1. business and industrial

JANUARY 19, 2015
Economy News
Equity
% Chg
 The Heavy Industry and Public Enterprises Ministry is drawing up a plan to
shut five chronic loss-making Central Public Sector Enterprises.(BL)
 The guidelines for spectrum sharing and trading by the department of
telecommunications (DoT) have been delayed. These are now expected
to be finalised only after the auction for spectrum, scheduled next month.
(BS)
 The Centre is keen to get private sector into mineral exploration as
government agencies entrusted with the job are unable to meet desired
output levels. (Mint)
 Reserve Bank of India (RBI) has allowed non-banking finance companies
(NBFCs) to treat some project loans as standard even if the said projects
are delayed and provided the revised date of commencement of
commercial operations (DCCO) of the project fall within two years.(Mint)
 Emboldened by the recent two-day strike by coal workers, central trade
unions of all political hues have decided to launch a countrywide
'satyagraha' on February 26, ahead of the Union Budget
presentation.(BL)
Corporate News
 Piramal Enterprises Ltd has invested $30.65 million (about Rs 1.8 bn)
towards acquiring Coldstream Laboratories Inc, a speciality
pharmaceutical contract manufacturer.(BL)
 The drop in crude oil and natural gas prices has led Reliance Industries'
(RIL) three shale gas joint ventures (JVs) in America to pare operating and
capital expenditure.(BS)
 Paving the way for setting up of a Rs. 17 bn manufacturing plant of
Asian paints at Visakhapatnam, the Andhra Pradesh government today
said it has cleared the "administrative hurdles" for the project.(BL)
 Mahindra & Mahindra Ltd (M&M) has launched the 1st Electric Vehicle
pilot project, under the aegis of the National Electric Mobility Mission Plan
(NEMMP).(BL)
 Coal India is in the process of identifying key projects to increase output
to one billion tonnes a year by 2020. The identified projects would be
brought under a comprehensive development plan and will be kept under
close monitoring of the Coal Ministry.(BL)
 JSW Group plans to expand its cement production capacity to 30 million
tonnes (mt) from 5 mt a year now by setting up grinding units closer to its
steel plants.(BS)
 Tata Motors would develop a slightly bigger hatchback at the Sanand
factory, to take on the Maruti Suzuki Alto. (BS)
 Reliance Capital Ltd's (R-Cap) asset management unit has expressed
interest to buy the fund management business of Goldman Sachs Group
Inc. in India deal that could strengthen its foothold in the exchangetraded funds (ETF) business that is growing in popularity with local
investors. (Mint)
 Reliance Industries Ltd (RIL) has decided to reopen all its fuel outlets
shuttered in 2007 as free pricing in auto fuel tempts the energy
conglomerate to return to the retail consumer.(Mint)
16 Jan 15
1 Day 1 Mth 3 Mths
Indian Indices
SENSEX Index
NIFTY Index
BANKEX Index
BSET Index
BSETCG INDEX
BSEOIL INDEX
CNXMcap Index
BSESMCAP INDEX
28,122
8,514
22,021
10,991
16,200
9,755
12,869
11,310
0.2
0.2
(0.0)
(0.2)
1.2
0.0
0.6
(0.0)
2.7
3.5
4.1
4.1
5.3
(2.3)
5.5
3.5
7.7
9.4
20.7
8.5
13.7
(7.5)
16.2
9.7
World Indices
Dow Jones
Nasdaq
FTSE
NIKKEI
HANGSENG
17,512
4,634
6,550
16,864
24,104
1.1
1.4
0.8
(1.4)
(1.0)
(1.6)
(2.7)
0.1
(3.8)
3.8
6.9
8.8
3.8
16.7
4.2
Value traded (Rs cr)
Cash BSE
Cash NSE
Derivatives
16 Jan 15
% Chg - Day
4,088
19,228
206,268
(3.8)
(10.0)
(44.6)
Net inflows (Rs cr)
15 Jan 15
% Chg
MTD
YTD
1,692
408
(7,335)
504
(311)
1,733
(311)
1,733
FII
Mutual Fund
FII open interest (Rs cr)
FII
FII
FII
FII
Index
Index
Stock
Stock
15 Jan 15
% Chg
16,577
66,873
52,721
3,392
(3.4)
3.3
0.3
1.4
Futures
Options
Futures
Options
Advances / Declines (BSE)
16 Jan 15
A
B
T
Advances
Declines
Unchanged
140
157
3
956
1,126
75
252
218
22
Total % total
1,348
1,501
100
Commodity
46
51
3
% Chg
16 Jan 15 1 Day 1 Mth 3 Mths
Crude (NYMEX) (US$/BBL) 48.2
Gold (US$/OZ)
1,276.7
Silver (US$/OZ)
17.8
(1.0)
1.1
3.9
(14.7)
6.7
10.2
(41.7)
3.0
1.6
Debt / forex market
16 Jan 15 1 Day 1 Mth 3 Mths
10 yr G-Sec yield %
Re/US$
7.7
62.0
7.7
62.1
8.0
63.5
8.4
61.8
Sensex
28,600
26,325
24,050
21,775
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,
BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange
19,500
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
MORNING INSIGHT
January 19, 2015
WIPRO TECHNOLOGIES
RESULT UPDATE
Dipen Shah
[email protected]
+91 22 6621 6301
PRICE: RS.555
TARGET PRICE: RS.624
Summary table
(Rs mn)
FY14
FY15E
FY16E
Sales
437,628
Growth (%)
16.9
EBITDA
100,392
EBITDA margin (%) 22.9
PBT
101,004
Net profit
78,403
EPS (Rs)
31.7
Growth (%)
27.2
CEPS (Rs)
36.1
BV (Rs/share)
139.3
Dividend / share (Rs) 6.0
ROE (%)
25.7
ROCE (%)
31.5
Net cash (debt) 156,472
NW Capital (Days)
73.1
P/E (x)
17.5
P/BV (x)
4.0
EV/Sales (x)
2.8
EV/EBITDA (x)
12.1
476,087
8.8
108,837
22.9
111,252
86,715
35.0
10.5
40.3
165.0
7.0
23.6
29.0
205,554
78.1
15.9
3.4
2.4
10.7
522,801
9.8
119,625
22.9
122,965
97,143
39.5
12.9
45.3
194.2
9.0
22.4
27.4
274,514
78.7
14.1
2.9
2.1
9.2
Source: Company, Kotak Securities - Private
Client Research
Wipro's 3QFY15 beat expectations on revenues as well as margins. The 3.7%
CC revenue growth was better than larger peers and the best in the past 12
quarters. We believe this reflects the benefits of the large deals won in the
recent quarters. Wipro won 8 large deals in 3Q also. The growth was broadbased with all verticals and geographies reporting growth. Employee
additions at 2569 are encouraging after an addition of 6845 employees in
2Q. This was the third successive quarter of additions after reductions in the
last three quarters of FY14. Margins also came in better than estimates.
Wipro has won marqee deals over the past few quarters, which should help
in accelerating growth. The management has guided for a 1% - 3% QoQ
growth for 4Q. The EPS works out to Rs.35 (Rs.34) for FY15 and Rs.39.5
(Rs.39) for FY16. We value the stock at Rs.624 (Rs.590, earlier) based on
FY16E earnings and upgrade the stock to BUY from ACCUMULATE. Our
target valuations are at a suitable discount to larger peers. We will become
more positive on the stock after seeing consistent high revenue growth,
going ahead.
3QFY15 - better v/s estimates
(Rs mn)
2QFY15
3QFY15
QoQ (%)
3QFY14
YoY (%)
Turnover
118,161
120,851
2.3
113,317
6.6
92,024
93,170
26,137
27,681
3,075
3,647
989
810
898
5,109
5,035
3,812
27,182
28,259
Expenditure
EBDITA
Depreciation
Interest
Other Income
PBT
Tax
PAT
Share of profit
Minority interest
Adjusted PAT
E.O. items
PAT after E.O. items
Price chart
RECOMMENDATION: BUY
FY16E P/E: 14.1X
86,790
5.9
26,527
4.3
3,109
4.0
26,332
5.0
20,272
6,199
6,228
20,983
22,031
0
0
0
-135
-103
-125
20,848
21,928
0
0
0
7.3
6,060
5.2
20,147
20,848
21,928
20,147
EPS (Rs)
8.45
8.89
8.17
EBIDTA(%)
22.1
22.9
23.4
EBIT (%)
19.5
19.9
20.7
Net Profit (%)
17.8
18.2
17.9
8.7
8.8
Source: Company
IT services
Revenues higher by 3.7% in CC terms
 Wipro's IT Services revenues reported a 3.7% growth in CC terms, which follows
a 3% growth in 2Q. The growth was better than the 2.6% CC growth reported
by Infosys and 2.5% reported by TCS.
 The growth was pretty broad-based with all the verticals and geographies reporting growth on a CC basis.
Source: Bloomberg
 Revenues grew by 3.7% despite this being a seasonally weak quarter and despite continuing challenges in the Retail vertical as well as in the Energy vertical.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
2
MORNING INSIGHT
January 19, 2015
 The management has indicated that, scale-ups in Retail will largely start in 4Q
and beyond.
 These reflect the benefits of the client hunting initiatives undertaken by the company and also reflect some stability in quarterly growth rates.
 We expect the same to improve in the future based on the order wins in the past
few months.
Demand generation initiatives yielding results; client specific issues setting off some of the gains
 During the recent reorganization process, the management has made several
changes to the structure to align it more with the demand generation process
and increasing efficiency.
 The variable component of the management and mid-management salaries has
been linked to client satisfaction and also employee satisfaction.
 It has set up dedicated hunting organisation to get more market share in existing
accounts and the run-the-business budgets.
 These initiatives have started yielding results, we opine. Wipro has won larger
deals in the recent past, including the $1.1bn Atco deal. The IMS business has
seen deals from marqee companies like Phillip Morris.
 Wipro added 44 new accounts during the quarter.
 Wipro is seeing a higher number of large deals in the market and is also participating in a higher number of these deals.
 Another dedicated farming organization has been created within the company to
target the change-the-business budgets.
 The company has been focusing more on the Top 125 accounts to get a higher
share of the wallet.
 However, the success in these initiatives has been relatively lower. The number
of clients in the $75mn - $100mn brackets has not increased over the past 5
quarters.
 During 3Q also, the Top 10 clients reported a marginal de-growth on a QoQ
basis.
 While there may be client client-specific issues, which could be at play, Wipro
needs to focus more on getting a higher wallet share of the customer spend.
Gains from Automation in execution
 To supplement the demand generation initiatives, Wipro has strengthened its
execution engine.
 The company is now focusing on automating a larger part of its delivery. It has
developed a proprietary platform - 'ServiceNext" which helps automate the repetitive part of the projects and has already won two projects on the same.
 Because of this platform, Wipro is now able to effectively compete in the
commoditized ADM space (by offering competitive pricing).
 This, along with other efficiency measures, has had a positive impact on margins.
 Contribution from fixed price projects has also improved to 55.1% from 53.1% in
2QFY15, helping profitability.
 Wipro added 2569 employees in 3Q. The company had added 1400 employees
in 1Q and 6845 employees in 2Q. This reflects better revenue visibility.
 Over the past few quarters, Wipro has been focusing more on non-linear growth
and has reduced the number of employees in IT services marginally during 2Q,
3Q as well as 4QFY14.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
3
MORNING INSIGHT
January 19, 2015
Macro scene - Greater opportunities seen
 As compared to the year-ago period, the deal pipeline is better and the conversions / bookings are faster, which is encouraging. The velocity of spending by the
clients has improved and this is helping order flows.
 It has closed 8 large deals in 3Q and expects good deal closures in 4Q also.
 US is seeing improving demand scenario with greater focus on discretionary
spends. We have been basing our constructive sectoral view on a potential improvement in the demand scenario in US.
 The GDP growth in Europe has raised concerns. Wipro has not experienced any
impact of the same till date. In fact, the region is opening up more to
outsourcing and offshoring, which is helping Indian vendors bag more business.
 While crude prices have come off, demand from Middle-East remains strong and
so does the demand from India, especially from the private sector.
Growth across geographies and verticals; Energy sector to be soft
 During the quarter, the growth was broad-based with all geographies and verticals reporting growth.
 The client specific issues and delays in initiation of new orders had their impact
on European revenues. Clients in Europe are looking at more cost reduction and
efficiency improvement initiatives, leading to higher IT spending.
 On the other hand, the US is seeing better trends and the pipeline is also stronger in that geography. Discretionary spends are also picking up in that economy.
Revenue growth in constant currency terms - Geography - wise
(Rs mn)
2QFY15
USA
3QFY15
3QFY14
3.20
4.50
2.60
-1.70
5.20
5.40
India & ME
4.10
7.70
5.50
APAC and other EMs
8.30
1.50
-5.20
Europe
Source : Company
 Vertical-wise also, the growth has come across verticals. The growth was led by
the Healthcare / Life sciences and Retail, Consumer Goods & Transport verticals.
 Within telecom, the OEM space remains stressed and Wipro is looking at communications / media verticals to support growth.
 In the Energy / Utilities vertical, Wipro is seeing some demand moderation in
discretionary areas because of the sharp fall in prices of commodities. This is expected to continue in 4Q also, with discretionary spends expected to be lower.
 While this may impact the revenue growth in short term, Wipro is aggressively
pursuing opportunities which will be thrown up by higher outsourcing by these
companies, especially the stand-alone oil-field companies.
 There are several majors which have not outsourced till now and who can actually be now forced to outsource.
 Within BFSI, the company is weak in insurance and plans to focus increasingly on
strengthening its position there. Within the capital market segment, it is seeing
discretionary spends coming back and that is encouraging.
 In banking, Wipro is pursuing three opportunities - Digital, Compliance and Infrastructure management services. Retail banks are looking more at cutting costs in
RTB and spending the same on CTB, especially on digital initiatives.
 Manufacturing continues to see growth and demand, whereas Health-care / Lifesciences is also seeing improved traction.
Kotak Securities - Private Client Research
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4
MORNING INSIGHT
January 19, 2015
Revenue growth in constant currency terms - Vertical - wise
(%)
2QFY15
3QFY15
3QFY14
Global Media / Telecom
0.20
3.40
1.10
Finance Solns
0.10
2.20
3.10
Maft & Hitech
3.00
3.30
0.80
Hcare, Life S, Sers
6.60
7.50
7.60
Retail & Trans
2.00
5.00
1.60
Energy & Util
9.10
2.80
4.80
Source : Company
EBIT margins came in better than expected
 EBIT margins in IT services fell by 18bps QoQ, but EBIDTA margins actually rose
by about 20bps QoQ, we understand. This is despite the fact that, 2Q margins
included a one-time gain of Rs.610mn from sale of assets (about 50bps positive
impact).
 If we exclude this, margins were higher by about 68bps QoQ.
 The improvement came despite lower off-shore content and lower utilization
rates. We believe that, higher revenues from fixed priced contracts, rupee depreciation and better efficiencies helped margins.
 Going ahead, Wipro has got levers like utilization rates, S&M expenses leverage,
non-linear revenues etc, which may negate the impact of future salary hikes.
Guidance for 4QFY15 in line with estimates
 Wipro has guided for a 1% - 3% CC QoQ growth in 4Q, which is in line with
estimates. We understand that, this takes into account the expected weakness in
the Energy vertical.
 Wipro has guided for revenues in the band of $1.81bn - $1.85bn for 4QFY15, as
compared to $1.795bn in 3Q.
 Wipro has won large deals in the past few months and the pipeline is also robust. Scale-up in these deals will lead to better growth rates in the future, we
believe. However, we need to watch out for the same.
Valuations and recommendations
 For FY15 and FY16, we expect IT services revenues to grow by about 8% and
12%, respectively, in USD terms. We have assumed rupee to average 61 / USD
in FY15 and 60.5/USD in FY16.
 Margins are expected to be lower v/s FY14. The expected rupee appreciation
and salary hikes may impact margins. However, higher utilization rates and better leverage on costs, along with higher non-linear proportion are expected to
largely nullify the impact.
We recommend BUY on
Wipro Technologies with a
price target of Rs.624
 We have assumed tax at 22% for FY15 and 21% for FY16. Consequently, PAT is
expected to rise to Rs.86.7bn in FY15 and Rs.97.1bn in FY16. EPS works out to
Rs.35 and Rs.39.5, respectively.
 Our PT stands at Rs.624, based on FY16 estimates (Rs.591). The stock has remained ranged over the past quarter. We upgrade the stock to BUY (ACCUMULATE, earlier).
 Our exit multiple works out to 15.8x FY16E EPS. The valuations are lower than
those accorded to TCS and Infosys.
 Consistent revenue growth in future will make us more positive on the stock.
Risks and concerns
 A delayed recovery in major user economies and a sharper-than-expected appreciation of rupee remain the key risks for earnings.
Kotak Securities - Private Client Research
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For Private Circulation
5
MORNING INSIGHT
January 19, 2015
NIIT LTD (NIIT)
RESULT UPDATE
Dipen Shah
[email protected]
+91 22 6621 6301
PRICE: RS.47
TARGET PRICE: RS.48
RECOMMENDATION: REDUCE
FY16E P/E: 8.1X
NIIT's 3QFY15 results were lack-lustre and below expectations. CLS was the
bright spot and reported a better-than-expected 28% QoQ growth in INR
terms. However, ILS reported a higher-than-expected 16% de-growth in
revenues YoY, which continues to be a point of concern. Sustained uptrend
in MTS and private schools is encouraging. CLS contributed about 76% of
the EBIDTA in FY14 and is expected to contribute 81% in FY16. CLS profits
are expected to grow by 34% in FY15 and 47% in FY16. However, ILS
business continues to impact the overall profitability, though to a lower
extent. Our FY15 and FY16 EPS estimates stand at Rs.1.6 (Rs.2.3 earlier) and
Rs.5.7 (Rs.5.4 earlier), respectively. While valuations are not demanding, we
await initial signs of improvement in IT courses (enrolments) in ILS.
Maintain REDUCE with an FY16-based PT of Rs.48 (Rs.47). The company has
paid out a dividend of Rs.1.6 per share for FY14 and we expect it to be
maintained for FY15.
Summary table
(Rs mn)
3QFY15 results were disappointing
FY14
Sales
9,511
Growth (%)
-1.0
EBITDA
621
EBITDA margin (%)
6.5
Net profit
179
EPS (Rs)
1.1
Growth (%)
(31.7)
CEPS (Rs)
5.8
Book value (Rs/share) 40.8
Dividend per share (Rs) 1.6
ROE (%)
2.7
ROCE (%)
(3.3)
Net cash (debt)
(172)
NW Capital (Days)
40.1
P/E (x)
43.0
P/BV (x)
1.1
EV/Sales (x)
0.8
EV/EBITDA (x)
12.7
FY15E
FY16E
(Rs mn)
2QFY15
3QFY15
QoQ (%)
3QFY14
YoY (%)
9,898
4.1
514
5.2
260
1.6
45.4
5.4
40.8
1.6
3.9
(2.2)
(166)
47.6
29.6
1.1
0.8
15.3
11,515
16.3
1,142
9.9
948
5.7
264.3
9.8
44.6
1.8
13.4
6.2
258
44.1
8.1
1.0
0.6
6.5
Income
-4.7
2336
6.3
Source: Company, Kotak Securities - Private
Client Research
2604
2482
Expenditure
2423
2425
EBIDTA
181
57
Depreciation
147
152
34
-95
0
0
0
-39
4
-46
PBT
-5
-91
Tax
0
4
14
-5
-95
-101
108
113
113
EBIT
Interest
Other Income
PAT
Share of profit
Adjusted PAT
2193
-68.5
143
-
-41
184
-
103
18
165.2
165.2
EPS (Rs)
0.6
0.1
0.1
EBIDTA (%)
7.0
2.3
6.1
1.3
-3.8
-1.8
-0.2
-3.8
-4.3
EBIT (%)
Net Profit (%)
-82.5
-87
165.2
Shares (mns)
-60.1
12
131.7
4.6
50.0
Source : Company
Price chart
CLS continues to drive growth and profitability
 Revenues grew by 9% on a QoQ basis for this export oriented business, which
was above our estimates. Revenues were up by 28% YoY (26% in 2Q).
 Managed Training Services continued to be the growth driver with 35% YoY
growth and now revenues from MTS form 87% (88% in 2Q) of CLS revenues.
 After transferring the Element K business, the company has been left with about
1/3rd of the overall revenues in CLS. Of this, about 87% is contributed by Managed Training Services (MTS), which has been growing at a very fast pace.
 The company had an order intake of $24mn during the quarter ($16mn in 1Q
and $21mn in 2Q). The business signed 3 new contracts in 3Q and won a new
client.
Source: Bloomberg
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
6
MORNING INSIGHT
January 19, 2015
 NIIT is developing into a major player in the MTS business with 24 (1 added in
3Q and 2 added in 2Q) clients, most of which are large corporations.
 We believe that, with the developed economies likely stabilizing, the opportunity
is huge and demand may pick up over the next few quarters.
 The contribution of CLS to NIIT's EBIDTA was at about 76% in FY14 and is expected to remain significant at about 81% in FY16.
 Thus, CLS profitability will greatly influence NIIT's margins in the near term. We
expect CLS profits to grow strongly in FY15 and FY16.
Revenue break up
(Rs mn)
Individual
Skill building
Schools
Corporate
3QFY15
2QFY15
3QFY14
769.00
1004.00
917.00
39.00
35.00
5.00
314.00
318.00
355.00
1360.00
1248.00
1059.00
Source : Company
ILS
 ILS revenues fell by 16% on a YoY basis, which was disappointing.
 The October - December quarter is generally a lean quarter for this business.
Even after considering this, revenues were disappointing. The IT enrolments are
yet to see any improvement, as yet. The numbers were lower than our estimates.
 The enrolments for RevGNIIT grew by 23% YoY, with own centres reporting a
50% growth. Beyond-IT enrolments grew by 23% YoY and overall enrolments
were at 56126.
 While IT - led revenues fell by 22% QoQ (24% QoQ fall in 2Q), Beyond-IT revenues were flat YoY, we believe. Beyond-IT now contributes 33% of overall revenues.
 The fall in IT course revenues reflects the continuing negative sentiments in the
minds of the prospective students.
 We opine that, despite some momentum in the revenue growth of IT services
exports industry the recruitments have not picked up as companies try to improve
utilization rates, look at just-in-time hiring and also increase non-linear revenues.
 While the higher capacity utilization levels at major IT companies in recent quarters do provide an opportunity, the bend towards non-linear revenues can pose a
challenge to ILS, going ahead.
 However, we do believe that, if the IT services exports continue to do well, the
positive sentiments will rub-off on NIIT over the next few quarters.
Growth in ILS revenues
Revenues (Rs mns)
YoY growth (%)
3QFY13
3QFY12
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
1034.00
1327.00
948.00
1269.00
917.00
824.00
726.00
1004.00
769.00
-22.08
10.77
-11.75
-15.06
-11.32
-16.00
-23.42
-20.88
-16.14
For Private Circulation
7
Source : Company
Kotak Securities - Private Client Research
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MORNING INSIGHT
January 19, 2015
 NIIT has already launched 'ReVolution GNIIT', which is aimed at maximising career opportunities for class XII and college students by offering a range of futureready courses.
 These courses will be offered in Banking and Finance, Digital Marketing and
Social Media, Cloud & Mobile Software Engineering, Big Data and Business
Analytics, e-Commerce & Business Administration and Cloud Computing & IT
Management.
 Thus, students from non-science streams - Arts & Commerce - will also be able
to add value to themselves, through these courses.
 We believe that, this expansion of coverage from 30% of college students (science) to nearly 70%, should lead to higher enrolments for the company.
 However, we feel that, improved sentiment in IT services industry and the consequent increase in enrolments, will be a big trigger for revenue growth as well as
margin improvement for the company.
 During the quarter, NIIT has rolled out training industry-programs in partnership
with organisations like ebay (for e-commerce certification) and Microsoft
('Women in IT' initiative in schools, colleges, etc).
Cloud expected to be a growth driver for ILS, but not a major
margin lever
 NIIT is now focusing on the Cloud Campus as the next growth area for this business. The company has invested significantly in building the Cloud infrastructure
which had impacted margins during FY13.
 The Cloud Campus program has been rolled out in 265 (222) centres and it already has 97857 (89971) enrollments. 143 courses are now being offered on
cloud campus.
 We expect this to be a driver of future revenue growth. We believe that, successful acceptance of this model can lead to faster roll-out of programs, wider reach
of programs as well as better employee productivity, leading to higher revenues
and margins.
 However, the company has already covered more than 90% of the capacity
(with 265 centres). About 300 centres can be equipped with Cloud Campus facilities but they form the remaining 15% capacity.
 Thus, the coverage increase will be slower in the future and higher profitability
will arise only as higher number of students opts for cloud-based learning.
SLS
 SLS revenues down by 11% YoY. The company had completed 4 large school
projects in 4QFY14 and one more in 2Q. The follow through impact was felt in
3Q.
 The growth came largely on the back of non-Government schools.
 The non-Government schools business now contributes about 61% of SLS revenues.
 The business added 69 non-Government schools (95 in 2Q, 129 in 1Q and 371 in
4QFY14).
 The company witnessed continuing momentum in IP based orders. N Guru, the
company's offering in the private schools business is gaining increasing acceptance, as is reflected in the additional schools bookings.
 N-Guru has now been implemented in 2465 schools.
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MORNING INSIGHT
January 19, 2015
Margins fell YoY; were lower than our expectations
 Headline margins for the quarter were lower by 283bps YoY to 2.3%.
 The ILS business reported margins of about (-)13% (1.64% in 3QFY14) due to a
16% fall in revenues.
 The company is reorganizing its business and that had some impact on margins.
 However, we also note that, consolidation including capacity recalibration led to
lower cost during the quarter. Increased implementation of Cloud Campus also
helped in restricting the impact on margins.
 The management has indicated that, it is looking at further rationalization of
costs, which should impact margins positively, going ahead.
 The current fixed cost base in 3Q in this business was about Rs.550mn, which
includes people, facilities and marketing spends. NIIT plans to further rationalize
facilities costs.
EBIDTA margins (%)
3QFY15
2QFY15
3QFY14
Individual
-13.00
4.38
1.64
Skill building
-20.51
-37.14
-500.00
2.55
2.20
5.63
11.54
11.54
12.56
Schools
Corporate
Source : Company
 Margins continued to be impacted by continued investments in the skills building
initiative, which the company has started with the joint venture - NIIT Yuva Jyoti
Ltd - with National Skills Development Council (NSDC). NSDC will hold 10%
equity in NYJL, which aims to train 7 million students in 1,500 centres across
1,000 cities over 10 years.
 The skills building business had a negative EBIDTA of Rs.8mn. It was lower than
the negative EBIDTA of Rs.25mn in 3QFY14. NIIT plans to achieve break even in
this business some time in FY16, we believe (earlier target was FY15). We have
assumed continuing losses in FY15 and positive EBIDTA in FY16.
 Margins in SLS were lower YoY due to the lower revenue levels and are expected to rise as revenues increase.
 In CLS, margins were impacted by initial costs on new projects. The impact is
expected to be repeated in 4Q. However, in FY16, we expect margins to improve on a YoY basis.
Future prospects
 We have our tweaked our FY15 and FY16 earnings.
 We have built in an improved scenario for the ILS and CLS businesses (on assumption of improvement in developed economies) and have also assumed profitability improvement due to the cloud initiative.
 We expect the individual learning business to report a 18% de-growth in FY15
but a 1% growth in FY16.
 CLS business is expected to grow at a CAGR of about 29% over FY14 - FY16.
 SLS is expected to report a de-growth of 13% in FY15 and a flattish growth in
FY16.
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9
MORNING INSIGHT
January 19, 2015
Revenue break up
(Rs mn)
FY14
FY15E
FY16E
Individual
3958.0
3229.6
3272.7
Schools
1554.0
1355.7
1362.3
Corporate
3972.0
5176.2
6615.2
27.0
138.0
265.0
9511.0
9899.5
11515.2
Skills development
Total
Source : Company, Kotak Securities - Private Client research
 We have assumed margins to improve to 5% in FY15 and 10% in FY16. The
cloud initiative is expected to help improve the ILS margins.
 Growth in ILS revenues and absence of spends on cloud / 1-NIIT should also help
in FY16. Skills building initiative is also expected to see profits v/s losses in FY15.
 On the other hand, SLS margins are expected to rise on higher contribution of
private schools and lower bought-outs. CLS should see margins improve due to
rupee depreciation and higher proportion of MTS revenues.
 After accounting for its 24% share in NIIT Technologies' profits, we expect the
net profit to be at Rs.260mn in FY15 and Rs.948mn in FY16.
 On stand-alone basis for NIIT, FY15 and FY16 is expected to see a net loss of
Rs.199mn and a net profit of Rs.408mn, respectively, as against a loss in FY14.
EBIDTA margins
(%)
Individual
Schools
Corporate
Skills development
Total
FY14
FY15E
FY16E
3.66
-2.83
2.78
6.31
3.95
7.27
11.91
11.66
14.02
-348.1
-37.0
9.4
6.53
5.19
9.92
Source : Company, Kotak Securities - Private Client research
Valuations and recommendation
 At our TP of Rs.48, FY16E earnings will be discounted by about 8x. The erratic
performance of the past constrains us from giving a better valuation to the stock.
 We will become more optimistic as and when we see the growth in IT services
starting to rub-off on student sentiment and hence, enrolments for NIIT. We have
assumed higher growth in ILS in FY16.
 Prior investments in cloud campus are expected to improve revenue prospects as
well as profitability.
We maintain REDUCE rating
on NIIT Ltd with a price
target of Rs.48
 The current valuations of about 6.5x EV/EBIDTA largely discounts the consistent
performance of CLS (81% of overall EBIDTA in FY16E), when seen in light of the
subdued performance of other businesses.
 We maintain REDUCE.
 The FY14 dividend of Rs.1.6 per share is expected to be maintained/increased for
FY15 and FY16.
Concerns
 A slower-than-expected recovery in the global economy could impact revenue
growth of NIIT.
 Steep rupee appreciation v/s major global currencies may impact the financials
of NIIT.
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10
MORNING INSIGHT
RESULT UPDATE
Saday Sinha
[email protected]
+91 22 6621 6312
January 19, 2015
AXIS BANK
PRICE: RS.515
TARGET PRICE: RS.615
RECOMMENDATION: BUY
FY17E P/E: 12.3X, P/ABV: 2.3X
Q3FY15 results: Core performance in line; fresh stress build-up
was well within the guidance…
Axis bank reported strong core performance on back of strong NIM (3.93%)
and healthy loan growth (23.2% YoY). Although operating profit came
strong at 26.8% YoY on back of healthy revenue growth along with
containment of opex (C/I ratio fell by 110bps QoQ), PAT (18.4% YoY) grew at
moderate pace (in-line with our expectations) due to higher provisions (2.5x
YoY). Reported NIM came at 3.93% in Q3FY15, much ahead of
management's medium term guidance of ~3.50%, largely aided by
improvement in LDR (410bps QoQ).
Although headline NPLs have been holding well contrary to street
expectations, high exposure to non-operational power portfolio remains a
potential risk, in our view. Fresh impairment (Rs.8.4 bn) remained way
below the management's guidance (Rs.65 bn for FY15). However,
management has maintained its earlier guidance by factoring in higher
restructuring during Q4FY15 (Rs.20-21 bn in Q4FY15), as provisioning
arbitrage ends between NPA and restructuring post FY15. At CMP, stock
trades reasonable at 2.3x its FY17E ABV with healthy return ratios (RoE: 1819%, RoA: 1.8%). We are retaining BUY rating on the stock with revised TP
of Rs.615 (Rs.560 earlier; 2.75x its FY17E adjusted book value) after rolling
over to FY17 estimates.
Quarterly Performance
(Rs Mn)
Q3FY15
YoY (%)
17.0
Interest on advances
65,019
55,573
Interest on Investment
22,798
21,104
8.0
539
488
10.5
Interest on RBI/ banks' balances
Other interest
541
727
-25.5
Total interest earned
88,897
77,891
14.1
Interest expense
53,002
48,051
10.3
35,896
29,840
20.3
Net interest income
Price chart
Q3FY14
Other income
20,391
16,444
24.0
Operating Revenue (NII + Other income)
56,286
46,284
21.6
Operating Expenses
23,140
20,134
14.9
7,785
6,551
18.8
Other operating expenses
15,356
13,583
13.0
Operating Profit Before Prov. & Cont.
33,146
26,150
26.8
Provisions & contingencies
5,072
2,025
150.5
Provision for taxes
9,077
8,084
12.3
18,998
16,041
18.4
8.0
6.8
17.6
Payments to / Provisions for employees
Net profit
EPS (Rs)
Source: Company
Source: Bloomberg
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
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11
MORNING INSIGHT
January 19, 2015
Margin remained ahead of management's guidance; PAT came
in-line with expectations on back of higher provisions (base effect).
Core performance (NII growth at 20.3% YoY) was marginally ahead of our expectations on back of strong NIM (3.93% in Q3FY15) and healthy loan growth (23.2%
YoY). Net revenue grew 21.6% YoY, highest in last 6 quarters on back of healthy
core performance along with strong non-interest income (24.0% YoY). Non-interest
income was largely aided by robust treasury gains (~9.5x YoY), while fee-based income grew at healthy pace (15.8% YoY) on back of strong fees earned from retail
and business banking segments. Large & Mid corporate segment saw decline of
4.7% YoY as demand from corporate segments has remained muted. Fee-income
business is progressively witnessing higher contribution from non-lending activities.
We are modeling moderate growth in non-interest income at 12.2% CAGR during
FY14-17E as against ~30% CAGR witnessed during FY08-14 as slow business growth
along with moderate traction in off-balance sheet items are likely to impact this
stream of revenue.
Breakup of Fee Income
(Rs bn)
1Q2013
2Q2013
3Q2013
4Q2013
1Q2014
2Q2014
3Q2014
4Q2014
1Q2015
Total Fee Income
2Q2015 3Q2015
11.54
13.43
14.05
16.18
13.17
14.32
14.56
17.80
13.78
15.91
16.86
Large & Mid corporate
4.09
4.35
4.61
4.75
3.80
4.31
4.44
5.38
3.31
4.59
4.23
Treasury & DCM
2.38
2.13
2.81
3.24
3.29
3.15
3.35
3.56
3.31
3.02
3.54
Agri & SME Banking
0.63
0.62
0.84
0.97
0.51
0.71
1.16
1.60
0.49
0.86
1.01
Business Banking
1.10
1.00
1.12
1.29
1.32
1.15
1.16
1.25
1.38
1.27
1.52
Capital Markets
0.12
0.13
0.14
0.16
0.13
0.14
0.00
0.00
0.00
0.00
0.00
Retail Banking
3.22
4.21
4.53
5.17
4.18
4.87
4.38
5.95
5.11
6.02
6.59
Source: Company
Contribution to Net Revenue
(%)
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
NII
56%
56%
59%
60%
60%
62%
64%
64%
64%
Fee Income
38%
34%
35%
37%
35%
36%
31%
32%
33%
4%
8%
3%
1%
4%
2%
4%
2%
1%
Trading Profit
Other non-interest Income
Total net Revenue
1%
2%
3%
2%
2%
1%
1%
1%
1%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Source: Company, Kotak Securities - Private Client Research
Composition of Net revenue (peer comparison)
FY14 (%)
Axis Bank
HDFC Bank
ICICI Bank
NII
62%
70%
61%
Fee Income
36%
27%
30%
Trading Profit
2%
0%
2%
Other non-interest Income
1%
3%
7%
100%
100%
100%
Total Income
Source: Company, Kotak Securities - Private Client Research
Although operating profit came strong at 26.8% YoY on back of healthy revenue
growth along with containment of opex (C/I ratio fell by 110bps QoQ), PAT (Rs.19.0
bn; 18.4% YoY) grew at moderate pace (in-line with our expectations) on back of
higher provisions (2.5x YoY).
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12
MORNING INSIGHT
January 19, 2015
Reported NIM came much ahead of guidance largely aided by
sharp rise in LDR.
Reported NIM came at 3.93% in Q3FY15, much ahead of management's medium
term guidance of ~3.50%, largely aided by improvement in LDR to 89.5% (410bps
QoQ). Although yield on advances fell 24bps QoQ (calculated), asset yield remained
stable at 8.7% with change in asset mix. During the same period, cost of funds fell
by 2bps to 6.17% in Q3FY15 on back of conscious strategy of mobilizing retail TD
along with shedding high cost bulk deposit (down from 26.1% in Q3FY14 to 21.9%
in Q3FY15).
Trends in NIM (%)
Source: Company
Going forward, we expect NIM to trend downward, as there is limited scope to further increase LDR from current levels. We believe mobilizing deposits would be the
key to fund its future loan growth. Bank had cut the base rate by 10bps during October 14, which is likely to show full impact during Q4FY15 as ~85% of domestic
book is linked with the base rate. Nonetheless, we also take cognizance of its favorable ALM profile, where 47% of deposits have less than one year maturity, while
17% of advances would be re-priced within one year (as per FY14 disclosures). We
believe this would support margins in the falling interest rate environment as larger
amount of deposits as compared to advances would come for re-pricing at lower
interest rates.
We are modeling NIM to come at 3.7%/3.6% during FY16E/17E as compared to
3.9% witnessed during 9MFY15 (3.8% in FY14), after factoring in amplified competitive intensity capping the asset yield.
Balance sheet growth picked-up marginally; however, retail
banking piece continued to impress
Axis bank's balance sheet growth picked up marginally (17.2% YoY) on back of
strong loan growth (23.2% YoY). Retail segment continued to witness robust growth
- 24.1% YoY (5.2% QoQ); however, corporate segment also witnessed strong
growth (10.3% QoQ) on refinancing opportunities.
In retail segment, focus continues on both housing as well as auto loans. However,
management has guided that share of higher yielding unsecured portfolio is likely to
rise in the future. We opine that competition has been intensifying in retail space.
Hence, we believe that although its NIM has been holding-up well in the recent
quarters, competitive pressure in retail segment could put pressure on its margins,
going forward.
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MORNING INSIGHT
January 19, 2015
Break-up of advances
(%)
Large & Mid Corporate
SME Advances
Agriculture
Retail
FY10
FY11
FY12
FY13
FY14
Q2FY14*
Q2FY15*
Q3FY15*
50.3%
17.5%
12.2%
20.0%
53.3%
15.0%
12.2%
19.5%
53.6%
14.0%
10.2%
22.1%
49.9%
15.2%
7.5%
27.4%
44.4%
15.4%
7.8%
32.4%
48.4%
16.3%
45.5%
15.6%
46.6%
15.3%
35.3%
38.9%^
38.1%^
Source: Company, * indicates reclassification of loan book, ^ indicates retail book including FCNR linked advances
Its deposit growth has continued to grow at moderate pace (11.0% YoY) while saving deposits grew healthy at 14.8% YoY. CASA deposits grew at moderate pace
(12.4% YoY) largely on back of subdued performance of current account floats
(8.5% YoY). The share of CASA mix stands healthy at 43.1% (Q3FY15) while CASA
share on daily average basis improved from 39% in Q3FY14 to 40% in Q3FY15.
Although headline NPLs suggest comfort, high exposure to nonoperational power portfolio remains a potential risk, in our view.
Despite marginal uptick in NPLs during Q3FY15 (GNPA/NNPA rose 8.0% and 6.0%,
respectively), its asset quality has been holding well contrary to street expectations.
In percentage terms, gross and net NPAs remain healthy (stable QoQ) at 1.34% and
0.44%, respectively, at the end of Q3FY15.
Fresh impairment during Q3FY15 (Rs.8.4 bn; 1.46% annualized) remained way below the management's guidance (Rs.65 bn for FY15). However, management has
maintained its earlier guidance by factoring in higher restructuring during Q4FY15
(Rs.34.3 bn in 9MFY15), as provisioning arbitrage ends between NPA and restructuring post FY15.
Trend in Asset Quality
(Rs. Bn)
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3-FY15
Gross NPA
21.91
% of Gross Advances
1.10
Net NPA
6.54
% of Net Advances
0.33
Provision Coverage Ratio (%) 80.0%
22.75
1.10
6.79
0.33
81.0%
23.93
1.06
7.04
0.32
79.0%
24.90
1.10
7.90
0.35
80.0%
27.35
1.19
8.38
0.37
80.0%
30.08
1.26
10.03
0.42
78.0%
31.46
1.22
10.24
0.40
78.0%
34.63
1.34
11.13
0.44
77.0%
36.13
1.34
11.80
0.44
78.0%
39.02
1.34
12.51
0.44
78.0%
Source: Company
Trend in addition to impaired assets
Rs. Bn
Restructuring
as a % of loan book
Slippage
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
6.28
3.23
3.68
7.91
6.86
10.31
6.70
11.15
4.80
Q22015 Q3 2015
5.70
1.32
1.48%
0.76%
0.87%
1.86%
1.39%
2.09%
1.36%
2.26%
0.83%
0.99%
0.23%
4.56
6.28
5.41
4.43
6.81
6.18
5.89
3.01
6.26
9.11
7.08
Slippage Ratio (%)
1.07%
1.48%
1.27%
0.90%
1.38%
1.26%
1.20%
0.61%
1.09%
1.58%
1.23%
Addition to impaired assets (%)
2.55%
2.24%
2.14%
2.76%
2.78%
3.35%
2.56%
2.88%
1.92%
2.57%
1.46%
Source: Company
Its outstanding restructured book is relatively comfortable at Rs.68.1 bn (2.8% of net
advances) as per the new classification. Although risk of asset impairment remains
elevated due to its high exposure to infrastructure and other stressed sectors, its
share has seen gradual decline over the years. In its power portfolio, only ~50% of
assets are operational in nature while rest will see DCCO (Date of Commencement
of Commercial Operations) during next two years. Nonetheless, we believe healthy
provision coverage ratio at ~78% (including prudential write-offs) provides some
comfort.
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14
MORNING INSIGHT
January 19, 2015
Exposure to Stressed Segments (Funded) - (%)
(%)
FY10
FY11
FY12
FY13
FY14
Q1FY15
Q2FY15
Q3FY15
Infrastructure Construction
8.2
8.2
6.8
7.6
7.4
7.6
7.8
7.8
Power Generation & Distribution
5.1
5.7
4.7
4.9
5.2
5.2
5.2
5.3
Metals & Metal Products
6.0
7.4
4.3
4.2
4.6
4.6
5.2
5.3
Engineering & Electronics
2.9
3.7
3.4
3.5
3.3
3.3
3.3
3.3
Financial Companies
11.0
14.3
12.7
7.0
4.6
4.3
4.5
5.5
Trade
6.5
4.5
3.2
2.9
3.6
3.6
3.6
3.5
Food Processing
6.4
4.4
4.1
4.1
3.6
3.7
3.5
3.5
Real Estate
5.4
3.2
2.6
3.3
3.3
3.3
3.3
2.5
2.3
2.3
2.3
2.1
2.1
0.5
0.5
0.4
38.4
39.0
40.1
Shipping, Transportation & Logistics
2.9
Telecom
5.0
Petroleum & Petroleum Products
2.7
Chemicals
Total Exposure to 10 sectors
1.4
54.2
3.3
1.8
1.6
59.4
46.7
40.7
39.4
Source: Company
We recommend BUY on Axis
Bank with a price target of
Rs.615
Valuations & recommendation
At CMP, stock trades reasonable at 12.3x its FY17E earnings and 2.3x its FY17E
ABV. We have tweaked the earnings estimate for FY15/16E and now expect earnings to grow 16.4% CAGR during FY14-17E along with healthy return ratios (RoE:
18-19%, RoA: 1.8%). We are retaining BUY rating on the stock with revised TP of
Rs.615 (Rs.560 earlier; 2.75x its FY17E adjusted book value) after rolling over to
FY17 estimates.
Key data
(Rs. bn)
2014
2015E
2016E
2017E
Interest income
306.4
350.0
408.1
486.7
Interest expense
186.9
208.1
244.5
296.6
Net interest income
119.5
141.9
163.6
190.1
Growth (%)
23.6%
18.7%
15.3%
16.2%
74.1
81.3
91.4
104.7
Gross profit
114.6
131.7
151.5
176.9
Net profit
62.2
73.4
84.3
98.1
20.0%
18.1%
14.9%
16.3%
Gross NPA (%)
1.2
1.5
1.6
1.5
Net NPA (%)
0.4
0.5
0.5
0.4
Net interest margin (%)
3.8
3.8
3.7
3.6
CAR (%)
16.1
15.6
14.3
13.1
RoE (%)
17.4
18.0
18.4
19.1
Other income
Growth (%)
RoA (%)
Dividend per share (Rs)
EPS (Rs)
Adjusted BVPS (Rs)
P/E (x)
P/ABV (x)
1.7
1.8
1.8
1.8
20.0
22.0
22.0
23.0
26.5
31.3
35.9
41.8
158.3
177.8
199.3
223.7
19.5
16.5
14.3
12.3
3.3
2.9
2.6
2.3
Source: Company, Kotak Securities - Private Client Research
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
15
MORNING INSIGHT
January 19, 2015
BAJAJ AUTO LIMITED (BAL)
RESULT UPDATE
Arun Agarwal
[email protected]
+91 22 6621 6143
PRICE: RS.2420
TARGET PRICE: RS.2556
RECOMMENDATION: ACCUMULATE
FY16E P/E: 18X
BAL's 3QFY15 results came in ahead of expectation. Revenues grew by 10%
YoY to Rs56.6bn. EBITDA margin at 20.3% came in ahead of our expectation
on the back of improved gross margins. Company reported PAT of
Rs8,612mn. However, adjusted for MTM gain/loss, PAT stood at Rs8,071mn,
lower by 4% YoY and 8% QoQ. Reason for decline in PAT was lower other
income during the quarter. Company expects to improve domestic volumes
on the back of planned new launches. In exports, given oil and currency
crisis, there could be some demand headwinds in the near term. Over the
medium to long term, we expect BAL's high margin business segment are
expected to grow a healthy rate. We retain our ACCUMULATE rating on the
stock with revised price target of Rs2,556 (earlier Rs2,562).
Quarterly performance
Summary table
(Rs mn)
FY14
FY15E
FY16E
(Rs mn)
3QFY15
3QFY14
YoY (%)
2QFY15
QoQ (%)
Sales
201,495 225,722 259,753
Growth (%)
0.8
12.0
15.1
EBITDA
41,057 44,531 51,519
EBITDA margin (%) 20.4
19.7
19.8
PBT
46,334 44,988 56,129
Net profit
32,424 33,577 38,922
Adjusted EPS (Rs)
112.0
116.0
134.5
Growth (%)
6.5
3.6
15.9
CEPS (Rs)
118.3
117.6
144.4
BV (Rs/share)
332.0
381.8
457.8
Dividend / share (Rs) 50.0
50.0
50.0
ROE (%)
37.0
32.5
32.0
ROCE (%)
52.5
45.4
45.9
Net cash (debt)
89,859 103,534 124,992
NW Capital (Days)
(8.4)
(7.8)
(8.6)
P/E (x)
21.6
20.9
18.0
P/BV (x)
7.3
6.3
5.3
EV/Sales (x)
3.1
2.7
2.3
EV/EBITDA (x)
15.2
13.9
11.7
Total Revenues
56,572
51,312
10.2
59,631
(5.1)
Total expenditure
45,093
40,916
10.2
47,689
(5.4)
RM consumed
38,620
35,663
8.3
41,101
(6.0)
Employee cost
2,139
1,848
15.8
2,102
1.8
Source: Company, Kotak Securities - Private
Client Research
Reported PAT
Other expenses
4,334
3,405
27.3
4,486
(3.4)
11,479
10,397
10.4
11,942
(3.9)
EBITDA margin (%)
20.3
20.3
-
20.0
-
Depreciation
658
460
43.1
686
(4.2)
EBITDA
Interest cost
Other Income
Exceptional/MTM income/ (loss)
PBT
PBT margins (%)
Tax
Tax rate (%)
PAT margins (%)
Adjusted PAT
Adjusted EPS (Rs)
2
(63.2)
1
40
2,218
(57.1)
1,136
(16.1)
789
955
(17.4)
(4,077)
-
12,563
13,109
(4.2)
8,314
51.1
22.2
25.5
3,950
4,063
(2.8)
2,405
13.9
31.4
31.0
-
28.9
-
8,612
9,046
(4.8)
5,909
45.8
64.2
15.2
17.6
-
9.9
-
8,071
8,386
(3.8)
8,807
(8.3)
27.9
29.0
(3.8)
30.4
(8.3)
984,520
993,690
(0.9)
1,055,582
(6.7)
Net Realization (Rs)
56,068
50,567
10.9
55,200
1.6
RM cost per vehicle (Rs)
39,227
35,889
9.3
38,936
0.7
Total Volumes
Price chart
1
953
Source:
Result Highlights
 Revenues in 3QFY15 grew by 10% YoY from Rs51.3bn in 3QFY14 to Rs56.6bn
during the quarter under review. Revenue growth came from 11% YoY increase
in blended realization as volumes during the same period reported marginal 1%
decline.
 Sequentially revenues were down by 5% on the back of 7% fall in sales volume.
Source: Bloomberg
 In the domestic segment, revenues declined by 2% YoY despite 13% lower volumes. Better product mix led to 13% jump in blended average selling price
(ASP). As compared with 2QFY15, domestic revenues came down by 8%, due to
similar decline in volumes.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
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16
MORNING INSIGHT
January 19, 2015
 Export revenues for the quarter stood at Rs26.2bn, 26% growth over 3QFY14.
Export revenue received support from 16% volume growth and 9% higher ASP.
Increased ASP was supported by better USD realization during the quarter.
 Gross margins in 3QFY15 improved from 29% in 3QFY14 and 29.5% in 2QFY15
to 30%.
 Despite 1% volume decline, employee cost increased by 16% YoY and other expenses increased by 27% YoY leading to negative operating leverage. 3QFY15
other expenses includes Rs137.3mn (9MFY15 Rs354.1mn) CSR contribution
made by the company. Sequentially though, both employee cost and other expenses did not witness significant changes.
 EBITDA margin at 20.3% remained static YoY as gross margin gain was offset by
negative operating leverage. As compared with 2QFY15, gross margin increase
translated into 30bps expansion in EBITDA margin.
 Depreciation witnessed a sharp jump YoY as the company reworked depreciation in accordance with new Companies Act (2013). As a result, for entire FY15,
the impact is expected to be Rs600mn.
 Other income during 3QFY15 came in lower. Both investment and other income
witnessed significant YoY decline. On a QoQ basis, investment income came
down by 32%.
 During the quarter, the company reported MTM gain of Rs789mn as against
MTM gain of Rs955mn reported during 2QFY15. In 2QFY15, the company reported MTM loss of Rs674mn.
 Adjusting for MTM gain, adjusted net profit for the quarter came in at
Rs8,071mn, 4% and 8% lower over 3QFY14 and 2QFY15 adjusted net profit.
Conference Call Highlights
 In the domestic market, company expects the Platina and Pulsar brands to do
well. Company expects new launches in 4QFY15 to bring incremental volumes of
~30,000 units.
 In the exports, there could be some near term headwinds. BAL's certain export
countries that are dependent on oil income could see currency related (USD
availability) issues. Further demand in Nigeria (BAL's biggest export market)
could face demand headwind in the near term as the company's distributor took
a sharp 15% hike on products (to counter local currency devaluation).
 In the domestic 3W segment, impact of Maharashtra permit has played out.
Though there are talks with the Maharashtra government for bringing certain reserved category un-utilized permit in open category (~15,000 permits). In
Telangana, ~30,000 - 40,000 new permits can come in the market going ahead.
Company expects 4QFY15 domestic 3W volumes to be similar to 3QFY15.
 On inventory, the management highlighted that in December, the inventory for
the industry increased by ~170,000 units. For BAL, the inventory did not witness
any increase post festive season and continues to stay under 30 days.
 Certain commodities like steel, aluminum has softened. But on the other hand,
conversion cost at the vendors end also increased. Accordingly, the benefit of
soft commodity prices would be very marginal.
 Other income in the next 2-3 years would be lower as the company has parked
substantial portion of surplus cash in FMP's with 3 year lock-in period in order to
take benefit of long term capital gain tax. FMP income will get booked on redemption (FY18). Around Rs2 to 2.5bn worth of other income per annum will get
postponed.
Kotak Securities - Private Client Research
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17
MORNING INSIGHT
January 19, 2015
 Company undertook price hike on 1st Jan 2015 to pass on impact of increase in
excise duty. On 6th Jan 2015, the company took ~Rs500 price increase on select
models.
 During the quarter, BAL realized Rs62.8/USD as against Rs60.9/USD and Rs61.5/
USD realized in 3QFY14 and 2QFY15 respectively. For FY16, the company has
covered ~60% of exports at USD realization levels better than FY15.
Outlook and Valuations
 For BAL, Discover performance remains the key challenge, though the company
continues to stay hopeful of market share gains over the next few quarters.
BAL's market share in the domestic 110cc and below segment have come down
from 19% in FY13 to 17% in FY14 and in 9MFY15, it slipped to 12%. In
4QFY15, the company will be making couple of launches under the Pulsar brand.
Company recently launched Platina with electric start. Apart from this, there
could possibly be a launch of 100cc bike under the new brand.
 We believe, revival in the economic situation will lead to strong demand for the
premium/sport motorcycles and we thereby remain optimistic on healthy growth
from the sports/premium segment over the medium term.
 Exports share in the volume mix has improved from 31% in FY11 to 48% in
9MFY15. Company remains confident of achieving robust volume growth, going
forward. Demand from company's key market continues to stay healthy. Further
entry into new markets is providing with additional growth opportunities.
 In the 3W segment, medium to long term domestic volume growth will remain
contingent up opening of new permits in the future.
We retain ACCUMULATE rating
on Bajaj Auto Ltd with a price
target of Rs.2556
 Company's high margin product growth prospects look positive and that should
keep operating margin strong. In 9MFY15, despite a mere 3% volume growth,
the company has been able to maintain strong EBITDA margin.
 We have revised our FY15/FY16 volume assumptions lower. We expect the
company's earnings in FY16 to grow on a strong note largely backed by improved sales volume performance. We retain our ACCUMULATE rating on the
stock with revised price target of Rs2,556 (earlier Rs2,562).
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
18
MORNING INSIGHT
January 19, 2015
TV18 BROADCAST
RESULT UPDATE
Ritwik Rai
[email protected]
+91 22 6621 6310
PRICE: RS.32
TARGET PRICE: RS.38
RECOMMENDATION: BUY
FY16E P/E: 22X
Even as TV18 has missed our profit estimates for 3QFY15, we upgrade the
stock to BUY (from REDUCE), and raise our price target on the stock to Rs 38
(from Rs 29), as we think: 1/ current earnings miss is largely on account of
new initiatives taken by the company, which have begun to show an impact
and which will lend visibility to long-term earnings, 2/ our concerns on the
stock have faded meaningfully, as operations have shown resilience, and
business news has likely filled in the gap left by weakness in general news,
3/ outlook for entertainment broadcasting has improved, as is visible in the
re-rating of Zee Entertainment, 4/ the company is likely to reap a rich
harvest from its dominance in business news over the medium-term, if
capital markets remain strong. We note that TV18 Broadcast trades at an
31% discount to Zee Entertainment (our price target implies 27x PER FY16E,
an 15% discount to Zee).
Summary table
(Rs mn)
Results Summary
FY14
FY15E
FY16E
Sales
19,681
Growth (%)
15.8
EBITDA
2,105
EBITDA margin (%) 10.7
PBT
994
Net profit (adj.)
1,036
EPS (Rs)
0.6
Growth (%)
NM
CEPS (Rs)
0.9
Book value (Rs/share) 19.8
Dividend per share (Rs) 0
ROE (%)
2.9
ROCE (%)
3.8
Net cash (debt)
-1,363
NW Capital (Days)
56
P/E (x)
55.5
P/BV (x)
1.6
EV/Sales (x)
2.7
EV/EBITDA (x)
30.1
22,654
15.1
2,547
11.2
1,933
1,427
0.8
8
1.2
20.6
0
4.1
5.2
-779
58
37.7
1.5
2.4
21.1
25,690
13.4
4,060
15.8
3,664
2,442
1.4
71
1.8
22.0
0
6.7
7.6
1,327
60
22.0
1.4
2.0
12.7
Source: Company, Kotak Securities - Private
Client Research
Price chart
Rs mn, FY ends Mar
Q3FY15
Income from operations
6072
Q3FY14 % chg. y/y
5255
Other Operating Income
Q2FY15 % chg. q/q
15.6
5537
9.7
NM
0
NM
Total Income from Operations
6072
5255
15.6
5537
9.7
Expenses
5278
4480
17.8
4970
6.2
Programming Costs
2038
1426
42.9
1709
19.2
Personnel Expenses
995
675
47.4
937
6.2
Mkting, Distbn, & Promotnal Exp. 1167
1408
-17.1
1173
-0.5
971
11.0
1150
-6.3
Other Expenses
EBITDA
Margin
1078
794
774
2.5
567
40.0
13.1%
14.7%
-1.7ppt
10.2%
2.8ppt
Depreciation and Amortization
144
121
19.5
110
30.9
EBIT
649
653
-0.6
457
42.1
Other Income
40
61
-33.9
128
-68.7
Interest Expenses
101
171
-40.7
119
-14.7
PBT
588
543
8.3
466
26.3
Exceptional Items
53
0
NM
0
-
Provision for Tax
106
31
242.3
112
NM
PAT before exceptional items
483
512
-5.8
353
36.6
PAT after exceptional items
535
512
4.5
353
NM
33
0
NM
36
-7.8
-36
-5
669.6
-43
-17.4
604
517
16.8
432
39.7
Share in Associate
Minority Interest
PAT
Source: Company Reports
 TV18 Broadcast (TV18) reported topline ahead of our estimates, while reported
EBITDA came in below our estimates, primarily on higher programming expenses, and lower profits from news operations.
 We note that year-on-year comparisons are not valid on consolidated financials,
since 3QFY15 financials include ETV financials (TV18 started consolidating ETV
operations from 4QFY15).
Source: Bloomberg
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
Kotak Securities - Private Client Research
Please see the disclaimer on the last page
For Private Circulation
19
MORNING INSIGHT
January 19, 2015
 The company has reported revenues Rs 6072mn, modestly ahead of our estimates. We note that standalone operations of the company have reported 3.4%
y/y growth. We expect that high base on account of assembly elections in
3QFY14 have led to the weakness. On a q/q basis, standalone operations have
registered 6.5% y/y growth - considering there was a budget event in 2QFY15,
we think revenue growth is not discouraging on a q/q basis.
 Among expenses, what stands out is the 19% q/q rise in programming expenses,
which we think has been on account of Bigg Boss in the quarter. There is also a
likelihood that the company has raised its programming hours in the quarter
(note that Zee TV has raised its programming hours on its flagship channel)
 Marketing spends have continued to be high (consistent with 2QFY15) as the
company has, in the quarter, re-launched IBN-7, and spends relating to marketing and distribution of the company's Gujarati business channel "CNBC Bajaar".
 Reported consolidated EBITDA, Rs 794 mn, is 10% below our estimates. This is
largely on account of: 1/ standalone EBITDA declining sharply (33% y/y), 2/ production expenses (entertainment operations) coming in higher than our expectations. We note that on a like-to-like basis, TV18 consolidated operations had
brought in EBITDA Rs 939mn in 3QF15, i.e. on a like-to-like basis, EBITDA of the
company has declined by 15.4%. Further, it is useful to know that in 3QFY15,
the company's movie operations had run up an EBITDA loss of Rs 130mn (modest profit this year).
 Of the Rs 300mn EBITDA that has declined this year, Rs 150mn is attributable to
standalone news operations. We also expect that ETV News business should
have seen significant moderation in EBITDA (54% margin in 3QFY14), and
should likely have witnessed a 40-50% decline in EBITDA (approx Rs 50mn). Of
the remaining 100mn decline, it is our expectation that the decline has been
contributed largely by Viacom18 operations, which should have experienced
higher distribution spends on Rishtey, as well as higher production expenses in
the quarter.
 Net interest expenses in the quarter have risen significantly, on a sequential basis. The company has reported an exceptional item in the quarter, which relates
to write-back of doubtful advances. Reported PAT, Rs xx mn is in line with our
estimates.
Standalone Operations: Financial Summary
Rs mn, FY Ends Mar
3QFY15
3QFY14
%chg. y/y
2QFY15 % chg. q/q
Income from operations
1495
Other Operating Income
Total Income from Operations
1495
Expenses
1170
Programming Costs
Personnel Expenses
371
Mktg, Distbn, & Promotional Exp. 258
Other Expenses
542
EBITDA
325
Margin
21.8%
Depreciation and Amortization
25
EBIT
301
Other Income
14
Interest Expenses
32
PBT
283
Exceptional Items
53
Provision for Tax
0
PAT before exceptional items
283
PAT after exceptional items
335
1446
3.4%
1404
1446
960
3.4%
21.8%
1404
1078
6.5%
NM
6.5%
8.5%
318
104
538
486
33.6%
53
433
25
53
405
0
0
405
405
16.7%
146.6%
0.6%
-33.0%
-11.8ppt
-53.2%
-30.6%
-44.8%
-40.2%
-30.2%
NM
NM
-30.2%
-17.2%
352
231
495
326
23.2%
27
299
41
47
293
0
0
293
293
5.5%
11.3%
9.4%
-0.1%
-1.4ppt
-8.4%
0.7%
-67.0%
-33.1%
-3.4%
#DIV/0!
NM
-3.4%
NM
Source: Company Reports
Kotak Securities - Private Client Research
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20
MORNING INSIGHT
January 19, 2015
 Operational performance in the quarter has been fairly strong. Business channels
continued to be market leaders in the quarter, with the Hindi and English business news channels, while the Gujarati business news channel witnessed significant acceleration in viewership (182%, in the CS AB Males 25+, Gujrat). Colors
has emerged as the #2 Hindi GEC post a hiatus. ETV Kannada and ETV Marathi
are #2 channels in their respective languages on a regular basis.
 On Colors, we especially note that the company has registered a noticeable improvement in its weekday primetime, with 2-3 programs regularly filling the spots
among the top ten programs.
Outlook and Investment View
 We had turned negative on TV18 Broadcast in May, 2014, as we had the following concerns: 1/ potential issues with management bandwidth in the short-term
(resignation of the top order in TV18 had just started as we were writing the
note), 2/ weakness in the viewership of Colors, 3/ potential for weak revenues
from general news and other channels, given high base of FY14 running upto
1QFY15, and uncertainty over whether the buoyancy in business news shall fill in
the gaps.
 TV18 stock has underperformed peers meaningfully since our downgrade. The
stock has returned -8% in the period from 29th May to yesterday's close, versus
peers' average of 32%.
Price Performance - TV18 Versus Peers - since our downgrade last May (May
28, 2014-till date)
(%)
ENIL
58.2
HMVL
47.0
Zee Ent.
44.6
DB Corp
35.6
Dish TV
33.3
Jagran
20.7
HT Media
14.0
Sun TV
3.7
TV18 Broadcast
-8.2
Source: Bloomberg, Kotak Securities - Private Client Research
 Meanwhile, the gaps in the positive investment view have begun to be filled: a/
we find that the company has been able to maintain (for the most part, key
exception being the general news, in our belief, which should have been hurt
significantly by top editors' departures) the operations, without a significant decline, through the transition in management; we also find it encouraging that the
company has appointed Mr. A. P. Parigi as the Group CEO. b/ the Viacom 18
management has filled in the gaps in programming of Colors, especially weekday programming, and new introductions have performed strongly. We are also
hopeful about the upcoming programming initiatives of Colors (Ashok, a mythological, is soon to be introduced, as is Fear Factor's new season). c/ we are now
more certain that strength in India's capital markets is here to stay, and the fact
that the company maintains a clear #1 position in the genre is certain to help.
 Further to these, internal changes, we are also encouraged by the changes in the
environment, so far as entertainment broadcasters are concerned: 1/ declining
commodity prices are likely to lead to a significant expansion in the gross margins of FMCG companies, which will improve ad spends on entertainment channels, 2/ the subscription revenue streams of broadcasters in general will benefit
from the potential rise in cable ARPUs (higher customer billing, initially prompted
by Star India's negotiations with MSOs).
Kotak Securities - Private Client Research
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21
MORNING INSIGHT
January 19, 2015
 Near-term, the company's profits are likely to miss our prior estimates. Summary
of revision in estimates is provided below:
Estimates
Revised
FY15
Revenues
Estimates
FY16
Prior Estimates
FY15
FY16
% change
FY15
FY16
22,654
25,690
22,654
25,690
0.0%
0.0%
EBITDA
2,547
4,060
2754
4060
-7.5%
0.0%
PAT
1,427
2,442
1595
2454
-10.5%
-0.5%
Source: Kotak Securities - Private Client Research
 Even so, on the back of positives discussed above, we believe the longer-term
prospects of the company are stronger, and the market has acknowledged stronger prospects of broadcasters in the re-rating that Zee Entertainment has seen.
On the back of stronger longer-term assumptions in our DCF valuation, as also
on lower cost of capital (reduction in long-term yields), our target price stands
revised to Rs 38. We upgrade TV18 Broadcast to BUY.
We recommend BUY on
TV18 Broadcast with a price
target of Rs.38
Kotak Securities - Private Client Research
 Key risks to our investment view include: a/ disruption in the Hindi GEC space,
by launch of new channels, especially upcoming Hindi GEC from Zee Entertainment, b/ weakness in capital markets, leading to weakness in viewership of business channels. Other risks include industry risks, such as those relating to advertising expenses by firms, regulatory risks for news broadcasters, and the direction and magnitude of changes in broadcasters' subscription revenues.
Please see the disclaimer on the last page
For Private Circulation
22
MORNING INSIGHT
Bulk deals
January 19, 2015
Trade details of bulk deals
Date
Scrip name
Name of client
Buy/
Sell
Quantity
of shares
16-Jan
Ankushfi
Harsadrai M Raval
S
55,000
4.7
16-Jan
Ankushfi
Rajeev Rajkumar Niroola
B
32,500
4.7
16-Jan
Ankushfi
Navjit Singh Grewal
B
31,411
4.7
16-Jan
Aryacapm
Rekha Mukesh Shah
B
60,000
14.0
16-Jan
Cml
Bhavesh Ishwarlal Panchasara
B
34,026
84.0
16-Jan
Mahindcie
India Value Fund Iii A
S
3,555,000
225.7
16-Jan
Manjushree
Tanvi Drolia
B
125,000
430.0
16-Jan
Manjushree
P K Drolia & Sons
S
125,000
430.0
16-Jan
Mayur
Sarita Gupta
S
30,000
23.6
16-Jan
Mayur
Prashant Verma Huf
B
29,775
23.6
16-Jan
Naisarg
Khusboo Kalpesh Gada
S
50,000
4.4
16-Jan
Polychmp
Bhavesh Suryakantbhai Chotai
B
30,000
7.9
16-Jan
Polychmp
Chirag Mahendra Baldev
S
30,000
7.9
16-Jan
Refnol
Ashirwad Trading & Holdings
B
19,519
10.2
16-Jan
Seche
Black Horse Media & Entertainment
B
500,000
3.0
16-Jan
Seche
Adila Traders Private Limited
B
510,000
3.0
16-Jan
Seinv
Spring Infradev Limited
S
247,080
259.0
16-Jan
Seinv
Agrim Marketing Private Limited
B
247,080
259.0
16-Jan
Shlakshmi
IFCI Limited
S
150,000
3.4
16-Jan
Sterlinh
Blue Ocean Investment Trust
S
1,000,000
220.0
16-Jan
Valechaeng-$
Valecha Investments Priva Te Limited S
335,000
105.3
16-Jan
Welspsy
Somesh Mehrotra
331,000
45.8
B
Avg.
price
(Rs)
Source: BSE
Forthcoming events
Company/Market
Date
Event
19-Jan
Indiabull Housing, Hindustan Unilever, Hindustan Zinc, Mindtree earnings
expected
Hindustan Media Venture, Kotak Mahindra Bank, Rallis, South Indian Bank
20-Jan
earnings expected
21-Jan
22-Jan
ING Vysya Bank, ITC, Zee Entertainment earnings expected
Biocon, Cairn India, Dish TV, Mastek, Polaris, Zee Media earnings expected
23-Jan
BEL, Colgate Palmolive earnings expected
Source: BSE
Gainers & Losers
Nifty Gainers & Losers
Price (Rs)
chg (%)
Index points
Volume (mn)
Zee Entertainment
386
4.5
NA
2.6
Power Grid
147
3.1
NA
4.6
Sun Pharma
850
2.9
NA
2.0
Gainers
Losers
PNB
205
(2.4)
NA
4.2
Hindalco Ind
139
(2.4)
NA
9.1
Cairn India
232
(2.2)
NA
2.1
Source: Bloomberg
Kotak Securities - Private Client Research
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MORNING INSIGHT
January 19, 2015
Fundamental Research Team
Dipen Shah
IT
[email protected]
+91 22 6621 6301
Arun Agarwal
Auto & Auto Ancillary
[email protected]
+91 22 6621 6143
Amit Agarwal
Logistics, Transportation
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Sanjeev Zarbade
Capital Goods, Engineering
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Ruchir Khare
Capital Goods, Engineering
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Meeta Shetty, CFA
Pharmaceuticals
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Teena Virmani
Construction, Cement
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Ritwik Rai
FMCG, Media
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Jatin Damania
Metals & Mining
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Saday Sinha
Banking, NBFC, Economy
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Oil and Gas
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Jayesh Kumar
Economy
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K. Kathirvelu
Production
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Technical Research Team
Shrikant Chouhan
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Amol Athawale
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Derivatives Research Team
Sahaj Agrawal
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Rahul Sharma
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Kotak Securities - Private Client Research
Malay Gandhi
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Prashanth Lalu
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MORNING INSIGHT
January 19, 2015
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