Morning Insight - 1 Jun 2016 · JUNE 1, 2016 Economy News India's gross domestic product (GDP) grew 7.6 per cent in 2015-16, up from 7.2 per cent a year ago. The full-year growth

JUNE 1, 2016

Economy News India's gross domestic product (GDP) grew 7.6 per cent in 2015-16, up

from 7.2 per cent a year ago. The full-year growth was fuelled by close toeight per cent growth rate in the fourth quarter of 2015-16, the fastest inthe world for the January-March quarter and FY16 since the new GDPseries was launched in 2011-12. (BS)

Upbeat about India's economic growth potential, Japanese government-sponsored fund JOIN said that it is keen on exploring investmentopportunities in the country's infrastructure space. (BL)

Public sector oil marketing companies have increased the retail sellingprice of petrol and diesel by Rs 2.58 a litre and Rs 2.26 a litre respectivelyin Delhi with a corresponding increase in other states. The increaseincludes state levies and is applicable from June 1. (ET)

Growth in the eight core sectors jumped to 8.5 per cent in April, due to asharp pick-up in refinery products and a commensurate rise in electricitygeneration. The index had grown by 6.4 per cent in March. (BS)

Corporate News PVR, India's leading multiplex operator, has closed a deal to acquire real

estate company DLF's cinema exhibition business, branded DT Cinemas,with fewer screens than originally planned. (ET)

Tata Motors-owned luxury car manufacturer Jaguar Land Rover (JLR)broke the half a million mark for the first time in its history as per itslatest vehicle sales results released this week. (ET)

ONGC Videsh Ltd, the overseas arm of state-owned Oil and Natural GasCorp (ONGC) has signed a pact with the trading arm of Azerbaijan'sstate energy company SOCAR to foray into oil trading. (ET)

Aurobindo Pharma, Indian drug firm with the highest number ofUSFDA product approvals, proposes to focus on increased AbbreviatedNew Drug Application (ANDA) filings and new differentiated productlaunches to maintain its growth. (ET)

Glenmark has launched an FCCB (foreign currency convertible bonds)issue from the Singapore stock exchange to raise up to $200 million. (ET)

In a statement to the BSE, Zee Learn said that its board meeting decidedthat Tree House Q4 results require careful evaluation and potentialimpact of the same, if any, "on the scheme of amalgamation of it with thecompany needs to be properly evaluated". (Moneycontrol)

Reliance Industries Ltd has informed BSE that due to lower release ofdam water and the significantly increased salinity of water supply toReliance Industries Limited's (RIL) Dahej manufacturing complex (DistrictBharuch, Gujarat), there is shortage of the right quality of industrial waterat Dahej complex. (BSE)

AXIS Bank Ltd has submitted to BSE a copy of the Press Release issued bythe Reserve Bank of India on May 31, 2016, allowing Foreign InstitutionalInvestors (FIIs) / Registered Foreign Portfolios Investors (RFPIs) to invest upto 62 per cent of the paid up capital of M/s. Axis Bank Ltd. under thePortfolio Investment Scheme (PIS). (BSE)

Equity% Chg

31 May 16 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 26,668 (0.2) 4.1 12.1NIFTY Index 8,160 (0.2) 4.0 13.0BANKEX Index 20,112 0.7 5.2 22.8SPBSITIP Index 11,576 (1.2) 2.2 9.1BSETCG INDEX 14,465 (0.7) 9.6 24.3BSEOIL INDEX 9,322 (0.7) (0.4) 10.9CNXMcap Index 13,293 (0.3) 0.7 12.1SPBSSIP Index 11,142 (0.1) 1.1 13.0

World IndicesDow Jones 17,787 (0.5) 0.1 5.5Nasdaq 4,948 0.3 3.6 5.5FTSE 6,231 (0.6) (0.2) 1.3NIKKEI 17,235 1.0 2.8 6.5HANGSENG 20,815 0.9 (1.2) 7.2

Value traded (Rs cr)31 May 16 % Chg - Day

Cash BSE 3,701 52.4Cash NSE 35,856 110.9Derivatives 186,577 15.1

Net inflows (Rs cr)30 May 16 % Chg MTD YTD

FII 390 (41) 2,559 14,349Mutual Fund 326 (25) 5,830 8,426

FII open interest (Rs cr)30 May 16 % Chg

FII Index Futures 17,398 (2.2)FII Index Options 51,512 2.0FII Stock Futures 50,666 3.4FII Stock Options 2,965 23.8

Advances / Declines (BSE)31 May 16 A B T Total % total

Advances 119 425 23 567 37Declines 180 720 37 937 61Unchanged 1 25 4 30 2

Commodity % Chg

31 May 16 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 48.9 (0.5) 6.4 42.0Gold (US$/OZ) 1,215.3 0.8 (6.0) (1.3)Silver (US$/OZ) 16.0 (0.0) (10.2) 8.0

Debt / forex market31 May 16 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.5 7.5 7.4 7.6Re/US$ 67.3 67.2 66.5 68.4

Sensex

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

22700

24200

25700

27200

28700

May-15 Aug-15 Nov-15 Feb-16 May-16

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

MORNING INSIGHT June 1, 2016

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

BLUE STAR LTD

PRICE: RS.416 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.448 FY18E P/E: 19.7X

Blue Star's (BSL) numbers missed our estimates on account of weakexecution in MEP and pricing pressure in unitary cooling (mainly room airconditioning) segment. However, there are several positive takeaways 1)Enhanced order book 2) Robust growth outlook in room AC and 3) Strongbalance sheet.

We have been bullish on the stock and it has outperformed the market inthe past three months (17% gains since Q3FY16 results). We continue toremain positive on the business but valuations are a constraining factor.Thus, we move our rating from "BUY" earlier to "Accumulate" (BUY ondeclines) with a revised target price of Rs 448 (Rs 404 earlier).

Quarterly performance

(Rs mn) Q4FY16 Q4FY15 YoY (%)

Net Sales 10900 9900 10

Other operating income 134 153 -13

Raw material costs 4858 5427 -10

Staff costs 710 686 3

Purchase of Stock in Trade 3271 1774 84

Other expenditure 1624 1475 10

Total Expenditure 10463 9362 12

PBDIT 571 691 -17

Other income 55 36 52

Depreciation 191 105 82

EBIT 436 622 -30

Interest 89 114 -22

PBT 347 509 -32

Tax 108 -170 -163

Adjusted PAT 239 679 -65

Extraordinary gain 478 382 25

Reported PAT 717 1061 -32

EPS Rs per share 2.7 7.6

PBDIT excluding other op income (%) 4.0 5.4

PBDIT (%) 5.2 6.9

Raw material cost to sales (%) 44.6 54.8

Other expenditure to sales (%) 14.9 14.9

Staff costs to sales (%) 6.5 6.9

Tax rate (%) 31.1 NA

Source: Company

Earnings estimates

(Rs mn) Reported Estimated Remarks

Revenue 10900 11080 In line revenue

EBITDA (%) 4.0 4.9 Margin deficit due to projects business

Adj PAT 239 336 Leading to profits missing our estimates

Source: Kotak Securities - Private Client Research

Summary table

(Rs mn) FY16 FY17E FY18E

Sales 33,977 40,471 48,515Growth (%) 10.3 19.1 19.9EBITDA 1,778 2,428 3,222EBITDA margin (%) 5.2 6.0 6.6PBT 1,004 1,797 2,571PAT 797 1,384 1,902EPS (Rs) 8.9 15.4 21.2Growth (%) 4.6 73.7 37.5CEPS 14.5 20.7 27.4BV (Rs/share) 92.1 99.3 111.1Dividend/share (Rs) 6.5 7.0 8.0ROE (%) 11.0 15.8 19.7ROCE (%) 10.4 14.1 17.7Net cash (debt) -2432 -1710 -1313NW Capital (Days) 8.0 6.2 6.0EV/Sales (x) 1.1 0.9 0.8EV/EBITDA (x) 21.5 15.7 11.7P/E (x) 46.9 27.0 19.7P/Cash Earnings 28.6 20.1 15.2P/BV (x) 4.4 4.1 3.7

Source: Company, Kotak Securities - Pri-vate Client Research

RESULT UPDATE

Sanjeev [email protected]+91 22 6218 6424



(Results are not strictly comparable on a y-o-y basis as the com-pany has merged Blue Star Infotech and its subsidiary Blue StarInfotech Business Intelligence & Analytics Pvt Ltd with Blue StarLtd. Effect to this merger was given from April 2015. In addition tothis, there was another reorganization in the previous fiscal as perwhich the Professional Electronics Division was transferred to itswholly owned subsidiary "Blue Star Engineering and Electronics"though some jobs pertaining this division were undertaken by BlueStar Ltd during the fiscal)Segment-wise, the Electro Mechanical Projects and Packaged AirconditioningSystems business accounted for 49% of the total revenues in the quarter. Rev-enue growth in this segment slowed down to 8% y-o-y for the quarter. The seg-ment has been going through a prolonged phase of challenging business scenarioin commercial real estate characterized by tight liquidity and elevated interestrates.

However, growth rates may improve in the coming quarters due to 1) expandedorder book 2) outlook for project investments both in industrial as well as com-mercial real estate is improving, the management believes

Unitary Cooling Products segment (Room ACs mainly) accounted for 49% of thetotal revenues of the Company during the quarter as it being a seasonally strongone for the segment.

This segment registered a growth of 19% yoy for quarter driven strong productdemand and various sales and marketing initiatives.

The market was favourable during the quarter as demand for room ACs re-mained firm on account of early start of summer season.

The Professional Electronics and Industrial Systems business reported 61% y-o-ydecline in revenue during the quarter mainly due to transfer of this segment toits subsidiary "Blue Star Engineering and Electronics". The segment revenue andresults reported in the Blue Star Limited standalone figures relate to some spe-cific orders that are being closed.

Segment Revenue

(Rs mn) Q4 FY16 Q4 FY15 YoY (%)

Central AC (MEP) 5456 5051 8%

Unitary Cooling products 5400 4545 19%

Professional electronics and Industrial Systems 178 458 -61%

Source: Company

Margin decline across MEP and Unitary Cooling Products segments

EBITDA margins for the quarter declined by 170 bps to 5.2% mainly due to dropin profitability in MEP and competitive pressures impacting "Cooling Products"margins.

The MEP (Mechanical Electrical & Plumbing) segment reported 160 bps contrac-tion in EBIT margin mainly due to tepid billing during the quarter.

"Cooling products" margins contracted to 10.8% in Q4FY16 vs 11.4% in corre-sponding quarter of the previous fiscal. Realisations were under pressure inQ4FY16 as some players dropped prices to drive sales.



Segment margins

(%) Q4 FY16 Q4FY15

Central AC (MEP) 2.8% 4.4%

Unitary Cooling products 10.8% 11.4%

Professional electronics and Industrial Systems 25.7% 24.4%

Source: Company

Exceptional items

The company booked exceptional gains of Rs 478 mn in Q4FY16 arising out of 1)gain on sale of IT business Rs 774 mn 2) VRS and plant closure expenses of Rs28.9 mn and 3) cost provisions on projects of Rs 272 mn.

The company has started the fiscal with an enhanced order book - Akey positive

For the fiscal, the company's order intake in the MEP segment rose to Rs 19.7bn, an increase of 29.8% over FY15.

Order book at the end of FY16 is at Rs 16.3 bn, up 17% over FY15.

We expect revenue growth in FY17 in MEP segment to be higher than FY16, pro-vided the execution issue remain under control.

Conference call highlights

The company is now done with closing legacy projects and has taken provi-sions for the same.

Although the company starts the fiscal with a clean order book, the segmentmargins are dependent on pace of execution of orders, the managementopined.

On new orders, the management expects MEP segment to report higher in-take in FY17 on the back of enhanced order enquiries.

On the room airconditioning segment, the management expects market andBSL's sales to grow at 20% and 30% respectively. The ongoing quarter ofcurrent fiscal has been very good for the industry with growth in sales vol-umes across regions likely to be in the range of 25-30%.

Aided by tax incentives at its Himachal Pradesh plants, the company's taxrate for FY16 is likely to stay at 21% levels in and may post a minor increasein FY17 due to expiry of CENVAT benefit at HP plant.

The company is reworking its manufacturing footprint. It has closed down itsThane and Bharuch plants and has decided to invest in two new manufactur-ing locations, one each at Jammu and Sricity. The company would be invest-ing ~ Rs 2.0 bn over the next 3-4 years. It is in the process of acquiring landin these two locations.

The Jammu plant will enjoy CENVAT benefits.

The company is also positioning itself strongly in the VRF AC market. Thissegment of the AC market is growing at a much faster clip than the overallAC market. The company has launched Blue Star VRF IV Plus, which is thefirst 100% Inverter VRF system "Made in India".

During the quarter, the company has forayed into air purifiers (current mar-ket size of Rs 7.5 bn) and air coolers. It has launched 3 models of air coolersin the Northern market. The air cooler market is pegged at Rs 26 bn out ofwhich organized share is Rs 16 bn.



We recommendACCUMULATE on Blue Star

Ltd with a price target ofRs.448

Borrowings have declined to Rs 2.85 bn at the end of FY16 as compared to Rs3.3 bn at the end of FY15. The company has cash and investible surplus of ~Rs 2.0 bn, contributed largely by the sale proceeds of IT business in Blue StarInfotech. The company plans to repay part borrowings from the availablecash and short-term investments (as they mature). Substantial repayment ofdebt would be constrained by working capital needs as the company expectsstrong growth in FY17 and funds needed for setting up a factory in Jammufor room airconditioners.

Marginal change in earnings in FY17

(Rs mn) Earlier Revised

Revenue 39,978 40,471

EBITDA (%) 6.1 6.0

EPS (Rs) 15.4 15.4

% change 0


Stock has been an outperformer in the past three months

We continue to be positive on the long term growth prospects of the room ACindustry in view of the significant under-penetration of the product among theIndian households. While BSL does not have a leading position in the room ACmarket, but it will continue to be a significant player by virtue of long presencein the Indian market and strong brand as a focused Air Conditioning company.The merger of group company Blue Star Infotech with itself has strengthened itsbalance sheet enabling it to compete in a market which has a large number ofplayers vying for market share.

We have been bullish on the stock and it has outperformed the market in thepast three months (17% gains since Q3FY16 results). We continue to positive onthe company as we note several positive - 1) Enhanced order book 2) Stronggrowth outlook in room AC and 3) Strong balance sheet. However, valuationsare a constraining factor. Thus, we move our rating from "BUY" earlier to "Ac-cumulate" (BUY on declines).

We value the standalone business at Rs 424 per share based on 20x FY18 earn-ings and add back Rs 24 per share towards the demerged business (now BSEEL -PBIT of Rs 268 mn in FY16).



RESULT UPDATE

Sanjeev [email protected]+91 22 6218 6424


VOLTAMP LTD

PRICE: RS.803 RECOMMENDATION: BUYTARGET PRICE: RS.950 FY18E P/E: 11.9X

Voltamp reported vastly improved set of quarterly numbers as gains inEBITDA margins continued leading to reported profits exceeding ourforecasts. We continue to be positive on the company on account ofimproving profit growth and a strong balance sheet.

The stock is valued at 11.9x FY18 earnings, which we believe offers upsidepotential given robust forecast earnings of 25% CAGR between FY16-18.Voltamp is one of the best managed companies in the transformer space.Although the near-term outlook on transformer demand is subdued, wesee good potential in the medium term aided by 1) Solar Power farms and2) Implementation of "UDAY" scheme for state power discoms. We seeimmense headroom for margins to inch up from current levels.

We value the stock at 14x FY18 earnings, thus arriving at a revised targetprice of Rs 950 (prior target of Rs 939)

Risk: Weak industry outlook characterized by intense price undercutting.

Quarterly performance


Gross sales 2,039 1,863 9

Excise 0 164 -100

Net Sales 2,039 1,700 20

Consumption of Raw Materials 1,550 1,397 11

Staff Cost 55 70 -21

Other Expenditure 251 145 74

Operating Expenditures 1,856 1,612 15

PBDIT 183 88 109

Depreciation 16 14 12

Other Income 104 60 73

EBIT 271 133 103

Interest & Finance Charges 1.4 0.6 128

Profit / (Loss) before tax 269 133 103

Tax provision 77 11 613

Profit / (Loss) after tax 192 122 57

EPS (Rs) 19.0 12.1 57

Ratios

EBITDA (%) 9.0 5.2

Raw material cost to sales (%) 76.0 82.2

Other exp to sales (%) 12.3 8.5

Tax rate (%) 28.7 8.2

Source: Company

Earnings estimates

(Rs mn) Reported Estimated Comment

Revenue 2039 1836 Revenue weakness due to subdueddemand from industrial sector

EBITDA (%) 9.00 8.00 Leading to margin gain

PAT 192 166 Profit aided by other income


Summary table


Sales 5633 6279 7221Growth (%) 9 11 15EBITDA 374 508 718EBITDA margin (%) 6.6 8.1 9.9PBT 593 696 940Net profit 440 522 684EPS (Rs) 44 52 68Growth (%) 56 19 31CEPS (Rs) 49 58 75BV (Rs/share) 491 491 541Dividend/share (Rs) 14 14 15ROE (%) 11 11 13ROCE (%) 11 11 13Net cash (debt) 2589 2589 2729NW Capital (Days) 121 121 122EV/Sales (x) 1.0 0.9 0.7EV/EBITDA (x) 15.8 10.9 7.5P/E (x) 18.4 15.5 11.9P/Cash Earnings 16.2 13.8 10.8P/BV (x) 1.8 1.6 1.5




Company reported improved all-round performance

Net sales posted a robust growth of 20% during the quarter.

EBITDA margin expanded by 380 bps to 9.0% in the quarter, ahead of ourexpectations. Due to intense competition in the western region, pricing oftransformers had taken a beating which impacted EBITDA margins of compa-nies including Voltamp. There has been some mitigation in margin pressure inrecent quarters partly due to softening in commodity prices like steel andcopper.

Gross margins expanded to 24% in Q4FY16 as compared to 17.8% inQ4FY15 most likely due to weak copper, aluminum and steel prices.

The management had been generally negative on the demand outlookthough lately it has noted some improvement in enquiry levels. However,these enquiries are taking a long time to fructify into firm orders.

The company remains debt free and has sizeable investments worth ~ Rs 2.2bn in treasury assets.

Business environment remains weak but improving

Notwithstanding, the recent optimism in the capital goods stocks, the man-agement of Voltamp has indicated that the situation continues to remain asweak as it has been for the past three years.

Voltamp's current capacity utilization stands at ~ 60-65%, in line with thatfor the domestic transformer industry.

The company noted that it can reach upto Rs 8.5 bn topline at optimum ca-pacity utilization in three year timeframe (by FY18).

On the pricing situation, the company indicated that unless the industry ca-pacity utilization improves from current levels of 60% odd levels, profitabilitywould continue to remain subdued.

The company does not have any plan to enter in to the high KV range oftransformers. The high KV power transformer market is already attractingnew players. The company expects to maintain its focus on existing productsand client segments.

"UDAY" programme can potentially alleviate capacity slack in in-dustry, we believe

The recently announced "UDAY" (Ujjwal Discom Assurance Yojana) programmeby the government can potentially give a fillip to demand for transformers. Oneof the aims of the programme is targeted reduction of AT&C losses, whichwould require interventions at various levels in terms of 1) investment in meter-ing at feeder and distribution transformer level, 2) Smart meter and 3)upgradation of distribution transformers. Through this programme, the partici-pating Discoms can look forward to higher free cash flows as interest burdenwould decline significantly after bulk of borrowings are transferred to state gov-ernments and the rest are converted into bonds at lower cost of borrowing.

Although, Voltamp is primarily focused on the industrial (non-SEB) segment, it isopen to bidding for SEB orders also provided that the orders are not margindilutive.



Cost savings from "UDAY"

Details Rs bn

Interest rate reduction 3% on 25% of debt + 4% of 75% of debt 170

Debt takeover by state 8% on 75% of debt 270

AT and C loss reduction Reduce to 15% 330

Coal swapping and higher domestic

coal usage 360

Demand side management LED and appliances 585

Others 92

Total 1807

Source: Company

Company bullish on demand potential from Solar Power projectsThe management is very positive on the potential demand created by invest-ment in solar power farms. In the solar park, transformers are required as partof the power evacuation system.

Earnings Revision - marginal upward revision in FY17 earnings

(Rs mn) Earlier Revised

Revenue 5967 6279

EBITDA (%) 7.2 8.1

EPS 47.0 52.0

% change 11


Valuation

The Voltamp stock is currently trading at PE of 15.5x and 11.9x FY17 and FY18earnings respectively.

Voltamp's revenues and EBITDA margin have significant upside potential overthe next few years, we believe and highlight that the company's average EBITDAmargins during the period of high growth (between FY06-11) was a staggering17.6%. Although, EBITDA margin may or may not return to those heady levels,but it certainly has immense room for upside from the current levels of 6.2%.Further, the company's margin woes are linked to industry over-capacity and weexpect to see margins inching up on higher capacity utilization levels of thetransformer industry.

We maintain BUY with a revised DCF based target price of Rs 950, which valuesthe stock at 14x FY18 earnings. Voltamp stands out among the small-cap trans-former companies in terms of quality of management and strength of balancesheet (zero debt and cash & liquid investments of ~ Rs 2.2 bn)

We recommend BUY onVoltamp Ltd with a price

target of Rs.950




ELGI EQUIPMENT LTD (EEL)PRICE: RS.174 RECOMMENDATION: SELLTARGET PRICE: RS.125 FY18E P/E: 24.8X

EEL reported Q4FY16 in line with estimates on revenue front, howeverfavourable currency movement and loss minimization in the internationalbusiness led to PAT higher than estimates. Domestic business reportedmeaningful YoY revenue growth driven by small sized orders. Operatingmargins expanded on back of higher volumes, favourable currencymovement and benign input prices in the quarter.

We tweak international business margins upwards in our DCF (in FY18 andbeyond) but continue to maintain 'SELL' in view of downside to our DCFbased revised target price of Rs 125 (Rs 110 earlier) on company's stock.

Consolidated Quarterly financials

(Rs mn) Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%)

Sales 4101 3503 17.1 3510 16.8

Decrease/ (Increase) in stock 62 73 94

Material consumed 1618 1275 26.9 1357 19.2

Purchase of traded goods 605 580 4.2 522

Employee expenses 654 631 3.6 657 (0.4)

Other expenses 677 715 (5.3) 571 18.6

Total Expenses 3615 3274 10.4 3200 13.0

EBITDA 486 229 112.6 309 57.1

Other income 27 17 16 62.2

Depreciation 115 117 (2.4) 108 5.7

EBIT 398 129 209.5 217 83.1

Finance cost 25.5 46.8 (45.5) 32.8 (22.3)

Exceptional Items 0.0 0.0 0.0

PBT 373 82 355.4 185 101.8

Total tax 67 32 113.0 63 6.0

PAT 305 50 507.2 121 151.8

Adj. PAT 305 50 507.2 121 151.8

EPS (Rs) 1.9 0.3 507.2 0.9 122.6

Adj. EPS 1.9 0.3 507.2 0.9

EBITDA (%) 11.8 6.5 8.8

Tax Rate (%) 18.0 38.5 34.3

RM/Sales (%) 55.7 55.0 56.2

Source: Company

EEL's consolidated operations reported 17.1% YoY revenue growth in Q4FY16 atRs 4.1 Bn driven by domestic business. Management stated that Indian markethas started to witness traction especially in low ticket sized jobs. Large ordersare still absent and would take time to recover.

International subsidiaries reported loss minimization in Q4FY16. Overseas subsid-iaries have collectively reported implied EBITDA of Rs 84 mn in Q4FY16 againstloss of Rs 31 mn Q4FY16 and Rs 28 mn in Q3FY16. We view this as a quarterlyaberration and expect sub-optimal recovery in overseas business in near term.Management highlighted that US market has started to show some improve-ment (non-Patton's part of business; reported 40% YoY revenue growth in USsubsidiary) and in Europe ELGI is witnessing demand for select products.

Summary table


Sales 14,055 15,810 18,204Growth (%) 7.5 12.5 15.1EBITDA 1,356 1,760 2,206EBITDA margin (%) 9.6 11.1 12.1PBT 856 1264 1660Net profit 675 847 1,112EPS (Rs) 4.0 5.3 7.0Growth (%) 31.2 34.1 31.4CEPS (Rs) 6.7 8.3 10.3BV (Rs/share) 34.1 38.1 43.7DPS (Rs) 1.1 1.2 1.2ROE (%) 12.2 14.8 17.2ROCE (%) 8.0 9.7 11.5Net cash (debt) (2,178) (2,484) (2,245)NW Capital (Days) 69.9 83.1 86.6EV/Sales (x) 2.1 1.9 1.6EV/EBITDA (x) 21.9 16.9 13.5P/E (x) 43.7 32.6 24.8P/Cash Earnings (x) 26.1 21.0 16.9P/BV (x) 5.1 4.6 4.0


RESULT UPDATE

Ruchir [email protected]+91 22 6218 6431



We note that Rotair's (EEL's Italian Subsidiary) has lost one large client in FY16(impacted sale of nearly 4 mn Euros in FY16). However, profitability has im-proved and management expects Rotair to compensate by improved margins inFY17 (Rotair reported nearly 5% EBIT margin in FY15/FY16). In Middle East andAfrica, management expect to register marginal recovery on back of new prod-uct launches on industrial (driven by non-oil segment) and portable compressorsside in the near term. China, Brazil and Belair (France) continues to remain chal-lenging.

Consolidated Segment Revenue


Compressors 3551 2991 18.7 3017 17.7

Automotive Equipment 430 394 9.1 378 13.8

Segment EBIT

Compressors 338 74 355.1 194 74.5

Automotive Equipment 33 38 (10.9) 23 44.6

Segment Margins %

Compressors 9.5 2.5 6.4

Automotive Equipment 7.8 9.5 6.1

Source: Company

Standalone


Sales 2669 2196 21.5 2215 20.5

Decrease/ (Increase) in stock 34 43 28

Material consumed 1304 1021 27.7 1049 24.3

Purchase of traded goods 214 204 210

Employee expenses 281 264 6.4 268 4.9

Other expenses 433 404 7.4 323 34.0

Total Expenses 2266 1936 17.0 1877 20.7

EBITDA 402 260 54.9 338 19.1

Other income 25 12 110.1 12 108.3

Depreciation 97 92 4.6 91 5.9

EBIT 331 179 84.5 259 27.9

Finance cost 6 11 (48.6) 8 (31.3)

Exceptional Items 552 0 0

PBT 325 169 93.0 251 29.8

Total tax 62 41 50.4 60 3.0

Reported PAT -289 127

Adj.PAT 263 127 106.8 191 38.3

Adj. EPS (Rs) 1.7 0.8 106.8 1.2 38.3

EBITDA (%) 15.1 11.8 15.2

Tax Rate (%) 19.0 24.4 24.0

RM/Sales (%) 58.2 57.8 58.1

Source: Company

Consolidated operating margins expanded sharply to 11.8% in the quarteragainst 6.5% in Q4FY15 due to 1) increased contribution from Indian business 2)benign raw material prices and 3) favourable currency movement to the tune ofRs 140 mn. We note that some of these benefits are negated by higherconsultancy and warranty fees paid in the quarter.



Consolidated compressor division reported revenue at Rs 3.5 Bn and EBIT mar-gins for the segment stood at 9.5% in Q4FY16 vis-à-vis mere 2.5% in Q4FY15.Revenues from Automotive division increased to Rs 430 mn in Q4FY16 vis-à-visRs 394 mn in Q4FY15. EBIT margins for the segment stood at 7.8% in Q4FY16.

Standalone business reported 21.5% YoY growth in sales, reported at Rs 2.6 Bndriven mainly by volume growth in Indian business. Management stated thatwater well business reported robust growth in Q4FY16. While management ex-pects strong demand from water-well in next two to three quarters, ex-water-well segments are also expected to pick up on back of increased infra spending.EBITDA margins stood at 15.1 % in Q4FY16 vis-à-vis 11.8% in Q4FY15.

In Q4FY16, EEL reported an exceptional loss of Rs 552 mn on account of diminu-tion of investment in China business (notional expense). Similar write down ofclose to Rs 500 mn (no impact on cash flows as expenses are already accountedfor in the past) can get incurred in Belair (France business) as well going ahead.

Management has guided for a capex of not more than Rs 300 mn for any givenyear but would likely invest substantially in marketing/branding activities overthe next few years. Strengthening of overseas distribution network and brandbuilding would remain the key focus areas for the company over the next fewyears.

Valuation and recommendation

At current price of Rs.174, stock is trading at 24.8x P/E and 11.9x EV/EBITDA onFY18E earnings.

We tweak international business margins upwards in our DCF (in FY18 and be-yond) but continue to maintain 'SELL' in view of downside to our DCF based re-vised target price of Rs 125 (Rs 110 earlier) on company's stock.

We continue to maintainSELL on Elgi Equipment Ltd

with a price target ofRs.125




SIMPLEX INFRASTRUCTURES LTD

PRICE: RS.273 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.295 FY18E P/E: 11.1X

Revenues for Q4FY16 were in line with our estimates while operat-ing margins were impacted by write offs. Net profit performancewas impacted by lower margins and continued high interest outgo.Company's order inflow during FY16 has been lower than our ex-pectations and even below company's guidance of Rs 70-80 bn in-flow. We revise our estimates downwards to factor in slightlylower margins. We also introduce FY18 estimates and roll over thevaluations on FY18 estimates. Owing to limited upside from cur-rent levels, we downgrade the stock to ACCUMULATE from BUY ear-lier with a revised price target of Rs 295 (Rs 292 earlier). In the nearto medium term, execution of the company may continue to re-main impacted by payment cycle of the clients.

Financial highlights


Net Sales 15,014 15,330 -2%

Expenditure 13,627 13,851

EBITDA 1,387 1,479 -6%

EBITDA margin 9.2% 9.6%

Depreciation 512 456

EBIT 875 1,023 -14%

Interest 1,089 1,037

EBT(exc other income) (214) (14)

Other Income 438 318

EBT 224 304 -26%

Tax 66 82

Tax (%) 29.6% 27.0%

Net profit 158 222 -29%

NPM (%) 1.1% 1.5%

Equity Capital 99 99

EPS (Rs) 3.2 4.5 -29%

Source: Company

Revenues in line with our estimates

Revenues for Q4FY16 declined by 2% YoY, in line with our estimates. This de-growth was largely attributed to continued delays in payment cycle of the cli-ents. Company is not billing certain projects as once the project gets billed, itwould entail an outflow of service tax also. Thus it plans to bill the project onlyonce the payment is received. Company continues to remain conservative in ex-ecution and expects execution cycle to improve only once payment cycle im-proves. Company expect debtor collection of Rs 5 bn during FY17.

Total debtors for FY16 stood at Rs 49.2 bn, out of which unbilled revenue isaround Rs 29 bn. Simplex Infrastructure has a recovery target of Rs 5 bn out ofthis, excluding the Abhijeet group project.

Summary table


Sales 57,734 62,255 64,746Growth (%) 4 8 4EBITDA 5,932 6,848 7,122EBITDA margin (%) 10.3 11.0 11.0PBT 964 1,591 1,817Net profit 663 1,066 1,218EPS (Rs) 13.3 21.5 24.5Growth (%) 6 61 14CEPS (Rs) 54.2 66.4 70.4BV (Rs/share) 308.3 329.2 353.1Dividend/share (Rs) 0.5 0.5 0.5ROE (%) 4.4 6.7 7.2ROCE (%) 11.7 11.0 11.2Net cash (debt) (27,173) (26,936)(25,363)NW Capital (Days) 204.3 204.3 204.3P/E (x) 20.5 12.7 11.1P/BV (x) 0.9 0.8 0.8EV/Sales (x) 0.7 0.6 0.6EV/EBITDA (x) 6.6 5.7 5.3


RESULT UPDATE

Teena [email protected]+91 22 6218 6432



Order inflows continued to remain below our expectations for the fourth con-secutive quarter. Company received an order inflow of Rs 17.88 bn duringQ4FY16 and Rs 50.6 bn during FY16, lower than our expectations. Company hadset a target of Rs 70-80 bn order inflow for FY16 but it has removed order worthRs 10 bn from the order book during the quarter pertaining to Oman project.Company has a current order book of Rs 140.7 bn excluding L1 of Rs 23.16 bn.L1 status orders are taking time to materialize but company expects them togather pace going forward.

Order inflow of Rs 50.6 bn during FY16 is diversified largely across segmentssuch as power, buildings and housing, roads and bridges, urban infra followed bypiling segment. Going ahead, company expects order inflow to come largelyfrom power, urban infra, industrial segment followed by bridges and piling seg-ment based on the current bid pipeline.

Current order book is diversified across buildings and housing (45%), bridges(8%), industrial (5%), marine (4%), piling (4%), power (15%), railways (3%),roads (3%), and urban infrastructure (13%). Domestic orders form nearly 88%of the order book while remaining is from overseas. Proportion of private sectorprojects in the total order book has gone up in FY16 to 58% (from 44% in FY15)while government projects form nearly 42% of the order book. Revenues forFY16 are diversified across buildings and housing (33%), bridges (9%), industrial(12%), marine (5%), piling (8%), power (10%), railways (2%), roads (5%), andurban infrastructure (16%). International revenues contributed 11% of the rev-enues while domestic revenues contributed around 89% during the quarter.

We expect execution to remain weak during FY17 also till company gets indica-tions of improvement in payment cycle. Key risk to our assumption would comeif payment cycle remains subdued further. We maintain our revenue estimatesand expect revenues to grow at a CAGR of 6% between FY16-18.

Operating margins impacted by bad debts written off for the quar-ter

Operating margins for the quarter were impacted by bad debts written off dur-ing the quarter. We therefore revise our estimates and expect margins to be11% going forward. (11.2% estimated earlier for FY17).

Net profit performance impacted by lower margins and high inter-est expense

Net profit performance was impacted by lower margins and high interest ex-pense but was boosted by higher other income. Other income was boosted bylower provisioning required for liabilities as company has written off Rs 70 mn inbad debts during Q4FY16 and Rs 430 mn for the full year so correspondinglyother income is higher on account of lower provisioning. Interest expense contin-ues to stay high despite reduction in average interest rates for its short termworking capital loans. Gross borrowings of the company stood at Rs 32 bn andcompany has indicated that their focus going forward would be more on debtorimprovement as well as debt reduction.

We revise our FY17 estimates and expect net profits to grow at a CAGR of 36%between FY16-18 (Rs 1.2 bn estimated earlier for FY17)

Valuation and recommendation

At current price of Rs 273, stock is trading at 12.7x P/E and 11.1x on P/E and5.7x and 5.3x EV/EBITDA on FY17 and FY18 estimates respectively. We reviseour estimates and target price of Rs 295 based on 12x FY18 earnings. (Rs 292earlier). Owing to limited upside from current levels, we downgrade the stock toACCUMULATE from BUY earlier. In the near to medium term, execution of thecompany may continue to be impacted by payment cycle of the clients.

We recommendACCUMULATE on SimplexInfrastructures Ltd with a

price target of Rs.295




RESULT UPDATE

Meeta Shetty, [email protected]

+91 22 6218 4425

SUN PHARMACEUTICALS INDUSTRIES LTD


Sun's results were a mixed bag, revenues were in line but EBIDTA marginsadjusted for higher other operating income was lower than expected.Forex loss (due to Taro) and lower tax outgo were the other aberration inthe quarter. US reported 18% growth in revenues largely led by gGleeveclaunch, base business witnessed pressure. Domestic formulations posted15% growth.

Management guided for a mere 8-9% growth in revenues and alsoindicated margin pressures due to higher expenses towards building aspecialty portfolio as well as higher R&D expenses. The sales guidanceincludes 4 months of gGleevec exclusivity revenues (our assumption -US$150mn revenue) as well as consolidation of Japanese acquisition(~US$60mn revenue). Adj for these, the base business growth for FY17Estands at a 4-5%. Keeping in mind the conservative guidance, we build14.6% growth in revenues for FY17E.

We revise our FY17E revenues lower by ~13% to factor the lowerguidance. We also revise our EBIDTA margins lower - from 35.7% to33.1%. Our revised EPS for FY17E now stands at Rs 29.0 vs. Rs 37.1. Weroll our valuations to FY18E and continue to value Sun at 23x. MaintainBuy with a target price of Rs 915.

Quarterly Financials - Snapshot

(Rs mn) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 YoY (%) QoQ (%)

Net Sales 61,449 65,222 68,033 70,466 74,139 20.7 5.2

Material Expenses 15,974 17,174 15,583 17,554 14,520 (9.1) (17.3)

Employee Expenses 11,286 12,270 12,088 11,483 11,812 4.7 2.9

Other Operating Expenses 20,910 14,635 16,600 14,334 18,091 (13.5) 26.2

Research and Development expenses 5,477 4,999 4,769 5,760 6,715 22.6 16.6

Operating Profits 7,802 16,143 18,994 21,335 23,000 194.8 7.8

Other Operating Income 122 2,354 343 355 2,203 1,713.1 519.8

EBITDA 7,923 18,497 19,337 21,690 25,203 218.1 16.2

Interest Cost 1,248 1,230 1,484 1,170 886 (29.0) (24.3)

Depreciation 4,618 2,401 2,711 2,508 2,643 (42.8) 5.4

Other Income 3,825 1,054 1,913 2,192 (350) (109.1) (115.9)

PBT 5,882 15,920 17,055 20,205 21,325 262.5 5.5

Tax (5,999) 2,268 3,355 2,020 1,706 (128.4) (15.6)

Minority interest (3,012) (2,011) (2,633) (3,948) (2,482) (17.6) (37.1)

Exceptional items - (6,852) - - -

RPAT 8,869 4,790 11,067 14,236 17,137 93.2 20.4

E/o (adj for tax) - 5,824 - - -

APAT 8,869 10,614 11,067 14,236 17,137 93.2 20.4

Margin Analysis (%) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 YoY (bps) QoQ (bps)

Raw mat cost 26.0 26.3 22.9 24.9 19.6 (641.1) (532.7)

Employee cost 18.4 18.8 17.8 16.3 15.9 (243.5) (36.4)

Other expenses 42.9 30.1 31.4 28.5 33.5 (948.1) 494.4

R&D Expenses 8.9 7.7 7.0 8.2 9.1 14.5 88.4

Operating Margin 12.7 24.8 27.9 30.3 31.0 1832.7 74.6

EBITDA Margin 12.9 27.4 28.3 30.6 33.0 2014.5 238.7

APAT Margin 14.4 15.7 16.2 20.1 22.4 804.4 234.6

Tax Rate (102.0) 14.2 19.7 10.0 8.0 10999.2 (200.0)

Source: Company



Summary table


Sales 282,697 324,063 388,344Growth (%) 3.0 14.6 19.8EBITDA 84,816 104,819 129,360EBITDA margin (%) 30.6 33.1 34.0PBT 67,653 95,471 121,908APAT 54,030 69,867 88,330AEPS(Rs) 22.5 29.0 36.7Growth (%) 19.0 29.3 26.4CEPS (Rs) 23.8 33.9 41.9BVPS (Rs) 130.5 162.1 201.8DPS (Rs) 2.0 2.2 2.2ROE (%) 16.3 19.8 20.2ROCE (%) 26.0 27.4 27.7Net debt (51,511)(124,865)(211,602)NW Capital (Days) 113.6 104.5 98.8P/E (x) 34.0 26.3 20.8P/BV (x) 5.8 4.7 3.8EV/Sales (x) 6.3 5.3 4.2EV/EBITDA (x) 21.0 16.3 12.6


Results highlights

Domestic formulations

Posted ~15% growth in the quarter, post adjustments in base (4QFY15),growth is pegged at 17%.

Withdrawal of bonus offers continued to impact sales. The WPI price cutsand FDC will impact sales but not adversely. 8.8%market share in the IPM.

Company believes that competition, government mandated price controlsand changing regulations - are key long term trend deciders for IPM.

Sun expects to continue to outperform the IPM.

US

US formulations revenues were at US$ 580 million up by 19% over Q4 lastyear.

159 ANDAs pending, 413 approved. 22 filed, 14 approvals. For FY16, com-pany had expected to file higher number of filings (ex-Taro), however, expectthe filings to pick up in FY17E. Of the filings made in FY16, few of them arefrom Halol.

Price pressure in US - Sun has been seeing a price erosion of ~5-10% in theUS, overall it's been below 10%.

US - ex- Taro/Gleevec business have been impacted due to pricing pressure.

Guidance

For FY16, company is In line with its guidance of flat to lower revenuegrowth. The key reason for subdued growth was price competition, customerconsolidation and supply constraints for US markets. Additionally, consciousdecision to cut down on low margin business in RoW/Emerging market seg-ment as well as currency tailwinds impacted sales.

For FY17. Company expects traction in all parts of business. Post factoringfor Halol remediation (assume - 2HFY17), Gleevec exclusivity sales of ~4months (till Aug-16), sales are expected to post 8-10% growth. Japan willcontribute from 2HFY17. R&D - 9% of revenues. Higher expenses related toenhance specialty business in US will impact margins. The guidance includesapprovals from Halol plant. Tax rate to be around 14-15% for FY17E.

Margins - Though synergies accruing, simultaneous increase on expenses forbuilding specialty business in US, it is not visible in margins. Going ahead too,the synergies will be channelized towards expenses on building long termsustainable specialty business and R&D expenses.

Ranbaxy integration on track, FY18 - $300mn synergy. Large part of thisshould accrue in FY17

Halol plant - Expect to invite in Jun-16 for re-inspection. In line with earlierindicated timeline.

Ranbaxy - Sun plans to invite one of the plants for re-inspection in FY17.

Others

Emerging Markets sales at US$ 124 million.

Rest of World sales at US$ 79 million.

API segment - posted 46% growth YoY, partly driven by consolidation ofOpioid business in Australia.

R&D expenses - 9.6% for 4QFY16 and 8.4% in FY16. The R&D expense washigher mainly due to clinical expenses for MK3222.

Absorica - Company believes that the potential for the product is far biggerand requires better marketing efforts as well as further trials to differentiateit from non-substitutable product.



Bromsite - Launch by ~Aug-Sep - 2016. Company expects to launch one morespecialty opthal product in FY17 (taking the total to 2) and have a dedicatedfield force of ~100 to market them.

Gleevec - Sun launched gGleevec in Feb-16 and has only booked two monthsof revenues and no inventory gains for future months.

Japan

The recent acquisition in Japan will act as a base for further built more sig-nificant business in the country.

Though the assets are consolidated in Sun's balance sheet as of FY16, thetransfer of rights of products and its marketing authorization will come by2HFY17. Hence, the profitability will be reflected in FY17E for full year butthe revenues will be booked only from 2HFY17. The revenues will be spreadover 2HFY17 as the marketing authorization for all products may not come atone go. The total revenues for the acquired business stood at US$160mn.

MK3222

Company is in the process of filing BLA to the USFDA for marketing the prod-uct in the US market. As per earlier guidance, MK3222 would requireUS$230mn of expenses mainly towards clinical trials for psoriasis. However,with plans to do trials for new indication would add up to the initial ear-marked amount. If Sun plans to target approval for these indications, theexpense would be similar to the amount spent on psoriasis indication($200mn+).

R&D expenses to remain high in FY17 - safety studies of Tildra, other exten-sion indication studies and pediatric studies will all result in higher R&Doutgo.

DOJ Subpoena

Timeline for the clearance of this issue is not clear yet. The issue does notpertain to any certain product.

Table

(Rs mn) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 YoY (%) QoQ (%)

Domestic formulations 15,690 17,840 18,187 18,903 18,066 15.1 (4.4)

Export formulations 43,425 44,941 47,215 47,513 52,800 21.6 11.1

- US formulations 30,477 30,744 33,158 32,003 39,103 28.3 22.2

- RoW formulations 12,948 14,197 14,057 15,510 13,697 5.8 (11.7)

Bulks 2,860 2,714 3,150 4,405 3,760 31.5 (14.6)

Others 122 214 142 207 165 35.2 (20.2)

Revenues 62,097 65,709 68,693 71,028 74,791 20.4 5.3

Source: Company

SUNP's typically guides conservativelyFor FY17E guided for a mere 8-10% growth in revenues in spite of gGleevec ex-clusivity for 4 months (US$140mn sales), consolidation of Japanese acquisition(US$60mn revenues). Adj for the same, base business growth comes around justat 4%. However, if one were to see the Sun's guidance historically, it has beenconservative compared to the actual growth delivered. Over the last 8-9 yearsSun has consistently outperformed over its guidance on revenue growth. In factin few years Sun has registered 2x growth of its guided growth. Though therehave been instance where Sun has got some one time opportunities which led tothe stupendous growth, consistent outperformance with a high margin pointstowards conservativeness in guidance. The only years where SUNP could notmeet its expectations were FY09 and FY15, which were impacted due to pecu-



liar issues like Caraco plant shut down and Halol plant compliance issues. Hencethough Sun has guided for 8-10% growth, we are modelling 14.6% growth, as-suming base business growth at ~10% and incremental revenues from gGleevecand Japan.

Revenue guidance

Year Guidance (%) Actual (%)

FY07 18 30.5

FY08 30 57

FY09 20 27

FY10 15 -9

FY11 18 47

FY12 18-20 40

FY13 18-20 41

FY14 18-20 42

FY15* 13-15 ~10

FY16 Flat to Negative 3

FY17 8-10 ??

*FY15 adj for Ranbaxy

Outlook and Valuation

Management guided for a mere 8-9% growth in revenues and also indicatedmargin pressures due to higher expenses towards building a specialty portfolioas well as higher R&D expenses. The sales guidance includes 4 months ofgGleevec exclusivity revenues (our assumption - US$150mn revenue) as well asconsolidation of Japanese acquisition (~US$60mn revenue). The Japanese acqui-sition will add revenues only for 5-6 months in FY17. Adj for these, the basebusiness growth for FY17E stands at a 4-5%. Keeping in mind the conservativeguidance, we build 14.6% growth in revenues for FY17E.

Our revised revenues for FY17E still stand lower by ~8.4%. We also revise ourEBIDTA margins lower from 35.7% to 33.1%. Our revised FY17E EPS now standsat Rs 29.0 vs. Rs 37.1. We roll our valuations to FY18E and continue to value Sunat 23x. Maintain BUY with a target price of Rs 915.

We maintain BUY on SunPharmaceuticals Industries Ltd

with a price target of Rs.915




KNR CONSTRUCTIONS LTD


KNR Constructions Q4FY16 results were ahead of our estimates. Netrevenue for the quarter grew by 15.7% yoy to Rs 2.96 bn and was ahead ofestimates of Rs 2.73 bn led by pickup in execution of new projects. EBITDAmargins for the quarter was ahead of estimates at 15.3%, up 170 bps yoyon account of contribution from some of the completed projects. PAT forthe quarter grew by 138% yoy to Rs 580 mn (Vs estimates of Rs 202 mn)led by interest on tax refund and tax write-back. KNR has strong currentorder backlog of Rs 45.5 bn which gives strong revenue growth visibilityfor the next 2-3 years. The company has received Rs 28.7 bn of new ordersin FY16 and targets to add Rs 20 bn of new orders in FY17, of which it hasalready added Rs 10.8 bn of orders in first two months of FY17. Themanagement has maintained its guidance of Rs 11 bn plus revenue in FY17on a conservative basis. We have revised our EPS estimates for FY17E toRs.40 (earlier Rs.36) by factoring in lower tax rate on MAT credit andintroduced FY18 estimates. The stock is currently trading at 11x on FY18EEPS of Rs 45 (after adjusting for BOT value of Rs 57). We maintain Buy onthe stock with revised target price of Rs 642 (Vs earlier Rs 595).

Standalone Result Table

Year to March (INR mn) Q4FY16 Q4FY15 % Chg Q3FY16 % Chg

Operating Revenue 2,943 2,557 15.1 2,035 44.6

Other Operating Revenue 15 - ! 16 (6.9)

Net Revenues 2,958 2,557 15.7 2,186 35.4

Raw Materials & Construction Cost 2,029 1,306 55.4 1,410 43.9

Gross Profit 929 1,251 (25.7) 775 19.8

Employee Expenses 116 110 4.9 106 9.4

Other Expenses 362 794 (54.4) 204 77.4

Operating Expenses 2,507 2,210 13.5 1,720 45.8

EBITDA 451 347 30.0 466 (3.1)

EBITDA margin 15.3% 13.6% 21.3%

Depreciation 110 126 (12.6) 108 1.5

Other income 154 54 184.8 16 842.9

Net finance expense 40 32 27.2 26 55.1

Profit before tax 455 244 86.7 348 30.8

Provision for taxes (125) (0) - 20 -

Reported net profit 580 244 137.6 328 76.6

As % of net revenues

COGS 68.6 51.1 64.5

Employee cost 3.9 4.3 4.8

Other Expenses 12.2 31.0 9.3

Operating expenses 84.7 86.4 78.7

EBITDA 15.3 13.6 21.3

Reported net profit 19.6 9.5 15.0

Tax rate (% of PBT) (27.4) (0.1) 5.6

Source: Company

Summary table - (Standalone)


Revenue 9025 11979 14641Growth (%) 3.0 32.7 22.2EBITDA 1554 1749 2159EBITDA margin (%) 17.2 14.6 14.7PBT 1301 1278 1603Adj. PAT 934 1125 1267Adj. EPS 33.2 40.0 45.0EPS Growth (%) 27.9 20.5 12.6CEPS (Rs) 73 58 65BV (Rs/share) 259 297 340Dividend / share (Rs) 3 2 2ROE (%) 24.9 14.4 14.2ROCE (%) 15.4 14.0 15.6Net cash (debt) (998) (1327) (998)NW Capital (Days) 90 94 90P/E (x) 16.7 13.9 12.3P/BV (x) 2.1 1.9 1.6EV/EBITDA (x) 10.7 9.7 7.7EV/Sales (x) 1.8 1.4 1.1


RESULT UPDATE

Pankaj [email protected]

+91 22 6218 6434



Q4FY16 revenue ahead of our estimates

Net revenue for the quarter was ahead of our estimates and grew by 15.7%yoy to Rs 2.96 bn (Vs our estimates of Rs 2.7bn) on pick up in the executionof new orders.

The revenue in Q4FY16 was contributed by pickup in execution in MaduraiRamanathpuram project, Tamil Nadu State highways projects,Thiruvananthapuram Bypass project, etc.

The company has added Rs 28.7 bn of new orders in FY16 and work on theseprojects are expected to pickup in FY17.

The company has guided for Rs 11 bn plus revenue in FY17 on a conservativebasis considering new projects bagged in the southern region are at initialstage and are taking time to pick up due to weather and site clearance re-lated issues.

As per management, the addition of Rs 10.8 bn of new orders in 2MFY17may help in achieving higher than targeted Rs 11 bn revenue in FY17. Webelieve that the company can achieve higher revenue that its guidance as-suming Rs 20 bn of new order inflows in FY17.

EBITDA & PAT moved up sharply on strong margins and tax write-back

EBITDA for the quarter was ahead of estimates and grew by 30% yoy to Rs451 mn as against our estimates of Rs 383 mn on account of better margins.

EBITDA margin for the quarter improved by 170 bps yoy and was at 15.3%Vs our estimates of 14%.

The higher EBITDA margins was on account of contribution from its olderprojects which were at final stage of completion and most of the cost on thesame were already booked. The management expects EBITDA margins cancome down to 13-14% in the coming years as the margins on the new EPCprojects would be relatively lower.

PBT for the quarter grew by 86.7% yoy to Rs 455 mn on account of higherother income and low depreciation. In the quarter, the company booked Rs58.6 mn as interest on income tax refunds for the prior year which resultedin higher other income. After adjusting the same, PBT grew by 63% yoy to Rs396 mn (up 63% yoy) Vs our estimates of (Rs 252 mn)

PAT for the quarter grew by 137.6% yoy to Rs 580 mn (Vs estimates of Rs202 mn) led by higher other income and tax write-back.

The company expects ~12% tax rate in FY17 and MAT rate for FY18 as itwould continue to claim 80IA tax benefits on the orders received till FY17.Since, the company has got refunds from IT department, we have adjustedtax rate in our estimates for FY17E & FY18E.

Current order book at Rs 45.5 bn, Target Rs 20 bn new orders inFY17

KNR has current order book of Rs 45.5 bn as against Rs 34.7 bn at the end ofQ4FY16 as it has added Rs 10.8 bn of new orders in 2MFY17. In FY16, thecompany added Rs 28.7 bn of new orders and in FY17 it targets to add Rs 20bn of new orders. Since it has already added Rs 10.8 bn of new orders in2MFY17, the company targets to add another ~Rs 10 bn of new orders in therest of the year.



The present order book gives very strong revenue growth visibility for thenext 2-3 years. The present order book is largely concentrated to southernregion comprising 87% of order book where the company has strong foot-hold. Roads sector contribute ~85% of the present order backlog and bal-ance is contributed by irrigation.

KNR is also targeting at hybrid annuity project and intends to add a few con-sidering government focus on the segment and huge opportunity in future.

Rise in debt and loans and advances at standalone level

The gross debt in the standalone balance sheet increased to Rs 1.17 bn andRs 7.4 bn on consolidated balance sheet with net debt to equity in standaloneand consolidated stood at 0.16x and 0.94x respectively. The standalone debtincludes borrowing from promoters of ~Rs 800 mn in order to meet increasedequity commitment in BOT projects.

Loans and advances in the standalone balance sheet increased from Rs 3.3bn to Rs 6.2 bn on yoy. The increase in the same was driven by Rs 1.3 bn in-fusion in Kerala BOT project, Rs 520 mn in Bihar BOT project and balance wasrelated to advance to subcontractors against which other current liability alsoincreased.

Increased equity infusion in Kerala project to reduce debt

KNR's BOT project in Kerala (Walayar -Vadakkancherry) is 100% completedand it has achieved final certificate of completion on 31st October 2015.Presently, the toll collection on the project is Rs 1-1.1 mn per day as againstearlier estimates of Rs 1.8-2 mn. The shortfall in toll collection is on accountof delay in completion of construction work at the adjoining stretches byother developers which resulted in traffic diversion.

Since the toll collection on the project is below estimates and the companywould not be able to service the original debt of Rs 5 bn through the presentcash flows. KNR reduced its debt in the project to Rs 3.5 bn through equitysupport from standalone balance sheet. As a result, the long term loans andadvances in the standalone balance sheet increased to that extent. With thisexercise, the rating of the project would also improve which will help in re-ducing interest cost. The company intends to further infuse Rs 500 mn in theproject in FY18.

Its another BOT project in Bihar (Muzaffarpur Barauni) with 51% stake (bal-ance 49% with JKM Infra) is 92.2% completed and revised COD is expectedby 30th June 2016. The company would be exiting from this project postcompletion.

Outlook and valuation

Based on strong current order book of Rs 45.5 bn and robust pipeline for futureprojects, we expect KNR's revenue growth to pick up from FY17 onwards. Webelieve that the company can achieve higher than its guidance in FY17 as itsnew projects picked up execution and new orders added in last two monthswould contribute to FY17 revenue. We have assumed Rs 20 bn of order inflowsper annum in FY17E and FY18E.

We have revised our earnings estimates for FY17E to Rs.40 (earlier Rs.36) con-sidering tax benefits claimed by the company and introduce FY18E estimates.The stock is trading at PE of 12.4x and 11x on FY17E and FY18E EPS of Rs 40and Rs 45 respectively after adjusting for BOT value of Rs 57 per share (Vs Rs 55earlier). We have reduced multiple for BOT projects from 1x to 0.5x consideringlower toll revenue and debt reduction met by increased equity commitment to-wards Kerala project. We roll forward our valuation multiple to FY18E and main-tain BUY with revised target price of Rs 642 (Vs Rs 595 earlier).

We maintain BUY on KNRConstructions Ltd with a price

target of Rs.642



Change in Estimates

Particulars Previous Revised Chg (%) NewRs Mn FY17E FY17E FY17E FY18E

Revenue 12031 11979 -0.4 14641

EBITDA 1746 1749 0.2 2159

EBITDA Margin% 14.5 14.6 9.7 14.7

Adj PAT 1011 1125 11.3 1267

Adj EPS (Rs) 36 40.0 11.3 45.0

Source: Kotak Securities Private Client Research

Valuation Table

Segment Parameter Multiple (x) Value (Rs Mn) Per Share (Rs)

Construction Business PE 13 16468 586

Road BOT BV of equity 0.5 1590 57

Consol KNR Value 18058 642

Source: Kotak Securities Private Client Research



Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

Tata Motors 315 11.7 NA 16.1

Tata Motors 460 9.1 NA 110.7

Autobinbdo Pharma 785 4.1 NA 4.2

Losers

Sun Pharma 763 (6.1) NA 15.7

Bharti Infra 375 (3.0) NA 3.1

TCS 2,569 (2.5) NA 1.9

Source: Bloomberg

Bulk deals Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

(Rs)

31-May CITIZYN Modi Prakashbhai Chunabhai B 35,794 4.9

31-May CITIZYN Sureshkumar Ratilal Daraji B 63,443 4.9

31-May DARSHANORNA Bhavna Paras Gathani B 40,000 60.7

31-May DELTA Trimline Agencies Pvt Ltd S 62,500 10.8

31-May GREYCELLS Malka Sanjiv Chainani B 160,000 34.0

31-May GREYCELLS Damodar Kapadia S 41,700 34.0

31-May JAUSPOL Hemant Gupta B 33,745 35.9

31-May KPEL Tia Enterprises Pvt Ltd S 44,000 90.0

31-May PINCON Youthvision Commodities Pvt Ltd B 176,093 113.6

31-May RESONANCE Dipak Kanayalal Shah S 100,000 18.2

31-May RESONANCE Camel Foods Pvt. Ltd., B 63,713 18.1

31-May SKILVEN Jaya Veera Venkata D Maddula S 25,000 21.6

31-May SPECIAPP Yadon Constructions Pvt Ltd B 781,700 0.5

31-May SRGHFL Sajankumar Rameshwarlal Bajaj B 75,000 59.1

31-May UVBOARDS Anil Dhedia HUF B 130,000 17.6

31-May UVBOARDS Subhash Chand Mantri HUF S 82,836 17.4

Source: BSE



RATING SCALE

Definitions of ratingsBUY – We expect the stock to deliver more than 12% returns over the next 9 months

ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months

SELL – We expect the stock to deliver negative returns over the next 9 months

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

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

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

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

NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.

Fundamental Research Team

Dipen ShahInformation [email protected]+91 22 6218 5409

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6218 6424

Teena VirmaniConstruction, [email protected]+91 22 6218 6432

Saday SinhaBanking, NBFC, [email protected]+91 22 6218 6437

Arun AgarwalAuto & Auto [email protected]+91 22 6218 6443

Ruchir KhareCapital Goods, [email protected]+91 22 6218 6431

Ritwik RaiFMCG, [email protected]+91 22 6218 6426

Sumit PokharnaOil and [email protected]+91 22 6218 6438

Amit AgarwalLogistics, [email protected]+91 22 6218 6439

Meeta Shetty, [email protected]+91 22 6218 6425

Jatin DamaniaMetals & [email protected]+91 22 6218 6440

Pankaj [email protected]+91 22 6218 6434

Nipun GuptaInformation [email protected]+91 22 6218 6433

Jayesh [email protected]+91 22 6218 5373

K. [email protected]+91 22 6218 6427

Technical Research Team

Shrikant [email protected] 22 6218 5408

Amol [email protected]+91 20 6620 3350

Derivatives Research TeamSahaj [email protected]+91 79 6607 2231

Rahul [email protected]+91 22 6218 5498

Malay [email protected]+91 22 6218 6420

Prashanth [email protected]+91 22 6218 5497



DisclaimerKotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage anddistribution house.Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE),Metropolitan Stock Exchange of India Limited (MSEI). Our businesses include stock broking, services rendered in connection with distribution of primarymarket issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited(CDSL). 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