Morning Insight 30 May 2012 - Business Standardsmartinvestor.business-standard.com/BSCMS/PDF/suzlon... · 2012. 6. 1. · debt, plans to raise about Rs 20 bn by listing its hospitals

MAY 30, 2012

Economy News The government said it has cleared 25 foreign direct investment (FDI)

proposals, including that of AIF III of Mauritius and Mumbai basedMicroqual Techno, worth Rs 29.73 bn (BS)

The Government may settle for a Rs 53-54 level against the dollar.Accordingly, it has indicated the use of policy tools for lifting the rupee tothis level. (BL)

The RBI has proposed to the finance ministry reducing the minimum lock-in debt investment periods for foreign institutional investors as a way toboost inflows and help protect a weakening rupee, a senior official said.(BS)

The debt-ridden textile sector can look forward to some relief as thegovernment has allowed restructuring of Rs 350 bn loans. (ET)

Short-term power prices have seen an increase of 20-25 per cent, with thehighest price at which power was traded touching Rs 5 per unit.Theaverage for power trading was Rs 3.5-4 per unit. (BS)

Corporate News Fortis Healthcare, which seeks to expand its clinical operations and cut

debt, plans to raise about Rs 20 bn by listing its hospitals business inSingapore, its chief executive said. The company's board has given an in-principle approval for the listing proposal. (BS)

State-owned gas utility GAIL India Ltd is planning to raise up to Rs. 7.50bn ($135.92 million) through bonds and is likely to launch the issue as earlyas next week, four bankers in talks with the firm said. (Mint)

Infrastructure major GVK said it has got environment clearance from theQueensland government in Australia for its $10 billion (about Rs 550 bn)Alpha Coal and rail project in Galilee Basin. The clearance is a majorachievement for the company and its Alpha Project which is considered tobe one of the biggest coal projects in Australia, GVK said. (BS)

State Bank of India (SBI) will approach Moody's to take a relook at itsrating of the bank. This comes in the backdrop of increase in capital of thebank. (BS)

The Competition Commission of India (CCI) has given the green signal toReliance Industries' acquisition of stake in the Raghav Bahl-promotedmedia firms Network 18 and TV18 Broadcast. (BL)

Hindustan Construction Co. Ltd (HCC) sold 20 acres of land along theMumbai-Pune expressway for Rs. 270 mn to encash a non-core asset, a topofficial said on condition of anonymity. (Mint)

The controversial merger proposal under which Escorts Ltd wanted tocombine three group companies with itself has been approved. Itmustered the "requisite majority" from shareholders in a 20 May vote,the Nanda family-controlled company said in a statement to the stockexchanges (Mint)

Equity% Chg

29 May 12 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 16,439 0.1 (5.1) (7.4)NIFTY Index 4,990 0.1 (4.9) (7.3)BANKEX Index 11,178 0.1 (5.5) (6.6)BSET Index 5,625 1.2 (1.4) (8.7)BSETCG INDEX 9,014 (0.1) (4.2) (13.5)BSEOIL INDEX 7,613 0.3 (4.4) (12.6)CNXMcap Index 6,996 (0.5) (6.4) (9.2)BSESMCAP INDEX 6,384 0.2 (5.6) (6.9)

World IndicesDow Jones 12,581 1.0 (4.8) (2.9)Nasdaq 2,871 1.2 (5.8) (3.2)FTSE 5,391 0.6 (6.0) (8.2)NIKKEI 8,657 0.7 (9.9) (11.8)HANGSENG 19,055 1.4 (11.4) (13.8)

Value traded (Rs cr)29 May 12 % Chg - Day

Cash BSE 1,703 9.3Cash NSE 8,510 15.2Derivatives 147,430 8.1

Net inflows (Rs cr)28 May 12 % Chg MTD YTD

FII 179 (149.2) (1,160) 42,309Mutual Fund 162 118.3 320 (5,637)

FII open interest (Rs cr)28 May 12 % Chg

FII Index Futures 14,346 3.8FII Index Options 45,191 0.9FII Stock Futures 23,982 2.6FII Stock Options 1,459 2.3

Advances / Declines (BSE)29 May 12 A B T Total % total

Advances 89 1,036 295 1,420 50Declines 113 912 256 1,281 45Unchanged 1 94 32 127 4

Commodity % Chg

29 May 12 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 90.4 (0.4) (13.8) (15.6)Gold (US$/OZ) 1,558.2 (1.1) (6.9) (10.0)Silver (US$/OZ) 27.9 (1.7) (10.8) (20.8)

Debt / forex market29 May 12 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 8.52 8.51 8.65 8.32Re/US$ 55.8 55.2 52.7 49.0

Sensex

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

15,000

16,600

18,200

19,800

May-11 Aug-11 Nov-11 Feb-12 May-12

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

MORNING INSIGHT May 30, 2012

NAGARJUNA CONSTRUCTION COMPANY (NCC)PRICE: RS.32 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.38 FY13E P/E: 13.6X

Result highlights: Revenues of the company were slightly better than ourestimates but operating margins were impacted by higher overhead costs.Profitability was impacted by high interest outgo and lower operatingmargins and came much lower than our estimates. We reduce our estimatesand maintain ACCUMULATE despite decent upside from the current levelssince we believe that stock may continue to underperform till order inflow,execution ramps up and interest rates come down.

Revenues reported a growth of 21% and 4% YoY for Q4FY12 and FY12 respec-tively. Full year revenue growth was impacted by lower execution on account oflack of order inflows during the fiscal.

Operating margins for Q4FY12 stood at 5.8%, lower than our estimates. Thoughcompany expects to maintain margins of 8.5% going ahead, we reduce our es-timates to factor in FY12 performance.

Earnings were impacted by steep increase in interest outgo and company posteda loss at the PBT level before other income. Net profit was boosted by higherother income but continued to remain below our estimates.

We revise our FY13 estimates to factor in poor performance witnessed duringFY12. At current price, stock is trading at 13.6x P/E and 8.1x EV/EBITDA on FY13estimates. Continued high interest rates coupled with high working capital cycleduring the fiscal had impacted net profit margins adversely for the company. Wecontinue to maintain ACCUMULATE despite decent upside from the current lev-els since we believe that stock may continue to underperform till order inflow,execution ramps up and interest rates come down.

Financial highlights

(Rs mn) Q4FY12 Q4FY11 YoY(%) FY12 FY11 YoY(%)

Net Sales 17,538 14,496 21% 52,485 50,674 4%

Expenditure 16,527 13,195 48,511 45,861

EBITDA 1,012 1,302 -22% 3,973 4,813 -17%

EBITDA margin 5.77% 8.98% 7.57% 9.50%

Depreciation (217) (186) (830) (685)

EBIT 795 1,116 -29% 3,143 4,128 -24%

Interest (984) (575) (3,840) (1,682)

EBT(exc other income) (189) 540 -135% (697) 2,446 -128%

Other Income 345 64 1,226 210

EBT 155 605 -74% 529 2,656 -80%

Tax (47) (248) (169) (1,021)

Tax (%) 30.24% 41.01% 32.00% 38.46%

PAT 108 357 -70% 360 1,635 -78%

NPM (%) 0.62% 2.46% 0.69% 3.23%

Equity Capital 513.17 513.17 513.17 513.17

EPS (Rs) 0.42 1.39 -70% 1.40 6.37 -78%

Source: Company

Summary table

(Rs mn) FY11 FY12E FY13E

Sales 50,674 52,485 57,733Growth (%) 6 4 10EBITDA 4,813 3,973 4,330EBITDA margin (%) 9.5 7.6 7.5PBT 2,656 529 913Net profit 1,635 360 602EPS (Rs) 6.4 1.4 2.3Growth (%) -30 -78 67CEPS (Rs) 9.0 4.6 5.7BV (Rs/share) 92.7 92.8 93.9Dividend / share (Rs) 1.3 1.3 1.3ROE (%) 7.1 1.5 2.5ROCE (%) 10.0 7.2 7.1Net cash (debt) (23,443) (23,900) (27,559)NW Capital (Days) 205.7 221.0 221.0P/E (x) 5.0 22.8 13.6P/BV (x) 0.3 0.3 0.3EV/Sales (x) 0.6 0.6 0.6EV/EBITDA (x) 6.4 7.9 8.1

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Teena [email protected]+91 22 6621 6302



Revenues slightly better than our estimates for the quarter Revenues reported a growth of 21% and 4% YoY for Q4FY12 and FY12 respec-

tively. Full year revenue growth was impacted by lower execution on account oflack of order inflows during the fiscal.

Though full year revenues of the company came in line with the revised revenueguidance of the company but due to uncertainty related to timing of order in-flow, company has refrained from giving any guidance for FY13. It expects theorder inflow of nearly Rs 85 bn for FY13 diversified across building, roads, irriga-tion, water supply and electrical segment.

Order inflow during Q4FY12 stood at Rs 10 bn while for full year it stood at Rs101 bn diversified across buildings, transportation, water and irrigation, electricaland other segments. It also includes order inflow of nearly Rs 52 bn from inhouse power project. Current order book of company stands at Rs201.9 bn diver-sified across roads (Rs 4.88 bn), water (Rs 22.64 bn), buildings (Rs 56.4 bn), irri-gation (Rs 20.64 bn), electrical (Rs 4.53 bn), oil and gas, mining and railways (Rs14.27 bn), international (Rs 15.28 bn) and power (Rs 63.3 bn).

Revenues in FY12 are diversified across roads (6%), water (17%), buildings(35%), irrigation (4%), electrical (7%), oil and gas, mining and railways (9%),international (14%) and power (8%).

We tweak our estimates and expect revenues to grow by 10% during FY13.

Status of key projects Brindavan Infrastructure road BOT Project is already operational

Bangalore elevated tollway project has average toll collection of Rs 22 lakh perday. It is lower than the breakeven levels of Rs 25 lakh per day.

Western UP tollway has received partial CoD and has commenced toll collectionand toll is around Rs 20lakh per day.

Pondicherry-Tindivaram toll collections have declined during Q4FY12 sequentiallyand has average toll collection of nearly Rs 3.5 lakh per day as against Rs 5 lakha day during Q3FY12.

Financial closure of 1320 MW Thermal Power Project at KrishnaPatnam, NelloreDist, Andhra Pradesh is achieved. Coal linkage for the project will be tied upwith Coal India (70%) and company is in queue for signing FSA with Coal Indiaand remaining coal is expected to be secured from Indonesian coal mines wherecompany will be investing $10 mn to develop the mines. It has already invested$2 mn. Civil work on this project has already commenced and company has alsoplaced the order to BTG suppliers. It expects to commission first phase of 660MWin 39 months by Jan, 2015 and second phase by March, 2015. For PPA's, com-pany is shortlisted for 500MW with Andhra Pradesh government at Rs 3.7 perunit. It is also likely to participate in biddings by Tamil Nadu and Karnataka gov-ernment. Due to lack of PPA's, we continue to remain skeptical about futuregrowth scenario of this project.

Himachal sorang project commissioning is delayed to Dec, 2012 due to local andhydrology related issues.



Operating margins impacted by higher subcontracting charges aswell as higher provisioning Operating margins for Q4FY12 stood at 5.8%, lower than our estimates.

Margins during the quarter were impacted by time and cost overrun in some ofthe projects coupled with increase in direct costs as well as subcontracting ex-penses. Company also made some provisions during the year for administrativeexpenses which were advances given to other parties and is now non-recover-able.

Though company expects to maintain margins of 8.5% going ahead, we reduceour estimates to factor in FY12 performance

Net profit performance impacted by lower execution and steepincrease in borrowings Earnings were impacted by higher interest outgo as well as lower than expected

execution and margins. It was also boosted by higher other income during thequarter.

Company has managed to bring down the debt from Rs 24 bn in FY11 to Rs 20.5bn by improving the working capital cycle led by higher mobilization advancesfrom the power project. However, inventories and loans and advances continueto stay at higher levels.

NCC plans to bring down the debt levels by monetizing some of the road assetsor power project. However, significant delays have been witnessed in this pro-cess. We believe that further delays in monetizing assets for reducing debt cancontinuously impact company's net profit margins.

We cut our estimates to factor in lower margins and continued high interest ratesand expect net profits to grow to Rs 602 mn for FY13 as against our earlier ex-pectation of Rs 895 mn.

Valuation and recommendation At current price, stock is trading at 13.6x P/E and 8.1x EV/EBITDA on FY13 esti-

mates.

We revise our FY13 estimates to factor in poor performance witnessed duringFY12.

Continued high interest rates coupled with high working capital cycle during thefiscal had impacted net profit margins adversely for the company.

We continue to maintain ACCUMULATE with a revised price target of Rs 38 (Rs57 earlier) despite decent upside from the current levels since we believe thatstock may continue to underperform till order inflow, execution ramps up and in-terest rates come down.

Sum of the parts valuation (FY13)

Segment Value per share Rationale

Core business valuation 16 Based on 7x one year forward P/E multiple

BOT projects 13 Based on NPV and P/BV methodology

Power projects 1 Based on P/BV methodology

Real estate and other inv 7 Based on P/BV of 1x of investments

Total value per share 38

Source: Kotak Securities - Private Client Research

We recommend ACCUMULATEon Nagarjuna Construction Co

with a price target of Rs.38



RESULT UPDATE

Ruchir [email protected]+91 22 6621 6448

SUZLON ENERGY LTD

PRICE: RS.21 RECOMMENDATION: REDUCETARGET PRICE: RS.20 FY13E P/E: 45.3X

Suzlon Energy reported Q4FY12 nos. in line with our estimates; higheremployee cost and interest charges led to decline in PAT for Q4FY12.

Emerging wind markets viz. Brazil and China remains on the growthtrack. US wind market offers poor visibility for FY13 due to expiry ofcash grants and PTC.

Company anticipates significant increase in competition among wind tur-bine players in domestic as well as international markets. However itexpects maintain market share and post meaningful growth in revenuesin FY13E.

Prevailing under capacity in the renewable energy space in India withchanging regulatory guidelines could lead to meaningful capacity addi-tion in India between FY11-FY15.

Company's consolidated order book currently stands at 5700 MW provid-ing approximately two years visibility. However we continue to remaincautious on the high net debt levels and interest outflow of the com-pany.

We continue to remain cautious on company's stock and maintain our'Reduce' rating on with one year forward revised target price of Rs 20 (Rs21 earlier).

Consolidated Financials

(Rs mn) Q4FY12 Q4FY11 YoY% Q3FY12 QoQ%

Income from operations 66995 72760 (7.9) 49858 34.4

other operating income 1157 961 20.4 477 142.7

Total income 68152 73721 (7.6) 50335 35.4

other income 401 295 35.8 300

Raw materials 46222 51096 (9.5) 33347 38.6

Forex loss 1 (2233) 343

Employees Cost 5300 4563 16.2 5277 0.4

Other expenditure 12594 9557 31.8 7304 72.4

Total Expenditure 64117 62982 1.8 46271 38.6

EBITDA 4035 10739 (62.4) 4063 (0.7)

depreciation 2018 2512 (19.6) 1704 18.5

Interest 4239 3625 16.9 4415 (4.0)

Exceptional Income 0 2160 (80)

Pft after int but bef excepnal (1823) 2737 (1675)

Pft from ord act before tax (1823) 2737 (166.6) (1675)

Tax expense 1167 458 154.7 1342

Net profit (2990) 2279 (231.2) (3017)

Add: Share in associate after tax 0 (86) 0

Add: Minority share in losses (13) (82) 153

Net profit after minority int (3002) 2111 (242.3) (2865)

EPS (Rs) (1.7) (1.6)

EBITDA% 5.9 14.6 1.2

RM/Sales 67.8 69.3 66.3

Source: Company

Summary table

(Rs mn) FY11 FY12E FY13E

Sales 180901 213592 275080Growth (%) (12.3) 18.1 28.8EBITDA 10472 18212 21926EBITDA margin (%) 5.8 8.5 8.0PBT (8784) (3690) 2842Net profit (13170) (4726) 824EPS (Rs) (7.5) (2.7) 0.5Growth (%) 17.9 - -CEPS (Rs) 7.7 8.6 (2.6)BV (Rs/share) 41.9 34.3 44.2Dividend/share (Rs) 0.8 0.0 0.0ROE (%) (20.6) (7.6) 1.4ROCE (%) 0.3 6.1 7.9Net cash (debt) (91424) (112659) (112299)NW Capital (Days) 140 127 106EV/Sales (x) 0.7 0.6 0.5EV/EBITDA (x) 12.6 7.2 6.0P/E (x) (2.8) (7.8) 45.3P/Cash Earnings (5.6) 20.4 5.6P/BV (x) 0.6 0.6 0.6




Result Highlights Suzlon reported consolidated revenue de-growth of 7.5% YoY at Rs 66 bn in

Q4FY12. Sales for FY12 stood at Rs 213 bn vis-à-vis Rs 180 bn in FY11 and weredriven by the domestic market.

Company reported consolidated EBITDA margin of 5.9% for the quarter. Webelieve that ongoing cost rationalizing drive and operating leverage has helpedin curtailing raw material pressure to some extent. However increase in otherexpenses at Rs 12 bn resulted in margin contraction.

Other expenses in Q4FY12 have increased by nearly 32% YoY due to change inproduct mix skewed towards higher turbine that requires higher provision for ven-dor payments. Management has stated that the currently industry has been ob-serving over capacity situation in lower turbines therefore expects pricing inhigher turbines to remain strong.

Realizations for Suzlon Wind stood at Rs 62 mn/MW vis-à-vis Rs 64 mn/MW inthe previous year. Company has been observing pricing pressure on account ofincreased competition in American and European region.

Employee expense has increased by 16% YoY to Rs 5.3 bn in the quarter. Man-agement has stated that it is taking continuous effort to avoid duplication of re-sources by streamlining the operations between REpower and Suzlon.

Consolidated Interest cost for the quarter increased significantly by 16% YoY toRs 4.2 bn vis-à-vis Rs 3.6 bn last year. We believe that this is mainly due tohigher working capital and increase of overall interest rates in the system.

In the past, we have been highlighting concern regarding current uptrend in in-terest rate cycle. We believe that this is likely to have a negative impact on thefree cash flow generation for the company.

At the end of the quarter, company reported consolidated cash figure of Rs 29bn vis-à-vis 19 bn in Q4FY11. Net Working Capital stood at Rs 48 bn as com-pared to Rs 50 bn at the end of Q4FY11. Company has observed YoY increase inreceivables at Rs 53 bn at the end of FY12 vis-à-vis Rs 33 bn last year.

For FY12, company has observed order flows of 3817 MW mainly contributed byREPower. Company has reported an order write off of 100 MW from one of theChinese customers in Q4FY12. Company's order book at the end of Q4FY12stands at 5700 MW MW implying average realization of close to Rs 60 mn/MW.

Lower operating margins and higher interest expense has resulted In a consoli-dated net loss of Rs 2.9 bn for the quarter vis-à-vis a loss of Rs 2.3 bn in Q3FY12.

High debt levels possess significant threat to free cash flow gen-eration over FY12E-FY13E; exposure to FCCB borrowings makescompany vulnerable to Forex fluctuations. Company at the end of Q4FY12 has a net debt of nearly Rs 111 bn. This includes

FCCB of USD 645 mn.

Out of the total sum of USD 645 mn, $246 mn (nearly Rs 12.3 bn) of FCCB areup for conversion in FY13. The details of these FCCB are stated below

Details of FCCB

Obligation ($ mn) Conversion price (Rs/share) Coupon Rate (%)

35.6 76.86 7.5

211 97.26 7.5

Source: company, Kotak Securities - Private Client Research

From current price of Rs 21 per share, it is difficult to assume that these bondswill get converted into equity. Thus we believe that the company has to repaythe obligation.



Moreover, in view of company's already stretched balance sheet situation is willhighly difficult for the company to raise funds in near future. The problem getsworse in the current situation where wind players have been one of the worst af-fected lots.

Company has been negotiating with various financial institutions to raise nearlyUSD 300 mn to meet the short term requirements. Management has also statedthat the company might sell off its non-strategic assets and generate cash ofnearly USD 100 mn which would be utilized for FCCB obligation.

However, we strongly believe that the stock would continue to remain underpressure as FCCB conversion date approaches.

Competition has been intensifying in wind energy space glo-bally; aggressive price cuts from Chinese players and regulatoryuncertainty in key European and US markets adds up to furtherIndustry woes Competition has been intensifying in wind energy space globally mainly driven

by lower prices quoted by Chinese turbine players.

USA, which is considered as second largest wind market after Europe, has beenobserving maximum pricing pressure. Pricing pressure exists across entire valuechain viz. from suppliers to project management companies.

Business outlook in European region appears far below the peak levels. Govern-ment of various countries within EU is reluctant in dealing with subsidy and taxincentives issues due to their stretched fiscal deficits position.

Suzlon claims that the introduction of REC's and other such incentives are likelyto provide thrust to the domestic wind market. However, we believe that thiswould be achievable in longer term after things get materialized in terms of poli-cies and infrastructure.

Domestic wind industry has been observing a lot of action from the internationalsplayers like Gamessa and GE trying to gain market share in India posing a threatto Suzlon that currently enjoys dominant position locally.

Order backlog provides 20-24 months visibility; fresh order in-take for Suzlon wind remain weak Suzlon current order book stands close to 5700 MW offering 18-20 months of

revenue visibility. Suzlon wind order book stands at close to 2056 MW including887 MW of international orders. Average realization of the order book stands atRs 60 mn/MW.

We opine that the current order book is still inadequate vis-à-vis capital goodspeers including BHEL and L&T, which boast of revenue visibility of 30-45 months.

Company continues to expect meaningful demand in the domestic businessdriven by increasing emphasis on green power generation by the regulator. Thecentral power regulator has made it mandatory for all power utilities to purchase6% green power of the total installed capacity in a year.

Company has bagged several orders in the domestic market in last few quarters.Successful implementation of REC's (Renewable energy certificate) trading andGBI (generation based incentive) has given the thrust to the domestic demand.

Financials & Valuations In recent quarters, the stock has been sensitive corporate developments focused

mainly on debt restructuring measures and balance sheet repair.

Going forward, the company needs to maintain momentum in terms of orderaccretion in absence of which we expect that the stock could continue to remainrange bound.



In our projections we build 29% YoY growth in consolidated revenues for FY13E.We expect that the company is likely to benefit from higher operating leveragebut would continue to observe margin pressure over next few quarters. In ourprojections we build 8% operating margins for FY13.

We expect valuations to remain under pressure for the sector and the companydue to 1) elusive business activity in wind energy space globally 2) government inEuropean region likely to remain reluctant in proving subsidy and tax incentivesdue to their already stretched fiscal deficits 3) higher debt levels of the companywith limited source of further restructuring.

We value company's stock on SOTP basis assign an EV/EBITDA multiple of 6x (at45% discount to peer group) for wind business on FY13E earnings and arrive ata target price of Rs 20 (Rs 21 earlier) on company's stock.

At current price of Rs 21 stock is trading at 45.3 x and 6.3x P/E and EV/EBITDAFY13E earnings respectively.

We maintain REDUCE rating on the stock with a SOTP based one year revisedprice target of Rs 20 (Rs 21 earlier).

SOTP

EV/EBITDA 6Wind Business EBITDA FY13 13601EV 82965Value of Repower stake 55897Net consolidated debt 103162.4Mkt value 35699No of shares 1777Target Price 20

Source: Kotak-PCG Research

We maintain REDUCE rating onSuzlon Energy with a price target

of Rs.20



MERCATOR LIMITED

PRICE: RS.20 RECOMMENDATION: BUYTARGET PRICE: RS.34 FY13E P/E: 8.3X

Subdued operational performance due to poor shipping marketMercator reported weak operational performance in the quarter withrevenues growing 31% YoY, but falling 7% QoQ to Rs 1.01 bn. The coalsegment (mining and trading) reported strong revenues of Rs 6.4 bngrowing 58% YoY, but again falling 6% QoQ. The operating margin for thecoal segment came in healthy at ~12%. In the shipping segment, theSingapore subsidiary reported PAT of USD 0.62 mn (falling 70% YoY) whilethe Indian shipping business reported loss of Rs 394 mn. The stockunderperformed the broader market in the last one year despite efforts ofthe company to diversify the business of the company as a hedge againstthe poor performing shipping segment. Company currently has diversifiedinto mining and has 3 mines in Indonesia with an estimated reserve of 75mn tonnes. It also has a Floating and Production Unit (FPU) and two oilblocks in Cambay basin in Gujarat in the offshore sector. We believe the coaland the offshore segment would drive the top line in FY13E withcontribution of coal (mining and trading) increasing from 47% in FY11 to62% in FY13E. IPO of Oorja Holding (mining business) is also expected inFY14E, which would be value accretive. Shipping segment would continueto go through a bad phase atleast for the next 3 to 4 quarters. We believethe price underperformance and IPO of Oorja holding offers an attractiveopportunity for investors to participate in the story which also has thebacking of the value of shipping assets.

We reiterate BUY on the stock with a target price of Rs 34 for the stock.Our target price is based on SOTP value of the different segments:Shipping= Rs 19: Mining = Rs 12 and Offshore = Rs 3. Downside risk to ourcall includes: 1) Further deterioration of the shipping market, 2)Fall in coalprices and crude price and 3) High leverage.

Key Financial highlights: Mercator Lines Ltd (MLL) reported subdued numbers with consolidated revenues

increasing 31% YoY, but falling 7% QoQ to Rs 1.01 bn amidst weak shippingmarket globally but strong performance of the coal segment.

Revenue of the coal segment was reported at Rs 6.4 bn growing 58% YoY, butagain falling 6% QoQ. The operating margin for the coal segment came inhealthy at ~12%

Revenues of offshore segment has remained flat in the quarter at Rs 564 mn. Inthe offshore segment the company currently operates a Floating Production Unit(FPU) deployed on long term contract.

Conolidated EBITDA was at Rs 1,461 million translating into EBIDTA margin of14.43%. The consolidated EBIDTA margin of the company has fallen primarilydue to increased share of low margin coal business in the overall revenues of thecompany and higher drydocking cost in the quarter (+200% QoQ).

Consequently the Shipping division reported a negative EBIT margin of ~8 %,coal division reported an EBIT margin of ~4%, while offshore reported an EBITmargin of 11%.

The company has booked a small loss on sale of ships (LSS) in the current quar-ter of Rs 3 mn.

Interest component has gone up in the current quarter to Rs 595 mn (previousquarter~ Rs 537 mn). The company currently has a of Rs 34 bn on the BS.

As a result the company has reported loss of Rs 243 mn

Summary table

(Rs mn) FY11 FY12 FY13E

Sales 28,259 36,684 43,851Growth (%) 56.2 29.8 19.5EBITDA 6,356 6,278 6,296EBITDA margin (%) 22.5 17.1 14.4PBT 965 522 729Net profit 440 203 588EPS (Rs) 1.8 0.8 2.4Growth (%) (17.3) (53.8) 189.4CEPS (Rs) 14.2 16.4 16.8BV (Rs/share) 94.6 95.1 97.0Dividend / share (Rs) 0.2 0.2 0.5ROE (%) 1.9 0.9 2.5ROCE (%) 4.7 3.8 4.1Net cash (debt) (25,354) (22,832) (20,672)NW Capital (Days) (51.1) (25.1) (29.4)EV/EBITDA (x) 4.8 4.4 4.1P/E (x) 11.1 24.1 8.3P/Cash Earnings 1.4 1.2 1.2P/BV (x) 0.2 0.2 0.2


RESULT UPDATE

Amit [email protected]

+91 22 6621 6222



Quarterly snapshot (Consolidated)

Rs Mn Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Shipping and offshore 3,518 3,305 3,529 3,757 3,773

Coal Mining/handling 4,283 4,687 4,282 7,244 6,422

Total revenues 7,801 7,992 7,811 11,001 10,195

QOQ growth (%) 0.3 2.4 -2.3 40.8 -7.3

YoY growth (%) 61.8 33.4 16.3 41.4 30.7

Operating exps 900 1,001 981 1,191 1,315

Bunker 400 523 551 556 340

Vessel Hire Charges 914 463 590 636 952

Coal operating expense 3,941 4,246 3,932 6,669 5,949

Employee Cost 38 100 94 102 162

Other Operating expense 161 105 38 85 121

Dry Docking 258 41 165 69 196

Exchange Fluctuation 10 -7 -38 -135 -301

Total Operating expenditure 6,622 6,472 6,313 9,173 8,734

EBITDA 1,179 1,520 1,498 1,828 1,461

EBITDA (%) 15.1 19.02 19.18 16.62 14.33

Depreciation 848 865 899 1,034 1,027

Interest (net) 436 428 473 537 595

Other income 16 23 11 0 43.00

Profit on sale of ship/ asset -219 0 0 0 -3.00

PBT -308 250 137 257 -121

Taxation 123 42 32 -2 151

MAT credit 0 0 0 0 0

PAT -431 208 105 259 -272

Minority Interest -26 -55 -38 -32 29.00

Exceptional -228 0 0 0 0

Adjusted PAT -685 153 67 227 -243

Source: Company

Coal business to play a significant role - Oorja Holding Pvt Lim-ited (OHPL)Mercator's coal business (mining and trading) is under its 100 % subsidiary OHPL.This company acquired coal mines in Indonesia and Mozambique in 2007. In Indo-nesia, OHPL owns 100% in two mines in Petangis (proven reserve of 15 mn tonnes)and 50% in mines in Kalimantan (proven reserve of 60 mn tonnes). Coal businesspicked up significantly in FY11 and FY12. The coal mining and trading business gen-erated revenue of Rs 23 bn and EBIT ~ Rs 1.4 bn in FY12 contributing ~60% of therevenues.

Mines owned by Mercator

No of Mines Proven Reserves Ownership Production per month Status

Petangis Mines

Two 15 mn tonnes 100% 80,000 tonnes Operational

No of Mines Proven Reserves Ownership Estimated Production per month Status

Batuah Kalimantan Mines

One 60 mn tonnes 50% 2 lakh tonnes by FY13 May-12

Source: Company



Quarterly performance of coal segment for Mercator

(Rs mn) Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Sales 4,283 4,687 4,282 7,244 6,781

QOQ growth 5.9 9.4 -9 69 -6

YoY growth 246.2 104.6 56 79 58

Operating Expd 3,941 4,246 3,932 6,669 5,949

Operating profit 342 441 350 575 832

Margins (%) 7.98 9.41 8.17 7.94 12.27

Source: Company

Estimation of performance of coal segment

FY09 FY10 FY11 FY12E FY13E FY14E

Mined 300,000 700,000 850,000 864,000 1,634,000 1,944,000

Procured for trading 0 1,000,000 4,900,000 6,125,000 7,656,250 9,570,313

Total traded tonnes 300,000 1,700,000 5,750,000 6,989,000 9,290,250 11,514,313

Revenues

Mining revenues 2,052 2,644 5,083 6,147

Trading revenues 11,829 18,743 23,819 30,261

Total revenue Rs Mn 770 4,383 13,881 21,386 28,902 36,408

Source: Company and Kotak Securities - Private Client Research

Coal mining and trading business is a fast growing and a low Ebidta margin businessfor the company.

New coal pricing policy in Indonesia has not impacted the com-pany.New Indonesian policy which aligns the royalty paid on the selling price of coal withinternational markets under the benchmark prices called the HBA Index has notimpacted the company. Management indicated that the above coal policy wouldincrease the coal prices only marginally (by $5 per tonne) and estimate to not im-pact the volumes as the demand for the commodity is robust in India and China.Mercator is primarily involved in sale of coal with a calorific value of 5300 and thiscoal is one of the most cost effective coal available to Indian customers from Indone-sia.

Listing of Oorja Holdings on the anvil - Value accretive, expectedin FY14EMercator is looking forward to get the 100% mining subsidiary listed (Oorja holdingltd) which would lead to value unlocking for the parent company. We believe thelisting of Oorja holding would be at average multiple of global mining cum tradingcompanies and may provide an upside of ~20 % from the current levels. Mercatorltd may get the subsidiary listed in FY14E. We estimate the equity value of Oorjaholding at ~ Rs 9 bn which is 4.5 x EV/EBIDTA FY14E. Listing of Oorja Holding (coalbusiness) may provide some momentum to the stock.

Offshore business - small part of the business but generateshealthy cash flowIn the offshore segment the company currently operates a Floating Production Unit(FPU) - A FPU is a combination of Mobile Offshore Production Unit (MOPU) and aFloating Storage and Offloading Unit (FSO) which is on long term contract with AfrenPlc. - a U.K. based company having its operations in Nigeria. The MOPU has a pro-cessing capacity of 50,000 barrels oil per day while the FSO has storage capacity of1.2 mn barrels oil. The day rate for the FPU is $115,000 per day with an opex of$40,000. Mercator Limited had earlier made a capital commitment of $120 mn forthe FPU completely through debt. We estimate the FPU to be generating ~Rs 500mn of free cash flow for the company per annum.



Another project in the offshore segment involves conversion of a Mobile OffshoreDrilling Unit (MODU) into Mobile Offshore Production Unit (MOPU) for ONGC.Mercator and Gulf Piping Company, Abu Dhabi had won the EPC contract In No-vember 2011. The scope of work for this project includes Surveys, Design, Engineer-ing, Procurement, Fabrication, Transportation, Jack up, Hook-up, Testing, Certifica-tion/Inspection, Pre-commissioning, Start-up and Commissioning of entire facilitiesincluding demolition of existing Drilling equipment for the conversion to Mobile Off-shore Production Unit (MOPU).

Assets in oil and gas segment obtained under NELP VIIIn December 2008, Mercator signed Production Sharing Contracts with the Govern-ment of India for exploration of crude in two blocks under the Seventh New Explo-ration Licensing Policy round (NELP-VII). Mercator is the operator of these blocks.The "S-Type" blocks are situated onshore in the prolific Cambay Basin of Gujarat.Currently seismic studies are on at the blocks, results for which are expected in thenext two quarters. These blocks can be potential assets for the company if oil is dis-covered on them. We are currently not factoring any value from these blocks in ourestimates.

Tough phase for shipping business continues - Supply side pres-sure continuesIn the dry market, the BDI is at 1,000 points level mark with oversupply of shipscontinuing to haunt the market. Even the tanker market is very soft with oversupplyof ships and minimum tonnage available. We are not bullish on the shipping busi-ness for the next 3 to 4 quarters primarily due to oversupply of ships in the bulksegment (net supply of 7 to 8% per annum) and even in the tanker segment (netsupply of 3% per annum) in CY12E. However with receding orderbook in all the keysegments and slowing of fresh orders, we estimate that the shipping markets mayshow signs of recovery in CY13E.

Fall in dry bulk order book

May-12 Jan-12 Dec-10 Jun-10

Dry bulk fleet 602,936 575,002 494,938 461,276

Orderbook 165,640 196,450 252,214 259,126

Orderbook as % of fleet 27.5 34.2 51.0 56.2

Source: Bloomberg

Current shipping fleet of Mercator Limited

Tanker fleet (crude and product)

In the tanker segment company currently owns 4 tankers (total dwt = 0.61 mn Dwt)and 3 Medium Range product carriers (total dwt = 0.13 mn dwt). It has also takena chemical tanker with a capacity of 20,000 dwt on charter. Management indicatedthat in the tanker segment the company has more than 70% of the ships on me-dium to long term time charters.

Bulk carrier fleet

In the bulk segment company owns a fleet 15 bulk carriers (total dwt = 1.34 mndwt) and has taken 3 Post Panamax (each of 92,000 dwt) on charter. In the bulksegment management indicated that, the company has more than 60% of the fleeton medium to long term time charters.

As shipping markets are currently going through a bad phase, time charters whichtypically have freight rates above the spot market in a bearish shipping market, ishelping Mercator Limited generate cash flows which is just enough to cover theoperational and capital cost associated with these shipping assets.



Dredging Segment

In the dredging segment, Mercator Limited owns 6 Trailer Suction Hopper Dredgershaving capacities ranging from 4,500 m3 to 7,000 m3. All the dredgers are de-ployed on short term to medium term contracts across various ports in the countryfor maintenance dredging.

Company not looking to sell any assetAs asset prices, especially the second hand asset prices are highly depressed,Mercator is not looking forward to discard or sell any of their assets at current mar-ket prices. The average age of the fleet of Mercator is 10 years.

Asset prices continue to be under pressure - however we believe this is the bottomof the asset prices

5 year old asset prices ($ mn)

May-12 Jan-12 Jun-11 Dec-10 YoY % fall QoQ % fall

Aframax 32.0 33.3 40.0 44.8 20.0 3.9

Suezmax 45.0 49.0 57.0 62.0 21.1 8.9

VLCC 59.0 57.0 81.0 89.5 27.2 -3.4

Handy Size 17.0 19.0 25.5 27.0 33.3 11.8

Supramax 22.5 25.0 31.3 32.3 28.0 11.1

Panamax 24.7 26.5 37.8 39.5 34.6 7.3

Capesize 34.5 37.0 54.0 55.5 36.1 7.2

Source: Bloomberg

Net Asset Value (NAV) has fallen by 15% in the last one quarterAsset prices (especially second hand) across categories have fallen in the last sixmonths as most of the ship owners are resorting to distress sales of shipping assetsas they are not able to cover even the operating cost associated with the asset. Weestimate the current Net Asset Value (NAV) of the company at Rs 31 per share (pre-viously Rs 35 in December 2011).

Estimation of Replacement value of shipping assets as on May 2012

Particulars US$ mn

Bulk Carriers 337

Tankers 145

Dredgers 60

Gross NAV ($ mn) 542

Conversion (Rs per $) 51

Gross NAV (Rs mn) 27642

Net debt ( of shipping business) 20000

Net NAV (Rs mn) 7642

Equity capital 245

NAV per share 31.2

Discount % 40

Value per share 18.7

Source: Kotak Securities - Private Client research



Consolidated Capex - company to invest primarily in mining busi-nessGoing forward the company would be primarily concentrating and investing in themining business. The management indicated that the investment would be ~Rs.2.5bn per annum over FY12 -FY14E. Such investments would give a fillip to the miningand trading volumes for the company. This would act as a hedge for the companyagainst the cyclical shipping business.

Margins to fall rapidly over FY11 to FY13E as contribution of coalin overall revenues increase and shipping markets remain sub-duedEbidta margin of ~30% (FY11) of Mercator's core business of shipping has been ona decline with falling shipping freight rates. Further we estimate the share of lowEbidta margin (8%) coal business to increase to 66% in FY13E from 47% in FY11.We estimate the above two factors would drag down the Ebidta margin of the com-pany from ~23% in FY11 to ~16% in FY12E and further to ~14% in FY13E. Fallingmargins would also impact the return ratios of the company.

Debt of the company to recede going forwardImproved profitability, huge depreciation, negative working capital and minimumcapex would help the company generate free cash flow of ~Rs 4 bn over FY11 toFY13E.

Change of name to Mercator LimitedRecently the name of the company has been changed from Mercator Lines Limitedto Mercator Limited. This is one of the efforts of the company to portray itself as adiversified company.

Valuation - We value Mercator Limited at Rs 34 per shareWe do SOTP valuation for Mercator Limited. We value the Shipping (includingdredging business) at 40% discount to NAV or replacement value which is Rs.19 pershare (NAV = Rs.31 per share), the mining business at 4x FY13 EV/EBIDTA (discountto global average) and low margin coal trading at 2x FY13E EV/EBIDTA, with com-bine value of coal business at Rs.12 per share and the offshore business at 6.0 xFY13E EV/EBIDTA (20% discount to global average) which is Rs 3 per share. Wereiterate BUY with a price target upto March 2013 of Rs 34.The price target of Rs.34implies a healthy upside of 70% for the stock in a period of 10 months to March2013. In our latest valuation we have increased the discount from 30% to 40% forthe shipping assets to factor in continued weakness in the shipping market, whilethe value of the fast growing mining business has increased from Rs 11 per share toRs 12 per share.

Valuation table

Segment Parameter Multiple Value

Shipping NAV 40% discount 18.7

Coal Mining EV/EBIDTA 4 x 11.8

Coal Trading EV/EBIDTA 2 x

Offshore EV/EBIDTA 6 x 3

Fair value 33.5

Source: Kotak Securities - Private Client Research

We reiterate BUY on Mercatorwith a price target of Rs.34

}



GATEWAY DISTRIPARKS LTD (GDL)PRICE: RS.145 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.154 FY13E P/E: 9.6X

Slightly subdued performance from Container Freight Station(CFS) and Container Rail SegmentGDL reported its consolidated net profit at Rs 327 mn (-8%YoY, -3% QoQ). Itwas a tad above our expectations of Rs 325 million. Revenues have grownby ~52% YoY to Rs 2,554 mn. We were unhappy with the performance ofthe key CFS segment. Volumes of the CFS segment has de grown 12% YoYand 3% QoQ to 76,992 primarily due to poor performance of Chennai CFS aswell as JNPT CFS. Even the realisation of the CFS segment has fallen to Rs9300/TEU from Rs 9,800/TEU QoQ as company has rationalized the tariffs(due to competition) plus the dwell time in the current quarter has fallen to10 days (previous quarter 12 days). However the performance of thecontainer rail segment was healthy for which the volumes have increased~30% QoQ and 51% YoY to 55,560 TEUs.The company continues to operate21 rakes primarily on Exim routes for the last 4 quarters. With Indianrailways behaving inconsistently in increasing the rail haulage charges,coupled with import/export mismatch, the margins have dipped by 240 bpsQoQ to 14.1% in the container rail segment. Operational performance of thecold chain business is stable but it continues to be a small part of theconsolidated entity. We assign a target price of Rs 154 for the stock andreiterate Accumulate. Downside risk to call includes: 1) Deterioration in Eximtrade. 2) Further competition in the CFS segment and 3) Competition in railhaulage business.

Financial highlights are: Consolidated revenues grew by ~52% YoY and 31% QoQ in Q4FY12 to Rs 2,554

mn.

Consolidated operating margins has decreased by ~630 bps to 25.2% QoQ ledby margin contraction both in the container rail segment and CFS business asoperational cost increase and competition intensifies.

The effective tax rate has increased for the company to 30% in the current quar-ter from average of 15% over FY07 to FY11.This was due to the CFS businessattracting full tax from FY12 (benefit under section 80IA was available until FY11end).

Consequently net profit after minority interest has fallen by ~ 8% YoY to Rs 320mn in Q4FY12.

Quarterly financial performance (consolidated)

(Rs mn) Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Revenues 1678 1830 1841 1,942 2,554

Growth QOQ (%) 9.5 11.9 0.8 5.5 31.5

Growth YOY (%) 20.9 42.8 34.9 25.6 52.2

Expense 1,140 1,212 1,194 1,330 1,910

EBIDTA 538 618 647 612 644

EBIDTA (%) 32.1 33.8 35.1 31.5 25.2

PAT (Adj) 350 334 335 331 320

Growth QOQ (%) 27.7 -11.4 0.5 -1.2 -3.23

Growth YOY (%) 38.3 138.6 63.4 18.2 -8.49

Equity Capital 1,078 1,078 1,078 1,078 1078

EPS (Rs) 3.2 3.1 3.1 3.1 3.0

Source: Company

Summary table

(Rs mn) FY11 FY12 FY13E

Sales 5,893 7,929 9,093Growth (%) 14.0 34.6 14.7EBITDA 1,577 2,410 2,794EBITDA margin (%) 26.8 30.4 30.7PBT 1,018 1,802 2,194Net profit 964 1,335 1,625EPS (Rs) 8.9 12.4 15.1Growth (%) 21.6 38.5 21.7CEPS (Rs) 13.5 18.3 21.3BV (Rs/share) 67.5 75.9 87.1Dividend / share (Rs) 5.0 4.0 4.0ROE (%) 13.2 15.7 16.6ROCE (%) 7.7 10.7 11.5Net cash (debt) (3,123) (3,033) (2,630)NW Capital (Days) 2.6 14.5 19.7EV/EBITDA (x) 9.8 6.6 5.7P/E (x) 16.2 11.7 9.6P/Cash Earnings 10.7 7.9 6.8P/BV (x) 2.1 1.9 1.7


RESULT UPDATE

Amit [email protected]

+91 22 6621 6222



CFS business performs poorly on the volume frontVolumes at all the CFS for GDL has de grown by 12% YoY and ~ 3% QoQ to76,992 TEUs. We reckon this drop in volumes because of stagnant port volumes atJNPT and increased competition. We now expect the total CFS volumes for the com-pany to grow by 12% (earlier 16%) to 3.7 lakh TEUs in FY12 in FY13E with the startof the Vallarpadam facility. Even the realizations per TEU was under pressure inQ3FY12 to ~Rs 9,300/TEU from Rs 9,800/TEU QoQ as the company has rationalizedthe CFS tariffs plus the dwell time in the current quarter has fallen to 10 days (pre-vious quarter 12 days). We believe the high realisation in the segment is not sustain-able as dwell time may come down further (due to EXIM imbalance) and also be-cause of competition.

Performance of CFS business

CFS business Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Mumbai 60,797 59,340 57,756 50,650 50,941

Chennai 18,477 23,140 19,138 19,237 16,870

Kochi/Vizag 8,248 8,379 9,996 9,460 9,181

Throughput (TEUs) 87,522 90,859 86,890 79,347 76,992

QOQ % 1.0 3.8 -4.4 -8.7 -3.0

YOY % 15.8 19.9 4.1 -8.4 -12.0

Revenue (Rs Mn) 706 801 794 777 715

QOQ % 13.6 13.6 13.6 13.6 13.57

YOY % -9.1 72.3 50.4 6.8 6.84

Revenue per TEU 8,067 8,816 9,138 9,795 9,287

EBIDTA 364 434 418 404 377.6

EBIDTA (%) 51.6 54.2 52.6 52.0 52.8

PAT 307 281 276 270 239

Source: Company

Current FacilitiesGDL currently has CFS operations in four locations and ICD operations at Garhi andLudhiana. The below mentioned table explains the current facilities of GDL group.JNPT continues to be the key CFS for the company.

Current facility of GDL

Location CFS/ICD Area Current Capacity(acres) (TEUs) Status

JNPT CFS 35 216,000 Fully operational

Punjab Conware CFS 27.5 150,000 Fully operational

Chennai CFS 19 80,000 Fully operational

Kochi CFS 20 24,000 Fully operational

Garhi ICD 90 120,000 Fully operational

Ludhiana ICD 33 140,000 Fully Operational

Faridabad ICD 66 90,000 Partly Operational

Vallarpadam CFS 8 75,000 H2FY13

Source: Company



Vallarpadam Container Freight Station (CFS)Company in Q3FY11 had won a contract to operate a CFS at Vallarpadam (Kochi)close to International Container Transshipment Terminal (ICTT), which would boostthe CFS business of the company from FY13E. This is 60:40 joint-venture of the com-pany and the Chakiat group. Vallarpadam is a transshipment port and would prima-rily replace the transshipment requirement of India shifted from Colombo andSingapore. Currently dredging work is been undertaken at the port to increase thedraft to enable large size container vessels to enter the port which would be over byend of June 2012.

Volume at Vallarpadam - At Vallarpadam the company has one plot of land which isof 6.5 acres and on which the company is currently constructing a CFS which wouldhave a capacity of 50,000 TEUs from FY13E. GDL has another plot of 20 acreswhich is at some distance from the port and which the company would utilize infuture to expand the CFS capacity. We estimate GDL's Vallarpadam CFS to handleabout 25,000 TEUs in FY13E and 27,000 TEUs in FY14E. Since it is a transshipmenthub (unlike JNPT and Chennai), we need to wait and see how volumes develop forall the CFS's at the port once transshipment activity starts.

Faridabad ICD has started operations in February 2012This ICD would have a total capacity of 100,000 TEUs per annum and has beenpartly operational from Q4FY12. Management has indicated that the container trainservice would begin from the terminal only in FY13E.This terminal is close to con-gested Tughlakabad ICD of Concor ( key ICD with 20% of total volumes for Concor)and which handles close to 450,000 Exim TEUs per annum. GDL expects some ofthese volumes to shift from Tughlakabad to their ICD at Faridabad from FY13E on-wards. Post the rail connectivity in place from FY13E, we anticipate volumes ofFaridabad to grow at healthy pace.

Container rail businessAs expected, Gateway's container train business continues to be in black (5th con-secutive quarter). The volumes were healthy in the quarter as the company hasstarted new routes with smaller margins in the domestic segment. The volumes haveincreased ~51% YoY to 55,560 TEUs. The fill factor in the quarter for the companyhas 83% which we believe has fallen in the last 2 quarters from 87%.The manage-ment indicated that the company has started new Exim cum domestic service fromSanand and Jodhpur which has impacted the margins of the rail business in the cur-rent quarter. We believe margins may have got impacted even due export importimbalance at various ports which leads to empty running.

Performance of rail segment

Rail Business Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Throughput (TEUs) 36822 39159 43057 42,697 55,560

QOQ % 6.7 6.3 10.0 -0.8 29.9

YOY % 15.9 37.6 36.4 23.8 50.9

Revenue (Rs Mn) 842 896 957 1,002 1,655

Revenue per TEU 22,867 22,881 22,226 23,468 29,780

EBIDTA 143 154 163 165 232.5

EBIDTA (%) 17.0 17.2 17.0 16.5 14.1

PAT 38 46 52 51 75

Source: Company



Rail Haulage business - 5 to 6 rakes to be added till FY13, morefocus on Exim segmentGDL currently owns 21 rakes. Almost 2/3 of these rakes run on Exim routes whichare more profitable because of low empty running and assured cargo. Going forwardthe company intends to add 5/6 more rakes and most of them would be primarilyplaced on Exim routes. Company currently runs Exim operations primarily out ofJNPT and Mundra and would start Pipavav service in the current financial year. Startof Faridabad ICD operations should help improving the Exim business and overallEbidta margins of the company.

Cold Chain BusinessGDL operates the cold chain business through Snowman Frozen Foods (GDLowns 50.12% stake) which has 16 cold stores spread across the country with a totalcapacity of 19,000 pallets, It also operates around 120 refrigerated trucks and hasthe capability to handle variety of products. GDL would be investing around Rs 200million in increasing the capacity to more than 30,000 pallets in the next 30 months.In our view, this business will take time to scale up for GDL given that the industryis still nascent. This segment reported topline of Rs 185 mn in Q3FY12. Managementhas guided that this segment would contribute Rs 1000 mn in revenues by FY13E(we estimate Rs 798 mn) with an EBIDTA margin of 20%.

Performance of the cold chain business

Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Revenue (Rs Mn) 139 134 137 163 185

EBIDTA 31 31 32 42 34

EBIDTA (%) 22.3 22.8 23.4 25.8 18.1

PAT 10.1 7.7 7.9 11.0 6.8

Source: Company

Capex to drive toplineGDL would be spending around ~Rs 2 bn on network development (ICD/CFS), pur-chasing rakes for its haulage business (rakes) and expanding cold chain businessover the next 24 months.

Committed capex as on May 2012

Capex Rs mn FY13E FY14E

CFS/ICD 200 200

Rail Haulage/ICD 820 820

Cold Chain 100 100

Total 1120 1120

Source: Company

The capex would be primarily done through internal accruals. The company currentlyhas a cash balance of Rs 1.5 bn and gross debt of Rs 1.2 bn (excluding PE invest-ment by Blackrock of ~ Rs 3 bn) on the balance sheet with operating cash flowgeneration of Rs 2 bn in FY13E ( FY12 = 1.4bn). The above capex would expand itscapacity from current two ICD at Garhi and Ludhiana and 21 rakes to three ICDs(added Faridabad in Q4FY12) and up to 26 rakes by FY13E. With this capex we ex-pect GDL's sales to grow at 15% in FY13E.

Key risk- fall in Global TradeThe most important risk to GDLs business is the fall in global trade. Sharp deteriora-tion in overall economy/ trade would have a substantial negative impact. Exim tradetypically grows at ~2x growth in GDP, and any significant drop in India's GDPcould lead to a sharp deceleration in Exim trade growth, impeding GDL's growthprospects.



Valuation and OutlookGDL is into multiple businesses 1) CFS - slowing down but steady 2) rail business -capital intensive, fast growing venture and highly competitive 3) cold storage busi-ness - small and nascent but a big opportunity.

Combining GDL's various businesses of different capital intensity and differentgrowth trajectory; we value the company on 3 financial parameters on FY13 basis -EV/EBITDA (6x), P/B (2x) and P/E (10x). We assign a target price of Rs 154 for thestock and ACCUMULATE. From the CMP of Rs 145 the stock has an upside of 7 %.

We recommend ACCUMULATEon GDL with a price target of

Rs.154



Trade details of bulk deals

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

(Rs)

29-May Adi Finechem Gemini Private Trust B 50,000 81.9

29-May Adi Finechem Moneybee Securities Pvt Ltd S 50,000 81.9

29-May Chandra Prab Piyush Jain B 155,000 18.3

29-May Chandra Prab Hemlata Jain B 258,000 18.3

29-May Chandra Prab Vikas Jain B 115,000 18.3

29-May Chandra Prab Gajraj Jain S 528,000 18.3

29-May IFL Promoters Vinay Sharma B 48,000 5.8

29-May Invicta Meditek Sanjay Jethalal Soni HUF S 53,546 23.8

29-May Jaihind Syn Vinod Ram B 24,925 15.9

29-May Kwality Cred Sangam Agro Agencies Pvt Ltd S 30,524 31.7

29-May Mangalam Timb Radiant Financial Services Ltd B 100,000 30.0

29-May Parichay Invest Sanjay Jethalal Soni Huf B 25,962 135.4

29-May Parichay Invest Ashlesh Gunvantbhai Shah S 10,000 135.4

29-May Parichay Invest Jhaveri Sanjeev Burman S 28,678 135.4

29-May PM Telelinnks Shaishil Tusharkumar Jhaveri B 52,167 172.4

29-May Rander Corp Sanklap Vincom Pvt Ltd B 63,880 49.7

29-May Rushil Decor Niraj Realtors & Shares Pvt. Ltd. B 110,000 208.5

29-May Sanguine Media Seema Dhruva Mall B 1,250,000 2.1

29-May Sanguine Media Naseen Tradelink Pvt Ltd S 690,713 2.1

29-May South Indian Bk First Carlyle Ventures Mauritius B 22,622,348 26.5

29-May South Indian Bk India Capital Management LtdA/C India Capital Fund Ltd S 20,000,000 26.5

29-May Steel Exch-$ S Uttamchand S 200,000 61.6

29-May Sybly Inds-$ Parveen Kumar B 2,342,001 0.3

Source: BSE

Bulk deals



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

Gainers

Infosys 2,410 1.0 3.7 0.6

Tata Consultancy 1,240 1.3 2.6 0.8

Wipro 410 2.5 1.6 0.7

Losers

ITC 231 (1.8) (7.2) 5.3

HDFC Bank 505 (0.8) (2.2) 2.6

HDFC 661 (0.5) (1.6) 2.0

Source: Bloomberg

Fundamental Research TeamDipen ShahIT, [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, Cement, Mid [email protected]+91 22 6621 6302

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

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun [email protected]+91 22 6621 6143

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

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

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

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

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 TeamSahaj [email protected]+91 22 6621 6343

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

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