rs.6.0 bnwrite-back of investment depreciation. NIM pressure duringQ4FY14 pulled down the cumulative margin from 3.19% during9MFY14 to 3.17% during FY14.

Rs mn Q4FY14 Q4FY13 % YoY Q3FY14 % QoQ

Net Sales / Income from Operations 9716 11543 (15.8) 10230 (5.0)

Other Income 315 334 (5.8) 236 33.1

Total Income 10031 11877 (15.5) 10466 (4.2)

Purchase of traded goods 362 388 (6.8) 407 (11.1)

Consumption of Raw Materials 5594 6888 (18.8) 5732 (2.4)

Staff Cost 817 885 (7.7) 873 (6.4)

Other Expenditure 1235 1443 (14.4) 1243 (0.6)

Operating Expenditures 8007 9604 (16.6) 8255 (3.0)

PBDIT 1709 1939 (11.8) 1975 (13.5)

Interest & Finance Charges 11 11 10 9.3

Depreciation 146 124 18.0 133 9.7

Exceptional Item

Profit / (Loss) before tax 1867 2137 (12.6) 2069 (9.7)

Exceptional Item 0 490 0

Tax provision 450 742 (39.4) 597 (24.7)

Profit / (Loss) after tax 1418 1885 (24.8) 1472 (3.7)

Adj PAT 1418 1542 (8.1) 1472 (3.7)

adj EPS 5.1 5.6 (8.1) 5.3 (3.7)

EBITA% 17.6 16.8 19.3

Raw material cost to sales % 61.3 63.0 60.0

Tax rate % 24.1 34.7 28.8

Source: Company

Result Highlights

Cummins India reported 16% YoY revenue de-growth in Q4FY14 at Rs 9.7 bn due tosluggish domestic power generation demand and subdued momentum in the indus-

trial segment. Revenue for power generation segment at Rs 2.7 bn declined by 38%YoY mainly on account of economic slowdown leading to subdued demand forbackup power.

Industrial segment reported revenues at Rs 1.1 bn a de-growth of 25% YoY. InFY14, Industrial division has reported revenue growth of 2.3% YoY at Rs 5.2 bn. InQ4FY14, revenues from automotive and distribution divisions stood at Rs 300 mn(decline of 43% YoY) and Rs 1.9 bn.

Segment Revenue Breakup Rs (mn)Q4FY14 Q4FY13 YoY% Q3FY14 QoQ%

Power Generation 2700 4360 (38.1) 3000 (10.0)

Industrial 1100 1460 (24.7) 1600 (31.3)

Automotive 300 370 (18.9) 350 (14.3)

Distribution 1950 2040 (4.4) 2400 (18.8)

Exports 3390 2960 14.5 2800 21.1

Source: Company

Summary table

(Rs mn) FY14 FY15E FY16E

Sales 39767 44152 51276

Growth (%) (13.4) 11.0 16.1

EBITDA 6968 8078 9504

EBITDA margin (%) 17.5 18.3 18.5

PBT 8175 9203 10628

Net profit 6000 6810 7865

EPS (Rs) 21.6 24.6 28.4

Growth (%) (8.2) 13.5 15.5

CEPS (Rs) 23.5 26.5 30.3

BV (Rs/share) 92.5 105.4 120.9

Dividend/share (Rs) 11.0 10.0 11.0

ROE (%) 24.2 24.8 25.1

ROCE (%) 23.0 23.7 24.1

Net cash (debt) 835 2753 5526NW Capital (Days) 36 35 18

EV/Sales (x) 4.2 3.8 3.3

EV/EBITDA (x) 23.6 20.4 17.3

P/E (x) 29.0 25.5 22.1

P/Cash Earnings 26.6 23.7 20.7

P/BV (x) 6.8 5.9 5.2

Source: Company, Kotak Securities - PrivateClient Research







Valuation and Recommendation

At current price of Rs 627, stock is trading at a P/E of 22.1x and EV/EBITDA of 17.3xon FY16E earnings.

We believe that the company is well positioned to benefit in case of recovery inCapex cycle and expect it to maintain margins over FY15-16. In view of marginalupside to our revised DCF based target price of Rs 680 (Rs 445 earlier) we maintain

'Accumulate' rating on company's stock.

We recommend Accumulate onCummins India Limited with a

price target of Rs.680






CHENNAI PETROLEUM CORPORATION LTD (CPCL)

PRICE: RS.108 RECOMMENDATION: SELLTARGET PRICE: RS.99 FY14E P/E: 7.1X

In Q4FY14, CPCL has reported a net profit of Rs. 2.47 Bn as againsta net loss of Rs. 968 Mn in Q3FY14. However, the company re-ported a net loss of Rs. 3.04 Bn for FY14. The Company has re-ported an average GRM of US$ 1.96/bbls in Q4FY14, down by28.5% QoQ but up by 145% YoY. In Q4FY14, CPCL reported athroughput of 2.81 Mn MT, up by 0.2% YoY and by 27.1% QoQ, re-sulting in 92.8% capacity utilization (higher by 19.8% QoQ).

At current price of Rs. 108, the stock is trading at 7.1x P/E and6.5x EV/EBITDA multiples on FY16E earnings. Post our BUY recom-mendation, the stock has given excellent returns. We believe thecurrent price captures most of the positives and hence we now

recommend 'SELL' rating on CPCL. We value CPCL using PE mul-tiple and arrive at a price target of Rs.99/Share. The Company isplanning to raise funds through rights issue. We believe this willhelp the Company to lower its debt levels and meet its expansionplans.

Results table

CPCL (Rs.mn) Q4FY14 Q4FY13 YoY (%) QoQ (%)

Net Sales 1,33,354 1,24,527 7.1 17.4

Incr/(Decr) in stock 3,031 1,462 107.3 (140.8)

Total Expenditure 1,34,170 1,27,225 5.5 28.2EBIDTA 2216 (1235) (279.4) 49.4

Depreciation 973.1 1,054 (7.7) 0.5

EBIT 1243 (2289) (154.3) 141.5

Other income 154 164 (5.9) 112.3

Interest-net 1,108 1,100 0.7 (29.5)

PBT 289 (3,225) (109.0) (129.3)

Tax (210) 698 (1.3) 1154.5

PAT 498 (3922) (1.1) 151.5

Equity Capital 17,526 17,526 0.0

EPS (Rs) 3.3 (26.3) (113) 151.5

Source: Company

Key Risk and Concerns:

1) Wide fluctuations in crude, forex and product prices can impact the margins.

2) If global supply exceeds demand then margins can be under pressure and vice-versa.

3) Any delay in executing the project can significantly impact the valuations.

4) Large outlay for new projects exposes CPCL to significant project implementationrisks

Summary table


Sales 5,39,237 5,81,3286,00,658

Growth (%) 15.1 7.8 3.3

EBITDA 5,993 10,880 11,992

EBITDA margin (%) 1.11 1.87 2.00

PBT (3,309) 1,713 2,913

Net profit (3,038) 1,146 2,262

EPS (Rs) (20.4) 7.7 15.2

Growth (%) 82.8 137.7 97.3

CEPS(Rs) 5.8 32.9 41.8

BV (Rs/share) 115.6 121.8 131.0

DPS (Rs) - 1.32 2.67

ROE (%) (16.2) 6.5 12.0

ROCE (%) 2.8 9.6 10.1

Net debt/(cash) 54,056 57,920 62,697

NWC (days) 26.2 19.9 20.0

P/E (x) NA 14.0 7.1P/BV (x) 0.9 0.9 0.8

EV/Sales (x) 0.13 0.13 0.13

EV/EBITDA (x) 11.71 6.80 6.57






MRPL Q4FY14 results analysis

Impressive throughput:

In Q4FY14, CPCL reported a throughput of 2.81 Mn MT, up by 0.2% YoY and by27.1% QoQ, resulting in 92.8% capacity utilization (higher by 19.8% QoQ).

CPCL's crude throughput and capacity utilization

Source: Company

CPCL’S Capacity Utilisation (%)

Source: Company






Refining margins performance:

In Q4FY14, CPCL has reported an average GRM of USD$ 1.96/bbls, down by 28.5%QoQ but up by 145% YoY.

Chart showing CPCL's GRMs trend ($/bbls)

Net revenue growth -

In Q4FY14, CPCL has reported net revenue of Rs. 133.35 Bn, increased by 7.1%YoY and by 17.4% QoQ mainly on account of higher crude throughput.

Margin Ratio (%) Q4FY14 Q4FY13 YoY (%) QoQ (%)

EBITDA Margin 1.66 -0.99 2.7 0.4

EBIT Margin 0.93 (1.84) 2.8 0.5

Adj PAT Margin 0.37 -3.15 3.5 1.2

Other Income/PBT 53.38 -5.08 58.5 60.8

Tax/PBT -72.57 -21.63 (50.9) (74.3)

excise/net sales 8.71 8.34 0.4 (0.1)

excise/VoP 9.33 9.00 0.3 (1.0)

Exports/Sales 1.66 -0.99 2.7 0.4

Expenses Q4FY14 Q4FY13 YoY (%) QoQ (%)

Raw Material consumption 1,33,012 123597 7.6 28.7

Purchases of Stock in Trade 640 1466 (56.3) 0.7

Staff costs 802 960 (16.5) 14.4

Forex Loss/(Gain) (2072) (743) 179.1 61.7

Other Expenditure 1532 1540 (0.5) (18.7)

Excise Duty On Stocks (Net) 256 405 (36.8) (137.3)

Total 1,34,170 1,27,225 5.5 28.2

Expenses Ratio Q4FY14 Q4FY13 YoY (%) QoQ (%)

Employee to Sales 0.6 0.8 (0.2) (0.1)

RM to VOP 97.5 98.1 (0.6) 0.1

Forex Loss to VOP (1.5) (0.6) (0.9) (0.3)

Mfg exp. To Sales 1.1 1.2 (0.1) (0.7)

Source: Company

Source: Company





Staff Cost: In Q4FY14, employee cost has increased by 14.4% QoQ but down by16.5% YoY to Rs. 802 Mn.

Other expenditure: In Q4FY14, CPCL's other expenditure has fallen by 18.7%QoQ to Rs. 1.5 Bn. Other expenditure is lower partly due to base effect.

Net Forex fluctuation gain: In Q4FY14, CPCL has reported a net forex gain of Rs.2 Bn. In Q4FY14, rupee remained stable which has resulted in forex gain.

Operating profit improved significantly in Q4FY14 (Rs. Mn) - In Q4FY14, CPCL hasreported an EBIDTA profit of Rs. 2.2 Bn as against a loss of Rs. 1.48 Bn in Q3FY14.

Depreciation cost: In Q4FY14, CPCL has reported depreciation cost of Rs. 0.97Bn, fallen by 7.7% YoY but flat on sequential basis.

Finance cost: Interest cost is reported at Rs. 1.11 Bn, down by 29.5% QoQ but flaton YoY. As on 31st March'14, the Company has debt of Rs. 54.5 Bn, lower thanlast year.

Other Income: In Q4FY14, CPCL has reported higher other income, up by112.3% QoQ but down by 5.9% YoY to Rs. 154 Mn. Other income mainly con-sists of interest and dividend income. As on 31st March'14, the Company hascash and cash equivalent of Rs. 466 Mn.

Profit before tax from ordinary activities: In Q4FY14, CPCL has reported a PBT of

Rs. 289 mn as against a loss of Rs. 985 Mn in Q3FY14.

Income tax: In Q4FY14, CPCL has refund on account of earlier accumulated losses.

Net profit - The Company has reported a net profit of Rs. 498 Mn in Q4FY14 asagainst a net loss of Rs. 968 Mn in Q3FY14.

OVERALL INVESTMENT SUMMARY

Particulars Unit FY16E Unit

FY16 EPS Rs. Mn 15.18

Target PE (x) X 6.50

Target price (Rs/share) Rs. Mn 99

CMP Rs. Mn 108

Upside potential (%) Rs. Mn -8.63%

Source: Kotak Securities - Private Client Research

BUSINESS BACKGROUNDIncorporated in 1965, Chennai Petroleum Corporation Limited (CPCL), formerly knownas Madras Refineries Limited (MRL) was formed as a joint venture between the Govern-ment of India (74%, GoI), AMOCO (13%) and National Iranian Oil Company (13%equity stake) In 1985, AMOCO sold its equity stake to GOI and the shareholding pat-tern of GOI and NIOC changed to 84.62% and 15.38% respectively. Later in 1992, GOIdisinvested 16.92% of the paid up capital in favor of Unit Trust of India, Mutual Funds,Insurance Companies and Banks, thereby reducing its holding to 67.7 %. CPCL cameout with a public issue in 1994 wherein GoI and NIOC divested part of their equitystakes and CPCL's shares were listed on stock exchanges. As a part of the restructuringsteps taken up by the Government of India, Indian Oil Corporation Ltd. acquired equityfrom GoI in FY 2001. In July 2003, NIOC transferred their entire shareholding to NaftiranInter trade Company Limited, an affiliate, in line with the formation agreement, as partof their organizational restructuring.

Key features of CPCL's refineryOriginally, CPCL refinery (grass-root refinery) was set up with an installed capacity of2.5 Million tonnes per annum (MMTPA) with an investment of Rs. 430 Mn. Later,the refinery capacity was increased. Currently, CPCL has two refineries with a com-bined refining capacity of 12.1 MMTPA. The Manali refinery has a capacity of 11.5MMTPA and is a complex (Nelson Complexity Index of 7.9) refinery with fuel, lube,wax and petrochemical feedstock production facilities. CPCL's second refinery is lo-

cated at Cauvery Basin at Nagapattinam. In 1993, the Cauvery basin refinery (CBR)was set-up with a capacity of 0.5 MMTPA and later enhanced to 1.0 MMTPA(simple refinery). It also has a lube refining capacity of 0.27 mtpa and a wax produc-tion capacity of 30,000 mtpa.

We recommend SELL on CPCLwith a price target of Rs.99






SUN TV NETWORK

PRICE: RS.426 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.470 FY16E P/E: 17.3X

Sun TV's results have come in ahead of our expectations, on theback of stronger than expected margins. In FY14, the companyhas likely set up an easy base to beat in the coming year. Weforecast 12.6% CAGR in revenues for Sun TV through FY14-FY16E.Along with modest margin gains, we expect earnings to register14% CAGR through FY14-FY16E. While there are risks to earnings(advertising revenues may not be in line with industry once SunTV complies with 10+2 regulations), and valuation risks relatingwith ongoing investigations against the promoter, we believeCMP (17.4x FY16E PER) factors in the same to a considerable de-gree. ACCUMULATE, with a price target of Rs 470 (19x FY16EPER). Expect volatility to remain; risk - averse investors mayavoid investing in the stock until resolution of investigationsagainst the promoter.

Results SummarySA, Rs mn, FY Ends Mar 4QFY14 4QFY13 % y/y 3QFY14 % q/q

Revenues 5202 4727 10.1% 5083 2.3%

- Advertising 2820 2690 4.8% 2720 3.7%

- Slot Sales 260 360 -27.8% 310 -16.1%

- Analogue Subscription 510 380 34.2% 540 -5.6%

- DTH 1210 1000 21.0% 1130 7.1%

-International Revenues 310 260 19.2% 330 -6.1%

-Other 92 37 148.1% 53 73.2%

Cost of Revenues 435 475 -8.3% 527 -17.4%

Employee Expenses 506 445 13.9% 494 2.4%

Other Expenses 260 322 -19.2% 342 -24.0%

Depreciation and Amortization 1123 1017 10.5% 1061 5.9%

EBIT 2877 2469 16.5% 2660 8.2%

EBIT Margin 55.3% 52.2% 3.1ppt 52.3% 3.0ppt

Interest Expenses 6 24 -75.6% 23 -74.8%

Other Income 132 216 -39.1% 149 -11.3%

PBT 3003 2661 12.8% 2785 7.8%

Provision for Tax 1027 889 15.6% 927 10.8%

PAT 1976 1772 11.5% 1858 6.3%

Equity Capital 1970 1970 0.0% 1970 0.0%

Shares O/S 394 394 0.0% 394 0.0%

EPS 5.0 4.5 11.5% 4.7 6.3%

Source: Company Reports

Along expected lines, Sun TV reported 10% growth in revenues. The com-pany reported a 5% y/y growth in advertising revenues. Subscription rev-enues, while impressive on a y/y basis, has come in short of our expectations.DTH revenue growth continued to be robust with 21% y/y (7% q/q) growth inrevenues.

The company registered an 8% y/y decline in cost of revenues, as depen-dence on non-fiction shows, which has been the prime driver of costs of rev-

Summary table

(Rs mn) FY14E FY15E FY16E

Sales 22,236 25,053 28,197

Growth (%) 15.6 12.7 12.6

EBITDA 15,098 17,004 19,477

margin (%) 67.9 67.9 69.1

PBT 11,251 12,669 14,649

Net profit 7,481 8,401 9,714

EPS (Rs) 19.0 21.3 24.6

Growth (%) 5.4 12.3 15.6

CEPS (Rs) 31.1 35.1 40.2

BV (Rs/share) 79.9 90.2 103.8

DPS (Rs) 9.5 9.5 9.5

ROE (%) 25.0 25.1 25.4

ROCE (%) 24.7 24.7 25.1

Net cash (debt) 8,567 13,301 19,656

NWC (Days) 189 182 176P/E (x) 22.4 20.0 17.3

P/BV (x) 5.3 4.7 4.1

EV/Sales (x) 7.2 6.2 5.3

EV/EBITDA (x) 10.6 9.1 7.6






enues line in the past few quarters, was lower in the quarter. Other expensesde-grew 19% y/y, largely on account of lower provisioning for bad debts inthe quarter.

As a result of lower than expected growth in expenses, the company regis-tered a 3.1 ppt rise in EBIT margins, and margins came in well ahead of ourexpectations. The same has led to an 10% beat on earnings.

We note that the company has been exceeding the prescribed 10+2 minutelimit on its channels for the past two quarters, which has led to some relief inadvertising revenues line. A decision on the same is awaited (likely July), fol-lowing which Sun TV may have to reduce its inventory.

The management indicated that it is satisfied with its competitive position inthe Tamil, Malayalam, and Kannada languages, but will need to take actionto improve its position in the Telugu markets. Also, the management pointedthat the Telugu markets have been weak in the recent past on account ofpolitical disturbances, and that, going forward, the market is likely to look up.

As of now, there is no visibility on either the rollout of DAS in Tamil Nadu, oron any renegotiation with Arasu cable regarding the pay TV revenues accru-

ing from the same. Other than Tamil Nadu, the company is likely to avail ofthe TRAI tariff order which allows for, over a period of one year, a rise of 27%in customer payments.

Outlook and Investment View Sun TV is likely to see only modest growth in revenues going forward. Adver-

tising revenues growth is unlikely to exceed industry growth for some time.Pay TV revenues, and DTH revenues are likely to see a softer growth goingforward, as Tamil Nadu revenues stagnate, and as DAS benefits have beenutilized in the current year to a significant degree. We factor in 13%/13%revenue growth for the company, even as we forecast healthy growth in sub-scription revenues (16%/19%) for FY15/FY16.

We believe that Sun TV shall be able to exercise significant control on ex-penses. Content expenses inflation, as pointed by management, is likely to beabout 10%. We have factored in slightly higher growth in content expenses inFY15, on assumptions that Telugu channels shall see greater content focus inthe coming quarters. The company has displayed, over the years, significantability to manage other expenses, and rise in cost of revenues, and other ex-penses, in recent quarters, sets up a strong base, from which, we believe ex-penses growth will be relatively modest. We model for flat margins in FY15,and an expansion of 110 bps in FY16 (lower losses from IPL, lower growth incontent expenses).

We recognize that there may be some irritants in the way of achieving thisgrowth. Most notably, the compliance of TRAI's 10+2 rules may affect adver-

tising revenues more adversely than we have estimated.

Even so, Sun TV currently trades at 17.4x FY16E PER, which is a significantdiscount to peer Zee Entertainment. We believe the CMP factors in to a sig-nificant degree, earnings risks, as also valuation risks from government inves-tigations against the promoter of the company. We value Sun TV Network at19xFY16E PER, at a discount of 20% to Zee Entertainment's fair value PER of24X FY16E PER. Our fair value for Sun TV Network, Rs 470, provides a 10%upside. We maintain ACCUMULATE.

Ongoing investigations against the promoter of the company, and uncertain-ties relating with compliance to the 10+2 advertising cap are the two mostsignificant risks to our investment view. Sun TV continues to be a stock suit-

able only for investors with requisite risk proclivity.

We recommend ACCUMULATE onSun TV Network with a price

target of Rs.470





ITC LTD

PRICE: RS.343 RECOMMENDATION: REDUCETARGET PRICE: RS.341 FY16E P/E: 24.1X

ITC's 4QFY14 results were broadly in line with our expectations;sales trends remain weak, while the company continues to beatmargin expectations. Going forward, we believe growth pros-pects of the company continue to be modest relative to recenthistory (we forecast 12%/14% earnings growth in FY15/FY16).Valuations are rich at 24.1x FY16E PER, especially consideringthat ITC stock may see adverse impact from speculation on ex-cise duty hikes in the upcoming budget. We downgrade ITC toREDUCE, with a price target of Rs 341; given our sustained faithin the long-term visibility of ITC's earnings growth, we wouldlook at 5-10% declines in the stock as viable entry points forlong-term investors.

Rs mn, FY Ends Mar Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

Net Sales 66522 71460 76271 81803 73385 77758 86231 91451

- o/w Cigarettes 33042 33852 36574 36232 35374 37238 41161 40788

- o/w Non-Cigarette FMCG 14731 16908 17827 20362 17447 19622 20778 23145

- o/w Hotels 2324 2170 3095 3155 2499 2470 3154 3205

- o/w Agri Business 16914 20239 16310 18545 21890 17725 17864 20042

- o/w Paper and Paperboard 10361 10590 10616 10575 11631 11787 12574 12612

Expenses

- Raw Material Expenses 25766 28644 30770 35478 28690 29784 34394 38696

Gross Profit 40756 42816 45501 46325 44696 47974 51837 52755

Gross Margins 61.3% 59.9% 59.7% 56.6% 60.9% 61.7% 60.1% 57.7%

- Employee Expenses 4125 2892 3462 3434 4269 3699 4008 4108

- Other Expenses 13557 13847 14311 16599 13236 13384 16024 17547

EBITDA 23075 26077 27727 26292 27191 30891 31806 31100

Margin 34.7% 36.5% 36.4% 32.1% 37.1% 39.7% 36.9% 34.0%

Depreciation 1948 1889 2052 2067 2153 2209 2259 2378

EBIT 21127 24188 25675 24225 25038 28682 29546 28722

Other Income 2376 2656 4148 3311 2754 3329 4948 3601

Interest Expneses 138 233 252 243 170 -327 91 95

PBT 23366 26611 29572 27293 27622 32338 34403 32227Provision for Tax 7344 8247 9053 8014 8709 10033 10550 9447

PAT 16021 18364 20519 19280 18913 22305 23853 22780


ITC's headline results were broadly in line with our estimates. The company reg-istered 12% growth in revenues, with 12.6% growth in cigarette net sales.Cigarette net sales growth was 50 bps below our expectation. We believe thecompany's volume growth for the quarter came in at about -2.5%.

Non-cigarette FMCG business of the company continued to see moderation ingrowth, with the quarters' growth coming in at 13.7% y/y. The company notesthat weakness in private final consumption expenditures has led to decline in

growth rates. ITC has substantially improved its market shares in cream biscuitsand noodles category (in the noodles category, ITC has registered 3X growth ofthe industry).





Growth in the hotels and agri-business continued to be soft, while paper andpapaer products registered strong growth in revenues on account of enhancedcapacities.

Segment Revenues Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

- o/w Cigarettes 33042 33852 36574 36232 35374 37238 41161 40788

- o/w Non-Cigarette FMCG 14731 16908 17827 20362 17447 19622 20778 23145

- o/w Hotels 2324 2170 3095 3155 2499 2470 3154 3205

- o/w Agri Business 16914 20239 16310 18545 21890 17725 17864 20042


Revenue Growth

- o/w Cigarettes 15.0% 14.0% 13.1% 11.5% 7.1% 10.0% 12.5% 12.6%

- o/w Non-Cigarette FMCG 23.0% 26.1% 30.1% 26.0% 18.4% 16.1% 16.6% 13.7%

- o/w Hotels 0.8% 2.8% 11.0% 10.4% 7.5% 13.8% 1.9% 1.6%

- o/w Agri Business -0.9% 41.1% 43.1% 31.1% 29.4% -12.4% 9.5% 8.1%

- o/w Paper and Paperboard 8.0% 5.3% 8.5% 7.9% 12.3% 11.3% 18.5% 19.3%

Revenue Contribution - o/w Cigarettes 49.7% 47.4% 48.0% 44.3% 48.2% 47.9% 47.7% 44.6%

- o/w Non-Cigarette FMCG 22.1% 23.7% 23.4% 24.9% 23.8% 25.2% 24.1% 25.3%

- o/w Hotels 3.5% 3.0% 4.1% 3.9% 3.4% 3.2% 3.7% 3.5%

- o/w Agri Business 25.4% 28.3% 21.4% 22.7% 29.8% 22.8% 20.7% 21.9%

- o/w Paper and Paperboard 15.6% 14.8% 13.9% 12.9% 15.8% 15.2% 14.6% 13.8%


ITC continued to see high profitability in the cigarettes segment, we believe onaccount of cost optimization initiatives by the company. Other FMCG business ofthe company has registered profits of Rs 431mn in the quarter; 4Q tends to dis-play some seasonality benefit in the stationary business. Hotels' business of thecompany has also registered improvement in profits. The paper and paperboardbusiness of the company, however, has seen weakened profitability on higherraw material prices.

Quarterly Segment Profit

Rs mn, FY Ends Mar Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

Segmental Profit 23233 26074 26663 24785 26826 29111 31623 29888

- o/w Cigarettes 18998 20802 22335 21124 22417 24117 26526 25519

- o/w Non-Cigarette FMCG -388 -303 -240 119 -189 -127 104 431

- o/w Hotels 262 153 555 405 89 67 622 599

- o/w Agri Business 1714 2597 1726 1275 1993 2846 2054 1455


Segment Profitability, % (PBIT/ Gross Sales)Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

Cigarettes 31.3 32.4 32.8 31.5 32.6 34.0 34.6 34.3

Non-Cigarette FMCG -2.6 -1.8 -1.3 0.6 -1.1 -0.6 0.5 1.9

Hotels 11.3 7.1 17.9 12.8 3.6 2.7 19.7 18.7

Agri-Business 10.1 12.8 10.6 6.9 9.1 16.1 11.5 7.3

Paper and Paperboard 23.9 25.2 20.2 16.5 20.4 17.6 17.3 14.0

Contribution to Segment Profits Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

Cigarettes 81.8% 79.8% 83.8% 85.2% 83.6% 82.8% 83.9% 85.4%

Non-Cigarette FMCG -1.7% -1.2% -0.9% 0.5% -0.7% -0.4% 0.3% 1.4%

Hotels 1.1% 0.6% 2.1% 1.6% 0.3% 0.2% 2.0% 2.0%

Agri-Business 7.4% 10.0% 6.5% 5.1% 7.4% 9.8% 6.5% 4.9% Paper and Paperboard 11.4% 10.8% 8.6% 7.5% 9.4% 7.6% 7.3% 6.3%






At Rs 31 Bn, EBITDA of the company was broadly in line with our estimates,even as revenue growth missed our estimates, on account of stronger then ex-pected profitability. With lower than expected effective tax rate, the company'sPAT came in modestly ahead of our expectations.

Outlook and Investment View

Growth in the company's cigarette volumes show signs of continued pressurefrom price hikes that the company has taken through the year. We also notethat ITC's volumes look respectable due to rising shares of <65mm cigarettes,which likely have lower gross margins than the rest of the portfolio.

The company's other FMCG segment has also registered a significant modera-tion, which we think will continue, following continued moderation in the indus-try growth. As such, we see hotels and paperboards business.

We believe growth prospects of ITC are weak as a result; we forecast 11/11.5revenue growth for ITC in FY15/FY16. Since ITC has utilized significant marginlever in FY13/FY14, we also believe that margin expansion opportunities will belimited, going forward. We forecast Rs 12.4/ Rs 14.2 EPS for the company inFY15/FY16, implying 12%/14% earnings growth.

Valuations of ITC, at 24.1x FY16E PER, are fairly rich, given growth prospects. Inthe immediate future, we think that speculation on hikes in excise duties shallimpact ITC stock. We note that despite sharp hikes in excise duties, the excisepayments continue to growth at 10-12% for most of the past year, indicatingthere is still some opportunity to raise excise revenues via duties. As such, wethink it is likely that ITC's valuations may see some correction in the comingmonth, providing better entry opportunities.

We assess the fair value of ITC at 24xFY16E PER, or Rs 341. We downgrade thestock to REDUCE (ACCUMULATE earlier). We continue to see ITC as a stockwith great earnings visibility over the long-term. We would see declines of 5-10% as accumulating opportunities in the stock.

Summary table


Sales 3,28,826 3,65,540 4,07,482

Growth (%) 11.1 11.2 11.5

EBITDA 1,20,988 1,34,626 1,51,936

EBITDA (%) 36.8 36.8 37.3

PBT 1,26,591 1,42,856 1,64,742

Net profit 87,852 98,571 1,12,849

EPS (Rs) 11.1 12.4 14.2

Growth (%) 16.7 12.2 14.5

CEPS (Rs) 12.2 13.5 15.4

BV (Rs/share) 29.3 34.1 40.7

DPS(Rs) 6.0 6.5 6.5

ROE (%) 40.5 39.1 38.0

ROCE (%) 32.5 31.8 31.6

Net cash (debt) 33,458 59,740 94,779

NWC (Days) 186 207 230

P/E (x) 31.0 27.6 24.1

P/BV (x) 11.7 10.0 8.4

EV/Sales (x) 8.2 7.3 6.4

EV/EBITDA (x) 22.2 19.8 17.3






COLGATE PALMOLIVE INDIA LTD

PRICE: RS.1369 RECOMMENDATION: REDUCETARGET PRICE: RS.1358 FY16E P/E: 30.2X

Colgate's 4Qfy14 earnings came in higher than our expectations,largely on lower-than -expected expenses, while volume growth/ sales growth surprised negatively. Volume growth for Colgate hasbeen among weakest in the past 5-6 years, indicating that salesgrowth shall weaken as demand-stimulating measures are with-drawn. We revise our earnings upwards c. 1% for FY15/FY16, as wefactor in lower employee expenses for the coming years. Our con-cerns on valuations remain, given somewhat soft sales/earningsoutlook. Maintain REDUCE, with a price target of Rs 1358.

Results SummaryQuarterly Trends 4QFY13 1QFY14 2QFY14 3QFY14 4QFY13

Net Sales 8,116 8,446 8,957 8,840 9,206

Growth, y/y (%) 18.3 14.7 15.8 15.9 13.4

Raw Material Expenses 3,221 3,283 3,621 3,458 3,659

Gross Profit 4,895 5,164 5,336 5,382 5,547

Gross Margin 60.3 61.1 59.6 60.9 60.3

Advertising Expenses 821 1,014 1,195 1,215 995

- as % sales 10.1 12.0 13.3 13.7 10.8

Personnel Expenses 696 620 535 530 434

Other Expenses 1,889 2,028 2,194 2,204 2,167

EBITDA (excl. other op. income) 1,488 1,502 1,413 1,434 1,952

Margin, % 18.3 17.8 15.8 16.2 21.2

Depreciation and Amortization 113 117 117 121 153

EBIT 1,376 1,385 1,296 1,314 1,799Other Operating Income 200 151 50 71 67

Other Income 121 171 130 162 39

Interest Expenses 0 0 0 0 0

PBT 1,696 1,707 1,477 1,547 1,905

Exceptional Items 0 706.4 0 -1.1 -61.5

Provision for Tax 463 561 382 418 521

PAT 1,233 1,852 1,095 1,128 1,323


Colgate's 4Qfy14 financials were broadly in line with our estimates. The com-

pany reported 13.4% growth in net sales, modestly below our expectations.Volume growth for the quarter was 7%. We note that the volume growth re-ported by the company is among lowest in 5-6 years

The company maintained its gross margins at 60.3%. Advertising expenses forthe quarter registered 70 bps rise over 4QFY13, but came in below our expecta-tions. We note that there is usually a significant sequential decline in 4Q follow-ing events scheduled in 3Q.

Personnel expenses also came in well below our expectations. We note that 4Qfinancials are balancing figures from full-year audited financials, and thecopmany's employee expenses have seen some declines for the year, on ac-count of sale of Global Shared Services Organisation.

Other expenses of the quarter have continued to remain at elevated levels, anddenote continued efforts by Colgate to keep entry barriers high via high promo-tion expenses.

Summary table


Sales 35,449 40,504 46,065

Growth (%) 14.9 14.3 13.7

EBITDA 6,640 7,497 8,477

EBITDA (%) 18.7 18.5 18.4

PBT 7,279 7,680 8,672

Adj. Net profit 4,883 5,606 6,157

Adj. EPS (Rs) 35.9 41.2 45.3

Growth (%) (1.7) 14.8 9.8

CEPS (Rs) 34.9 45.1 49.6

BV (Rs/share) 40.6 45.6 51.2

DPS (Rs) 29.8 30.9 34.0

ROE (%) 88.5 90.3 88.4

ROCE (%) 103.7 95.6 93.5

Net cash (debt) 4,409 4,881 5,453

NWC (Days) -40 -34 -30

P/E (x) 38.1 33.2 30.2

P/BV (x) 33.7 30.0 26.7

EV/Sales (x) 5.1 4.5 3.9

EV/EBITDA (x) 27.4 24.2 21.3







Disclaimer

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any otherperson. Persons into whose possession this document may come are required to observe these restrictions.

This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construedas an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for thegeneral information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment ob-

jectives, financial situations, or needs of individual clients.

We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completenesscannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. Therecipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to inthis material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options andother derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technicalanalysis centers on studying charts of a stock’s price movement and trading volume, as opposed to focusing on a company’s fundamentals and as such, maynot match with a report on a company’s fundamentals.

Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the informationdiscussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautionedthat any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses maymake investment decisions that are inconsistent with the recommendations expressed herein.

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has beenprepared by the Private Client Group . The views and opinions expressed in this document may or may not match or may be contrary with theviews, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

We and our affiliates, officers, directors, and employees world wide may: (a) from time to time, have long or short positions in, and buy or sell the securitiesthereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation oract as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or haveother potential conflict of interest with respect to any recommendation and related information and opinions.

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company orcompanies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations orviews expressed in this report.

No part of this material may be duplicated in any form and/or redistributed without Kotak Securities’ prior written consent.

Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all therisk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Kotak Securities Limited, Registered Office: Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India. Correspondence address: Infinity IT Park,Bldg. No 21, Opp Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097.Tel No : 66056825.SEBI Reg No's: NSE INB/INF/INE 230808130, BSE INB010808153/INF 011133230/INE 011207251, OTC INB 200808136, MCXSX INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164.NSDL: IN-DP-NSDL-23-97. CDSL: IN-DPCDSL-158-2001. Investment in securities market is subject to market risk, please read the combined risk disclosure document prior toinvesting. Compliance Officer - Mr. Sandeep Chordia. Tel. No: 022 6605 6825, Email id: [email protected].

In case you require any clarification or have any concern, kindly write to us at below email ids: "For Trading Account related queries:[email protected]; "For Demat Account related queries: [email protected].

Alternatively, you may feel free to contact our customer service desk at our toll free numbers 18002099191 or 1800222299. You may also call at30305757 by using your city STD code as a prefix.

In case you wish to escalate your concern / query, please write to us at [email protected] and if you feel you are still unheard, write to ourcustomer service HOD at [email protected].

Fundamental Research Team

Dipen [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, Engineering


Teena VirmaniConstruction, Cement


Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, NBFC, Economy


Arun AgarwalAuto & Auto Ancillary


Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, Media


Sumit PokharnaOil and Gas


Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Jayesh KumarEconomy


K. KathirveluProduction


Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Premshankar [email protected]+91 22 6621 6261

Derivatives Research Team

Sahaj [email protected]

+91 79 6607 2231

Rahul [email protected]

+91 22 6621 6198

Prashanth [email protected]

+91 22 6621 6110

Documents

Cummins Kotak