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Professional Investors Theme Day

Emerging Investment Ideas


An End is Only A Beginning in Disguise

What a beginning we had in 2017! Full of surprises and unforeseen events, 2016 was a year of volatility, uncertainty,
ambiguity and confusion. Brexit, Trump election and of course Demonetization all swung the market sentiment. Who
could have thought of any of these events coming true when the year began? Though each of these events was capable
of having profound negative impact on the markets, but it didnt. In fact post trump election Dow Jones in one of the
sharpest rallies, has added Indias complete market capitalization of $ 1.6 trn to itself.

Ever since Modi rally began in Jan 2014, growth in India, as always, seemed just 2 quarters away. While this mirage
chasing continued in 2016, last 8 quarters of poor earnings growth, a stronger dollar and demonetization took its toll on
investor psyche. Be that as it may, markets dont move by looking in the rear view mirror. So it forces us to focus on
2017. While it may be fool hardy to predict growth timelines, one thing is for sure- that we are trading at very attractive
valuation. The interest rates in any economy are akin to the reins of the horse tighten the reins and horse slows down
and release it to let the horse gallop. 2016 saw one of the sharpest falls in bond yields ever. Consequently the interest
rate spread between 10 year paper and Nifty earning yields at just 40 bps is one of the lowest levels in last decade. This is
a strong and clear inducement to markets, that it is time to begin the gallop.

So what will be the trigger for the markets to recognize these fundamentals and respond? While there may be many, but
one which appears to be on the horizon is global growth. Global head winds are turning to tail winds. Developed
economies are witnessing growth and inflation uptick. The difference between EM growth rate vs DM growth rate is also
increasing again even adjusted for higher DM growth. While bullish equities is clearly a trend that we forecast for the
2017 what else of interest could play out. We foresee few large trends globally coming to some level of fruition.

Disruption in global automobile markets as electric cars, Uber taxi service and automated driving begin to take hold.
Globally about 90 mn automobiles are produced annually with most of the heavy lifting being done by just 10
companies or so. Industry at $ 3 Trn employing 60 mn people, is on the verge of serious disruptions. This could
seriously impact car demand as utilization of radio taxi is normally said to be 5x that of a privately owned vehicle.

Second will be the trend of disruption in energy sector. 65% of Global oil demand is focused towards transportation
sector. Of the 96 mn barrels of oil that world consumes daily, just a million barrel reduction in demand plays havoc
with demand and supply. This demand is under serious threat as electric vehicles take ground. This effect could get
further accentuated by the fact that shale with ever decreasing costs is anyway creating pressure on conventional oil,
as crude moves back close to 55$, close to the break even cost for shale.

On the domestic front pick up in manufactured exports in the textile sector in India could be a big trend.
Governments intentions in this regard are becoming clearer by the day with focus on rejuvenating the sector which is
the largest employer after agriculture.

As we move deeper into an eventful 2017 a stock market investor would do well to remember that while stock markets
trends are your friends till they last, but serious wealth creation could happen only with bottoms up stock picks.

Happy hunting.

1 Edel Invest Research


Edelweiss Professional Investors Theme Day- Emerging Investment Ideas:- About the Event
Today we are living in a world of investment where Indian equity market is touching all time highs; but financial
performance of companies across the sectors is lagging expectations and therefore valuation is looking stretched.
Moreover, global uncertainty makes the equity market more events driven and hence highly volatile. Under such
circumstances, investors are struggling to find investment ideas which are rationally priced and can offer long term
sustainable return. In Edelweiss Professional Investors Theme Day- Emerging investment Ideas we bring in ten
companies from five different sectors which we believe will be major beneficiaries of recovery, experience growth going
forward and are attractively valued.

Low cost housing is the focus area of the Indian government and a lot of investment is expected to happen there. We
have identified two fast growing HFCs (PNB Housing Finance and GIC Housing Finance) with sound asset quality and
believe they would be major beneficiaries of investments expected to happen in the housing sector. With the increasing
political and economic uncertainty across the globe, gold prices have started stabilizing which will benefit Gold loan
NBFCs, like Manappuram Finance. After a long period of low demand and depressed pricing scenario, commodity cycle
has started showing initial sign of recovery. We have thus invited Graphite India - the third largest manufacturer of
graphite electrodes in the world, to share their growth story. Road and Infrastructure sector is the thrust area of the new
government; Dilip Buildcon, one the largest construction company in India known for its timely execution, will join us to
explain their strategy in the fast growing infrastructure segment. After the boom in service sector, its time that India will
capture high market share in global manufacturing space due to low cost advantage and man power availability. S.P.
Apparels and Indo Count Industries will share their views on the sector and strategy to capture growth opportunities.
Education is an evergreen business; Zee Learn the largest pre-school player will explain how a sustainable and profitable
business can be created around the schooling operation. Borosil Glass works, a leader in the glass ware segment will join
us to discuss their business, plans and strategies to capture growing discretionary consumption in India. We believe that
India will continue to have attractive investment opportunities arising from different emerging sectors and this event will
help identify such opportunities.

Participating Companies and Valuation Metrics


EV/EBITDA (X) /
S.No Stock Name CMP Mkt Cap P/E (X) ROE (%)
Price/BV
(INR) (INR Cr) FY17E FY18E FY17E FY18E FY17E FY18E
1 Borosil Glass work Ltd 6650 1509 NA NA NA NA NA NA
2 Dilip Buildcon Ltd 312 4,364 18.3 22.9 7.3 6.4 17.5 16.1
3 GIC Housing Finance 300 1,623 11.4 8.9 1.9 1.6 18.2 19.9
4 Graphite India Ltd 111 2,150 45.1 22.5 26.8 10.8 2.7 5.3
5 Indo Count Industries Ltd 167 3,337 13.3 11.7 7.8 6.9 35.2 30.6
6 Manappuram Finance Ltd 96 6,737 12.0 8.5 2.5 1.9 19.1 21.2
7 PNB Housing Finance Ltd 986 16,604 25.3 16.9 2.4 2.2 1.5 1.6
8 Sanghi Industries Ltd 61 1,370 23.9 16.5 8.8 7.2 6.2 8.2
9 S P Apparels Ltd 422 1,070 18.8 12.5 9.6 7.2 22 19.3
10 Zee Learn Ltd 46 1,462 46.3 40.8 31.1 23.5 12.4 12.4

2 Edel Invest Research


Index

Table of Contents

1. Borosil Glass Works Ltd .................................................................................................................................................... 4

2. Dilip Buildcon Ltd .............................................................................................................................................................. 6

3. GIC Housing Finance ......................................................................................................................................................... 8

4. Graphite India Ltd ........................................................................................................................................................... 10

5. Indo Count Industries Ltd ............................................................................................................................................... 12

6. Manappuram Finance Ltd............................................................................................................................................... 14

7. PNB Housing Finance Ltd ................................................................................................................................................ 16

8. Sanghi Industries Ltd ...................................................................................................................................................... 18

9. S P Apparels Ltd .............................................................................................................................................................. 20

10. Zee Learn Ltd .................................................................................................................................................................. 22

3 Edel Invest Research


Edel Invest Research Not Rated

Borosil Glass work Ltd


Growing strong CMP INR: 6650
company was not able to scale itself owing to low aggression, legacy business of asset and wealth management being a part of the mainstream
BorosilNow
company reflecting poorly on the financials.
Sangeeta Tripathi Glass work (Borosil) is a brand with 50+ year legacy. The company is a pioneer in the specality glass
industry and is a market leader in microwavable kitchen glassware segment. The company is present in two
Research Analyst
segments- Consumer product division and the laboratory glass ware segment. Despite having strong market
+91 (22) 6187 9524 leadership position in the glass ware segment, and good product portfolio, the growth lagged the potential. Now
Sangeeta.tripathi@edelweissfin.com with the change in the management and Mr. Sheervar (current MD) coming on Board with fresh thinking and
enhanced aggression we expect growth momentum to expediate. Also the management is focusing and aims to
grow the business organically as well as inorganically. It has acquired two businesses (a) Hopewell in the
consumer product business (b) Klasspack in the scientific product business that caters to the pharma packaging
business. Along with increased aggression in the business, the company has also restructured its business. The
interplay of these positives along with companys effort towards divesting its non core assets is likely to result in
healthy earnings and returns performance ahead.
Bloomberg: BRSL:IN
Investment rationale
52-week range (INR): 8,702/ 2466 Market leader in the categories served Borosil serves two segments- Labware segment, wherein the
primary demand comes from the scientific equipment division and the consumer ware segment through its
Share in issue (crs): 0.23 range of microwavables kitchen glasses, tumblers, storage containers, lunch boxes etc under the brand
Borosil. Currently consumer business constitutes around 60% to the revenue and 40% comes from the
M cap (INR crs): 1509 Labware segment. The company is the market leader in each of the categories with over 60% market share.

Avg. Daily Vol. BSE :(000): 0.1 Acquisition of Hopewell Tableware to provide entry in the strong growth Opalware category- In order to
strengthen its consumer business portfolio, in Jan 2016, the company acquired 100% stake in Hopewell
Tableware, which is present in the Opalware category selling products under the brand Larah. Currently,
Opalware is an INR 300 crore market and is growing healthy at 20% + levels. The market is largely
SHARE HOLDING PATTERN (%) unorganized, moving towards organized and in that front LaOpala is the only leading player. With only one
organized player, this acquisition opens strong opportunity for Borosil to encash on its distribution network,
brand recall etc. The company sells its product under the brand Larah- by Borosil, and is available across
10,000 + retail touch points. The brand Larah has posted 68% yoy growth in 9MFY17, and presents
opportunity to reach margin in line with LaOpala (currently the company posted less than 1% margin, while
LaOpala posts upwards 30% margin), thus provides strong leg room for revenue and earnings growth ahead.
Public, 27.7
Restructuring of business to bring synergies, while monetization of non core assets to uplift RoCE-, Inorder
to restructure the business and bring down the cross holdings, the company has proposed to merge the
acquired company Hopwell , Vyline glass works ltd (this is a promoter company, that does third party
Promoter, manufacturing for Borosil), and Fennel Investment & Finance Pvt Ltd . The restructuring would reduce
72.3 related party transactions, reduce cross holdings, bring cost synergies and simplify the structure. Further the
company has started monetizing its noncore assets, that coupled with earnings upmove would uplift the
ROCE.
Risks
Failure to monetize on the Borosil brand name, reach and innovation
Lack of managements focus towards the business.
400
Valuation
350
The stock is currently trading at P/E of 30x FY16E earnings.
300
250
200 Year to March FY13 FY14 FY15 FY16 9MFY17*
150 Revenues (INR Cr) 134 156 175 222 192
100
Rev growth (%) 6.7 16.0 12.5 26.7 NA
50
0
EBITDA (INR Cr) 3 9 7 8 20
Nov-16
Jul-16

Sep-16
Mar-16
Jan-16

Jan-17
May-16

Net Profit (INR Cr) 20 41 53 52 118


EPS (INR Cr) 66 138 178 226 510
Borosil Sensex
EPS growth (%) (44.8) 109.2 28.6 27.4 NA
P/E (x) 99.3 47.4 36.9 29.0 NA
P/B (x) 3.1 3.0 2.8 2.7 NA
th RoAE (%) 3.2 6.5 7.9 8.3 NA
Date: 6 March, 2017

*9MFY17 results includes profit on sale of non core assets of INR 90 crore

4 Edel Invest Research


Borosil Glass work Ltd.

Income statement (Standalone) (INR cr) Balance sheet (Standalone)


Year to March FY12 FY13 FY14 FY15 FY16 9MFY17 As on 31st March FY12 FY13 FY14 FY15 FY16
Income from operations 126 134 156 175 222 192 Equi ty s ha re ca pi ta l 3 3 3 3 2
Direct costs 72 75 90 101 126 105 Preference Sha re Ca pi ta l 0 0 0 0 0
Employee costs 11 15 17 20 25 19 Res erves & s urpl us 621 624 654 694 566
Other expenses 52 56 56 67 88 48 Sha rehol ders funds 624 627 657 697 569
Total operating expenses 123 131 147 168 214 172 Secured l oa ns 0 0 0 0 0
EBITDA 3 3 9 7 8 20 Uns ecured l oa ns 0 0 1 0 0
Depreciation and amortisation 1 2 4 5 5 4 Borrowi ngs 0 0 1 0 0
EBIT 2 1 6 2 3 15 Mi nori ty i nteres t 0 2 0 3 32
Interest expenses 0 0 0 0 1 1 Sources of funds 624 629 658 700 601
Other income 42 25 41 66 58 113 Gros s bl ock 38 86 182 170 179
Profit before tax 44 26 46 68 60 127 Depreci a ti on 4 6 10 14 19
Provision for tax 8 6 5 14 7 9 Net bl ock 34 80 173 156 160
Core profit 36 20 41 53 52 118 Ca pi ta l work i n progres s 47 14 6 6 5
Extraordinary items 0 0 0 0 0 Tota l fi xed a s s ets 81 94 179 162 165
Profit after tax 36 20 41 53 52 118 Other Li a bi l i ti es 0 0 0 0 0
Minority Interest 0 0 0 0 0 Inves tments 156 225 116 158 87
Share from associates 0 0 0 0 0
Inventori es 23 30 30 36 40
Adjusted net profit 36 20 41 53 52 118
Sundry debtors 25 29 29 32 37
Equity shares outstanding (cr) 0.3 0.3 0.3 0.3 0.2 0.2
Ca s h a nd equi va l ents 9 8 5 5 7
EPS (INR) basic 119 66 138 178 226 510
Loa ns a nd a dva nces 58 78 55 64 74
Diluted shares (Cr) 0 0 0 0 0 0.2
Other current a s s ets 37 11 12 6 3
EPS (INR) fully diluted 119 66 138 178 226 510
Tota l current a s s ets 151 155 132 143 160
Dividend per share 15 15 20 25 25 NA
Sundry credi tors a nd others 29 22 21 26 31
Dividend payout (%) 0.0 0.0 0.0 0.0 0.0 NA
Provi s i ons 6 7 8 12 2
Tota l CL & provi s i ons 36 29 30 37 33
Common size metrics- as % of net revenues (INR cr)
Net current a s s ets 115 127 102 106 127
Year to March FY12 FY13 FY14 FY15 FY16 9MFY17
Net Deferred ta x 2 -1 -3 -13 -13
COGS 56.8 55.6 57.9 57.7 56.9 54.9
Mi s c expendi ture 0 0 0 0 0
Employee cost 8.7 10.9 11.2 11.5 11.3 9.9
Non Current Inves tments 268 184 264 286 235
Other expenses 32.5 31.1 25.0 26.6 28.3 15.0
Us es of funds 623 629 658 700 601
Operating expenses 97.9 97.6 94.0 95.8 96.5 89.8
Book va l ue per s ha re (INR) 2,074.7 2,086.6 2,186.8 2,320.2 2,462.2
Depreciation 0.6 1.5 2.4 3.1 2.4 2.3
-0 -0 0 -1 1
Interest expenditure 0.1 0.2 0.3 0.1 0.5 0.6
Cash flow statement
EBITDA margins 2.1 2.4 6.0 4.2 3.5 10.2
Year to March FY12 FY13 FY14 FY15 FY16
Net profit margins 28.5 14.8 26.6 30.4 23.5 61.4
Net profi t 36 20 41 53 52
Add: Depreci a ti on 1 2 4 5 5
Growth metrics (%)
Add: Mi s c expens es wri tten off 0 0 0 0 0
Year to March FY12 FY13 FY14 FY15 FY16
Add: Deferred ta x 2 3 2 10 0
Revenues 5.8 6.7 16.0 12.5 26.7
Add: Others 0 0 0 0 0
EBITDA (124.6) 20.9 190.9 (21.2) 6.8
Gros s ca s h fl ow 39 25 47 68 58
PBT 155.6 (40.5) 76.7 47.2 (12.1)
Les s : Cha nges i n W. C. -41 14 -24 6 21
Net profit (126.8) (44.8) 109.2 28.6 (2.1)
Opera ti ng ca s h fl ow 79 12 71 63 36
EPS (126.8) (44.8) 109.2 28.6 27.4
Les s : Ca pex 71 15 88 -11 9
Ratios Free cash flow 8 -3 -16 74 28
Year to March FY12 FY13 FY14 FY15 FY16
ROAE (%) 5.6 3.2 6.5 7.9 8.3
ROACE (%) 0.3 0.2 0.9 0.3 0.0
Debtors (days) 72 78 68 66 61
Current ratio 5.6 8.1 5.5 5.0 6.6
Debt/Equity 0.0 0.0 0.0 0.0 0.0
Inventory (days) 66 81 71 75 65
Payable (days) 60 34 37 35 36
Cash conversion cycle (days) 78 125 102 106 91
Debt/EBITDA 0.0 0.0 0.1 0.0 0.0
Adjusted debt/Equity (0.0) (0.0) (0.0) (0.0) (0.0)

Valuation parameters
Year to March FY12 FY13 FY14 FY15 FY16
Diluted EPS (INR) 119.4 66.0 138.0 177.6 226.2
Y-o-Y growth (%) (126.8) (44.8) 109.2 28.6 27.4
CEPS (INR) 121.9 72.8 150.4 195.8 249.0
Diluted P/E (x) 54.8 99.3 47.4 36.9 29.0
Price/BV(x) 3.2 3.1 3.0 2.8 2.7
EV/Sales (x) 15.6 14.6 12.6 11.2 6.8
EV/EBITDA (x) 736.5 609.5 209.9 266.2 191.2
Diluted shares O/S 0.3 0.3 0.3 0.3 0.2
Basic EPS 119.4 66.0 138.0 177.6 226.2
Basic PE (x) 54.8 99.3 47.4 36.9 29.0
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

5 Edel Invest Research


Edel Invest Research Not Rated
Dilip Buildcon Ltd
Emerging leader in road sector CMP: INR 311

Ankush Mahajan Dilip Buildcon Ltd (DBL) has emerged as the largest EPC player in the road sector, having pan-India presence
Research Analyst across 16 states. DBLs control over execution and timely completion, supported by the largest fleet of 8,213
ankush.mahajan@edelweissfin.com construction equipments & vehicles, differentiates its execution capabilities from peers. DBL has successfully
+91 (22) 4272 2514 completed ~90% projects before time and won INR 220 crore early-completion bonus in FY16. As of 31st
December, 2016, DBL had an order backlog of INR 13,124 crore (3.2x FY16 net revenues), with ~89% of the order
Debashish Mazumdar book comprising road projects.
Research Analyst
Emerged as the largest player in EPC Road segment
debashish.mazumdar@edelweissfin.com
Indias road sector has seen continuous uptick in investment from Ministry of Road Transportation & Highways,
+91 (22) 4088 5819
MoRTH (including NHAI) since the last 3 years. Further, NHAI has shifted focus from BOT road projects to EPC &
HAM road projects. MoRTH (including NHAI) has awarded road projects at the rate of ~10,000 km/year over
FY14-17E vs ~2,800 km km/year road projects over FY12-14. DBL has emerged as largest EPC player and
garnered 10% market share in overall road ordering activities during FY15-17E. Further, we expect MoRTH will
award projects at the rate of ~12,000 km/year and DBL could maintain similar market share over FY17E-19E. At
Bloomberg: DBL:IN
the current juncture, most road construction companies are facing execution challenges as NHAI is not able to
52-week range (INR): 340 / 178 provide the necessary 90% land to start construction work. DBLs careful selection criteria for road projects
results in timely execution and the company is not facing execution challenges due to land acquisition issues.
Share in issue (Crs): 13.67
Strong order backlog of INR 13,124 crore, bill to book ratio 3.2x
M cap (INR crs): 4,364 DBL has strong order backlog of INR 13,124 crore (Q3FY17) providing revenue visibility for the next three years.
Avg. Daily Vol. The overall order backlog breakup comprises road sector (89%), irrigation (2%), urban development (2%) and
13.8/111.2 mining (8%). The share of government orders has increased to 76.3% in FY16 from 22.9% in FY12, a complete
BSE/NSE :(000):
shift for DBL from being a subcontractor to the largest EPC player. DBL has reported strong order inflow of ~INR
10,000 crore in different verticals like EPC road (38%), HAM road (32%) and Excavation work in coal mining (30%)
in the last 11 months.
SHARE HOLDING PATTERN (%)
Stretched working capital due to high number of construction sites
In-house execution strategy for speedy execution results in higher gross block (2x asset turnover) and stretched
working capital (140 days). DBL is operating at 67 construction sites, this enables DBL to build up stone chips
(aggregates) inventory for speedier execution that leads to higher inventory days. We expect improvement in
inventory days with the fall in the number of sites (due to increase in ticket size) in upcoming years.
Public, 24.4
Key risks
Execution hurdles like land acquisition could arise.
Promoter, Stretched working capital of 141 days vis-a-vis industry of 80 days
75.6 Valuations
At CMP of INR310, DBL trades at P/E multiple of 19.9x & 15.5x for FY16 & FY17E EPS of INR 16.1 and INR 20.0.

110
Year to March FY12 FY13 FY14 FY15 FY16 *9MFY17
100 Revenues (INR Cr) 1,187 1,911 2,316 2,624 4,085 3,349
90 Rev growth (%) 173.4 60.9 21.2 13.3 55.7 (18.0)
EBITDA (INR Cr) 261 472 470 566 799 639
80
Net Profit (INR Cr) 52 203 194 146 220 167
70
EPS (INR Cr) 18.2 42.3 32.8 12.4 18.8 *20.0
60 EPS growth (%) 64.5 132.4 (22.6) (62.1) 50.9 6.6
Dec-16
Oct-16

Nov-16
Nov-16
Sep-16

Sep-16

Jan-17

Jan-17
Aug-16

P/E (x) 17.0 7.3 9.5 24.9 16.5 *15.5


Dilip Builcon Sensex P/B (x) 6.4 3.4 2.5 4.2 3.3 *3.2
RoACE (%) 25.2 29.9 22.2 15.7 17.6 -
th
Date: 6 March, 2017 RoAE (%) 37.8 46.9 26.7 16.7 20.1 -
*Ratios based on full year financials. In FY17E, DBL raised equity via IPO.

6 Edel Invest Research


Dilip Buildcon Ltd

Income statement (INR cr) Balance sheet (INR cr)


Year to March FY12 FY13 FY14 FY15 FY16 As on 31st March FY12 FY13 FY14 FY15 FY16
Income from opera ti ons 1,187 1,911 2,316 2,624 4,085 Equi ty s ha re ca pi tal 59 59 59 117 117
Di rect cos ts 899 1,357 1,746 1,932 3,017 Wa rra nts 0 0 0 0 0
Empl oyee cos ts 15 25 24 36 71 Res erves & s urpl us 226 476 669 756 975
Other expens es 12 56 76 90 198 Sha rehol ders funds 285 535 728 873 1,093
Tota l opera ti ng expens es 926 1,439 1,846 2,059 3,286 Secured l oa ns 722 938 1,218 2,151 2,413
EBITDA 261 472 470 566 799 Uns ecured l oa ns 0 0 0 0 0
Depreci a ti on a nd a morti s a ti on 43 71 79 118 183 Borrowi ngs 722 938 1,218 2,151 2,413
EBIT 219 401 391 448 615 Mi nori ty i nteres t 0 0 0 0 0
Interes t expens es 57 105 155 259 380 Sources of funds 1,007 1,473 1,946 3,024 3,506
Other i ncome 3 2 7 6 15 Gros s bl ock 609 694 864 1,673 1,940
Profi t before ta x 164 299 243 195 250 Depreci a tion 76 146 224 484 520
Provi s i on for ta x 112 96 48 49 31 Net bl ock 533 547 639 1,189 1,420
Core profi t 52 203 194 146 220 Ca pi tal work i n progres s 0 0 0 0 0
Extra ordi na ry i tems 0 0 0 0 0 Total fi xed a s s ets 533 547 639 1,189 1,420
Profi t a fter ta x 52 203 194 146 220 Goodwi l l 0 0 0 0 0
Mi nori ty Interes t 0 0 0 0 0
Inves tments 59 95 183 279 290
Sha re from a s s oci a tes 0 0 0 0 0
Inventori es 197 363 522 948 1,580
Adjus ted net profi t 52 203 194 146 220
Equi ty s ha res outs ta ndi ng (Crore) 5.9 5.9 14 14 14 Sundry debtors 275 671 1,058 1,264 1,210
EPS (INR) ba s i c 18.2 42.3 14 11 16 Ca s h a nd equi va l ents 93 52 67 234 106
Di l uted s ha res (mn) 5.9 5.9 14 14 14 Loa ns a nd a dva nces 66 130 182 265 444
Ca s h EPS (INR) 8.8 34.3 20 19 30 Other current a s s ets 115 133 0 0 0
Di vi dend per s ha re 0.1 0.2 1 1 0 Total current a s s ets 746 1,349 1,829 2,711 3,341
Di vi dend pa yout (%) 1.5 1.6 0 0 0 Sundry credi tors a nd others 287 451 546 964 1,205
Provi s i ons 30 54 0 0 0
Common size metrics- as % of net revenues Total CL & provi s i ons 317 505 546 964 1,205
Year to March FY12 FY13 FY14 FY15 FY16 Net current a s s ets 428 844 1,283 1,746 2,135
Opera ti ng expens es 78.0 75.3 80 78 80 Net Deferred tax -13 -14 -27 -71 -94
Depreci a ti on 3.6 3.7 3 4 4 Mi s c expendi ture 0 0 0 0 0
Interes t expendi ture 4.8 5.5 7 10 9 Uses of funds 1,007 1,473 1,946 3,024 3,506
EBITDA ma rgi ns 22.0 24.7 20 22 20 Book va l ue per s ha re (INR) 48 90 54 64 80
Net profi t ma rgi ns 4.4 10.6 8 6 5
Opearting cash Flow
Growth metrics (%) Year to March FY12 FY13 FY14 FY15 FY16
Year to March FY12 FY13 FY14 FY15 FY16 EBIT 219 401 391 448 615
Revenues 173.4 60.9 21 13 56 Depri ci a tion 43 71 79 118 183
EBITDA 189.6 80.5 -0 20 41 Ta x 112 96 48 49 31
PBT 180.1 82.2 -19 -20 28 Chg i n WC 212 456 333 535 410
Net profi t a fter MI 166.2 290.8 -4 -25 51 CFO (62) (80) 88 (19) 358
EPS 64.5 132.4 -66 -25 51

Profit & Efficiency Ratios


Year to March FY12 FY13 FY14 FY15 FY16
ROAE (%) 37.8 46.9 27 17 20
ROACE (%) 25.2 29.9 23 18 19
Debtors (da ys ) 84 128 167 176 108
Current ra tio 2.4 2.7 3 3 3
Debt/Equi ty 2.5 1.8 2 2 2
Inventory (da ys ) 61 69 82 132 141
Pa ya bl e (da ys ) 84 128 86 134 108
Ca s h convers i on cycl e (da ys ) 61 69 163 173 142
Debt/EBITDA 2.8 2.0 3 4 3
Adjus ted debt/Equi ty 2.5 1.8 2 2 2

Valuation parameters
Year to March FY12 FY13 FY14 FY15 FY16
Di l uted EPS (INR) 18.2 42.3 14 11 16
Y-o-Y growth (%) 64.5 132.4 -66 -25 51
CEPS (INR) 25.5 54.3 20 19 30
Di l uted P/E (x) 17.0 7.3 9.5 24.9 16.5
Pri ce/BV(x) 6.4 3.4 2.5 4.2 3.3
EV/Sa l es (x) 2.1 1.4 1 2 2
EV/EBITDA (x) 9.2 5.6 6.1 9.8 7.4
Di l uted s ha res O/S 5.9 5.9 14 14 14
Ca s h EPS 25.5 54.3 20 19 30
Ca s h PE (x) 12.2 5.7 6.7 13.8 9.0
Di vi dend yi el d (%) 0.0% 0.1% 0% 0% 0%

7 Edel Invest Research


Edel Invest Research Not Rated

GIC Housing Finance Ltd.


Margin to improve through strategic shift in borrowing profile CMP INR: 302

Raj Jha GIC Housing Finance Limited (GIC) is engaged in financing for retail housing and LAP. GIC has major
Research Analyst presence in Tier II and III cities and focuses on lower income group clientele. GICs average loan ticket size is
+91 (22) 4272 2341 about INR 15 lakh with an LTV of 67%. Currently, the HFC has a loan book of INR 8,962 cr with total ~60
Raj.jha@edelweissfin.com branches as of Q3FY17. The Company is promoted by General Insurance Corporation of India. GIC has a
strong marketing team and tie-ups with builders to provide finance to individual borrowers.

Investment rationale
NIM expansion through strategic shift in borrowing profile and increasing share of high yielding mortgage
loans (loans against property)
GICHFL has been consistently increasing its share of lower-cost funding. The share of lower-cost was 23% in
Bloomberg: GICHF:IN FY15, which increased to 33% in FY16 and we believe that the company is capable increasing further its
money market borrowing, given improvement in rating from credit rating agencies. The company has
52-week range (INR): 354 / 205 witnessed 56bps expansion in NIM from 2.94% in FY12 to 3.50% in FY16. We estimate a 10bps expansion to
3.60% in FY18 driven by lower cost of funds and increasing share of high yield loans.
Share in issue (crs): 5.39

M cap (INR crs): 1,623


Increasing share of high yielding mortgage loans (loans against property)
GICHFL has been increasing its focus on non-housing loans (loans against property) which generates
Avg. Daily Vol. BSE :(000): 154 higher margin as compared to housing loans. The share of non-housing finance loans has increased from
2.1% in FY11 to 17.8% in FY16. We believe that this will improve RoE from 17.9% to 19.9% over FY16-18E.

Robust growth trajectory to sustain going forward


SHARE HOLDING PATTERN (%) GICHFL has reported very robust set of growth metrics over the last few years. The AUM, NII and PAT grew
at a CAGR of 20%, 23% and 21%, respectively over FY12-FY16 and we expect AUM, NII and PAT to grow at
CAGR of 21%, 22% and 21% to INR 11,683 cr, INR 385 cr and INR 183 cr, respectively till 2018E.

Asset quality to improve


GIC has witnessed a substantial improvement on the asset quality front over the last five years. The Gross
Public, 57.8 NPA ratio has improved by ~102bps from 2.78% in FY11 to 1.76% by FY16. However, the HFC reported
marginal deterioration in Q3FY17 because of demonetization and not availing the RBIs dispensation.
Promoter,
42.2
Management has guided for a return to normalized levels by Q4FY17.

Risks
LAP has supported growth from 3-4 years and is now 17% of loan book. While low ticket size and low
LTV provide comfort but any major decline in property prices may dent asset quality and growth.

Valuation
At CMP of Rs 302, stock is trading at 1.9x FY17E P/ABV and 1.7x FY18E P/ABV.
160

140

120

100
(INR Cr) FY14 FY15 FY16 FY17E FY18E
80
Net Interest Income 190 207 257 313 385
60
Total Income 206 224 276 333 406
40
Nov-16

Profit After Tax 98 103 125 143 183


Jul-16

Sep-16
Mar-16
Jan-16

Jan-17
May-16

Basic EPS 18 19 23 27 34
GIC Sensex
P/E 16.7 15.8 13.1 11.4 8.9
Book value per share 113.3 122.6 135.8 156.4 184.2
P/B 2.7 2.5 2.2 1.9 1.6
th Return on Average Equity 17% 16% 18% 18% 20%
Date: 6 March, 2017

8 Edel Invest Research


GIC Housing Finance Ltd.

P&L (INR cr) FY14 FY15 FY16 FY17E FY18E Balance Sheet (INR cr) FY14 FY15 FY16 FY17E FY18E
Net interest income 190 207 257 313 385 Share Capital 54 54 54 54 54
Y-o-Y Growth 16% 9% 24% 22% 23% Reserve & Surplus 557 606 678 789 939
Non-interest income 16 17 19 20 21
Shareholder's Fund 610 660 732 843 993
Total operating income 206 224 276 333 406
Y-o-Y Growth 14% 9% 23% 21% 22%
Borrowings 4,652 5,794 7,001 8,478 10,365
Operating Expenses 48 58 69 83 100 Other Liabilities & Provisions 256 266 289 344 397
Cost-to-Income ratio 23% 26% 24.97% 24.93% 24.68% Total Liabilities 5,518 6,721 8,021 9,664 11,754
Operating Profit 158 166 207 250 306 Cash and cash equivalent 90 42 52 52 52
Y-o-Y Growth 13% 5% 25% 21% 22% Loans & Advances 5,332 6,618 7,934 9,587 11,683
Provisions & Contingencies 25 12 16 35 32 Y-o-Y growth 17% 24% 20% 21% 22%
PBT 133 154 191 215 274 Fixed Assets 5 3 2 2 2
Tax 36 51 67 72 91
Investments & Other Assets 91 58 33 33 33
Net Profit 98 103 125 143 183
Total Assets 5,518 6,721 8,021 9,675 11,771
Y-o-Y Growth 15% 6% 21% 15% 28%
Adj. EPS (Rs ) 18 19 23 27 34
P/E (x) 16.7 15.8 13.1 11.4 8.9
Adj. Book Value 113.3 122.6 135.8 156.4 184.2
P/ABV (x) 2.7 2.5 2.2 1.9 1.6

Spread Analysis FY14 FY15 FY16 FY17E FY18E


Avg. yield on interest earning assets 12.0% 11.8% 11.7% 11.6% 11.5%
Avg. cost of funds 9.7% 9.7% 9.4% 9.2% 9.0%
NIM - calculated 3.8% 3.4% 3.5% 3.5% 3.6%
Profitability
ROAA 1.9% 1.7% 1.7% 1.6% 1.7%
ROAE 16.8% 16.2% 17.9% 18.2% 19.9%

Efficiency Ratio FY14 FY15 FY16 FY17E FY18E


Cost-to-income ratio 23.2% 25.8% 25.0% 24.9% 24.7%
Emp. Cost/Operating Expenses 29.1% 33.8% 32.8% 33.0% 33.3%
Cost-to-total assets 0.9% 0.9% 0.9% 0.9% 0.9%

Valuation ratio FY14 FY15 FY16 FY17E FY18E


Book Value 113.3 122.6 135.8 156.4 184.2
P/BV (x) 2.7 2.5 2.2 1.9 1.6
Adjusted Book Value 113.3 122.6 135.8 156.4 184.2
P/ABV (x) 2.7 2.5 2.2 1.9 1.6
EPS (Rs ) 18.1 19.1 23.1 26.6 33.9
P/E (x) 16.7 15.8 13.1 11.4 8.9
Dividend per share 6.0 5.0 5.0 5.0 5.0
Dividend Yield 2% 2% 2% 2% 2%

9 Edel Invest Research


Edel Invest Research Trading BUY

Graphite India Ltd.


On an upswing CMP INR: 105 Target Price: 127

Salil Utagi Graphite India (GI), the worlds 3rd largest manufacturer of Graphite Electrode, is set to benefit from the
Research Analyst upswing in steel production owing to the Electric Arc Furnace(EAF) route, consolidation in the already
+91 (22) 4272 2319 oligopolistic Graphite Electrode industry and increased probability of passing on higher needle coke prices to
salil.utagi@edelweissfin.com steel producers. Industry-wide capacity utilisation is expected to stay above 80% in FY18E and FY19E, resulting
in positive operating leverage for the company. We expect GI to enhance its capacity utilisation to 90% in
Debashish Mazumdar FY18E/FY19E and hike prices by 15% in each year from a lower base of FY17E. On a consolidated basis, we
Research Analyst expect the companys net sales, EBITDA and net profit to grow at a CAGR of 9.9%, 17.4%, and 33.8%,
respectively over the FY16-FY19E period. We are valuing the stock at EV/EBITDA of 12x on FY19E basis for a
+91 (22) 4088 5819
target of INR 150.
deabshish.mazumdar@edelweissfin.com
Higher production through EAF and consolidation in Graphite Electrode industry to boost capacity utilisation
Despite expected fall (3% yoy) in demand in China, the largest steel consumer market (~50% of total), the World
Bloomberg: GRIL:IN Steel Association expects the global steel demand to grow by 0.4% yoy in CY17, as higher demand in India, North
America, the Middle East, and the European Union (EU) is expected to more than compensate for fall in demand
52-week range (INR): 110 / 65 from China. We believe that the incremental demand for steel will be met by domestic production in these
respective countries. This augurs well in view of the anti-dumping duties imposed on the Chinese products across
Share in issue (Crs): 19.54 the globe along with the announcement of 150mn tons worth capacity cuts in China. We also believe that EAF
production will get a fillip in CY17 since all these regions have EAF as the principle source of steel production. We
M cap (INR crs): 2,150
expect 6.2% growth in EAF production in CY17, which will lead to 8.7% growth in demand for Graphite Electrodes.
Avg. Daily Vol. BSE/NSE :(000): 300 The constrained industry capacity and higher demand for Graphite Electrode in CY17 would take the industry-wide
capacity utilisation level above 80% in FY18E and FY19E.

Pricing to improve due to consolidation and uptick in crude oil prices


SHARE HOLDING PATTERN (%) In the past 3 years, the global Graphite Electrode industry has witnessed industry-wide capacity reduction of
around 1 lakh tons along with industry consolidation following the acquisition of Graftech/SGL (1 st/2nd largest in
the world) by Brookfield/Showa Denko (3rd largest). We expect this consolidation in the industry to intensify in the
coming years, as players look to close high-cost operations to improve profitability. We expect capacity constraints
to shift the balance of power in favour of the Graphite Electrode industry from the steel consumers, leading to
better pricing power. Also, electrode prices move in tandem with the fluctuations in crude oil, as Needle Coke is a
Public, 34.8
crude derivative and accounts for 40% of the cost of manufacturing. The Needle Coke industry is also an
oligopolistic one and companies are now looking to increase prices, which are usually passed on to the steel
manufacturers with a lag of 3-6 months. At a consolidated level, Graphite Indias realisation/ton should rise from
$2674/ton in FY16 to 3006/ton in FY19E, still way below the peak level of $4795/ton achieved in FY08.
Promoter,
65.2
Strong balance sheet; attractive valuation for an industry riding an upswing:
We expect Graphite Indias consolidated net sales to grow at a CAGR of 9.9% over FY16-FY19E and 19.4% over
FY17E-FY19E, respectively. Positive operating leverage and cheaper power in West Bengal are expected to drive
profitability. EBITDA and net profit margin are expected to improve to 10.9% and 6.5% in FY19E, respectively from
9% and 3.9% in FY16. Despite higher working capital requirements, the company has net debt/equity of negative
0.1x. We are giving trading BUY on the stock and a target price of INR150, valuing the stock at 12x FY19E
EV/EBIDTA.
140
120
100
80 Year to March (Consolidated) FY15 FY16 FY17E FY18E FY19E
60
Revenues (INR Cr) 1,711 1,532 1,427 1,775 2,036
40
Rev growth (%) (15) (10) (7) 24 15
20
0
EBITDA (INR Cr) 131 139 70 173 222
Nov-16
Jul-16

Sep-16
Mar-16
Jan-16

Jan-17
May-16

PAT (INR Cr) 53 56 48 95 132


EPS (INR) 3 3 2 5 7
Graphite Sensex
EPS growth (%) (52) 7 (28) 100 38
P/E (x) 34.4 32.3 45.1 22.5 16.3
P/B (x) 1.2 1.2 1.2 1.2 1.2
th
Date: 7 March, 2017 RoACE (%) 4.0 4.2 0.8 5.4 7.3
RoAE (%) 3.3 3.5 2.7 5.3 7.2

10 Edel Invest Research


Graphite India Ltd.

Income statement (Consolidated) (INR cr) Balance sheet (INR cr)


Year to March FY15 FY16 FY17E FY18E FY19E As on 31st March FY15 FY16 FY17E FY18E FY19E
Income from opera tions 1711 1532 1427 1775 2036 Equi ty s ha re ca pi ta l 39 39 39 39 39
Di rect cos ts 1014 865 865 1033 1180 Res erves & s urpl us 1,707 1,712 1,730 1,768 1,820
Empl oyee cos ts 208 202 183 211 229 Sha rehol ders funds 1,746 1,751 1,770 1,807 1,859
Other expens es 565 529 493 569 634 Long term borrowi ngs 42 0 0 0 0
Total opera ting expens es 1580 1394 1358 1602 1814 Short term borrowi ngs 262 302 270 335 384
EBITDA 131 139 70 173 222 Tota l Borrowi ngs 304 302 270 335 384
Depreci a tion a nd a mortis a tion 44 49 52 56 58 Deferred Ta x Li a bi l i ti es 82 73 73 73 73
EBIT 88 90 17 117 164 Sources of funds 2,133 2,126 2,113 2,215 2,316
Interes t expens es 16 9 9 12 13 Gros s bl ock 1,389 1,416 1,582 1,632 1,682
Profi t before tax 107 109 73 147 202 Depreci a ti on 750 825 907 993 1,083
Provi s i on for tax 49 48 26 51 71 Net bl ock 640 591 675 639 599
Core profi t 58 61 48 95 132 Ca pi ta l work i n progres s 10 65 0 0 0
Extra ordi na ry i tems 5 5 0 0 0 Tota l fi xed a s s ets 649 657 675 639 599
Profi t a fter tax 53 56 48 95 132 Inves tments 369 416 416 416 416
Adjus ted net profi t 53 56 48 95 132
Inventori es 992 749 684 728 803
Equi ty s ha res outs tandi ng (mn) 20 20 20 20 20
Sundry debtors 433 485 405 439 496
EPS (INR) ba s i c 3.2 3.4 2.4 4.9 6.7
Ca s h a nd equi va l ents 31 21 141 194 218
Di l uted s ha res (Cr) 20 20 20 20 20
Loa ns a nd a dva nces 96 108 81 110 131
EPS (INR) ful l y di l uted 3 3 2 5 7
Tota l current a s s ets 1,552 1,362 1,311 1,470 1,647
Di vi dend per s ha re 2 2 1 3 4
Sundry credi tors a nd others 356 270 257 273 305
Di vi dend pa yout (%) 68 64 50 50 50
Provi s i ons 103 56 49 53 58
Tota l CL & provi s i ons 459 326 306 327 363
Common size metrics- as % of net revenues (INR cr)
Net current a s s ets 1,093 1,037 1,005 1,144 1,284
Year to March FY15 FY16 FY17E FY18E FY19E
Net Deferred ta x
Opera ting expens es 92.3 90.9 95.1 90.3 89.1
Mi s c expendi ture 21 17 17 17 17
Depreci a tion 2.5 3.2 3.7 3.2 2.8
Uses of funds 2,133 2,126 2,113 2,215 2,316
Interes t expendi ture 0.9 0.6 0.7 0.7 0.7
Book va l ue per s ha re (INR) 89 90 91 92 95
EBITDA ma rgi ns 7.7 9.1 4.9 9.7 10.9
Net profi t ma rgi ns 3.1 3.7 3.3 5.4 6.5
Cash flow statement (INR cr)
Year to March FY15 FY16 FY17E FY18E FY19E
Growth metrics (%)
Net profi t 53 56 48 95 132
Year to March FY15 FY16 FY17E FY18E FY19E Add: Depreci a ti on 44 49 52 56 58
Revenues (14.9) (10.4) (6.9) 24.4 14.7 Add: Mi s c expens es wri tten off (3) 4 17 - -
EBITDA (47.6) 5.8 (49.9) 148.8 28.6 Add: Deferred ta x (8) (9) - - -
PBT (49.8) 2.4 (33.0) 100.2 37.9 Gros s ca s h fl ow 85 101 117 152 190
Net profi t (55.7) 6.7 (22.5) 100.2 37.9 Les s : Cha nges i n W. C. (78) (45) (151) 85 116
EPS (51.9) 6.5 (28.5) 100.2 37.9 Opera ti ng ca s h fl ow 163 146 268 67 73
Les s : Ca pex (7) 57 87 20 19
Free cash flow 170 90 181 46 55

Ratios
Year to March FY15 FY16 FY17E FY18E FY19E
ROAE (%) 3.3 3.5 2.7 5.3 7.2
ROACE (%) 4.0 4.2 0.8 5.4 7.3
Debtors (da ys ) 92 115 104 90 89
Current ra tio 3.4 4.2 4.3 4.5 4.5
Debt/Equi ty 0.2 0.2 0.2 0.2 0.2
Inventory (da ys ) 212 178 175 150 144
Pa ya bl e (da ys ) 76 64 66 56 55
Ca s h convers i on cycl e (da ys ) 228 229 213 184 178
Debt/EBITDA 2.3 2.2 3.9 1.9 1.7
Adjus ted debt/Equi ty 0.2 0.2 0.1 0.1 0.1

Valuation parameters
Year to March FY15 FY16 FY17E FY18E FY19E
Di l uted EPS (INR) 3.2 3.4 2.4 4.9 6.7
Y-o-Y growth (%) (51.9) 6.5 (28.5) 100.2 37.9
CEPS (INR) 5 6 5 8 10
Di l uted P/E (x) 34.4 32.3 45.1 22.5 16.3
Pri ce/BV(x) 1.2 1.2 1.2 1.2 1.2
EV/Sa l es (x) 1.2 1.3 1.3 1.1 0.9
EV/EBITDA (x) 15.7 14.5 26.8 10.8 8.5
Di l uted s ha res O/S 19.5 19.5 19.5 19.5 19.5
Ba s i c EPS 3.2 3.4 2.4 4.9 6.7
Ba s i c PE (x) 34.4 32.3 45.1 22.5 16.3
Di vi dend yi el d (%) 1.8 1.8 1.3 1.1 1.5

11 Edel Invest Research


Edel Invest Research BUY

Indo Count Industries Ltd.


Undergoing Consolidation Phase CMP INR: 162 Target: INR 220

Kshitij Kaji Incorporated in 1988, Indo Count Industries Ltd. (ICIL) is a vertically-integrated textile player with a presence
Research Analyst across the entire value chain (from spinning & weaving to processing). The company is promoted by Mr. Anil
+91 (22) 4272 2515 Kumar Jain. Currently, ICIL has emerged as the third largest manufacturer and exporter of bed sheets from India.
Kshitij.kaji@edelweissfin.com The company is a net exporter, with ~70% of its clientele in the international markets. Its Home textiles plant is
located in Kolhapur, Maharashtra and is equipped with the state-of-the-art imported machinery. The Processing
facility is equipped with state-of-the-art continuous Bleaching, Dyeing and Finishing machinery. The company has a
Praveen Sahay
showroom and design studio in New York, which was established in 2011 and a warehousing facility in Charlotte,
Research Analyst
USA. ICIL also established a showroom, design studio and warehouse in Manchester, UK as well as in Melbourne,
+91 (22) 6187 9611 Australia in July 2014.
praveen.sahay@edelweissfin.com
Investment rational
Penetration into new geographies and value added segments to drive revenues and margins respectively
Bloomberg: ICNT:IN ICIL is currently present in the Pillow Cases and Cotton Bed Sheets category. ICIL exports account for ~85% of its
revenue (~66% of exports to the US). The company has a ~20% share in the Indian bed linen exports to the US.
52-week range (INR): 217 / 135 ICILs revenue are expected to increase going ahead, as the company plans to penetrate further into new
international geographies such as UK, Australia, New Zealand, Japan etc. Going forward, the company also plans to
Share in issue (crs): 19.7 expand its presence in the remaining three segments i.e. Fashion (top-of-the-bed i.e. bed dressing, quilts,
comforters etc), Utility and Institutional which will aid in margin improvement.
M cap (INR crs): 3,337

Avg. Daily Vol. BSE :(000): 108 Niche capability, adherence to stringent safety & quality norms strengthen ties with marquee global retailers
Superior quality makes textile companies in India key players in major home textiles markets of the US, Europe and
the UK. In addition, Indias cotton surplus status allows easy availability of raw material. Indian textile exporters
are in a favorable position due to the competitive cost dynamics, skilled labour advantage and supportive
SHARE HOLDING PATTERN (%) government policies & subsidies.

Capacity expansion to reach 90 mn meters processing capacity in next quarter
Diversification of product basket within home textiles has led the need for capacity expansion. The company is
close to completing Phase I brownfield processing capacity expansion from 68mn mt to 90mn mt at a total cost of
INR 175cr. Capex is funded by a mix of Debt and Internal Accruals, with the majority portion being funded by
internal accruals. Phase II of capacity expansion is a mix of greenfield as well as brownfield expansion and will cost
Public, 41.1 INR300cr for upgrading existing spinning facilities, investment in additional weaving capacity (with specialized
Promoter, looms) and value added equipment's for the delivery of fashion and utility bedding. This phase will begin shortly.
58.9
Risks
Raw material volatility: Any volatility in prices of cotton and cotton yarn can lead to inventory losses.
Losing Suppliers: ICIL sources Yarn from the market and grey fabric either through toll manufacturing or from
the market. Although this model is cost effective, it exposes the company to supplier driven risks.
Geographic exposure: Currently, the US accounts for ~70% of ICILs revenues. Any change in import norms or
any import restrictions by the US would adversely affect the companys revenue.

130
Valuation
We believe that ICILs strong clientele, expanding product bouquet, entry into new export markets, shift in product
110 mix towards premium products, superior return ratios and backward integration are the key positives. We value
the stock at 12x FY19E giving us a TP of 220.
90

70 Year to March FY15 FY16 FY17E FY18E FY19E


Revenues (INR Cr) 1,717 2,174 2,250 2,481 2,807
50
Rev growth (%) 19.6 24.2 3.5 10.1 12.9
Nov-16
Jul-16

Sep-16
Mar-16
Jan-16

Jan-17
May-16

EBITDA (INR Cr) 314 474 481 543 633


Net Profit (INR Cr) 146 265 271 306 355
Indo Count Sensex
EPS (INR Cr) 7.4 13.4 13.7 15.5 18.4
EPS growth (%) 27.6 80.8 2.3 13.2 18.7
P/E (x) 24.5 13.6 13.3 11.7 9.9
P/B (x) 8.4 5.4 4.1 3.2 2.5
th RoACE (%) 37.8 48.6 40.1 37.1 35.4
Date: 6 March, 2017
RoAE (%) 40.4 48.7 35.2 30.6 28.7

12 Edel Invest Research


Indo Count Industries Ltd.

Income Statement (INR cr) Balance sheet (INR cr)


Year to March FY15 FY16 FY17E FY18E FY19E As on 31st March FY15 FY16 FY17E FY18E FY19E
Net Sa l es 1,717 2,174 2,250 2,481 2,807 Equi ty s ha re ca pi ta l 39 39 39 39 39
Other Opera ti ng Income 65 39 39 39 39 Wa rra nts 0 0 0 0 0
Income from opera ti ons 1,782 2,213 2,289 2,520 2,846 Res erves & s urpl us 382 616 833 1,078 1,369
Di rect cos ts 1,225 1,407 1,464 1,602 1,793 Sha rehol ders funds 421 656 872 1,117 1,408
Empl oyee cos ts 80 105 114 121 134 Secured l oa ns 346 344 269 379 349
Other expens es 243 333 344 375 420 Uns ecured l oa ns 0 0 0 0 0
Tota l opera ti ng expens es 1,468 1,739 1,808 1,977 2,213 Borrowi ngs 346 344 269 379 349
EBITDA 314 474 481 543 633 Mi nori ty i nteres t 6 6 6 6 6
Depreci a ti on a nd a morti s a ti on 15 19 30 35 39 Sources of funds 773 1,005 1,146 1,501 1,762
EBIT 298 455 452 509 594 Gros s bl ock 714 825 1,025 1,300 1,425
Interes t expens es 65 55 43 46 54 Depreci a ti on 311 330 360 394 433
Other i ncome 0 0 0 0 0 Net bl ock 403 495 665 905 991
Profi t before ta x 233 400 409 463 540 Ca pi ta l work i n progres s 0 0 0 0 2
Excepti ona l Items -26 0 0 0 0 Tota l fi xed a s s ets 403 495 665 905 993
Provi s i on for ta x 61 135 138 156 186 Goodwi l l 0 0 0 0 0
Core profi t 146 265 271 306 355 Inves tments 0 0 0 0 0
Extra ordi na ry i tems 0 0 0 0 0 Inventori es 383 456 472 520 587
Profi t a fter ta x 147 265 271 306 355 Sundry debtors 127 206 188 207 234
Mi nori ty Interes t 0 0 0 0 0
Ca s h a nd equi va l ents 51 33 124 203 324
Sha re from a s s oci a tes 0 0 0 0 0
Loa ns a nd a dva nces 141 144 149 164 186
Adjusted net profit 147 265 271 306 355
Equi ty s ha res outs ta ndi ng (cr) 19.7 19.7 19.7 19.7 19.7 Other current a s s ets 138 94 94 94 94
EPS (INR) ba s i c 7.4 13.4 13.7 15.5 18.4 Tota l current a s s ets 839 934 1,028 1,189 1,425
Di l uted s ha res (cr) 19.7 19.7 19.7 19.7 19.7 Sundry credi tors a nd others 359 282 408 449 507
EPS (INR) ful l y di l uted 7.4 13.4 13.7 15.5 18.4 Provi s i ons 71 88 92 97 102
Di vi dend per s ha re 0.0 2.7 2.7 3.1 3.7 Tota l CL & provi s i ons 430 369 500 545 608
Di vi dend pa yout (%) 0.0 20.0 20.0 20.0 20.0 Net current a s s ets 409 565 528 643 816
Net Deferred ta x -37 -54 -47 -47 -47
Common size metrics- as % of net revenues
Mi s c expendi ture 0 0 0 0 0
Year to March FY15 FY16 FY17E FY18E FY19E
Uses of funds 775 1,005 1,146 1,501 1,762
Opera ti ng expens es 82.4 78.6 79.0 78.4 77.7
Book va l ue per s ha re (INR) 22 33 44 57 72
Depreci a ti on 0.9 0.9 1.3 1.4 1.4
Interes t expendi ture 3.6 2.5 1.9 1.8 1.9 Cash flow statement (INR cr)
EBITDA ma rgi ns 17.6 21.4 21.0 21.6 22.3 Year to March FY15 FY16 FY17E FY18E FY19E
Net profi t ma rgi ns 8.2 12.0 11.8 12.2 12.5 Net profi t 172 265 271 306 364
Add: Depreci a ti on 15 19 30 35 39
Growth metrics (%) Add: Mi s c expens es wri tten off 0 0 0 0 0
Year to March FY15 FY16 FY17E FY18E FY19E Add: Deferred ta x 0 17 -7 0 0
Revenues 19.6 24.2 3.5 10.1 12.9 Add: Others 0 0 0 0 0
EBITDA 73.9 51.0 1.7 12.8 16.6 Gros s ca s h fl ow 188 301 293 341 403
PBT 94.9 71.4 2.3 13.2 16.8 Les s : Cha nges i n W. C. 17 173 -127 36 52
Net profi t a fter mi nori ty i nteres t 32.3 80.5 2.3 13.2 15.8 Opera ti ng ca s h fl ow 170 128 420 305 350
EPS 27.6 80.8 2.3 13.2 18.7 Les s : Ca pex 72 111 150 275 127
Free cash flow 98 17 270 30 223

Profit & Efficiency Ratios


Year to March FY15 FY16 FY17E FY18E FY19E
ROAE (%) 40.4 48.7 35.2 30.6 28.7
ROACE (%) 37.8 48.6 40.1 37.1 35.4
Debtors (da ys ) 26 34 30 30 30
Current ra tio 2.0 2.5 2.1 2.2 2.3
Debt/Equi ty 0.8 0.5 0.3 0.3 0.2
Inventory (da ys ) 78 75 75 75 75
Pa ya bl e (da ys ) 74 46 65 65 65
Ca s h convers i on cycl e (da ys ) 31 63 40 40 40
Debt/EBITDA 1.1 0.7 0.6 0.7 0.6
Adjus ted debt/Equi ty 0.7 0.5 0.2 0.2 0.0

Valuation parameters
Year to March FY15 FY16 FY17E FY18E FY19E
Di l uted EPS (INR) 7.4 13.4 13.7 15.5 18.4
Y-o-Y growth (%) 27.6 80.8 2.3 13.2 18.7
CEPS (INR) 8.2 14.4 15.2 17.3 20.4
Di l uted P/E (x) 24.5 13.6 13.3 11.7 9.9
Pri ce/BV(x) 8.4 5.4 4.1 3.2 2.5
EV/Sa l es (x) 2.2 1.8 1.6 1.5 1.3
EV/EBITDA (x) 12.4 8.2 7.8 6.9 5.7
Di l uted s ha res O/S 19.7 19.7 19.7 19.7 19.7
Ba s i c EPS 7.4 13.4 13.7 15.5 18.4
Ba s i c PE (x) 24.5 13.6 13.3 11.7 9.9
Di vi dend yi el d (%) 0.0% 1.4% 1.5% 1.6% 2.0%

13 Edel Invest Research


Edel Invest Research BUY

Manappuram Finance Ltd.


Micro and macro tailwinds in place CMP: INR 100 Target Price: INR 118

Shivaji Thapliyal Manappuram Finance Ltd is Indias second largest listed specialized Gold Loan NBFC with a Gold Loan AUM of
Research Analyst INR 12267 cr and a network of 3,293 branches. The company witnessed a perfect storm in FY12-14, when gold
+91 (22) 4272 2159 prices fell sharply and the regulatory environment worsened, leading to a -16% CAGR in its AUM. Since FY14,
shivaji.thapliyal@edelweissfin.com gold prices have stabilized and the regulatory environment has improved. Importantly, the company possesses
some unique advantages that are allowing it to grow AUM and win market share in the gold loan market, a
trend we expect to sustain going forward. Therefore, we recommend a BUY rating on the stock.

Investment rationale
Superior NPA and auction math due to Manappurams focus on products of shorter tenure
The theoretical risk of borrower default has fallen dramatically due to Manappuram Finances complete shift to
loans with a 3-month tenure cap.
Manappurams underlying gold holdings trend shows a robust operational backbone
Bloomberg: MGFL:IN
We looked at the gold holdings trend for Manappuram and noted its ability to grow gold holdings in the face of
falling gold prices. In FY14-16, Manappurams gold holdings grew at a CAGR of 15% even as gold prices de-grew at
52-week range (INR): 107 / 26
a CAGR of 4.7%.
Share in issue (Crs): 84 Manappuram has significant upside in operating leverage vs Muthoot Finance
Manappuram had made significant investments to grow its branch network to 3,293 branches by FY13. Its AUM
M cap (INR crs): 6,737
per branch of INR 3.9 cr compares well with INR 6.3 cr for Muthoot Finance, indicating significant scope for upside
Avg. Daily Vol. BSE/NSE for the company from an operating leverage perspective.
6213
:(000): Manappurams Non-Gold Loan portfolio highly synergistic
Manappurams strategy of focusing on Microfinance, small-ticket Housing Finance for the self-employed category
and Used CV Finance is highly synergistic in terms of branch network and target clientele. We also note that the
AUM per branch for Ashirvad Microfinance stands at INR 2.7 cr compared to INR 6.1-13.8 cr for key listed peers,
SHARE HOLDING PATTERN (%) leaving considerable upside from an operating leverage perspective.
Manappuram continues to win market share amid decreasing competitive intensity
Since FY14, Manappuram has been gaining market share even as certain non-specialized entities seem reluctant to
keep gold loan risk on their balance sheets. Manappuram has grown its market share from 6% in FY14 to 7.2% in
FY16 amid diminishing competitive intensity in the Gold Loan segment.
Promoter,
34.5 Manappurams branch presence in strategically important geographies gives it a distinct advantage
Manappuram has 1,778 branches in Rural and Semi-Urban centres compared to 304-851 for key competitors.
Further, it has 2,239 branches in South India compared to 389-874 for key competitors. Thus, it possesses the
optimal branch network to exploit the generic Gold Loan opportunity.
Public, 65.6
Manappuram a beneficiary of NBFC-over-Banks advantages, shift from informal to formal sector and positive
ultra-long term gold price outlook
Specialised NBFCs continue to maintain various operational advantages over banks, and as a consequence they
continue to win market share. The shift from the unorganised sector to formal lending will accelerate due to
Aadhaar and Jan Dhan coverage as well as demonetisation. Further, long-term outlook for gold prices remains
bright given the start of a new global price cycle, which is further supported by INR depreciation vis--vis USD.
400
350
Risks
300 A significant and sustained downtrend in gold prices can materially incentivize borrowers to default.
250 Unforeseen government intervention can impact potential borrower behaviour in using gold as collateral.
200
150 An outsized increase in the incidence of theft can lead to material unexpected losses.
100
50 Valuation and rating: BUY Rating, PT of INR 118
0 The stock currently trades at 1.9x FY18E book value.
Dec-16
Jun-16

Oct-16
Nov-16
Apr-16

Jul-16
Feb-16

Sep-16

Feb-17
Mar-16
Jan-16

Jan-17
Aug-16
May-16

(INR Cr) FY15 FY16 FY17E FY18E FY19E


Manappuram Sensex Net Interest Income 1103 1329 1959 2382 2807
Total Income 1108 1334 1964 2387 2812
Profit After Tax 271 337 697 985 1204
Basic EPS 3.2 4.0 8.3 11.7 14.3
P/E 30.9 24.8 12.0 8.5 7.0
Book value per share 31 33 40 52 66
th P/B 3.2 3.1 2.5 1.9 1.5
Date: 6 March, 2017
Return on Average Equity 11% 13% 23% 25% 24%
Credit Costs 0.3% 0.3% 0.5% 0.4% 0.4%

14 Edel Invest Research


Manappuram Finance Ltd.

Income Statement (INR cr) Balance sheet (INR cr)


Year to March FY15 FY16 FY17E FY18E FY19E As on 31st March FY15 FY16 FY17E FY18E FY19E
Interest income 1,976 2,213 2,965 3,598 4,330 Share capital 168 168 168 168 168
Interest charges 872 884 1,006 1,216 1,523 Reserves and surplus 2,459 2,569 3,215 4,200 5,404
Net interest income 1,103 1,329 1,959 2,382 2,807 Shareholders funds 2,627 2,737 3,383 4,368 5,573
Other income 5 4 5 5 5 Long-term borrowings 1,550 1,115 1,561 1,873 2,248
Net revenues 1,108 1,334 1,964 2,387 2,812 Other long term liabilities 109 124 124 130 136
Operating expense 669 782 834 924 1,025 Non-current liabilities 1,660 1,239 1,685 2,003 2,385
- Employee exp 311 399 439 483 531 Short-term borrowings 5,300 6,767 8,053 9,664 11,596
- Depreciation / amortisation 54 53 57 63 69 Trade Payables 24 23 26 27 28
- Other opex 304 330 337 378 425 Other current liabilities 1,673 1,078 1,065 959 829
Preprovision op. profit 440 551 1,130 1,463 1,787 Short-term provisions 48 67 87 91 96
Provisions 27 32 59 56 67 Current liabilities 7,045 7,935 9,231 10,741 12,550
PBT 412 519 1,071 1,407 1,720 TOTAL EQUITY AND LIABILITIES 11,332 11,911 14,299 17,112 20,507
Taxes 142 182 374 422 516 Fixed assets 172 190 209 230 253
PAT 271 337 697 985 1,204 Non-current investments 168 324 436 567 737
Extraordinaries 0 0 0 0 0 Deferred tax assets (net) 30 39 59 76 99
Reported PAT 271 337 697 985 1,204 Long-term loans and advances 86 210 378 454 544
Basic number of shares (cr.) 84.1 84.1 84.1 84.2 84.2 Other non current assets 131 98 98 103 108
Basic EPS (INR) 3.22 4.01 8.28 11.71 14.31 Non-current assets 587 861 1,180 1,429 1,741
Diluted number of shares (cr.) 84.1 84.1 84.1 84.2 84.2 Current investments 212 0 0 0 0
Diluted EPS (INR) 3.22 4.01 8.28 11.71 14.31 Cash and bank balances 682 492 492 517 542
Short-term loans and advances 9,255 10,179 12,249 14,699 17,638
Other current assets 596 379 379 468 585
Current assets 10,746 11,050 13,120 15,683 18,766
TOTAL ASSETS 11,332 11,911 14,299 17,112 20,507

RoE Decomposition
Year to March FY15 FY16 FY17E FY18E FY19E
Net Interest Income / Assets 9.7% 11.2% 13.7% 13.9% 13.7%
Other Income / Assets 0.0% 0.0% 0.0% 0.0% 0.0%
Net Revenues / Assets 9.8% 11.2% 13.7% 13.9% 13.7%
Operating Expense / Assets 5.9% 6.6% 5.8% 5.4% 5.0%
Provisions / Assets 0.2% 0.3% 0.4% 0.3% 0.3%
Taxes / Assets 1.3% 1.5% 2.6% 2.5% 2.5%
Total Costs / Assets 7.4% 8.4% 8.9% 8.2% 7.8%
Return on Assets 2.4% 2.8% 4.9% 5.8% 5.9%
Assets / Equity 4.4 4.2 3.9 3.7 3.4
Return on Equity 10.4% 12.0% 19.1% 21.2% 20.2%

Valuation Metrics
Year to March FY15 FY16 FY17E FY18E FY19E
Basic EPS 3.2 4.0 8.3 11.7 14.3
EPS growth 20% 25% 107% 41% 22%
Book value per share 31.2 32.5 40.2 51.9 66.2
Basic P/E 30.9 24.8 12.0 8.5 7.0
Price - to - Book 3.2 3.1 2.5 1.9 1.5

Growth Ratios
Year to March FY15 FY16 FY17E FY18E FY19E
NII growth 3% 20% 47% 22% 18%
Net Revenues growth 2% 20% 47% 22% 18%
Opex growth -4% 17% 7% 11% 11%
PPOP growth 13% 25% 105% 29% 22%
Provisions growth -41% 18% 80% -5% 20%
PAT growth 20% 25% 107% 41% 22%

Operating Ratios
Year to March FY15 FY16 FY17E FY18E FY19E
Yield on IEA 22.2% 21.9% 24.9% 25.0% 25.0%
Cost of Funds 12.9% 12.0% 11.5% 11.5% 12.0%
Spread 9.3% 9.9% 13.4% 13.5% 13.0%
Net Interest Margin 12.4% 13.1% 16.5% 16.5% 16.2%
Cost to Income Ratio 60% 59% 42% 39% 36%
Tax Rate 34% 35% 35% 30% 30%

15 Edel Invest Research


Edel Invest Research Not Rated

PNB Housing Finance Ltd.


Fast-growing HFC with sound asset quality CMP INR: 1002

Shivaji Thapliyal PNB Housing Finance (PNBHF) is a deposit-taking Housing Finance Company with Loan Assets of INR 34330
Research Analyst cr as of Q3FY17. In 2009, Destimoney Enterprises (DEL) acquired 26% stake in the company and in 2010,
+91 (22) 4272 2159 Kshitij, a business process re-engineering project was launched. In 2012, DEL raised it stake to 49% and in
shivaji.thapliyal@edelweissfin.com 2015, DEL itself was acquired by QIH, of the Carlyle Group. Notably, PNBHF is no longer run by officers on
deputation from PNB. PNBHF has a market share of c.3.5% of outstanding industry loans and, importantly,
has a c.10-11% disbursements market share in the cities in which they are present, which are primarily
Metro/Urban centres.

Investment rationale
Well-managed liability profile keeps cost of borrowings at 8.8%, which is lower compared with key peers
Bloomberg: PNBHOUSI:IN PNBHF has H1FY17 Cost of Borrowings of 8.8%, which is lower than key peers such as LICHF (8.9%), IBHF
(9.1%), Repco (9.2%) and DHFL (9.3%) and somewhat higher than Can Fin (8.6%) and HDFC (8.6%). This is
52-week range (INR): 1,139 / 792 driven by a low dependence on high cost Bank borrowings, which is 3% of Funding mix compared with 9-
44% for key peers. Their NCD is rated AA+ by CRISIL and CP is rated A1+ by CARE allowing them to keep
Share in issue (crs): 12 lower-cost DCM funding high at 57% of mix, which is the highest among key peers, which are at 13-56% of
M cap (INR crs): 16,604 mix, barring LICHF (82%). Its Fixed Deposit is rated FAAA by CRISIL, which it also benefits from by drawing
25% of its funding from this source.
Avg. Daily Vol. BSE :(000): 0.1
Near best-in-class asset quality with GNPA Ratio at 0.37% underlines superior risk management
PNBHF has a GNPA Ratio of 0.37% as of Q3FY17, which is superior compared with key peers at 0.5-2.6%,
except Can Fin, which is at 0.24%. They run a LAP portfolio with average borrower age of c.45-50 years, LTV
SHARE HOLDING PATTERN (%) of c.46% and yield of c.11.25% resulting in GNPA Ratio (for LAP) of c.0.3%. Their Construction Finance
portfolio does not have any NPAs.

Fastest growing HFC (41% yoy) in a market with significantly attractive generic opportunity
PNBHFs Q3FY17 yoy loan growth stood at 41%, well ahead of key peers at 15-32%. This signifies that
PNBHF is gaining market share in the Indian housing finance market, which, in itself, is a credit market of
significant generic opportunity. Young demographic, shift to nuclear family setup, rapid urbanization,
Public, 60.9 Promoter, improving affordability and low interest rate regime are some of the powerful macro trends providing
39.1
significant tailwind to housing finance.

Risks
Significant exposure to higher risk LAP segment, which is 17% of Q3FY17 loan book, which is lower than
Repco (21%) and IBHF (24%) but remaining key peers are at 6-16%.
Significant exposure to Non Salaried clientele at 42% of Q3FY17 loan book with Repco and DHFL higher
at 58% and 43%, respectively whereas remaining key peers are at 16-40%.
RoE is currently driven by growth with H1FY17 C/I Ratio at 25% compared with 4-23% for key peers and
130
NIM at 2.7% compared with 2.7% for LICHF and 3.1-4.3% for remaining key peers. It may noted though,
110 that C/I Ratio has improved from 28% in H1FY16 and the NIM has improved to 3.0% in Q3FY17.

90 Valuation
The stock is currently trading at a FY16 P/ABV of 6.2x. This trailing multiple has to be viewed in the context
70 of its rapid balance sheet growth.

50
Financials (INR cr)
Dec-16
Dec-16
Nov-16
Nov-16

Jan-17

Jan-17

Jan-17

Year to March FY13 FY14 FY15 FY16


PNB Sensex Net revenue 204 319 516 839
Net profit 92.8 130 194 328
Dil. EPS (INR) 18.2 19.4 18.7 25.8
th Adj. BV (INR) 118.7 134 146.3 161.6
Date: 6 March, 2017
Price/ Adj book (x) 8.4 7.5 6.9 6.2
Price/ Earnings (x) 55.1 51.7 53.6 38.9

16 Edel Invest Research


PNB Housing Finance Ltd.

Profit and Loss Statement (INR cr) Balance Sheet (INR cr)
Year to March FY13 FY14 FY15 FY16 As on 31st March FY13 FY14 FY15 FY16
Interest income 643 1,077 1,706 2,569 Liabilities
Interest charges 462 802 1,265 1,860 Equity capital 50 65.7 104 127
Net interest income 181 275 442 709 Reserves 568 869 1,475 2,018
Fee & other income 23.8 43.4 74 131 Net worth 618 934 1,579 2,145
Net revenues 204 319 516 839 Secured loans 5,409 8,228 9,754 13,408
Operating expense 63.1 109 183 254 Unsecured loans 1,392 2,070 7,071 12,868
Employee exp 25.4 40.4 67.1 75.3 Total borrowings 6,801 10,298 16,825 26,276
Depreciation /amortisation 1 3.3 8.3 15 Total liabilities 7,419 11,232 18,404 28,421
Other opex 36.7 65.6 108 164 Assets
Preprovision profit 141 209 333 585 Loans 6,718 10,711 17,098 27,740
Provisions 12.5 30.4 38.1 81.1 Investments 777 646 1,586 1,622
PBT 129 179 295 504 Current assets 132 141 311 253
Taxes 35.9 49.3 100 177 Current liabilities 236 307 625 1,222
PAT 92.8 130 194 328 Net current assets -105 -166 -314 -969
Reported PAT 92.8 130 194 328 Fixed assets (net block) 14.2 25.8 39.6 58.1
Basic number of shares 5 6.57 10.39 12.69 Deferred tax asset 14.1 15.5 -6.2 -30.2
Basic EPS (INR) 18.2 19.4 18.7 25.8 Total assets 7,419 11,232 18,404 28,421
Diluted number of shares 5.09 6.69 10.39 12.69 Earning assets 7,391 11,191 18,371 28,393
Diluted EPS (INR) 18.2 19.4 18.7 25.8 Disbursements 1,167 1,715 2,181 2,851
DPS (INR) 2 2.2 2.3 3.2 Balance sheet ratios (%)
Payout ratio (%) 11.1 11.6 12.4 12.3 Loan growth 66.9 59.4 59.6 62.2
EA growth 72 51.4 64.2 54.6
Growth Ratios (%) Disbursement growth 12 46.9 27.2 30.7
Year to March FY13 FY14 FY15 FY16 Gross NPA ratio 1.5 1.5 1.3 1.3
NII growth 34.7 52.5 60.4 60.5 Net NPA ratio 1 0.7 0.5 0.5
Net revenues growth 39.4 56 61.7 62.8 Provision coverage 33.1 51 62 63.4
Opex growth 81.9 73.2 67.4 38.7
PPP growth 26.2 48.3 58.8 76
Provisions growth 98.9 144 25.2 112.9
PAT growth 19.8 39.7 49.6 68.8

Operating Ratios (%)


Year to March FY13 FY14 FY15 FY16
Yield on advances 12 12.4 12.3 11.5
Cost of funds 8.6 9.4 9.3 8.6
Spread 3.3 3 2.9 2.8
Net interest margins 3.1 3 3 3
Cost-income 30.9 34.3 35.5 30.2
Tax rate 27.9 27.5 34.1 35

ROA Decomposition (%)


Year to March FY13 FY14 FY15 FY16
Net interest income/Assets 3.1 3 3 3.03
Other Income/Assets 0.4 0.5 0.5 0.6
Net revenues/Assets 3.5 3.4 3.5 3.6
Operating expense/Assets 1.1 1.2 1.2 1.1
Provisions/Assets 0.2 0.3 0.3 0.3
Taxes/Assets 0.6 0.5 0.7 0.8
Total costs/Assets 1.9 2 2.2 2.2
ROA 1.6 1.4 1.3 1.4
Equity/Assets 8.7 8.4 8.5 8
ROAE 18.2 16.7 15.4 17.6

Valuation metrics
Year to March FY13 FY14 FY15 FY16
Diluted EPS (INR) 18.2 19.4 18.7 25.8
EPS growth (%) -28.4 6.2 -3.5 38.2
Book value per share (INR) 123.6 142.2 152 169
Adj. BV per share (INR) 118.7 134 146.3 161.6
Diluted P/E (x) 55.1 51.7 53.6 38.9
Price/ BV (x) 8.1 7.0 6.6 5.9
Price/ ABV (x) 8.4 7.5 6.9 6.2

17 Edel Invest Research


Edel Invest Research BUY

Sanghi Industries Limited


Strengthening Geographical Presence to Boost Margin CMP INR: 62 Target: INR 102

Raj Jha Sanghi Industries (SNGI) is a well integrated cement manufacturing player based in Gujarat with an installed
Research Analyst grinding capacity of 4.1MTPA, clinker capacity of 3.6MTPA and a 60MW multi-fuel power plant. Easy access to
+91 (22) 4272 2341 excellent quality raw material lends it the distinction of being the lowest cost cement producer in the state and
raj.jha@edelweissfin.com also leads to production of the best quality cement, which commands a price premium in the Gujarat market.
Moreover, the company is undertaking a comprehensive capacity expansion plan which will take total capacity
of grinding to 8.1mt, clinker to 6.6mt and power to 126MW. Additionally, in order to make inroads in the high
realisation Mumbai market, SNGI has set up terminals at Navlakhi in Gujarat & Dharamtar in Maharashtra and
also ordered 2 ships to cater to the market via the coastal route. Shipment via the sea route will prune
transportation cost by 40-45% and also boost realisation. We estimate SNGI to clock 14% revenue CAGR over
FY16-19 led primarily by higher volume CAGR of 8.6% and 5% realisation CAGR. The volume spurt will be
spearheaded by Mumbai and local markets. We forecast 22.5% EBITDA CAGR and 31.7% EBIT CAGR over FY16-
Bloomberg: SNGI:IN 19, while net profit surge is expected to be remain moderate because of next phase of expansion due to higher
capital cost.
52-week range (INR): 91 / 46
Proximity of plants to premium quality raw material lends distinct cost edge over peers
Share in issue (crs): 22 Proximity of SNGIs clinker plants to best quality limestone is the companys core strength. While availability of
abundant resources near the manufacturing site reduces transportation cost, premium quality of limestone (47-
M cap (INR crs): 1,370 48% CaCo3 content) leads to production of superior quality cement. Availability of premium quality raw material
within 3km of the plant and access to fly ash within 170km helped the company generate 93.3% gross margin.
Avg. Daily Vol. BSE :(000): 316
Moreover, SNGI generates one of the highest EBITDA per tonne in the western market on account of: a) lower raw
material cost; b) lowest labour cost; and c) lowest power & fuel cost in the industry because of multi-fuel power
plant, own jetty to import coal & pet coke and availability of lignite within 43km range.
SHARE HOLDING PATTERN (%)
Comprehensive capacity expansion programme burnishes prospects
SNGI has chalked out a comprehensive capacity expansion programme spanning Q4FY17 to FY20. The next leg of
capex entails 4mt grinding units, 3.3mt clinker capacity and a 63MW power project, which will take the companys
total capacity of grinding to 8.1mt, clinker to 6.6mt and power to 126MW. The upcoming capacities are anticipated
to reduce the lead distance because of enhancement of shipment from Kutch to Surat, Mumbai and Kerala.
Public, 25.0
Deeper inroads in lucrative Mumbai market to boost realisation and margin
Currently, SNGI sells 7.5-8k tonne cement per month in Mumbai, which is expected to catapult to 60k-70k tonne
cement per month, resulting 7.5-8.5lakh tonne per annum. Mumbais current market size is about 4mt per annum,
Promoter,
which is expected to jump exponentially as slum rehabilitation accelerates under PMAY and also construction of
75.0
the Navi Mumbai airport will provide another tailwind. Considering the opportunity pie, the company has set up
terminals at Navlakhi in Gujarat & Dharamtar in Maharashtra and also ordered 2 ships to cater to the Mumbai
market via the coastal route. Shipment via the sea route will prune transportation cost by 40-45% and also boost
realisation. As the per tonne cement realisation in Mumbai is much higher than in Gujarat and Rajasthanits
mainstay marketsSNGIs average realisation and margin are bound to improve from H2FY18

Outlook and valuations: Value play; recommend BUY


140 SNGI is currently trading at attractive valuation of 7.2x FY18E and 5.5x FY19E EV/EBITDA and an EV/tonne of USD
130 70 versus average of 11.4x FY18E EV/EBITDA and EV/tonne of USD90. We believe, it should trade at higher
120 multiple from current levels led by virtue of being a low cost producer and securing a long term contact for raw
110
material near to its plant. Based on 8.0x FY19E EV/EBITDA, we arrive at a target price of INR102 per share which
100
90 entails 64% upside.
80
70 Year to March FY15 FY16* FY17E FY18E FY19E
60
50
Revenues (INR Cr) 932 777 1,104 1,287 1,540
40 Rev growth (%) -11.1 11.1 6.6 16.6 19.7
Nov-16
Jul-16

Sep-16
Mar-16
Jan-16

Jan-17
May-16

EBITDA (INR Cr) 157 141 218 265 345


Net Profit (INR Cr) 31 2 58 84 125
Sanghi Sensex EPS (INR Cr) 1.4 2.8 2.6 3.8 5.7
EPS growth (%) -38.2 169.5 -29.8 44.7 48.6
P/E (x) 45.2 22.4 23.9 16.5 11.1
P/B (x) 1.5 1.5 1.4 1.3 1.2
th RoACE (%) 3.4 5.8 7.2 8.0 9.0
Date: 6 March, 2017
RoAE (%) 3.4 0.2 6.4 8.2 9.8
* 9M data

18 Edel Invest Research


Sanghi Industries Limited
Balance Sheet (INR cr)
Year to March FY15 FY16* FY17E FY18E FY19E
As on 31st March FY15 FY16 FY17E FY18E FY19E
Net revenue 932 777 1,104 1,287 1,540
Equity capital 220 220 220 220 220
Materials costs 54 52 72 84 98
Preference Share Capital 43 0 0 0 0
Gross profit 878 724 1,032 1,203 1,442
Reserves & surplus 691 692 750 834 959
Power & Fuel Cost 247 160 244 283 331
Borrowings 492 608 708 1058 1408
Freight Cost 267 212 290 328 381
Deferred Tax Liabilities (Net) -59 -59 -59 -59 -59
Other Cost 208 211 280 327 385
Sources of funds 1387 1462 1620 2054 2528
EBITDA 157 141 218 265 345
Net Fixed Assets 1294 1287 1364 1739 2309
Depreciation & Amortization 106 54 74 74 81
Investments 0 0 0 0 0
EBIT 51 87 144 190 264
Inventories 167 163 222 255 299
Other income 7 3 4 7 8
Sundry debtors 15 18 27 33 42
Interest expenses 27 27 76 93 117
Cash & Bank Balances 6 83 101 128 45
Profit before tax before EI 31 62 72 105 156
Other Current assets 46 46 55 64 76
Exceptional Items - (60) - - -
Loans and advances 174 177 228 266 268
PBT 31 2 72 105 156 Total current assets 407 488 633 747 729
Provision for tax - 0 14 21 31 Sundry creditors and others 153 144 195 220 255
Reported PAT 31 1.53 58 84 125 Provisions 161 169 183 213 255
Adjustment in PAT - 60.4 - - - Total current liabilities & provisions 314 313 377 433 509
Adj Net Profit 31 62 58 84 125 Net current assets 93 174 256 314 220
Basic shares outstanding (crs) 22 22 22 22 22 Uses of funds 1387 1462 1620 2054 2528
EPS (Rs.) 1.4 2.8 2.6 3.8 5.7
Dividend per share (Rs.) - - - - - Free cash flow
Dividend payout (%) 0.00 0.00 0.00 0.00 0.00 Year to March FY15 FY16 FY17E FY18E FY19E
Net profit 31 62 58 84 125
Common Size Add : Depreciation 106 54 74 74 81
Year to March (%) FY15 FY16 FY17E FY18E FY19E Adjustment -27 -109 0 0 0
Gross profit margin 94.2 93.3 93.5 93.5 93.6 Operating profit (before WC changes) 110 7 132 158 205
Power & fuel 26.4 20.7 22.1 22.0 21.5 Less: Changes in WC -40 4 63 31 -11
Freight & forwarding 28.6 27.3 26.3 25.5 24.7 Operating cash flow 150 3 68 127 216
Other manufacturing cost 22.3 27.2 25.4 25.4 25.0 Less: Capex 89 41 150 450 650
EBITDA margin 16.9 18.1 19.7 20.6 22.4 Free cash flow 60 -38 -82 -323 -434
Depreciation 11.4 7.0 6.7 5.8 5.2
Interest expenses 2.9 3.5 6.9 7.2 7.6 Cash Flow Statement
Year to March FY15 FY16 FY17E FY18E FY19E
Tax rate 0.0 0.6 20.0 20.0 20.0
Cash flow from operations 177 112 68 127 216
Net profit margins 3.3 0.2 5.3 6.5 8.1
Cash Flow from investing activities -89 -41 -150 -450 -650
Cash Flow from financing activities -89 116 100 350 350
Growth Ratios
Capex -89 -41 -150 -450 -650
Year to March (%) FY15 FY16** FY17E FY18E FY19E
Dividends - - - - -
Revenues -11.1 11.1 6.6 16.6 19.7
EBITDA -20.1 19.2 16.0 21.7 30.3
PBT -29.7 171.3 -12.8 44.7 48.6
Net profit -38.2 169.5 -29.8 44.7 48.6

Profitability & Efficiency Ratios


Year to March FY15 FY16 FY17E FY18E FY19E
ROAE (%) 3.40 6.79 6.16 8.29 11.17
ROAA (%) 3.42 5.81 7.21 8.04 9.01
Inventory day 78.73 93.51 91.25 91.25 91.25
Debtors days 5.70 8.67 9.10 9.50 9.91
Payable days 72.30 82.62 80.20 78.55 77.80
Cash conversion cycle (days) 12.13 19.56 20.15 22.21 23.36
Current ratio 1.54 1.55 2.43 2.22 1.71
Gross debt/equity 0.54 0.67 0.73 1.00 1.19
Adjusted debt/Equity 0.53 0.58 0.63 0.88 1.16
Interest coverage ratio 1.9 3.2 1.9 2.1 2.3

Valuation Parameters
Year to March FY15 FY16** FY17E FY18E FY19E
Adjusted Diluted EPS (INR) 1.4 2.8 2.6 3.8 5.7
Y-o-Y growth (%) -38.2 169.5 -29.8 44.7 48.6
Adjusted Cash EPS (INR) 6.2 5.3 6.0 7.2 9.3
Diluted P/E (x) 44.5 22.0 23.5 16.3 10.9
P/BV (x) 1.5 1.5 1.4 1.3 1.2
EV/tonne (USD/tonne) 95.3 68.8 68.8 68.8 68.8
EV/sales (x) 2.0 2.4 1.7 1.5 1.2
EV/EBITDA (x) 11.8 13.4 8.7 7.1 5.5
EV/EBITDA (x), 1 yr fwd. 13.1 8.7 7.1 5.5 3.6

**annualized for FY16

19 Edel Invest Research


Edel Invest Research BUY

S.P.Apparels Ltd
Embarking on a growth journey CMP INR: 425 Target: INR 550

Kshitij Kaji S.P. Apparels (SPAL) is Indias leading manufacturer and exporter of infants & childrens garments (knitwear
Research Analyst segment) in the 0-8 years category to UKs marquee retailers Tesco, Primark, ASDA, Mothercare and Dunnes.
+91 (22) 4272 2515 Although the companys growth has been subdued over the past 5 years, the recent balance sheet clean up has set
Kshitij.kaji@edelweissfin.com the stage for aggressive surge. Incremental orders from fast growing clients and expansion to new geographies
(US) are envisaged to yield sustained 18-20% top-line growth. Moreover, higher backward integration and
tailwinds from government incentives for textile exporters are anticipated to spur SPALs operating margin. We are
Praveen Sahay
convinced that burgeoning order book, entry in new export markets, and a lean balance sheet are key ingredients
Research Analyst
that will enable SPAL spin a commendable growth story.
+91 (22) 6187 9611
praveen.sahay@edelweissfin.com Investment rational
Niche capability, adherence to stringent safety & quality norms strengthen ties with marquee global retailers
SPAL is a differentiated childrenswear exporter as it manufactures design-specific medium-sized orders of 20,000-
Bloomberg: SPAL:IN 50,000 pieces as opposed to competitors, which manufacture simple bulk orders of 1,00,000 plus pieces. The
companys USP is that it is actively involved in design development as its core competency lies in understanding
52-week range (INR): 450 / 276 latest fashion trends to suit customers preferences. Ergo, its realisations are almost 3x competitors. Also, SPAL has
proven its ability to adhere to highest standards of safety and quality norms which are mandatory for
Share in issue (crs): 2.5 childrenswear. This has helped establish its credentials and forge long-term alliances with UKs marquee retailers.
M cap (INR crs): 1,070
Revitalised balance sheet to spur garments division; Crocodiles expansion to spruce up domestic revenue
Avg. Daily Vol. BSE :(000): 25 A high debt to equity of 5.0x in FY12 and 2.2x in FY16 offered SPAL very little room to pursue aggressive growth
despite burgeoning interest from potential clients. However, debt, which stood at INR392cr in FY12, has dipped to
INR175cr and the debt to equity has plummeted significantly to 0.4x currently. Hence, we estimate SPALs garment
division to post 15-20% CAGR over FY16-19 versus 7.4% CAGR over FY12-16 due to higher financial freedom.
SHARE HOLDING PATTERN (%) Moreover, we envisage Primark to spearhead surge and growth can be further accentuated by adding 1-2 more
non-UK customers. Expansion of the retail brand Crocodile in the domestic market is also bound to spur growth.

Backward integration and deleveraging exercise potent bottom-line boosters
SPAL has chalked out a comprehensive plan to utilise INR215cr of IPO proceeds to complete the backward
integration process and prune debt. The backward integration plan to change the count of spinning capacity to suit
its needs coupled with a new knitting facility and balancing of dyeing facility will help the company be full vertically
Public, 39.9 integrated. This will boost EBITDA margin by at least 200bps. Additionally, debt repayment of close to INR75cr will
Promoter, provide a further leg up to the bottom line, which is estimated to clock 46% CAGR over FY16-19.
60.1
Risks
Customer and geographic concentration risk alongwith risk of stagnating customer growth
Changes in domestic and international regulations and other events such as Brexit
Long term profitable growth in the retail division remains unclear.

Valuation
The future financial performance of SPAL will be very different from the past, post the financial transformation.
150 Several favorable tailwinds such as regulatory benefits, government incentives, new client additions and success in
their retail operations can surprise positively. Topline growth of 20%, operating margin improvement and
130
deleveraging should result in a high 46% CAGR bottomline growth from FY16 to FY19E and will trigger a re-rating.
110

90
Year to March FY15 FY16 FY17E FY18E FY19E
70 Revenues (INR Cr) 473 533 648 782 932
Rev growth (%) 4.8 12.8 21.7 20.7 19.2
50
EBITDA (INR Cr) 69 85 116 151 187
Dec-16
Oct-16

Nov-16
Nov-16
Sep-16

Sep-16

Jan-17

Jan-17
Aug-16

Net Profit (INR Cr) 10 34 54 81 107


EPS (INR Cr) 6.0 20.3 21.8 32.7 42.8
SP Apparels Sensex
EPS growth (%) 50.9 239.5 7.6 49.9 31.1
P/E (x) 68.7 20.2 18.8 12.5 9.6
P/B (x) 6.7 5.3 2.5 2.1 1.7
RoACE (%) 11.6 15.2 17.5 19.9 23.0
th
Date: 6 March, 2017 RoAE (%) 14.0 36.8 22.0 19.3 20.7

20 Edel Invest Research


S.P.Apparels Ltd.

Income statement (Standalone) (INR Cr) Balance sheet (Standalone) (INR cr)
Year to March FY15 FY16 FY17E FY18E FY19E As on 31st March FY15 FY16 FY17E FY18E FY19E
Income from operations 473 533 648 782 932 Equity share capital 17 17 25 25 25
Direct costs 225 224 261 303 354 Preference Share Capital 27 20 20 20 20
Employee costs 100 121 147 178 212 Reserves & surplus 59 96 357 439 546
Other expenses 179 224 272 328 391 Shareholders funds 103 133 402 484 591
Total operating expenses 404 448 533 631 745 Secured loans 216 230 110 80 50
EBITDA 69 85 116 151 187 Unsecured loans 60 59 59 59 59
Depreciation and amortisation 20 20 24 28 30 Borrowings 276 288 160 130 100
EBIT 49 65 91 123 157 Minority interest -5 -6 -6 -6 -6
Interest expenses 31 25 20 13 10 Sources of funds 374 415 556 608 685
Other income 7 5 8 9 10 Gross block 417 436 536 586 611
Profit before tax 24 45 79 119 157 Depreciation 141 159 184 212 242
Provision for tax 15 11 25 38 50 Net block 275 277 353 375 370
Core profit 10 34 54 81 107 Capital work in progress 0 4 0 0 0
Extraordinary items -0 0 0 0 0 Total fixed assets 275 281 353 375 370
Profit after tax 10 34 54 81 107 Unrealised profit 0 0 0 0 0
Minority Interest 0 1 1 1 1 Investments 1 1 5 5 5
Share from associates 0 0 0 0 0 Inventories 107 128 151 178 207
Adjusted net profit 10 35 54 82 107 Sundry debtors 74 82 99 120 143
Equity shares outstanding (mn) 2 2 3 3 3 Cash and equivalents 7 11 74 73 121
EPS (INR) basic 6.0 20.3 21.8 32.7 42.8
Loans and advances 32 31 38 45 54
Diluted shares (Cr) 1.7 1.7 2.5 2.5 2.5
Other current assets 0 0 0 0 0
EPS (INR) fully diluted 6.0 20.3 21.8 32.7 42.8
Total current assets 220 251 362 416 525
Dividend per share 0.0 0.0 0.0 0.0 0.0
Sundry creditors and others 103 95 115 139 165
Dividend payout (%) 0.0 0.0 0.0 0.0 0.0
Provisions 9 10 11 11 12
Total CL & provisions 112 105 126 150 178
Common size metrics- as % of net revenues
Net current assets 108 146 236 265 348
Year to March FY15 FY16 FY17E FY18E FY19E
Net Deferred tax -32 -37 -37 -37 -37
Operating expenses 85.4 84.0 82.2 80.7 80.0
Misc expenditure 22 25 0 0 0
Depreciation 4.2 3.8 3.8 3.6 3.2
Uses of funds 374 415 556 608 685
Interest expenditure 6.6 4.7 3.1 1.7 1.1
Book value per share (INR) 61 77 161 193 236
EBITDA margins 14.6 16.0 17.8 19.3 20.0
Net profit margins 2.1 6.5 8.4 10.4 11.5
Cash flow statement
Year to March FY15 FY16 FY17E FY18E FY19E
Growth metrics (%)
Net profit 10 34 54 81 107
Year to March FY15 FY16 FY17E FY18E FY19E
Add: Depreciation 20 20 24 28 30
Revenues 4.8 12.8 21.7 20.7 19.2
Add: Misc expenses written off -6 -3 25 0 0
EBITDA 7.9 23.8 35.6 30.8 23.5
Add: Deferred tax 14 6 0 0 0
PBT 106.0 83.7 76.6 50.4 31.4
Add: Others 0 1 1 1 1
Net profit 50.1 252.8 57.9 50.4 31.4
Gross cash flow 39 57 104 110 137
EPS 50.9 239.5 7.6 49.9 31.1
Less: Changes in W. C. -21 34 27 31 33
Operating cash flow 60 23 77 79 104
Less: Capex 11 25 96 50 25
Free cash flow 49 -2 -19 29 79
Ratios
Year to March FY15 FY16 FY17E FY18E FY19E
ROAE (%) 14.0 36.8 22.0 19.3 20.7
ROACE (%) 11.6 15.2 17.5 19.9 23.0
Debtors (days) 57 56 56 56 56
Current ratio 2.0 2.4 2.9 2.8 3.0
Debt/Equity 2.7 2.2 0.4 0.3 0.2
Inventory (days) 83 87 85 83 81
Payable (days) 80 65 65 65 65
Cash conversion cycle (days) 60 78 76 74 72
Debt/EBITDA 4.0 3.4 1.4 0.9 0.5
Adjusted debt/Equity 2.6 2.1 0.2 0.1 (0.0)

Valuation parameters
Year to March FY15 FY16 FY17E FY18E FY19E
Diluted EPS (INR) 6.0 20.3 21.8 32.7 42.8
Y-o-Y growth (%) 50.9 239.5 7.6 49.9 31.1
CEPS (INR) 17.8 32.0 31.5 43.9 54.8
Diluted P/E (x) 68.7 20.2 18.8 12.5 9.6
Price/BV(x) 6.7 5.3 2.5 2.1 1.7
EV/Sales (x) 2.0 1.8 1.7 1.4 1.1
EV/EBITDA (x) 13.9 11.5 9.6 7.2 5.4
Diluted shares O/S 1.7 1.7 2.5 2.5 2.5
Basic EPS 6.0 20.3 21.8 32.7 42.8
Basic PE (x) 68.7 20.2 18.8 12.5 9.6
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

21 Edel Invest Research


Edel Invest Research BUY

Zee Learn Limited


Market leader and strong brand to drive growth CMP INR: 45 Target: INR 80

Praveen Sahay Zee Learn (ZLL) is Indias leading player in the education segment by virtue of having the fastest growing chain of
Research Analyst K-12 schools (Mount Litera Zee School) and Asias No. 1 chain of pre-schools (Kidzee) in its kitty. In FY16, pre-
+91 (22) 6187 9611 school (Kidzee) and K-12 school segments contributed ~70%+ and ~20%+, respectively, to the companys
praveen.sahay@edelweissfin.com revenue. Rising disposable incomes, burgeoning school age population and prudent franchise (in K-12 and pre-
school) additions over FY16-19E equip ZLL to clock 44% earnings CAGR. This, in turn, is bound to fuel healthy
cash flows and boost return ratios. At CMP of INR48, the stock is currently trading at 24x/19x FY18E/FY19E
EV/EBITDA, respectively. We initiate coverage with BUY recommendation.

Pre-school segment: Branded players control dominant share


In FY16, the domestic pre-school segment was pegged at USD2.5bn (up from USD0.75bn in FY11). Of this, the
branded players constituted 34%; Kidzee accounts for 33% of the branded pie. The domestic pre-school segment is
Bloomberg: ZLL:IN envisaged to grow to USD3.4bn by CY20, clocking CAGR of over 17%. With growing awareness of importance of
pre-school/play-school in upbringing of child in tier 2 and 3 cities, penetration rate for the pre-school segment is
52-week range (INR): 49 / 27 expected to rise to 25%. ZLL ensure and takes up the training of teacher recruits at franchisee schools, regular
safety & quality audits of franchise and discontinue the franchise on compliance issue as well.
Share in issue (crs): 32
Innovation, quality focus, diverse product portfolio entrench dominant player credentials
M cap (INR crs): 1,462
ZLL has invested considerable resources in developing learning designs, student learning materials and e-content
Avg. Daily Vol. BSE :(000): 0.1 for pre-schools and K-12 schools. Moreover, with rising scale and rationalisation of vendors, the company has
prudently managed cost of goods while simultaneously improving quality. We perceive these initiatives as potent
operating and profitability margin boosters.

SHARE HOLDING PATTERN (%) K-12 business India largest in world...growing at faster rate
The Indian K-12 system is the largest in the world with 253 mn students enrolled in 1.4 mn schools. However, with
inefficiencies in the government education system, has resulted in poor infrastructure both hard (buildings,
technology) and soft (teachers, pedagogy) and high drop-out rates. Thus, it is an opportunity to overhaul to
education system in the country for the efficient private players

Public, 32.7 Robust 18% sales CAGR over FY16-19E; healthy operations to spur cash flow
We estimate ZLLs net sales to clock ~18% CAGR over FY16-19E to INR246cr by FY19E driven by increase in student
enrollments in both the category schools and continuous schools addition. We forecast Kidzee to post ~20% CAGR
and continue to contribute ~70% to total revenue and Mount Litera to register 17% CAGR over FY16-19E mainly
Promoter, with increase in pupils. Moreover, we envisage robust operational performance to boost the companys cash flow
67.3 in the coming years.

Outlook and valuations: Scaling the growth highway; initiate with BUY
Rising disposable incomes, burgeoning school age population and prudent franchise (in both K-12 and pre-school)
additions over FY16-19E position ZLL to deliver 44% earnings CAGR, which will spur healthy cash flows and return
ratios. At CMP of INR 48, the stock is currently trading at 24x/19x FY18E/FY19E EV/EBITDA, respectively. We
initiate coverage on the stock with BUY recommendation and target price of INR80, valuing it on discounted cash
130 flow (DCF).

110 Risks
Complex regulatory environment.
90 K-12 schools must be operated as not-for-profit entities either as Public Trusts.
Franchise model.
70

50 Year to March FY15 FY16 FY17E FY18E FY19E


Dec-16
Jun-16

Oct-16
Nov-16
Apr-16

Jul-16
Feb-16

Sep-16

Feb-17
Mar-16
Jan-16

Jan-17
Aug-16
May-16

Revenues (INR Cr) 128 151 178 207 246


Rev growth (%) 5.3 18.4 17.5 16.6 18.9
Zee Learn Sensex EBITDA (INR Cr) 31 43 57 69 82
Net Profit (INR Cr) 10 15 33 38 45
EPS (INR Cr) 0.3 0.5 1.0 1.2 1.4
EPS growth (%) (608.2) 52.2 119.2 13.6 20.2
P/E (x) 154.5 101.5 46.3 40.8 33.9
th
Date: 6 March, 2017 P/B (x) 6.5 6.1 5.4 4.8 4.2
RoACE (%) 3.7 5.3 7.2 9.1 10.3
RoAE (%) 4.3 6.2 12.4 12.4 13.1

22 Edel Invest Research


Zee Learn Limited

Income statement (INR crs) Balance sheet (Standalone) (INR cr)


Year to March FY15 FY16 FY17E FY18E FY19E As on 31st March FY15 FY16 FY17E FY18E FY19E
Income from opera ti ons 128 151 178 207 246 Equi ty s ha re ca pi ta l 32 32 32 32 32
Di rect cos ts 38 41 44 51 59 Preference Sha re Ca pi ta l 0 0 0 0 0
Empl oyee cos ts 25 25 25 29 35 Res erves & s urpl us 202 218 251 289 334
Other expens es 60 67 77 88 105 Sha rehol ders funds 234 250 283 321 366
Tota l opera ti ng expens es 97 108 121 138 164 Secured l oa ns 338 361 245 120 120
EBITDA 31 43 57 69 82 Uns ecured l oa ns 34 26 26 26 26
Depreci a ti on a nd a morti s a ti on 9.4 10.2 9.3 5.7 6.4 Borrowi ngs 372 387 270 145 145
EBIT 21 33 47 63 76 Mi nori ty i nteres t 0 0 0 0 0
Interes t expens es 15 20 14 14 14 Other l i a bi l i ty 2 9 125 250 250
Other i ncome 4 2 3.6 4 5 Sources of funds 608 646 679 716 761
Profi t before ta x 10 15 37 54 67 Gros s bl ock 116 146 171 191 211
Provi s i on for ta x 0.0 0.0 3.7 16.1 22 Depreci a ti on 22 32 42 47 54
Core profi t 10 15 33 38 45 Net bl ock 94 114 130 144 157
Extra ordi na ry i tems -0 0 0 0 0 Ca pi ta l work i n progres s 444 478 478 478 478
Profi t a fter ta x 10 15 33 38 45 Tota l fi xed a s s ets 539 592 607 622 635
Mi nori ty Interes t 0 0 0 0 0
Unrea l i s ed profi t 0 0 0 0 0
Sha re from a s s oci a tes 0 0 0 0 0
Inves tments 4 10 11 12 13
Adjus ted net profi t 10 15 33 38 45
Equi ty s ha res outs ta ndi ng (mn) 32 32 32 32 32 Inventori es 27 11 26 30 30
EPS (INR) ba s i c 0.3 0.5 1.0 1.2 1.4 Sundry debtors 16 30 25 32 41
Di l uted s ha res (Cr) 32.0 32.1 32.1 32.1 32.1 Ca s h a nd equi va l ents 16 12 34 54 93
EPS (INR) ful l y di l uted 0.3 0.5 1.0 1.2 1.4 Loa ns a nd a dva nces 4 21 12 13 8
Di vi dend per s ha re 0.0 0.0 0.0 0.0 0.0 Other current a s s ets 0 0 0 0 0
Di vi dend pa yout (%) 0.0 0.0 0.0 0.0 0.0 Tota l current a s s ets 64 73 97 130 172
Sundry credi tors a nd others 75 58 67 77 89
Common size metrics- as % of net revenues Provi s i ons 0 1 1 1 1
Year to March FY15 FY16 FY17E FY18E FY19E Tota l CL & provi s i ons 75 59 68 78 90
Opera ti ng expens es 76.1 71.4 68.1 66.7 66.6 Net current a s s ets -12 14 29 52 82
Depreci a ti on 7.3 6.7 5.2 2.7 2.6 Net Deferred ta x
Interes t expendi ture 11.9 13.2 8.1 6.7 5.6 Mi s c expendi ture 77 31 31 31 31
EBITDA ma rgi ns 23.9 28.6 31.9 33.3 33.4 Uses of funds 608 646 679 716 761
Net profi t ma rgi ns 7.7 10.0 18.6 18.1 18.3 Book va l ue per s ha re (INR) 7 8 9 10 11
0 0.1 0.0 0.0 0.0
Growth metrics (%) Cash flow statement
Year to March FY15 FY16 FY17E FY18E FY19E Year to March FY15 FY16 FY17E FY18E FY19E
Revenues 5.3 18.4 17.5 16.6 18.9 Net profi t 10 15 33 38 45
EBITDA 151.8 41.4 31.2 21.7 19.3 Add: Depreci a ti on 9 10 9 6 6
PBT (609.3) 52.5 143.6 46.0 25.6 Add: Mi s c expens es wri tten off -5 46 0 0 0
Net profi t (609.3) 52.5 119.2 13.6 20.2 Add: Deferred ta x 0 0 0 0 0
EPS (608.2) 52.2 119.2 13.6 20.2 Add: Others 0 0 0 0 0
Gros s ca s h fl ow 14 71 42 43 51
Les s : Cha nges i n W. C. 0 29 -7 2 -8
Opera ti ng ca s h fl ow 14 42 49 41 60
Les s : Ca pex 77 63 25 20 20
Ratios Free cash flow -63 -21 24 21 40
Year to March FY15 FY16 FY17E FY18E FY19E
ROAE (%) 4.3 6.2 12.4 12.4 13.1
ROACE (%) 3.7 5.3 7.2 9.1 10.3
Debtors (da ys ) 46 72 52 57 60
Current ra tio 0.8 1.2 1.4 1.7 1.9
Debt/Equi ty 1.6 1.5 1.0 0.5 0.4
Inventory (da ys ) 78 26 54 53 45
Pa ya bl e (da ys ) 0 0 0 0 0
Ca s h convers i on cycl e (da ys ) 124 98 106 110 105
Debt/EBITDA 12.2 8.9 4.8 2.1 1.8
Adjus ted debt/Equi ty 1.5 1.5 0.8 0.3 0.1

Valuation parameters
Year to March FY15 FY16 FY17E FY18E FY19E
Di l uted EPS (INR) 0.3 0.5 1.0 1.2 1.4
Y-o-Y growth (%) (608.2) 52.2 119.2 13.6 20.2
CEPS (INR) 0.6 0.8 1.3 1.3 1.6
Di l uted P/E (x) 154.5 101.5 46.3 40.8 33.9
Pri ce/BV(x) 6.5 6.1 5.4 4.8 4.2
EV/Sa l es (x) 14.7 12.6 9.9 7.8 6.4
EV/EBITDA (x) 61.5 44.0 31.1 23.5 19.2
Di l uted s ha res O/S 32.0 32.1 32.1 32.1 32.1
Ba s i c EPS 0.3 0.5 1.0 1.2 1.4
Ba s i c PE (x) 154.5 101.5 46.3 40.8 33.9
Di vi dend yi el d (%) 0.0 0.0 0.0 0.0 0.0

23 Edel Invest Research


Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200

Vinay Khattar

Head Research

vinay.khattar@edelweissfin.com

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

24 Edel Invest Research


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Edel Invest Research


Disclaimer

Edelweiss Broking Limited (EBL or Research Entity) is regulated by the Securities and Exchange Board of India (SEBI) and is licensed to carry on the business of broking, depository services and related activities. The
business of EBL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management
and Life Insurance.
Broking services offered by Edelweiss Broking Limited under SEBI Registration No.: INZ000005231; Name of the Compliance Officer: Mr. Dhirendra Rautela, Email ID: complianceofficer.ebl@edelweissfin.com Corporate
Office: Edelweiss House, Off CST Road, Kalina, Mumbai - 400098; Tel. (022) 4009 4400/ 4088 5757/4088 6278
Disclosures under the provisions of SEBI (Research Analysts) Regulations 2014 (Regulations)
Edelweiss Broking Limited ("EBL" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities. The
business of EBL and its associates are organized around five broad business groups Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance. There were no
instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. This research report has been prepared and distributed by
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There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years.
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