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Institutional EquitiesTable of ContentsReliance Infrastructure - 2QFY12 Result Update.. ………………………………………….….…..……03Reliance Infrastructure - Initiating Coverage ………………………………………………..……………07IVRCL Infrastructure 2QFY12 Result Update ……………………………………………………………21IVRCL Infrastructure - Initiating Coverage ………………………………………………………..………25IRB Infrastructure - 3QFY12 Result Update. ……………………………………………………..………37IRB Infrastructure - Initiating Coverage …………………………………………………….………..……41GMR Infrastructure - 3QFY12 Result Update. ………………………………………….………..………55GMR Infrastructure - Initiating Coverage ………………………………………………..…….….………59Bharat Heavy Electricals - 3QFY12 Result Update. ………….………………………………..……..…71Bharat Heavy Electricals - Initiating Coverage ……………………...…………………..…….…………75Pharmaceutical Sector - 3QFY12 Result Preview ………………………………..…………….……….89Sun Pharmaceutical Industries - Initiating Coverage …………………………………………..…..……93Torrent Pharmaceuticals - 3QFY12 Result Update. …………………………………….….…………103Torrent Pharmaceuticals - Conference Call Update……………………………………..….….………105Torrent Pharmaceuticals - Initiating Coverage …………………….……………………..…..…..……107IT Sector - 3QFY12 Result Preview……………………………………………….….…...…….….……119Infosys - 3QFY12 Result Update………………………………………………………………….………123Infosys - Initiating Coverage ………….……………………………………………….…...…….….……127HCL Technologies - 2QFY12 Result Update. ……………………………….……………….…………143HCL Technologies - Initiating Coverage………………………………………….......………….………147Bata India - 3QCY11 Result Update. ……………………………………………….…………..….……157Bata India - Initiating Coverage …………………………………………………….……….…..……..…159JBF Industries - 3QFY12 Result Update. …………………………………….………………..….……177JBF Industries - Initiating Coverage ……………………….………………………….…………………181Top Buys Returns……………………….……………………………….…………..….…………………203

Institutional EquitiesReliance Infrastructure9 November 20112QFY12 Result UpdateStrong traction in EPC businessReliance Infrastructure’s standalone earnings beat our estimates as well as Bloombergestimates, up 191% at Rs4.95bn, primarily driven by strong traction in the EPCsegment. On consolidated basis, earnings remained flat at Rs 3.6bn because of lowermargin in the EPC segment (versus standalone) and loss in the infrastructure segment.Looking at recent positive developments (like renewal of Mumbai power discom licenceand the recent tariff hike by its Delhi electricity distribution unit), strong EPC segmentorder book of Rs240bn which has started driving revenue growth and alsocommissioning of six road projects, Mumbai metro rail project (Phase I) and a powertransmission project in the next six months apart from attractive valuation, we retainour Buy rating on the stock with a TP of Rs724.Standalone performance well ahead of expectations: Reliance Infrastructure’s (R-Infra)2QFY12 standalone earnings beat Bloomberg estimate sharply, led by strong traction in theEPC business. Revenue grew 62% YoY to Rs39.5bn, (18% above our estimate and 30%above Bloomberg estimate) driven by 192% growth in EPC revenue to Rs24.3bn. Electricityrevenue declined 14% YoY to Rs13.4bn because of lower sales volume of the Mumbai powerdistribution business. EBITDA increased 70% YoY to Rs7.1bn because of higher EPCrevenue and improvement in margin. Other income rose 322% YoY to Rs1.12bn (in line withour estimate of Rs1.1bn). Following robust revenue growth and improvement in margin, PATgrew 191% YoY to Rs4.95bn, 77% above our estimate and 98% above Bloomberg estimate.Consolidated earnings remain flat: Net sales rose 41.7% to Rs57.2bn (12% higher than ourestimate and 17% higher than Bloomberg estimate), primarily driven by robust growth in EPCrevenue. EPC revenue grew 222% to Rs22.1bn, 15% higher than our estimate. However,EBITDA was higher by only 13.8% to Rs7bn, while EBITDA margin declined by 330bps to12.3% because of a rise in the contribution of the low margin segment (EPC) to revenue. EPCsegment’s EBIT margin was 640pbs lower than standalone because of elimination of profit tothe extent of the company’s stake in Reliance Power. Interest costs increased 64.9% toRs2.5bn, primarily because of commissioning of Delhi metro rail projects. Subsequently,despite robust growth in revenue, net profit remained flat at Rs3.63bn, 9% below our estimatebut 3% higher than Bloomberg estimate.We maintain Buy rating on the stock: We maintain our Buy rating on R-Infra with a targetprice of Rs724 based on SOTP valuation. Our TP comprises Rs150 from electricity business(Mumbai, Delhi discoms), Rs121 from EPC business, Rs223 from 38% stake in ReliancePower, Rs191 as equity value of infrastructure projects (road, metro rail and powertransmission projects), and Rs 40 cash and investible surplus in the books (at 50% discount).Please refer to the disclaimer towards the end of the document.BUYSector: InfrastructureCMP: Rs469Target Price: Rs724Upside: 54%Amit K Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 267.4Mkt Cap (Rsbn/US$bn) 129.3/2.652 Wk H / L (Rs) 1,075/365Daily Vol. (3M NSE Avg.) 1,647,455Price Performance (%)1 M 6 M 1 YrReliance Infra 23.8 (19.2) (53.8)Nifty Index 8.6 (4.3) (15.7)Source: BloombergY/E March (Rsmn) Consolidated 2QFY11 1QFY12 2QFY12 YoY(%) QoQ (%) 1HFY11 1HFY12 YoY (%)Net sales 39,691 51,911 57,289 44.3 10.4 77,927 109,200 40.1Cost of electricity energy purchased 20,174 19,067 22,098 9.5 15.9 42,278 41,165 (2.6)Cost of fuel 3,200 4,479 3,686 15.2 (17.7) 7,378 8,165 10.7Cost of materials and sub-contract charges 5,636 14,939 18,475 227.8 23.7 8,661 33,415 285.8Employee costs 2,431 2,769 2,675 10.0 (3.4) 4,761 5,444 14.3Other expenses 2,076 2,767 3,332 60.5 20.4 3,878 6,099 57.3EBITDA 6,174 7,890 7,024 13.8 (11.0) 10,253 14,913 45.5EBITDA margin (%) 15.55 15.20 12.26 13.16 13.66Depreciation 1,257 1,024 1,009 (19.7) (1.5) 2,453 2,034 (17.1)Interest costs 1,520 2,168 2,507 64.9 15.6 2,893 4,675 61.6Other income (261) 1,283 1,264 583.7 (1.5) 1,758 2,548 44.9PBT 3,136 5,981 4,772 52.2 (20.2) 6,666 10,752 61.3Tax expenses 615 2,713 1,833 198.0 (32.5) 1,279 4,546 255.5Net profit 2,521 3,268 2,939 16.6 (10.1) 5,388 6,207 15.2Share of profit in associates 1,081 777 684 (36.7) (11.9) 1,967 1,461 (25.7)Adj. PAT 3,602 4,057 3,630 0.8 (10.5) 7,355 7,687 4.5Source: Company, Nirmal Bang Institutional Equities Research

Institutional EquitiesExhibit 2: Quarterly P&LExhibit 1: Financial summaryY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 125,781 146,286 151,278 186,080 221,879YoY (%) 50.7 16.3 3.4 23.0 19.2EBITDA 6,299 12,264 14,981 30,729 40,056EBITDA margin (%) 5.0 8.4 9.9 16.5 18.1Net profit (Post MI and share in associate cos) 13,532 15,194 15,516 16,201 19,432YoY (%) 14.9 12.3 2.1 4.4 19.9Adj. EPS 50.6 56.8 58.0 60.6 72.6PER (X) 8.5 7.5 7.4 7.1 5.9P/BV (x) 0.7 0.6 0.5 0.5 0.4RoCE (%) 1.0 2.3 2.5 4.6 5.8RoE (%) 8.0 7.3 6.6 6.5 7.3Source: Company, Nirmal Bang Institutional Equities ResearchY/E March (Rsmn) (Standalone) 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 YoY (%) QoQ (%)Net sales of electrical energy 15,572 14,238 12,470 14,860 13,404 (13.9) (9.8)Income from EPC, contracts business 8,072 10,621 9,628 18,849 24,309 201.2 29.0Other operating Income 748 1,318 1,200 2,899 1,793 139.8 (38.2)Total operating income 24,391 26,176 23,298 36,607 39,505 62.0 7.9Cost of electricity energy purchased 6,293 7,224 5,127 6,703 5,854 (7.0) (12.7)Cost of fuel 3,199 3,008 3,574 4,033 3,685 15.2 (8.6)Cost of materials, sub-contracts 6,857 9,295 7,904 15,026 18,730 173.1 24.7Employee costs 1,915 2,031 1,875 2,111 2,028 5.9 (4.0)Other expenses 1,625 1,822 1,920 1,773 2,112 30.0 19.1Total expenditure 20,229 23,706 20,688 29,646 32,409 60.2 9.3EBITDA 4,162 2,470 2,610 6,961 7,096 70.5 1.9EBITDA margin (%) 17.1 9.4 11.2 19.0 18.0Depreciation 825 817 724 689 638 (22.6) (7.4)EBIT 3,337 1,654 1,887 6,272 6,458 93.5 3.0Interest expenses 600 582 629 570 833 38.7 46.1Other income (508) 1,021 2,815 1,093 1,126 321.8 3.1PBT 2,229 2,092 4,073 6,795 6,752 202.9 (0.6)Less: Tax expenses 524 435 (912) 2490 1,794.40 242.6 (27.9)Net profit 1,705 1,657 4,984 4,305 4,957 190.8 15.2Source: Company, Nirmal Bang Institutional Equities ResearchMixed performance of power distribution businessMumbai distribution business reported revenue of Rs10.6 bn (down 23% YoY and 11% QoQ), selling1,628mu (down16.2% YoY and 10.3% QoQ). The decline in unit sales is likely on migration of thecompany’s consumers towards Tata Power. Cost of energy purchased fell 8% to Rs6.08 bn, with thepurchases being 6,080mu at Rs7.09/kwh. Volumes of the Delhi distribution unit supported electricitybusiness earnings at the consolidated level, with a volume of 4,369mu at Rs4.99/kwh (up 8% YoY and 32%QoQ) accounting for sales amounting to Rs21800mn (up 20% YoY and down 20% QoQ). EBIT margin in thepower distribution business (STD) was 18.4% (up120 bps YoY, but down 320 bps QoQ), while consolidatedEBIT margin was 12.4% (down 50 bps YoY and 340 bps QoQ).Delhi Electricity Regulatory Commission (DERC), in its recent order, has approved power tariff hike of 22%and introduced the concept of quarterly fuel price adjustment surcharge w.e.f. 1 October 2011, which webelieve is a positive step to ease the cash crunch of the Delhi distribution business.On the Mumbai power distribution front, Maharashtra Electricity Regulatory Commission (MERC) granteddistribution licence to the company for the next 25 years and has approved the recovery of regulatory assetsworth Rs23.16bn from all consumers connected to R-Infra’s network, including those catered by Tata Power.MERC has also allowed the levy of cross subsidy surcharge on all migrating consumers from the date ofmigration.4Reliance Infrastructure

Institutional EquitiesExhibit 3: Power distribution business performanceQ2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12Gross generation 1,617 1,422 1,726 1,553 1,492External electricity purchased (mu) 1,055 1,111 735 1,023 858Gross energy available (mu) 2,672 2,533 2,461 2,576 2,350Electricity sold (mu) 2,415 2,192 1,951 2,231 2,060Cost of energy purchased (Rsmn) 6,290 7,170 5,127 6,930 6,080Per unit purchase cost 5.96 6.45 6.98 6.77 7.09Mumbai mu sold 1,943 1,801 1,616 1,815 1,628Sales Rs/kwh 7.08 6.99 6.58 6.53 6.51Cost of fuel/unit 1.98 2.12 2.07 2.60 2.47Delhi mu sold 4,044 3,099 2,797 3,306 4,369Sales Rs/kwh 4.49 4.49 4.68 8.24 4.99Cost 13,881 7,304 12,936 12,811 16,244Cost (Rs/kwh) 3.43 2.36 4.62 3.87 3.72Distribution revenue (Rsmn)Mumbai discom 13,750 12,580 10,630 11,860 10,600Delhi discom 18,140 13,910 13,100 27,230 21,800Source: Company, Nirmal Bang Institutional Equities ResearchEPC business drives outperformanceFor the second consecutive quarter, the company reported robust EPC revenue of Rs22.1bn (up 211% YoYand 26% QoQ) on the back of healthy execution of Reliance Power projects namely Butobori, Samalkot andSasan power projects. EBIT margin of the EPC segment on standalone basis climbed higher to 17% vsconsolidated EPC’s EBIT margin of 10.4 % (660bps lower than standalone) because of elimination of profit tothe extent of the company’s stake in Reliance Power. The company’s current order book of Rs243.2bncomprises six power projects totaling 9,900MW, one power transmission project (of 1,500 km) and six roadprojects totaling 570km. We believe the robust performance of the EPC segment will continue in FY12 due tofaster execution of captive orders.Infrastructure segmentRevenue from the infrastructure segment rose 524% YoY to Rs 772mn, which comprises Delhi metro railproject, four road projects and power transmission projects. However, on sequential basis, it declined 31% dueto wrong classification of other income in the infrastructure segment during 1QFY12. Adjusted for this item,revenue has shown a growth of 28% on sequential basis. EBIT of the infrastructure business turned negativeto Rs75mn, mainly on account of higher depreciation post commissioning of Delhi metro rail project.The company expects six road projects (currently four road projects are operational) and Mumbai metro line –Phase 1 to get commissioned in FY12.Exhibit 4: Segmental revenue (standalone)Segmental revenue (standalone) (Rsmn) 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12Electricity energy 16,067 14,737 13,192 17,719 15,185EPC and contract business 8,324 11,440 10,107 18,888 24,320Total 24,391 26,176 23,298 36,607 39,505Less: Inter-segment revenueNet sales/income from operations 24,391 26,176 23,298 36,607 39,505Segment-wise EBITElectricity energy 2,760 759 999 3,826 2,795EPC and contract business 648 986 1,259 2,558 4,128Total 3,408 1,745 2,257 6,384 6,923EBIT margin (%)Electricity energy 17.2 5.2 7.6 21.6 18.4EPC and contract business 7.8 8.6 12.5 13.5 17.0Source: Company, Nirmal Bang Institutional Equities Research5Reliance Infrastructure

Institutional EquitiesExhibit 5: Consolidated segmental revenue(Rsmn) Q2FY11 Q3FY11 Q4FY11 Q1FY12 2QFY12Electricity energy 33181.7 26394.4 29724 33254.4 34393.4EPC and contract business 7117.3 10613.4 7769.7 17540.8 22123.3Infrastructure business 127.9 431.8 485.4 1116.6 772.4Total 40426.9 37439.6 37979.1 51911.8 57289.1EBITElectricity energy 4294.5 3325.8 2376.8 5243.7 4259.1EPC and contract business 656.5 1010.4 193.6 1406.5 2302.1Infrastructure business 37.3 79.1 11 401.5 (75)EBIT margin (%)Electricity energy 12.9 12.6 8.0 15.8 12.4EPC and contract business 9.2 9.5 2.5 8.0 10.4Infrastructure business 29.2 18.3 2.3 36.0 NASource: Company, Nirmal Bang Institutional Equities ResearchRatings trackDate Rating CMP (Rs) Target price (Rs)26 September 2011 Buy 434 7246Reliance Infrastructure

Institutional EquitiesReliance Infrastructure26 September 2011Initiating CoverageReuters: RELIN.BO Bloomberg: RELI INCore earnings to improveRenewal of Mumbai discom licence and the recent tariff hike in Delhi electricitydistribution business are likely to eliminate the overhang on RelianceInfrastructure’s valuation with respect to its power distribution business. TheEPC segment has an order book of Rs280bn, which would drive revenue growthin coming years. Infrastructure projects are now turning from the developmentstage to the revenue generation stage with the commissioning of six roadprojects, Mumbai metro rail phase I and one transmission project in the next sixmonths. However, the stock is currently trading at a P/BV of 0.5x, which webelieve is unjustified and below stress case valuation. We assign a Buy ratingand a target price of Rs724 to the stock.End of power distribution overhang: MERC has extended the company’s powerdistribution licence period in suburban Mumbai for the next 25 years, allowed chargingcross-subsidy for migrated customers and also approved recovery of regulatory assetsworth Rs23bn. Cross-subsidy charge will reduce the migration of high-end customersand recovery of regulated assets will reduce debt and improve cash flow. Recently,DERC hiked the power tariff by 21.7% after six years, which will ease the liquiditycrunch faced by Delhi distribution units.We believe that overall it is a positivedevelopment that will eliminate the overhang with respect to electricity distributionbusiness.EPC business with order book of Rs 280bn: The company’s order book stands atRs 280bn, which is 7x FY11 EPC revenue. We believe EPC revenue is at inflexionpoint and will show a CAGR of 50% between FY12-13. We expect the company tomaintain its EBITDA margin of 8% in the EPC segment driven by in-house designing,engineering capability and skilled manpower.Infrastructure projects’ earnings have started picking up: The company has astrong infrastructure portfolio that consists of eleven road projects, three metro raillines and five power transmission projects worth Rs346bn. The execution of keyinfrastructure projects is on track and six road projects, Mumbai metro rail phase I andone transmission project will be commissioned during FY12. The company’sinfrastructure portfolio is now turning from the development stage to the revenuegeneration mode.Stock trading below stress case valuation: Reliance Infrastructure is currentlytrading at a P/BV of 0.5x and if we adjust the value of stake in Reliance Power andcash on the books, the market appears to be assigning just 10% value toinfrastructure, electricity and EPC projects, which we believe is unjustified and belowstress case valuation. We assign a Buy rating and a target price of Rs724 to the stock.Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13ENet Sales 125,781 146,286 151,278 186,080 221,879YoY (%) 50.7 16.3 3.4 23.0 19.2EBITDA 6,299 12,264 14,981 30,729 40,056EBITDA Margin (%) 5.0 8.4 9.9 16.5 18.1Net Profit (Post MI & Associate) 13,532 15,194 15,516 16,201 19,432YoY (%) 14.9 12.3 2.1 4.4 19.9Adj. EPS 50.6 56.8 58.0 60.6 72.6PER (X) 8.5 7.5 7.4 7.1 5.9P/BV (x) 0.7 0.6 0.5 0.5 0.4ROCE (%) 1.0 2.3 2.5 4.6 5.8ROE (%) 8.0 7.3 6.6 6.5 7.3Source: Company, Nirmal Bang Institutional ReearchBUYSector: InfrastructureCMP: Rs434Target Price: Rs724Upside: 67%Amit K Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 267.4Mkt Cap (Rsbn/US$bn) 116/2.352 Wk H / L (Rs) 1,135/402Daily Vol. (3M NSE Avg.) 1,449,998Share holding (%)3QFY11 4QFY11 1QFY12Promoter 48.1 47.7 47.7FII 17.1 16.8 16.3DII 21.0 21.3 22.2Corporate 2.7 2.7 3.0General Public 11.0 11.0 10.8One Year Indexed Stock PerformancePrice Performance (%)1 M 6 M 1 YrReliance Infra (3.7) (31.9) (59.2)Nifty Index (1.6) (11.2) (18.3)Source: Bloomberg

Institutional EquitiesAssign Buy rating to stock with a target price of Rs724We assign a Buy rating and a target price of Rs724 to Reliance Infrastructure, implying 58% upside from theCMP, as the company’s business model comprises regulated returns, market driven returns, long gestationprojects, and investments that cannot be captured by earnings-based multiple. Hence, we have used SOTPmethodology, using a combination of price to book value (P/BV) and discounted cash flow (DCF) approach forthe regulated business and infrastructure projects (road and metro rail projects), EV/EBITDA for EPC businessand investment in Reliance Power at a 30% discount to the CMP. Our SOTP-based TP comprises: (1)Rs150/share from electricity business (Mumbai discom and Delhi discom), (2) Rs121/share from the EPCbusiness, (3) Rs223/share from 38% stake in Reliance Power (4) Rs191/share as equity value of infrastructureprojects (road, metro rail and transmission projects), and (5) Cash and investible surplus in the books atRs40/share (at 50% discount).Exhibit 1: SOTP valuationValuation (Rsmn) Stake Method Multiple EBITDA EV Rs/shareEPC segment - EV/EBITDA FY13, 5x 6,483.84 32,419 121Mumbai licence area - DCF-Equity CoE-14% - - 119R-Power 38% 30% disc. to CMP - - - 223Delhi distribution 49% DCF -Equity CoE-14% - - 31Metro rail projects - DCF -Equity CoE-16% - - 27Road projects - DCF -Equity CoE-16% - - 149Power transmission projects - DCF -Equity CoE-16% - - 14Net cash - - - - - 40Target price - - - - - 724Source: Company and Nirmal Bang Institutional Equities ResearchStock trading below stress case valuation levelReliance Infrastructure has historically traded in the range of 0.7x to 4.5x P/BV, which has come down to 0.5x.Adjusted for the value of stake in Reliance Power and cash in its books; the market appears to be assigningjust 10% value to infrastructure, electricity and EPC businesses combined, which we believe is unjustified. Webelieve the stock will be re-rated on successful commencement of infrastructure projects under development,deployment of cash in profitable infrastructure projects and improvement in execution of EPC order book.Exhibit 2: PE ratio trend(x)6050403020100Sep-07 Sep-08 Sep-09 Sep-10 Sep-11P/E5 year avgSource: Company, Nirmal Bang Institutional Equities ResearchExhibit 3: P/BV trend(x)5.04.54.03.53.02.52.01.51.00.50.0Sep-07 Sep-08 Sep-09 Sep-10 Sep-11P/B5 year avgSource: Bloomberg, Nirmal Bang Institutional Equities ResearchElectricity businessThe company’s electricity business includes Mumbai discom (generation, transmission and distribution) andDelhi distribution which earns regulated return on equity. We have used the DCF model to value the electricitybusiness. We have assumed 14% cost of equity and a terminal growth of 3%. Accordingly, we have derived avalue of Rs119/share (implying a P/BV of 1.4x) for Mumbai discom and Rs 31/share (implying a P/BV of0.75x) for Delhi discoms.8Reliance Infra

Institutional EquitiesEPC segment valued at EV/EBITDA of 5xWe have valued the EPC segment at 5x EV/EBITDA on FY13E earnings, which is 25% below the lower end ofthe average range for pure construction companies. The company has EPC order book of Rs280bn, which isprimarily from Reliance Power. Hence, a 25% discount is justifiable as compared to a pure EPC player.Exhibit 4: EPC segment valuationEBITDA (FY13, Rsmn) 6,483.84Average EV/EBITDA6x-8x25% discount to lower band 5xEV 32,419Rs/share 121Source: Company, Nirmal Bang Institutional Equities ResearchInfrastructure projects valued on P/BV, DCFThe company has a portfolio of eleven road projects, three metro rail projects and five power transmissionlines. We have valued the operational projects on DCF basis and under-development projects on P/BV basis.Though the infrastructure business contributes about 27% to our target price, we believe that going ahead thissegment will be a key driver of valuation and earnings growth and the company best positioned in terms ofBalance Sheet strength to support the equity commitment for future projects.Exhibit 5: Infrastructure projects valuationInfrastructure projects Model Rs/shareRoad projects BOT CoE-16% 149Metro rail projects BOT CoE-16% 27Power transmission projects BOT, regulated CoE-16% 14Total - - 191Source: Company, Nirmal Bang Institutional Equities Research38% stake in Reliance PowerReliance Infrastructure has a 38% stake in Reliance Power, which is executing 18,840MW power generationproject. We have valued Reliance Power stake at a 30% holding discount to the CMP and arrived at avaluation of Rs 223/share (around 60% CMP of Reliance Infrastructure).Exhibit 6: Reliance Power valuationCMP (Rs) 80No. of equity shares (mn) 2,805Mkt cap (Rsmn) 224,408Holding discount 30%Stake 38%Value of equity (Rsmn) 59,693Rs/share 223Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 7: Reliance Power project portfolioPlant name Capacity (MW) TypeButibori 600 CoalSamalkot 2,400 GasSasan UMPP 3,960 CoalKrishnapatnam 3,960 CoalChitrangi power project 3,960 CoalTilaya UMPP 3,960 CoalSource: Bloomberg, Nirmal Bang Institutional Equities Research9Reliance Infra

Institutional EquitiesInvestment ArgumentsExtension of licence period of Mumbai power distribution companyMumbai discom includes Dahanu power generation (500MW), transmission network from Dahanu to Mumbaiarea and the distribution network in Mumbai suburbs with regulated equity of Rs22bn. MERC has extendedthe licence period in suburban Mumbai (which had expired on 15 August 2011) by another 25 years. It wasalso clarified that new licencees shall have to lay their own distribution network for distributing electricity, asthe existing network belongs to the company. We believe this is a positive development which will eliminatethe overhang and lead to re-rating of Mumbai discom. We have valued the Mumbai suburbs powerdistribution business at Rs119/share (implied P/BV of 1.4x and accounting for 16% of our SOTP) at aCoE of 13.5%, given the fix return of 16% on regulated equity.Exhibit 8: Regulated equitySegment Regulated equity (Rsmn) RoE (%)Distribution 14,900 16Transmission 1,500 15Generation 5,500 23Total (Mumbai discom) 21,900 -Delhi discoms (BRPL&BYPL) 22,000 16Source: Company, Nirmal Bang Institutional Equities ResearchCross subsidy charges lead to reduction in subscriber migrationMERC has approved cross-subsidy charges to customers who have migrated to Tata Power Company. Crosssubsidycharge would be levied over and above the wheeling charges. This would allow the company tocharge a higher tariff to migrated customers in order to subsidise low-end customers. Earlier, Tata PowerCompany was able to poach high-end customers of Reliance Infrastructure as Tata Power Company’s tariff,even with wheeling charges, were lower. Once cross-subsidy charges are levied, there will not be muchdifference between Reliance Infrastructure and Tata Power Company’s tariff and hence, the cross-over ofcustomers is expected to reduce.Exhibit 9: Customer baseExhibit 10: Electricity units soldSource: Company, Nirmal Bang Institutional Equities ResearchSource: Bloomberg, Nirmal Bang Institutional Equities ResearchApproval for regulated assets worth Rs 23bn should lead to reduction in debtThe company’s accumulated regulatory assets (the gap between power cost and tariff to consumers) of Rs23bn has increased its debt by the same amount. MERC has approved regulatory assets of Rs 23bn, whichwill be recovered over a period of time. Apart from this, the company is now levying charges based on the costof electricity and as result no regulatory assets are getting built.10Reliance Infra

Institutional EquitiesExhibit 11: Regulatory assetsRevenue gapApproved(Rsbn)RemarksRegulatory assets (FY05-FY09) 7.32 Already approved in past tariff orders but recovery was deferredIncremental revenue gap of FY09 0.96 -Incremental revenue Gap of FY10& 11 13.74 Impact of tariff stay and subsidyImpact of ATE order 0.91 ATE allowed carrying cost at SBI PLR(against 6% considered by MERC)Capitalisation 0.23 Recognising past year’s capitalisationTotal gap 23.16 -Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 12: Power procurement planMedium-termSource Duration Capacity(MW) Levelised tariff (Rs/Unit)KSK Energy FY12-14(3 years) 260 4.85Abhijeet FY12-14(3 years ) 55 4.8R-Power (Butibori) FY13-14(3 years) 135 4.8DTPS Till FY17 500 RegulatedTotal - 950 -Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 13: Power cost break-up2.81 3.76 4.26 5.43 7.40 6.59 6.401.11.11 1.11 1.16 1.28 1.53 1.641.762.72 3.22 4.36 6.12 5.06 4.76FY05 FY06 FY07 FY08 FY09 FY10 FY11Power purchase Distribution costSource: Company, Nirmal Bang Institutional Equities ResearchDelhi discoms area tariff hike by 21.7% to ease liquidity crunchThe company has a combined 49% stake in BSES Rajdhani Power Limited (BRPL) and BSES Yamuna PowerLimited (BYPL) units of Delhi power distribution business, which have regulated equity of around Rs22bn. Recently,DERC hiked the tariff by 21.7% after six years (last tariff hike of 6.6% was witnessed in 2005-06), which comes as abig respite for Delhi power distribution units (BRPL and BYPL) as they were facing a severe liquidity crunch due torising gap between power cost and tariff charged to consumers. There was also a steep increase in debt level inorder to fund capex and power procurement cost. We believe this move (the tariff hike) is a major positive towardsimproving the deteriorated financials of Delhi discoms and we expect further tariff hikes to happen, in tranches, inorder to recover accumulated revenue deficit and ease the company’s liquidity position. We have valued Delhipower distribution business at Rs31/share (implied P/BV of 0.75x ) at a CoE of 13.5%, given the fixed return of 16%on regulated equity.11Reliance Infra

Institutional EquitiesExhibit 14: EPC order book detailsEPC upcoming projects MW RemarksInternal projects600MW Butibori TPP 6002,400MW Samalkot powerproject6 x 660MW Sasan ultra megapower projectWestern Region strengtheningproject(ckm)External power projectsEPC business order book at Rs 280bnThe company has order book of Rs280bn in respect of its EPC arm, which is 7x FY11 EPC revenue. Theorder book is primarily driven by in-house orders of Reliance Power and construction work of infrastructureprojects (seven power projects aggregating 9,900MW, one power transmission project of 3,285 circuit km andsix road projects totaling 570km). We believe the EPC revenue is at inflexion point of growth and would showa CAGR of 50% over FY12-13. Some of the fast moving projects which would drive robust revenue growth areSamalkot and Butibori power projects, WRSS transmission project and road projects like Gurgaon-Faridabad,Jaipur-Reengus and Delhi-Agra. We expect the company to maintain its EBITDA margin of 8% in the EPCsegment, driven by in-house designing, engineering capability and skilled manpower.We believe the company is currently going for in-house power and BOT projects. Going ahead, it would scaleup the EPC segment by bidding for outside projects. We have valued the EPC business at 5x EV/EBITDA,which implies a valuation of Rs121/ share.80% engineering work completed, 90% of 220KV switchyard erection work completed All packages awarded and boiler drum lifting for boththe units completed2,400 Major orders for gas and steam turbine, 90% packages awarded3,960 60% engineering work completed, further work stalled due to Indonesia coal price regime. Also, 20% of progress achieved in civil work3,2851,200MW Raghunathpur TPP 1,2001,200MW Rajiv Gandhi TPP* atHisar500MW Parichha TPP* BOPpackageSolapur-Karad line in Maharashtra operational since February 2011. Limdi Vadavi line in Gujarat is operational since May 2011. Entireproject to be commissioned in FY12Overall progress is 70% despite land acquisition delay. Boiler structure erection completed for both units of,400 KV. Switchyard inadvanced stage of completion1,200 Trial run of both units completed and are under HPGCL commercial operations.500 90% progress achievedSource: Company, Nirmal Bang Institutional Equities ResearchInfrastructure projects’ earnings to start gaining momentumThe company has a strong infrastructure portfolio that consists of eleven road projects, three metro rail linesand five transmission projects worth Rs346bn. The execution of key infrastructure projects is on track. In theroad portfolio, nine projects would be in revenue generation mode during FY12. In the metro rail portfolio, theDelhi metro is operational and Mumbai metro phase - I is likely to be commissioned by 4QFY12. In the powertransmission portfolio, two lines of WRSS project have been commissioned and the full project is expected tobe commissioned in FY12. We believe the company’s infrastructure portfolio is now turning fromdevelopment stage to revenue generation stage.Exhibit 15: Infrastructure project portfolioBusiness Projects Cost (Rsbn)Road 11 120Metro rail 3 160Transmission 5 66Total 19 346Source: Company, Nirmal Bang Institutional Equities ResearchRoad projects: Six additional projects in revenue generation mode in FY12The company is developing eleven road projects worth about Rs120bn, of which three projects have startedgenerating revenue and another six projects would do so in FY12. The company reported healthy revenuefrom toll collection of Rs1.16bn in 1QFY12 from its four road projects. We expect the revenue from roadportfolio to start ramping up once heavy traffic toll projects like Delhi-Agra and Gurgaon-Faridabad getoperational in FY12, followed by the four other road projects. The company also remains a beneficiary ofupcoming NHAI projects, as it has achieved financial closure for all road projects. The contribution from roadprojects to our SOTP stands at Rs149/share. We have used the FCFE methodology to value RelianceInfrastructure’s portfolio of toll roads with a CoE of 14-16% and assuming traffic growth of 5-7%.12Reliance Infra

Institutional EquitiesExhibit 16: Road project portfolioRoad projectsLength(kms)Concession period(yrs)Project cost(Rsbn)Debt(Rsbn)Grant/(Premium)(Rsbn)Equity(Rsbn)RevenuestartNamakkal Karur 44 20 3.45 2.46 0.24 0.45 OperationalDindigul Samyanallore 53 20 4.15 3.32 0.31 0.52 OperationalTrichy Karur 80 30 7.3 5.1 1.5 0.7 FY12Trichy Dindigul 88 30 5.37 3.22 1.07 1.08 FY12Salem Ulenderpet 136 25 10.61 6.37 2.12 2.12 FY12Gurgaon Faridabad 66 17 7.79 5.84 (1.5) 1.95 FY12Jaipur Reengus 52 18 5.56 3.89 1.03 0.64 FY12Pune Satara 140 24 19.85 10.9 (0.91) 8.9 OperationalKandla Mundra 71 25 11.28 7.9 (0.42) 3.38 Q4FY13Hosur Krishnagiri 60 24 9.24 6.47 (0.67) 2.77 FY12Delhi Agra 180 26 29.44 20.61 1.8 7.03 FY12Total 970 - 119.04 76.08 - 29.54 -Source: Company, Nirmal Bang Institutional Equities ResearchMetro rail projects execution on trackThe company has a portfolio of three projects, of which Delhi Metro rail project was commissioned in February2011, Mumbai metro line phase– I is expected to be operational by 4QFY12 and Mumbai metro line phase -IIby FY16.Delhi metro rail reported heavy traffic in June 2011 of 12,000 passengers/day (initially estimated as FY12traffic target) and leased out 25% of land parcels at New Delhi and Shivaji stations at Rs425/sq. ft. We haveassumed passenger traffic of 28,000 in FY12 and average leasing rate of Rs325 /sq. ft. at a majority of realestate parcels in Dwarka. We have valued Delhi metro rail project based on FCFE methodology with a CoE of16%, which accounts for Rs 18/share in our SOTP valuation.Exhibit 17: Metro rail projectsMetro rail projectsLength Project cost Debt Grant Equity COD/Rev Concession(km) (Rsbn) (Rsbn) (Rsbn) (Rsbn)start period (years)Stake (%)Delhi 23 24.5 17.15 7.35 Feb-11 30 95Mumbai - Phase 1 11 25 12.75 6.75 5.5 Q4FY12 35 69Mumbai - Phase II 32 110 70.4 23.1 16.5 Within 5 year 35* 48Source: Company, Nirmal Bang Institutional Equities Research *could be extended for further 10 yrsLargest private player in power transmission projectsThe company is developing five power transmission projects worth about Rs66bn, which includes WRSS,Parabati-Koldam, Mumbai transmission, North Karanpura and Talcher II. The company has commissionedtwo lines of WRSS project, i.e. Solapur-Karad and Limbdi-Vadavi, and expects the entire project to becommissioned in FY12. We have valued the transmission business (WRSS project) at Rs14/share byassuming CoE at 16%.Exhibit 18: Power transmission projectsTransmissionprojectsProject cost(Rsbn)TariffstructureStake(%)RemarksWRSS 13.8 Competitive 100 Commissioned two lines ,i.e Solapur Karad and Limbdi - VadaviParabati-Koldam 10.7 Regulated 74 Signed financing agreement with PFC and REC for debt amount of Rs7.7bnObtained approval from MOP for commencement of workConstruction activity has commenced at project siteMumbai transmission 18 Regulated 100 All major equipment orders such as for GIS, transformers, cables placedThree receiving stations already charged in FY11North Karanpura 15.5 Competitive 100 Acquisition process completedTalcher II 8.2 Competitive 100 Acquisition process completedTotal 66.2 - - -Source: Company, Nirmal Bang Institutional Equities ResearchTransmission licence received and project execution commencedTransmission license received and project execution commenced13Reliance Infra

Institutional EquitiesOther businesses at development stageAirport businessReliance Infrastructure, through Reliance Airport Developers (RAD), has won lease rights to develop andoperate five brownfield airports in Maharashtra - at Nanded, Latur, Baramati, Yavatmal and Osmanabad – fora period of 95 years, for which an upfront premium of Rs630mn has been paid. Nanded and Latur airportshave obtained aerodrome licence from the Directorate General of Civil Aviation (DGCA). At Baramati airport,the terminal building has been refurbished along with a VIP room facility. Osmanabad airport terminal buildingis under construction. Re-carpeting and widening of the runway at Yavatmal airport has been completed andoperations by non- scheduled aircraft have commenced.Exhibit 19: Airport portfolioAirports Runway length Land area Opportunities on anvil(mtrs)(hectare)Nanded 2,300 105Latur 2,420 145Yavatmal 2,100 113Baramati 2,350 182Osmanabad 1,200 55Total 600Source: Company, Nirmal Bang Institutional Equities ResearchCement projectsCargo and logistics hubAir connectivity – Pune, Hyderabad, Amritsar andTirupati. Pilgrims visiting ‘Sachkhand Gurudwara’Warehousing and food storage hubAir logistics hubAviation Engg. Institute and aviation theme film studioAir connectivity - Mumbai, Nagpur and DelhiEmerging power and cement manufacturing hubAircraft recycling zoneAircraft parking plazaMRO hubTextile , leather SEZs of Italian governmentAviation and aeronautical engineering instituteReliance Cementation, a wholly-owned subsidiary of Reliance Infrastructure, has achieved certain milestonesin setting up two cement plants of 5mt capacity each at Maihar, Madhya Pradesh and at Mukutban,Maharashtra, with a project cost of Rs47bn.Exhibit 20: Milestones at Madhya Pradesh, Maharashtra cement project sitesMadhya Pradesh projectLand acquisition completedEnvironment clearance receivedMining lease secured for limestone resourceOrders placed for major plant and machinerySource: Company, Nirmal Bang Institutional Equities ResearchMaharashtra projectLand acquisition completedEnvironment clearance receivedLimestone resources at advanced stage of approvalOrders placed for major plant and machinery14Reliance Infra

Institutional EquitiesExhibit 21: Corporate structureCompany backgroundReliance Infrastructure is involved in the complete chain of power generation, transmission and distributionbusiness. In the infrastructure space, it is developing 11 road projects, 3 metro rail projects and 5 transmissionlines on BOT basis. The EPC division has an order book of over Rs 280bn, primarily in-house projects in thepower and infrastructure space. The company generates 940MW of electricity through its power stationslocated in Maharashtra, Andhra Pradesh, Kerala, Karnataka and Goa. The company holds a 38% stake inReliance Power, which plans to have a portfolio of 32GW of generating assets.Source: Company15Reliance Infra

Institutional Equities1QFY12 performanceRise in the execution rate in construction segment and write-back of depreciation helped the company toregister earnings growth in the standalone business.EPC income surged by 295% YoY and margin stood at 14.6%, up 220bps.Revenue from infrastructure projects jumped 121% sequentially on commencement of tolling by Hosur-Krishnagiri road project and full quarter contribution from Delhi metro rail project.Interest costs jumped on commissioning of Delhi metro rail project.Exhibit 22: 1QFY12 performanceY/E March (Rsmn) Q1FY11 Q4FY11 Q1FY12 YoY (%) QoQ (%)Net sales 38,256 37,980 51,910 35.7 36.7Total expenditure 34,157 34,646 44,022 28.9 27.1EBITDA 4,080 3,334 7,890 93.4 136.7EBITDAM (%) 10.7 8.8 15.2 - -Depreciation 1,196 1,115 1,024 (14.4) (8.2)EBIT 2,884 2,219 6,866 138.1 209.4Interest cost 1,372 1,893 2,168 58.0 14.5Other income 2,020 2,530 1,283 (36.5) (49.3)PBT 3,531 2,856 5,981 69.4 109.4Tax expense 664 (578) 2,713 308.6 -Net profit 2,867 3,434 3,268 14.0 (4.8)Net Profit (Post MI & Associates) 3,753 4,114 4,057 8.1 (1.4)Source: Company, Nirmal Bang Institutional Equities Research16Reliance Infra

Institutional EquitiesFinancial performanceRevenue to show a CAGR of 21%During FY11, net sales increased by only 3.4% to Rs151bn on lower energy sales because of migration of high-endcustomers to Tata Power Company. We expect the migration to reduce in the coming quarters due to levy of subsidy andthe company’s medium-term power procurement plan to reduce power costs. The EPC segment is expected to show aCAGR of 50% over FY12-13. Based on this, net sales would show a CAGR of 21% in FY12 and FY13 to Rs186bn andRs221.8bn, respectively.Exhibit 23: Revenue trend(Rsbn) (%)25020015010050126146 151186222605040302010-FY09 FY10 FY11 FY12E FY13ENet sales (Rsbn)% YoY-Source: Company, Nirmal Bang Institutional Equities ResearchEBITDA to show CAGR of 64%During FY11, EBITDA rose 22% to Rs14.9bn and EBITDA margin improved 150bps to 9.9%. We expectEBITDA to show a CAGR of 64% to Rs30.7bn and Rs40bn for FY12 and FY13, respectively, driven by robustgrowth in EPC segment, rising contribution of high margin infrastructure projects and revision in power tariff.However, net profit is expected to be subdued and show a CAGR of 12% over FY12/13 due to increase ininterest costs and lower other income.Exhibit 24: EBITDA, EBITDA margin trends(Rsbn) (%)4540353025201510506.312.315.030.740.1FY09 FY10 FY11 FY12E FY13EEBIDTA (Rsbn)EBIDTAM%Source: Company, Nirmal Bang Institutional Equities Research20181614121086420Exhibit 25: Net profit trend(Rsbn) (%)25252019.52015.2 15.5 16.215 13.5151010550-FY09 FY10 FY11 FY12E FY13ERPAT (Rsbn) % YoYSource: Bloomberg, Nirmal Bang Institutional Equities Research17Reliance Infra

Institutional EquitiesCore earning changing the return ratio trendThe company’s earnings scene is now shifting from the stress on other income to core earnings over theperiod. This is reflected in the return ratios, where RoCE is showing an improving trend as cash is gettingdeployed in infrastructure projects which are driving up operating income and reducing other income, therebysuppressing the RoE. We expect the RoCE to improve by 120bps to 5.8% and the RoE by 80bps to 7.3% inFY13.Exhibit 26: Return ratios trend(%)121086420FY09 FY10 FY11 FY12E FY13ESource: Company, Nirmal Bang Institutional Equities ResearchROE (%) ROCE (%)The company had announced buy-back of shares worth Rs10bn at a maximum price of Rs 725/share. Ithas already bought around 3mn shares at an average price of Rs575/share.18Reliance Infra

Institutional EquitiesFinancialsExhibit 27: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 125,781 146,286 151,278 186,080 221,879Growth (%) 50.7 16.3 3.4 23.0 19.2Total expenditure 119,482 134,022 136,297 155,351 181,822EBITDA 6,299 12,264 14,981 30,729 40,056Growth (%) 18.4 94.7 22.2 105.1 30.4EBITDA margin (%) 5.0 8.4 9.9 16.5 18.1Depreciation 3,304 4,724 4,825 7,961 9,152Interest costs 4,394 5,251 6,350 11,378 13,314Other income 14,774 11,188 9,752 5,687 3,450Profit before Tax 13,375 13,476 13,558 17,077 21,041PBTM (%) 10.6 9.2 9.0 9.2 9.5Tax 783 1,498 1,268 4,106 5,161Reported PAT 12,591 11,978 12,290 12,971 15,879Growth (%) 10.4 (4.9) 2.6 5.5 22.4RPAT (post minority share) 13,532 15,194 15,516 16,201 19,432Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 29: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity capital 2260.7 2449.2 2674.7 2674.7 2674.7Share warrants 7834.9 5410.8 - - -Reserves & surplus 158,880 199,181 233,401 247,357 264,544Net worth 168,976 207,041 236,076 250,032 267,219Minority interest 1116 1146.8 1876.4 1876.4 1876.4Long -term loans 46,215 57,490 94,695 98,116 101,132Short-term loans 54838.5 28349 28356.7 28356.7 28356.7Total loans 101,054 85,839 123,052 126,473 129,489Deferred tax (liability) /assets 2113.4 1569.4 987.9 987.9 987.9Total liabilities 273,259 295,596 361,992 379,369 399,572Gross block 101,074 117,482 143,967 211,770 242,681Less: Depreciation 46,380 51,683 56,508 64,469 73,621Net block 54,694 65,799 87,459 147,301 169,060Capital WIP 35,582 46,387 100,301 77,498 85,248Investments 159364.1 136591.4 137939 124145.1 111730.59Current assets 95,695 132,399 182,150 197,132 225,686Inventories 5,606 3,898 4,255 5,098 6,079Sundry debtors 19,278 22,496 73,000 63,726 75,986Cash and bank balances 4,583 4,494 6,357 13,475 14,671Other current assets 10,775 15,605 18,653 20,518 22,570Loans and advances 55,453 85,906 79,885 94,315 106,380Current liabilities and provisions 72,077 85,580 145,857 166,707 192,153Current liabilities 59,129 70,421 132,381 152,943 176,287Provisions 12,949 15,159 13,476 13,765 15,866Net current assets 23,618 46,819 36,292 30,424 33,533Total assets 273,259 295,596 361,992 379,369 399,572Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 28:Cash flowY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 2,995 7,539 10,156 22,768 30,904Inc./(dec.) in working capital (2,530) (13,265) (13,401) 12,985 (1,912)Cash flow from operations 464 (5,726) (3,245) 35,753 28,992Other income 11,877 8,341 10,895 17,065 16,764Depreciation 3,304 4,724 4,825 7,961 9,152Interest paid (-) (4,394) (5,251) (6,350) (11,378) (13,314)Tax paid (-) (2,072) (404) 326 (4,106) (5,161)Dividends paid (-) (1,701) (2,005) (1,849) (2,245) (2,245)Net cash from operations 7,478 (321) 4,602 43,051 34,188Capital expenditure (-) (24,948) (22,047) (78,701) (45,000) (38,661)Net cash after capex (17,470) (22,369) (74,098) (1,949) (4,473)Inc./(dec.) in borrowing 16,459 12,918 55,025 3,422 3,016(Inc./(dec. in investments 3,837 9,329 20,272 5,645 2,653Equity issue/(buyback) 603 33 665 - -Cash from financial activities 20,899 22,280 75,961 9,067 5,669Change in cash 3,429 (88) 1,863 7,117 1,196Opening cash 1,154 4,583 4,494 6,357 13,475Closing cash 4,583 4,494 6,357 13,475 14,671Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 30:Key ratiosY/E March FY09 FY10 FY11 FY12E FY13EEPS 51 57 58 61 73Cash EPS 63 74 76 90 107ValuationsPE ratio (x) 8.5 7.5 7.4 7.1 5.9Price/sales (x) 0.8 0.7 0.8 0.6 0.5Price /CEPS (x) 6.8 5.7 5.6 4.7 4.0Price /BV (x) 0.7 0.6 0.5 0.5 0.4EV/sales (x) 0.3 0.8 1.0 0.9 0.8EV/EBITDA (x) 5.4 9.3 10.5 5.5 4.5EV/EBIT (x) 11.3 15.2 15.5 7.4 5.9Margins (%)EBITDA margin 5.0 8.4 9.9 16.5 18.1EBIT margin 2.4 5.2 6.7 12.2 13.9PBT margin 10.6 9.2 9.0 9.2 9.5Net margin 10.8 10.4 10.3 8.7 8.8Returns (%)RoCE 1.0 2.3 2.5 4.6 5.8RoNW 8.0 7.3 6.6 6.5 7.3Efficiency ratiosAsset T/O 0.5 0.5 0.4 0.5 0.6Fixed asset T/O 1.2 1.2 1.1 0.9 0.9DupontNPM (PAT/sales) 0.11 0.10 0.10 0.09 0.09Total asset T/O 0.46 0.49 0.42 0.49 0.56Equity multiplier 1.62 1.43 1.53 1.52 1.50Gearing ratiosNet debt/equity (x) (0.4) 0.05 0.2 0.2 0.3Total debt/equity (x) 0.6 0.4 0.5 0.5 0.5Debt / EBITDA (x) 16.0 7.0 8.2 4.1 3.2Source: Company, Nirmal Bang Institutional Equities Research19Reliance Infra

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.Institutional EquitiesIVRCL14 November 20112QFY12 Result UpdateYet Another Subdued PerformanceIVRCL reported net profit of Rs81mn (down 65% YoY) for 2QFY12, below ourexpectation of Rs141mn but above Bloomberg consensus estimate of Rs56mn. Netsales remained flat at Rs10.4bn, 17% lower than our expectation and 9% down fromBloomberg consensus estimate. However, EBITDA margin improved 230bps YoYto 9% (60bps higher than our expectation) and EBITDA increased 32% to Rs937mn.Interest costs and depreciation increased 36% each to Rs 652mn and Rs 249mn,respectively. Subsequently, net profit fell 65% to Rs 81mn. We have cut ourrevenue estimates by 8% for FY12E and by 5% for FY13E to factor in lower-thanexpectedrevenue traction. Subsequently, this led to earnings downgrade of 22%for FY12E and 11% for FY13E. We maintain our Buy rating on IVRCL with a revisedtarget price of Rs55 from Rs59 earlier.Slower-than-expected project execution: IVRCL reported flat net sales growth atRs10.4bn due to slower execution of slow-moving Andhra Pradesh-based projects andthe monsoon season. The company expects revenue growth to improve in the comingquarters, but we have cut our revenue estimates by 8% for FY12 and 5% for FY13.EBITDA increased 32% to Rs 937mn and EBITDA margin improved 230bps because of alow base during 2QFY11 (prior period adjustments). Interest costs and depreciationincreased 36% each to Rs652mn and Rs249mn, respectively. Subsequently, net profitfell 65% to Rs81mn. Subsequent to our cut in revenue estimate, we downgrade ourearnings estimate by 22% for FY12E and 11% for FY13E.Order backlog at 4.6x; comfort on revenue visibility front: During 2QFY12, thecompany witnessed order inflow of Rs70bn (including L1) and the order book stood atRs260bn. This works out to 4.6x order book-to-bill (BTB) ratio on FY11 revenue, whichgives comfort on revenue visibility for the next three years.Merger of IVRCL Asset Holding (IVRCLAH) with IVRCL: The management hasproposed the merger of arm IVRCLAH with IVRCL, for which the board has approved aswap ratio of five shares of IVRCL for every six shares held in IVRCLAH. This has valuedIVRCLAH at Rs6.2bn which is in line with the valuation for IVRCLAH in our SOTPvaluation. IVRCL currently holds 75.7% stake in IVRCLAH, which will get cancelled andlead to issue of 39.8m shares of IVRCL, thereby resulting in equity dilution of 14.9% inIVRCL.Valuation: We believe the declining profitability and high interest rate scenario is nearingtheir bottom and it’s already discounted in the CMP. Therefore, despite a disappointingquarter, we believe the company’s performance in the coming quarters will improve andbetter geared up for future growth. Following the earnings downgrade, we cut ourtarget price on IVRCL from Rs59 earlier to Rs55, but maintain our Buy rating.BUYSector: InfrastructureCMP: Rs38Target Price: Rs55Upside: 45%Amit Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 267.0Mkt Cap (Rsbn/US$mn) 10.1/201.252 Wk H / L (Rs) 140/31Daily Vol. (3M NSE Avg.) 6,302,304Price Performance (%)1 M 6 M 1 YrIIVRCL (1.3) (49.4) (72.9)Nifty Index 0.3 (7.1) (15.2)Source: BloombergY/E March (Rsmn) 2QFY11 1QFY12 2QFY12 YoY (%) QoQ (%) 1HFY11 1HFY12 YoY (%)Net sales 10,502 11,219 10,460 (0.4) (6.8) 21,564 21,679 0.5Total Expenses 9,797 10,387 9,524 (2.8) (8.3) 19,853 19,910 0.3EBITDA 706 832 937 32.8 12.5 1,711 1,769 3.4EBITDAM (%) 6.7 7.4 9.0 7.9 8.2Other Income 304.4 72.3 54.1 (82.2) (25.2) 315.9 126.4 (60.0)Interest costs 480.5 628.2 652.4 35.8 3.9 933.4 1,280.6 37.2Depreciation 184.2 227.7 249.7 35.6 9.7 341.6 477.4 39.8PBT 345.3 48.8 88.8 (74.3) 81.9 751.8 137.6 (81.7)Tax expense 112.5 6.6 7.4 (93.4) 12.8 237.8 14.0 (94.1)PAT 232.8 42.2 81.4 (65.0) 92.7 514.0 123.6 (75.9)Source: Company, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesExhibit 1: Financial performanceY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 48,819 54,929 56,515 58,383 71,562EBITDA 4,218 5,319 5,146 5,026 6,284Net profit 2,260 2,111 1,579 1,050 1,581EPS (Rs) 8.7 7.9 5.9 3.9 5.9EPS growth (%) 7.2 (9.5) (25.2) (33.5) 50.6EBITDA margin (%) 8.6 9.7 9.1 8.6 8.8PER (x) 4.8 5.3 7.1 10.7 7.1P/BV (x) 0.6 0.6 0.6 0.5 0.4Price/sales (x) 0.2 0.2 0.2 0.2 0.2EV/EBITDA (x) 5.7 4.8 6.0 6.3 5.4RoCE (%) 10.5 11.8 9.6 8.1 8.9RoE (%) 13.7 11.5 8.2 5.2 6.6Source: Company, Nirmal Bang Institutional Equities ResearchCon-call Highlights: 2HFY12 performance to be upbeatThe company has highlighted that the business environment has stabilised and there could be improvement in itsperformance in the coming quarters and maintain EBITDA margin in the range of 8-9% for FY12.Revenue mix for the quarter constitute of 38% from water segment, 25% from building segment, 26% fromtransportation and remaining from other segments (power and oil).The company is in advanced stage of monetisation of Noida land bank and three road projects which will reduce thedebt level. Over a period of 2-3 years, the company intends to exit from BOT projects and land parcels to focus onEPC projects.Equity requirement stands at Rs2bn for the next 2-2.5 years, excluding the Haryana road project where the equitycommitment would be around Rs2.5 bn.Road projects like Chengapalli-Walia, Indore-Jabhua, Phaltan-Baramati and Karanji - Ghuggus -Chandrapur will becompleted in the next 12-18 months’ time frame.Exhibit 2: Earlier, revised estimatesParticulars Earlier estimates Revised estimates % changeFY12ERevenues (Rsmn) 63,748 58,383 (8.4)EBITDA (Rsmn) 5,487 5,026 (8.4)EPS (Rs) 5.1 3.9 (22.3)FY13ERevenues (Rsmn) 74,998 71,562 (4.6)EBITDA (Rsmn) 6,585 6,284 (4.6)EPS (Rs) 6.7 5.9 (11.0)Source: Nirmal Bang Institutional Equities Research22IVRCL

Institutional EquitiesMerger of IVRCLAH with IVRCLThe board of IVRCL has approved the merger of IVRCLAH (BOT assets) with IVRCL and demerger of real estateand tower manufacturing businesses into separate subsidiaries.The swap ratio for this transaction has now been fixed at five shares of IVRCL for every six shares held in IVRCLAH,which will result in a 14.9% increase in the outstanding shares of IVRCL, from 267mn to 306.9mn. IVRCL holds75.7% stake in IVRCLAH, which will be cancelled after the merger.IVRCLAH has invested around Rs11bn of equity in its BOT assets. The current share swap ratio valued the entity atRs6.2bn which is 0.6x of invested capital and in line with our valuation for the company based on SOTP method.Post merger, the promoter’s stake in IVRCL would increase to 13.5% from 11% (as they holds 7.2% stake inIVRCLAH).Exhibit 3: BOT project detailsProject Project cost Stake (%) Equity Equity contribution CoD Concession periodChennai desalination 5,679 75% 1729.8 1,297 Operational 25 yearsJalandhar-Amritsar 3,431 100% 671 671 Operational 20 yrsKumarapalayam–Chengalpalli 4,215 100% 650 650 Operational 20 yrsSalem -Kumarapalayam 5,020 100% 800 800 Operational 20 yrsBaramati- Phaltan 3,820 75% 690 518 FY14 25 YearsIndore-Gujarat border 15,237 100% 3,809 3,809 FY14 25 yrsChengapalli-Wallayar 11,230 100% 3,260 3,260 FY14 27 yrsGoa-Karnataka 31,000 100% 7,200 7,200 FY15 23 yrsSion-Panvel 14,500 51% 3,000 1,530 FY14 17.5 yrsIOCL tank 30,000 38% 3940 1,497 15 YearsKaranji - Ghuggus -Chandrapur 7,500 100% 1,300.0 1,300 FY15 30YearsTotal 131,631 25,750 21,232Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 4: Change in IVRCL shareholding pattern post mergerShareholding Current structure Post merger(mn) (%) Addition (mn) (mn) (%)Promoter 29.4 11.0 11.9 41.3 13.5FIIs 108.8 40.7 5.1 113.9 37.1Banks/Fis/MFs 9.5 3.6 10.3 19.8 6.5Public 57.8 21.6 9.3 67.0 21.8Corporate Holding 61.6 23.1 3.2 64.8 21.1267.0 100.0 39.9 306.9 100.0Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 5: SOTP ValuationSegment Multiple (x) Value (Rsmn) Value per share (Rs)Core construction 7 10,749 40IVRCLAH Holding Discount 35% 3,005 11HDO Holding Discount 35% 1,004 4Total Fair value 55Source: Company, Nirmal Bang Institutional Equities Research23IVRCL

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Institutional EquitiesIVRCL Infrastructure26 September 2011Initiating CoverageReuters: IVRC.BO Bloomberg: IVRC INProject Execution To Gain MomentumIVRCL Infrastructure, a well established construction company with an orderbacklog of Rs230bn, which is 3.8x FY11revenue, provides strong revenuevisibility. Project execution is poised to pick up from 2HFY12, driven bycommencement of billing in three new projects, increase in shorter executioncycle projects in total order book and increase in sub-contracting post stabilityin interest rates, which will drive 17% yoy revenue growth and 32% yoy earningsgrowth during FY13. The company is also in advance stage of talks for sale ofstake in the special purpose vehicle of IVRCL Assets & Holding (IVRCLAH) andmonetisation of real estate, which would ease funding needs. We assign a Buyrating and a target price of Rs59 to the stock based on SOTP valuation.Order backlog at 3.8x; strong revenue visibility: Despite decline in order inflow by45% during FY11, the company has diversified order book of Rs230bn comprising38% water and irrigation projects, 22% building projects, 29% road projects and 11%oil and power projects. This works out to 3.8x of order book-to-bill (BTB) ratio on FY11revenue, which provides strong revenue visibility for next three years. Based on prequalificationand a track record in order inflow, the order backlog is estimated to showa CAGR of 17% in the next two years to Rs 296bn by the end of FY13.Execution rate poised to improve: We expect project execution to pick up from2HFY12, driven by commencement of billing in three new projects, increase in shorterexecution cycle projects and the rise in sub-contracting post stability to interest rates,which will drive revenue up 17%yoy and earnings 32% yoy during FY13.Stake sale of SPV or land monetisation to ease liquidity: BOT projects underconstruction require cumulative equity contribution of around Rs10bn by IVRCLAHover the next two-three years. The company is in advanced stage of talks formonetisation of land assets and dilution of stake at the SPV level to meet the equityrequirement. We believe this would ease the company’s liquidity situation.Attractive valuation: We assign a Buy rating and a target price of Rs59 to the stockbased on SOTP valuation. During the past one year, the stock has corrected byaround 78% and is currently trading at a one-year forward PE ratio of 6x and a P/BV of0.5x, near its historical low touched during the Lehman crisis, which is not justified.We have valued the core construction business at a PE multiple of 8x, which is on thelower side of historical PE multiple, contributing Rs52 to our TP. The company has twosubsidiaries, IVRCLAH and Hindustan Dorr Oliver (HDO), which are valued at a 25%discount to their market price.BUYSector: InfrastructureCMP: Rs38Target Price: Rs59Upside: 55%Amit Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 267.0Mkt Cap (Rsbn/USbn) 10.0/0.2052 Wk H / L (Rs) 174/31Daily Vol. (3M NSE Avg.) 5,195,842Share holding (%)3QFY11 4QFY11 1QFY12Promoter 9.5 9.5 935FII 57.9 51.2 49.3DII 5.3 5.6 4.0Corporate 15.6 18.8 20.8General Public 11.7 14.9 16.5One Year Indexed Stock PerformanceY/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 48,819 54,929 56,515 63,748 74,998YoY (%) 33.4 12.5 2.9 12.8 17.6EBITDA 4,218 5,319 5,146 5,487 6,585EBITDA margin (%) 8.6 9.7 9.1 8.6 8.8Net profit 2,260 2,111 1,579 1,350 1,777YoY (%) 7.4 (6.6) (25.2) (14.5) 31.6EPS (Rs) 8.7 7.9 5.9 5.1 6.7PE ratio (x) 4.2 4.7 6.3 7.3 5.6P/BV (x) 0.5 0.5 0.5 0.5 0.4RoCE (%) 10.5 11.8 9.6 9.0 9.9RoE (%) 13.7 11.5 8.2 6.6 8.1Source: Company, Nirmal Bang Institutional Equities ResearchPrice Performance (%)1 M 6 M 1 YrIVRCL 1.6 (49.3) (77.8)Nifty Index (1.6) (11.2) (18.3)Source: Bloomberg

Institutional EquitiesValuation at historical bottomWe assign a Buy rating and a target price of Rs59 to the stock based on SOTP valuation. The coreconstruction business is valued at a PE ratio of 8x, which is at the lower side of historical PE multiple andcontributes Rs53 to our target price. IVRCL Infrastructure has two subsidiaries - IVRCLAH and Hindustan DorrOliver (HDO) - valued at a 25% holding discount to their market price. At the current market price of Rs.38,IVRCL Infrastructure is trading at a PE multiple of 6x and EV/EBITDA multiple of 5x FY13 earnings. Webelieve the stock is providing a good investment opportunity for investors.Exhibit 1: SOTP valuationSegment Basis Multiple (x) Value (Rsmn) Value per share (Rs)Core construction FY13E, PE (x) 8.0 13,861 53IVR prime CMP 25% 1,321 3HDO CMP 25% 627 3Total fair value - - - 59Source: Company, Nirmal Bang Institutional Equities ResearchTrading at near historical low P/B, PEHistorically, IVRCL Infra has traded at a five year average PE of 22x and P/BV of 2.2x. During the past oneyear, the stock has corrected by around 78% on concerns over rising interest rates, lack of order inflow anddecline in profitability. It is currently trading at a one-year forward PE of 6x and P/BV of 0.5x on FY13 earnings,near its historical low touched during the Lehman crisis, which is not justified. Hence, we have valued the corebusiness at 8x, which is in the lower range of its EPC construction business.Exhibit 2: P/BV trend(x)5.04.54.03.53.02.52.01.51.00.50.0Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11Exhibit 3: PE ratio trend(x)4035302520151050Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11P/B5Y averageP/E5 year avgSource: Bloomberg, Nirmal Bang Institutional Equities ResearchSource: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 4: EV/EBITDA trend(x)2520151050Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11EV/EBITDA5 year avgSource: Bloomberg, Nirmal Bang Institutional Equities Research26IVRCL

Institutional EquitiesInvestment ArgumentsOrder book/bill at 3.8x; strong revenue visibilityIVRCL Infrastructure has an order book of Rs230bn (including L1 orders of Rs23bn and adjusted forcancellation of Rs19bn order from Saudi Arabia due to no work progress), which comprises 38% water andirrigation projects, 22% building projects, 29% transportation projects and 11% power and oil projects. Thisworks out to 3.8x of its order book-to-bill (BTB) ratio on FY11 revenue, which provides strong revenue visibilityfor the next three years. During FY04-11, the order book showed a CAGR of 45%, but looking at macro factorsand short-term hiccups in the award of projects; we expect the order backlog to show a CAGR of 17% in thenext two years, to Rs296bn by FY13 (primarily focusing on EPC and BOT segments of road and water projectsin Tamil Nadu and overseas projects).Exhibit 5: Order inflow trend(Rsbn) (%)35016030025020015010050-FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13EClosing order book (Rsbn) Order inflow (Rsbn) Growth (YoY %)Source: Company, Nirmal Bang Institutional Equities ResearchKey highlights of order bookThe company has order backlog of Rs230bn, of which around Rs45bn worth of orders are captive. Thisgives certainty to a large extent regarding project execution on time.The company is pre-qualified for Rs200bn of orders and is expecting pre-qualification for incrementalaround Rs100bn of orders.Saudi Arabia order worth Rs19bn has been deleted from the order backlog due to delay in progress of theproject.Andhra Pradesh contributes around Rs28bn to the order book, where execution of the project hasimproved (execution was slow in the past due to delay in payment).Order book mix biased toward shorter execution cycle projectsDuring FY02-09, the order-book mix was biased toward the water segment, which was in the range of 57-69%.At the end of FY10, around 45% of order inflow was from the road segment, which has increased thetransportation segment’s contribution from 5% in FY09 to 31% in FY10, while the water segment’s contributionfell to 45% from 69%. During FY11, the contribution of water segment further declined to 38%, transportationsegment slightly declined to 29%. Transportation segment orders are primarily captive orders where paymentdelay risk is lower and execution cycle is shorter. Historically, whenever there is a significant increase in thetransportation segment’s order book, revenue growth follows with a lag of one year. Hence, we believe projectexecution will pick up during 2HFY12, driven by increased contribution from shorter execution cycle orders.14012010080604020-(20)27IVRCL

Institutional EquitiesExhibit 6: Segment-wise order book trendExhibit 7: Revenue vs order book of transportation segment(%)80706050403020100573069612770181810 121093 1 2 34615633562211 1160694538312922 2222189 9115 5 6FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11Water & Enviornment Buildings & Ind Structures Power TransportationSource: Company, Nirmal Bang Institutional Equities Research(%)353331302729252220 18151099550FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11Transportation (% of OB)Revenue (%YoY) (RHS)Source: Company, Nirmal Bang Institutional Equities Research(%)80706050403020100Historically, revenue growth has higher correlation with book-to-bill ratioDuring FY04, the BTB ratio fell from 3.4x in FY03 to 2.1x in FY04, which resulted in a sharp decline in revenuegrowth from 74% in FY04 to 37% in FY05. The BTB ratio was in the range of 3.5x-3.8x during FY05-08 andrevenue growth was in a rising mode until FY08. The BTB ratio fell to 2.8x and revenue growth declined from59% in FY08 to 33% in FY09. Hence, we believe that historically the BTB ratio has shown a higher correlationwith revenue growth. However, during FY10-11, the BTB ratio increased in the range of 3.8x-4.4x, but revenuegrowth did not pick up. Hence, we believe the project execution will pick up during 2HFY12-13 and revenuegrowth will also gain momentum.Exhibit 8: Order book to bill vs revenue growth(x)4.54.03.53.02.52.04.44.0 4.03.73.83.83.43.53.62.82.1FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13EOrder book to bill Revenue growth (%)(%)80706050403020100Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 9: Order book growth, revenue growth trendExhibit 10: Revenue growth vs order inflow growth(%)16014012010080604020-(20) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13ERevenue growth (%) Orderbook growth (%)Source: Company, Nirmal Bang Institutional Equities Research(%)2902401901409040(10)FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E(60)Revenue growth (%) Order inflow growth (%)Source: Company, Nirmal Bang Institutional Equities Research28IVRCL

1QFY102QFY103QFY104QFY101QFY11Institutional Equities2QFY113QFY114QFY111QFY12Higher interest rates impacting near-term project executionTo curb rising inflation, the Reserve Bank of India raised repo rate by 350bps during January ’2010-September2011, which is 75bps lower than its previous peak of October 2008. This has adversely impacted the executionof large projects, as the small sub-contractors are not getting bank credit. This led to slippage of revenue byaround 20%. As per consensus estimate, the interest rates would go up by another 25bps and then willstabilise at that level (may not correct sharply as in the previous cycle of FY09). Given the fact that interestrates are going to stabilise, subcontracting is likely to increase in coming quarters which will improve projectexecution.Exhibit 11: Sub-contracting revenue declining(bn)252018.920.5151010.812.5 11.811.1 10.514.111.251.63.1 2.63.61.9 1.7 1.94.41.80RevenueSubcontracting revenueSource: Company, Nirmal Bang Institutional Equities ResearchBOT assetsExhibit 12: BOT portfolio operational statusIVRCL Infrastructure has a portfolio of 11 BOT projects, of which four are operational. Three operational roadprojects contributed toll revenue of Rs2.4mn/day, which is below the initial estimate of the management. FromSeptember 2011, the company will enforce the toll hike which is linked to WPI and this will spur revenuegrowth in the coming quarters. Chennai desalination project had a revenue of Rs4.4mn/day during 1QFY12.Overall, the three road projects and Chennai desalination project contributed Rs620mn for the quarter. Apartfrom that, the company has three projects under construction- Baramati Phalthan (30% complete), Chengaplliproject (10% complete), and Indore-Gujarat project (50% complete). Sion-Panvel and Chandrapur projectshave achieved financial closure and the construction will start in coming quarters. Goa-Karnataka project hasnot yet achieved financial closure and it will take another six months to start construction.Projects Jalandhar-Amritsar Salem-Kumarapalayam Kumarapalaym- Chenagmpalli Chennai water Baramati-PhaltanStake(%) 100 100 100 75 75Project type Toll Toll Toll Two-part tariff TollConcession 17.5 years 20 20 - 25Construction period 2.5 years 2 3 - -Grant structure Postive grant -Rs394mn - - - Positive grant of Rs1,220 mnProject status operational operational operational operational 35% construction completedProjects Chengapalli-walayar Indore-Gujarat Sion-Panvel epresswayMaharashtra/GoaborderKaranji-Wani-Ghuggus-ChandrapurStake (%) 100 100 51 100 100Other partners - - Kakade infra - -Project type Toll Toll Toll Toll TollConession 25 27 18 years and 9 months 23 years 30 yearsConstruction period - - - -3 years 2 yearsGrant structure Rs360mn revenue share Rs230 mn revenue share No grantProject status20% constructioncompletedSource: Company, Nirmal Bang Institutional Equities Research55% constructioncompletedFinancial closure achieved ,initial work startedPositive grant ofRs6647.2 mnConcessionagreement signed,financial closure soonRs2318.4 mn VGFConcession agreement tobe signed29IVRCL

Institutional EquitiesStake sale in SPV and monetisation of real estate to meet equity commitmentWe expect BOT projects under construction and at planning stage to require cumulative equity contribution ofaround Rs10bn over the next 2-3years, of which around Rs1.8bn is required in FY12. The company is lookingto raise funds on its own via monetisation of land assets, securitisation of receivables from operating projectsand dilution at the project SPV level to meet this equity requirement. The management has given an indicationthat it is already in advanced stage of talks with investors for the same.Exhibit 13: BOT asset portfolioProject (Rsmn) Project cost Stake (%) Equity Equity cont CoD Concession periodChennai desalination 5,679 75% 1729.8 1,297 Operational 25 yearsJalandhar-Amritsar 3,431 100% 671 671 Operational 20 yrsKumarapalayam–Chengalpalli 4,215 100% 650 650 Operational 20 yrsSalem -Kumarapalayam 5,020 100% 800 800 Operational 20 yrsBaramati to Phaltan 3,820 75% 690 518 FY14 25 YearsIndore-Gujarat border 15,237 100% 3,809 3,809 FY14 25 yrsChengapalli-Wallayar 11,230 100% 3,260 3,260 FY14 27 yrsGoa-Karnataka 31,000 100% 7,200 7,200 FY15 23 yrsSion-Panvel 14,500 51% 3,000 1,530 FY14 17.5 yrsIOC tank 30,000 38% 3,940 1,497 - 15 YearsKaranji - Ghuggus -Chandrapur 7,500 100% 1,300.0 1,300 FY15 30YearsTotal 131,631 - 25,750 21,232 - -Source: Company, Nirmal Bang Institutional Equities Research30IVRCL

Institutional EquitiesHindustan Dorr Oliver: Synergy improves scope of workHindustan Dorr Oliver, a subsidiary of IVRCL Infrastructure (55% stake), is engaged in the business ofproviding EPC, manufacturing and engineering services, to various industry segments like mineral processingand beneficiation, pulp and paper processing, fertiliser and environmental management. In order to increase itsproduct portfolio and to gain international presence, HDO, in 4QFY10, acquired Davy Markham, the Sheffield,UK-based heavy engineering company which designs, manufactures and assembles large equipment used formining, nuclear, power generation, oil and gas exploration and tunnel boring. IVRCL Infrastructure was able toget synergies post acquisition of HDO due to its expertise in designing and installing equipment, which helpedthe company to improve margins and to bid for higher qualification engineering work.HDO stock corrected by 80% on bleak order bookThe company’s order book in 1QFY12 stood at Rs16bn (1.7x FY11 revenue.), dominated by the mineraldivision (50%) followed by water and manufacturing divisions. The company witnessed a fall in revenue in1QFY12 by 41% and profit also took a hit, declining by 64%, due to delay in billing as it did not get the designand engineering clearances for projects of clients like GAIL (India) and Bharat Petroleum Corporation. Duringthe quarter, a positive factor was that the company won a project worth Rs3.8bn from Konkola Copper Minesin Zambia and also bid for few other clients like Hutti Gold Mines and Uranium Corporation.Going forward, we believe the pace of order inflow and increase in execution of lumpy orders would be themain triggers, as in the last three-four quarters we have not seen any major pick-up in revenue and order bookdespite repeated assurances given by the management.Exhibit 14: Financial summaryY/E March (Rsmn) FY08 FY09 FY10 FY11Net sales 3,042 5,153 8,631 9,445EBITDA 331 511 1,009 904EBITDA margin (%) 10.9 9.9 11.7 9.6PAT 226 302 555 538Source: Company, Nirmal Bang Institutional Equities ResearchCompany backgroundIVRCL Infrastructures & Projects is one of the leading civil construction companies in India having a strongpresence in water, transportation and building projects business, industrial structures and also powertransmission projects. The company has created a niche for itself in project execution skills across thesegment and has a presence in most of the states in India. It has a well-diversified and de-risked business mix,with a presence across various sectors and regions. The company has shown a 39% CAGR in terms ofrevenue and 30% in terms of earnings over the past five years.Source: Company, Nirmal Bang Institutional Equities Research31IVRCL

Institutional EquitiesExhibit 15: Company structureSource: Company, Nirmal Bang Institutional Equities Research32IVRCL

Institutional Equities1QFY12 performanceRevenue growth was flat due to lower sub-contracting of large projects (sub-contractors are not gettingsufficient funds from banks). Project execution rate declined by 5-10%, implying loss of revenue worth Rs2bn.EBITDA margin slipped by 170bps to 7.4% due to slower project execution, sharp increase in raw materialcosts and non-billing of some water segment projects, where billing of cost escalation is allowed only after24 months.Net profit declined by 85% to Rs42mn due to lower EBITDA margin and higher interest costs.Current order book at Rs230bn (includes L1 orders worth Rs23 bn and removal of Saudi Arabia projectworth Rs19 bn), is down 9.8% YoY. Water and irrigation projects accounted for 38% of the order book,followed by 22% share of building projects and 29% of transportation projects.Exhibit 16: Quarterly performanceY/E March (Rsmn) 1QFY11 4QFY11 1QFY12 YoY (%) QoQ (%)Net sales 11,061 20,516 11,219 1.4 (45.3)Other Income 11.4 55.4 72.31 - 30.5Total Income 11,072 20,571 11,291 2.0 (45.1)Total expenditure 10,056 18,741 10,387 3.3 (44.6)EBITDA 1,005 1,775 832 (17.2) (53.1)EBITDAM (%) 9.1 8.7 7.4 - -Depreciation 157 217 227 44.6 4.6Interest 452 656 628 38.9 (4.3)PBT 406 956 49 (87.9) (94.9)Tax 159 308 6.7 (95.8) (97.8)Reported PAT after tax 281 649 42 (85.1) (93.5)Source: Company, Nirmal Bang Institutional Equities ResearchFinancial analysisRevenue growth to pick up in FY13During FY11, net sales rose by just 3% to Rs56.4bn (showing a CAGR of 39% over FY04-10) due to projectdelay (land clearance and payment issues), slower execution during state assembly elections and lower subcontractingdue to non-availability of credit from banks. We expect project execution to pick up from 2HFY12,driven by start of billing in three new projects, increase in shorter execution cycle projects and increase in subcontractingpost stability to interest rates. Based on all this, net sales would show a CAGR of 15 % betweenFY12 and FY13 to Rs 63.7bn and 74.9bn, respectively.Exhibit 17: Segment-wise revenue16.022.2FY11 (%)5.444.5Water & Enviornment Buildings & Ind Structures Power TransportationSource: Company, Nirmal Bang Institutional Equities ResearchExhibit 18: Revenue growth trend(%)8075.07063.76054.9 56.548.8504036.63023.12015.010.47.610 4.40FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13Revenue (Rs bn) YoY (%)Source: Company, Nirmal Bang Institutional Equities Research33IVRCL

Institutional EquitiesOperating margin under pressureThe company reported EBITDA margin in the range of 9-10% and EBITDA showed a CAGR of 31% overFY06-11. We expect EBITDA margin to be under pressure due to rising contribution of low margin projects andtwo projects where cost escalation can’t be passed on for two years. EBITDA margin is estimated to declineby 50bps to 8.6% in FY12 and then improve by 20bps to 8.8% in FY13. EBITDA is expected to show a CAGRof 13% to Rs 5.5bn in FY12 and Rs6.6bn in FY13, respectively. Net profit is expected to decline in FY12 by14% due to lower operating margin and higher interest rates but grow by 32% in FY13.Exhibit 19: EBITDA margin trendExhibit 20: EBITDA trend(%)10.510.09.59.08.58.07.57.06.56.0FY13EFY12EFY11FY10FY09FY08FY07FY06FY05FY04FY03FY02Source: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities ResearchImprovement in return ratiosDuring FY07-11, the company's return ratios were in declining mode due to equity dilution and withdrawal ofSection 80A tax benefit. We expect the RoE to decline by 150bps to 6.7% in FY12 due to fall in operatingmargin and higher interest rates. In FY13, the RoE is likely to improve by 150bps to 8.1% based on 32%growth expected in PAT and assumption of no equity dilution.Exhibit 21: Return ratio trend(%)151311975FY09 FY10 FY11 FY12E FY13EROCE (%) ROE (%)Source: Company, Nirmal Bang Institutional Equities Research34IVRCL

Institutional EquitiesFinancialsExhibit 22: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 48,819 54,929 56,515 63,748 74,998Growth (%) 33.4 12.5 2.9 12.8 17.6Consumption of materials 16,578 20,211 19,897 23,002 26,343Construction expenses 25,194 26,070 27,299 31,119 37,155Employee costs 1,953 2,026 2,623 2,546 3,040Other expenditure 876 1,303 1,471 1,594 1,875Total expenditure 44,601 49,610 51,369 58,261 68,413EBITDA 4,218 5,319 5,146 5,487 6,585Growth (%) 16.6 26.1 (3.2) 6.6 20.0EBITDA margin (%) 8.6 9.6 9.1 8.6 8.7Interest costs 1,233 1,637 2,182 2,782 3,135Depreciation 473 543 758 886 1,026Other income 299 149 120 196 228Profit before tax 2,811 3,288 2,326 2,015 2,652PBTM (%) 5.8 6.0 4.1 3.2 3.5Tax 478 1,177 747 665 875RPAT (before E.O. item) 2,333 2,111 1,579 1,350 1,777E/O items (73) - - - -Adj. PAT 2,260 2,111 1,579 1,350 1,777Growth (%) 7.3 (6.6) (25.2) (14.5) 31.6Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 24: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity share capital 267 534 534 534 534Reserves & surplus 17,839 17,999 19,340 20,563 22,174Net worth 18,106 18,533 19,874 21,097 22,708Long-term debt 10,185 12,688 16,295 22,813 25,550Short- term debt 3,410 3,445 4,663 241 962FCCBs 385 - - - -Total debt 13,980 16,133 20,958 23,054 26,512Deferred tax (liability) / assets 117 125 87 87 87Sources of funds 32,203 34,791 40,918 44,237 49,306Gross block 6,624 7,502 9,242 11,242 13,242Less: Depreciation 1,417 1,838 2,324 3,210 4,237Net block 5,207 5,664 6,918 8,032 9,006Investments 3,892 6,138 6,347 6,982 7,680Inventories 8,892 2,447 2,732 10,479 11,918Debtors 11,430 19,464 19,298 16,769 19,556Cash & bank balance 1,009 1,643 1,432 1,601 3,260Loans & advances 16,804 23,451 31,062 21,517 21,262Current assets 38,135 47,005 54,523 50,367 55,994Current liabilities 14,787 23,924 26,727 21,059 23,249Provisions 440 445 403 344 384Current liabilities 15,226 24,369 27,130 21,403 23,633Net current assets 22,909 22,635 27,393 28,964 32,361Application of funds 32,203 34,791 40,918 44,237 49,306Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 23:Cash flowY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 3,971 4,925 4,508 4,601 5,559Inc./(dec.) in working capital (2,878) (2,481) (1,659) (1,401) (1,739)Cash flow from operations 1,093 2,443 2,848 3,200 3,820Other income (745) (165) (97) 196 228Depreciation 473 543 758 886 1,026Interest paid (-) (1,233) (1,637) (2,182) (2,782) (3,135)Tax paid (-) (1,018) (1,293) (1,651) (665) (875)Dividends paid (-) (189) (215) (246) (126) (166)Net cash from operations (1,620) (323) (569) 709 898Capital expenditure (-) (1,306) (720) (1,571) (2,000) (2,000)Net cash after capex (2,926) (1,043) (2,139) (1,291) (1,102)Inc./(dec.) in borrowings 3,221 1,150 4,791 2,096 3,458Inc./(dec.) in investments (1,058) (522) (2,714) (635) (698)Equity issue/(buyback) 0 1,050 (150) - -Others - - - - -Cash from financial activities 2,163 1,677 1,927 1,461 2,760Change in cash (763) 635 (212) 170 1,658Opening cash 1,771 1,009 1,643 1,432 1,601Closing cash 1,009 1,643 1,432 1,601 3,260Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 25:Key RatiosY/E March FY09 FY10 FY11 FY12E FY13EEPS (x) 8.7 7.9 5.9 5.1 6.7ValuationPE ratio (x) 4.2 4.7 6.3 7.3 5.6Price /CEPS (x) 1.8 3.7 4.2 4.4 3.5Price /BV (x) 0.5 0.5 0.5 0.5 0.4EV /sales (x) 0.5 0.4 0.5 0.5 0.4EV /EBITDA (x) 5.4 4.6 5.7 5.7 5.0Margins (%)Operating margin 8.6 9.7 9.1 8.6 8.8EBIT margin 8.3 9.0 8.0 7.5 7.7PBT margin 5.8 6.0 4.1 3.2 3.5Net margin 4.8 3.8 2.8 2.1 2.4Returns (%)RoCE 10.5 11.8 9.6 9.0 9.9RoNW 13.7 11.5 8.2 6.6 8.1Efficiency ratioAsset T/O 1.5 1.6 1.4 1.4 1.5Turnover ratioDebtors T/O 85.5 129.3 99.4 96.0 95.2Creditors T/O 30.3 43.6 34.0 33.0 31.0Inventory T/O 66.5 16.3 17.6 60.0 58.0DuPontNPM (PAT/sales) 4.78 3.84 2.79 2.12 2.37Total asset T/O 1.52 1.58 1.38 1.44 1.52Equity multiplier 1.78 1.88 2.06 2.10 2.17Gearing ratiosNet debt/ equity (x) 0.5 0.5 0.7 0.7 0.7Total debt/equity (x) 0.8 0.9 1.1 1.1 1.2Source: Company, Nirmal Bang Institutional Equities Research35IVRCL

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Institutional EquitiesIRB Infrastructure27 January 20123QFY12 Result UpdateReuters: IRBI.BO; Bloomberg: IRB INOperational performance in line with estimatesIRB Infrastructure reported a net profit of Rs1.31bn (down 1.2% YoY, up 19.4%QoQ) for 3QFY12, higher than our estimate by ~18% due to higher other incomeand interest costs being lower than our expectation. Net sales rose 11.5% toRs7.45bn and EBITDA by 16.4% YoY, broadly in line with estimates. Based on thequarterly performance and the progress made in ongoing projects, we believethe company would be able meet its guidance for FY12 and is on track to achievethe financial closure for its Ahmedabad-Vadodara project by the end of FY12. Weretain our Buy rating on the stock with a target price of Rs235.Moderate revenue growth of 11% YoY: EPC revenue rose 12.7% to Rs 5.27bn,driven by pick-up in execution of Talegao-Amravati, Jaipur-Deoli and Amritsar-Pathankoat projects. BOT toll revenue was up 18.4% YoY at Rs 2.53bn on account ofthe hike in Mumbai-Pune, Surat-Dahisar and Bharuch-Surat toll rates and the start oftoll collection at Tumkur-Chitradurga project from 1QFY12. Overall, this has led to netrevenue growth of 11.5% YoY at Rs 7.5bn.Net profit higher than our expectation: EBITDA increased 16.4% YoY to Rs3.41bnand the EBITDA margin improved by 190bps to 45.8%. Interest costs rose 73% toRs1.42bn, lower than our estimate of Rs1.53bn and other income went up by 188% toRs 338mn as against our estimate of Rs 232mn. This has led to a net profit of Rs1.31bn, 18% higher than our estimate. The Surat-Dahisar project was completed duringthe quarter, which has increased the BOT portfolio of operational projects to 11.However, this will lead to higher amortisation and interest burden from 4QFY12onwards, which will suppress net profit.EPC segment order book at Rs91.2bn: The company has an order book of Rs91.2bn, of which ongoing projects account for Rs33.9bn, O&M projects Rs20.6bn andupcoming projects Rs36.7bn. Looking at the robust order book coupled with threeprojects under active phase (worth Rs33.9bn and to be executed by FY13-14) and theAhmedabad-Vadodara project to be ramped up during FY13; we believe the companywould continue to report robust growth in the EPC segment next financial year.We retain Buy rating with a target price of Rs235: IRB Infrastructure is on track toachieve financial closure for its Ahmedabad-Varodara project during 4QFY12. Webelieve three projects are under active construction and the ramp-up of Ahmedabad-Vadodara project would drive revenue growth in FY13, and BOT projects’ toll revenuewould continue to provide sustainability to cash flow. We maintain our Buy rating on thestock with a target price of Rs235 based on SOTP valuation.BUYSector: InfrastructureCMP: Rs168Target Price: Rs235Upside: 40%Amit Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 332.4Mkt Cap (Rsbn/US$bn) 55.9/1.152 Wk H / L (Rs) 230/121Daily Vol. (3M NSE Avg.) 1,303,187Price Performance (%)1 M 6 M 1 YrIRB Infra 19.9 (10.8) (23.9)Nifty Index 9.4 (9.2) (9.3)Source: BloombergY/E March (Rsmn) 3QFY11 2QFY12 3QFY12 YoY (%) QoQ (%) 9MFY11 9MFY12 YoY (%)Net sales 6,688 7,359 7,455 11.5 1.3 16,711 22,827 36.6Total expenditure 3,752 4,145 4,038 7.6 (2.6) 8,919 12,901 44.7EBITDA 2,936 3,214 3,417 16.4 6.3 7,793 9,926 27.4EBITDA margin (%) 43.9 43.7 45.8 - - 46.6 43.5 -Interest costs 820 1,411 1,420 73.2 0.6 2,174 4,005 84.3Depreciation 585 629 724 23.6 15.1 1,666 1,954 17.3Other income 117 301 338 188.2 12.3 416 920 121.3PBT 1,648 1,475 1,611 (2.2) 9.2 4,369 4,886 11.9Tax 288 367 291 0.9 (20.8) 782 1,100 40.7PAT (after minority interest) 1,330 1,100 1,314 (1.2) 19.4 3,497 3,756 7.4Source: Company, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesExhibit 2: BOT revenue – Project-wiseExhibit 1: Financial summaryY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 9,918 17,048 24,381 31,940 45,862EBITDA 4,374 7,990 10,939 13,542 17,247Net profit 1,758 3,855 4,524 4,642 5,967EPS (Rs) 5.3 11.6 13.6 14.0 18.0EPS growth (%) 26.6 119.2 17.4 2.6 28.5EBITDA margin (%) 44.1 46.9 44.9 42.4 37.6PER (x) 32.1 14.7 12.5 12.2 9.5P/BV (x) 3.3 2.8 2.3 2.0 1.6Price/sales (x) 5.7 3.3 2.3 1.8 1.2EV/EBITDA (x) 12.9 7.1 5.2 4.2 3.3Dividend yield (%) 1.0 1.1 0.9 1.2 1.2RoCE (%) 6.2 11.8 9.8 8.4 8.9Source: Company, Nirmal Bang Institutional Equities ResearchBOT revenue – Project-wise (Rsmn) 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 YoY (%) QoQ (%)Mumbai - Pune 808.7 802.1 986.0 997.0 1,000.0 23.7 0.3Surat-Dahisar 954.6 981.5 942.0 939.0 1,063.0 11.4 13.2Bharuch-Surat 347.8 351.0 336.0 347.0 372.0 7.0 7.2TBB - 4 (Mumbra) 138.0 150.3 156.0 145.0 159.0 15.2 9.7Tumkur-Chitradurg - - 114.0 387.0 380.0 - (1.8)Thane - Ghodbunder 72.8 73.8 70.0 69.0 75.0 3.1 8.7Pune - Nashik 55.5 55.0 56.0 55.0 58.0 4.6 5.5Pune - Solapur 35.4 42.0 43.0 39.0 42.0 18.8 7.7NKT 35.9 37.2 37.0 35.0 35.0 (2.6) -Kharpada 19.3 21.3 23.0 19.0 19.0 (1.3) -MMK 19.0 20.5 20.0 19.0 20.0 5.4 5.3Total 2,486.9 2,534.8 2,783.0 3,051.0 3,223.0 29.6 5.6YoY (%) 8.0 8.5 18.7 34.0 29.6 - -Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 3: segment performance(Rsmn) 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 YoY (%) QoQ (%)Revenue 6,805.2 7,898.5 8,295.5 7,659.5 7,792.3 14.5 1.7Construction 4,665.1 5,783.6 5,971.5 5,275.0 5,257.8 12.7 (0.3)BOT 2,140.1 2,114.9 2,324.0 2,384.5 2,534.6 18.4 6.3EBITDA (including other income) 3,052.8 3,375.7 3,576.6 3,515.6 3,754.4 23.0 6.8Construction 1,160.9 1,459.9 1,547.8 1,399.1 1,469.1 26.6 5.0BOT 1,891.9 1,915.8 2,028.8 2,116.4 2,285.3 20.8 8.0Interest costs 819.7 1,398.2 1,174.3 1,411.5 1,419.6 73.2 0.6Construction 161.9 252.4 284.9 319.5 318.3 96.6 (0.4)BOT 657.8 1,145.8 889.5 1,092.0 1,101.3 67.4 0.9Depreciation 585.4 587.2 602.3 628.5 723.7 23.6 15.1Construction 147.1 149.2 137.1 140.2 143.7 (2.3) 2.5BOT 438.3 438.0 465.2 488.3 580.0 32.3 18.8PBT 1,647.7 1,390.3 1,800.0 1,475.6 1,611.1 (2.2) 9.2Construction 851.9 1,058.2 1,125.9 939.4 1,007.1 18.2 7.2BOT 795.8 332.1 674.1 536.2 604.0 (24.1) 12.7Tax expense 288.1 335.6 442.6 366.9 290.7 0.9 (20.8)Construction 274.9 324.4 360.0 284.2 315.7 14.8 11.1BOT 13.1 11.2 82.5 82.7 (25.0) (290.1) (130.2)PAT 1,359.7 1,054.6 1,357.4 1,108.7 1,320.4 (2.9) 19.1Construction 577.0 733.8 765.9 655.2 691.4 19.8 5.5BOT 782.7 320.8 591.5 453.5 629.0 (19.6) 38.7Source: Company, Nirmal Bang Institutional Equities Research38IRB

Institutional EquitiesRatings trackDate Rating Market price (Rs) Target price (Rs)29 September 2011 BUY 163 23511 November 2011 BUY 167 23518 November 2011 BUY 143 23512 January 2012 BUY 137 23539IRB

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Institutional EquitiesIRB Infrastructure26 September 2011Initiating CoverageReuters: IRBI.BO Bloomberg: IRB INOn The Road To SuccessIRB Infrastructure, a premier toll road developer and operator with in-houseintegrated execution capabilities, will be the biggest beneficiary of traction in theroad segment. We believe the company is offering a good blend of growth andsustainable cash flow (EPC business to drive revenue CAGR of 37% betweenFY11-13 and toll revenue will provide sustainable operating cash flow of aroundRs12bn to meet the equity commitment of new projects without equity dilution).We assign a Buy rating and a TP of Rs235 to its stock based on SOTP valuation.Biggest beneficiary of traction in road segment: NHAI is expected to tender roadprojects of around 24,000km in the next three years and has given a clear timeline(with project-wise details) to award projects worth around Rs483bn in the next sixmonths. As India’s largest integrated player in the road space, the company is anatural beneficiary. During the past six months (April 2011 onwards), NHAI hasawarded projects worth Rs 164bn (around 1,851km) in which the company hassecured one mega project worth Rs49bn and is targeting incremental orders worthRs25bn to Rs30bn in FY12 which would translate into around 13% of projects awardedby NHAI in FY12.Strong operating cash flow to drive future growth: IRB Infrastructure has aportfolio of 17 projects with a daily gross toll collection of Rs30mn, which is growing ataround 14-16% per annum. The company has witnessed a significant growth in itsoperating cash flow, from Rs2.5bn in FY08 to Rs10bn in FY11, which is expected tobe in the same range until FY13. On the other hand, for existing projects, the equitycommitment could be in the range of Rs11bn over FY12-13, which could be fundedthrough internal accruals. Thus, existing cash flows are sufficient to meet equityfunding requirements of its projects without any dilution. However, on completion ofexisting projects, the debt/equity ratio would increase to 1.9x in FY13.EPC order book of Rs117bn to drive robust growth: The company has an orderbook of Rs117bn, (7x FY11 construction revenue), which is expected to be executedover the next three years. Robust order book coupled with four projects under activephase (worth Rs46.8bn and executable by FY13), would drive revenue CAGR of 37%over FY11-13. However, we expect the net profit to show a CAGR of 11% due tohigher interest costs and depreciation charges on completion of BOT assets worthRs82bn.SOTP-based target price of Rs235: We assign a Buy rating with a target price ofRs235 to IRB Infrastructure based on SOTP valuation, comprising Rs151 (64% ofSOTP, based on FCFE) for BOT assets and Rs84 (36% of SOTP, PE ratio of 8x) forthe EPC business. Accordingly, we have arrived at a valuation of Rs235.BUYSector: InfrastructureCMP: Rs163Target Price: Rs235Upside: 44%Amit Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 332.4Mkt Cap (Rsbn/US$bn) 54.1/1.152 Wk H / L (Rs) 290/132Daily Vol. (3M NSE Avg.) 1,772,290Share holding (%)3QFY11 4QFY11 1QFY12Promoter 75.0 74.8 74.8FII 13.5 14.3 13.7DII 3.4 3.9 4.0Corporate 4.0 2.6 2.7General Public 4.2 4.5 4.9One Year Indexed Stock PerformanceY/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13ENet Sales 9,919 17,049 24,381 31,941 45,863YoY (%) 35.4 71.9 43.0 31.0 43.6EBITDA 4,374.0 7,990.2 10,939.3 13,542.7 17,247.3EBITDA margin (%) 44.1 46.9 44.9 42.4 37.6Net Profit 1,759 3,855 4,524 4,642 5,967YoY (%) 54.4 119.2 17.4 2.6 28.5EPS (Rs) 5.3 11.6 13.6 14.0 18.0PER (x) 31.0 14.1 12.0 11.7 9.1P/BV (x) 3.2 2.7 2.2 1.9 1.6ROCE (%) 6.2 11.8 9.8 8.4 8.9ROE (%) 10.2 18.9 18.6 16.0 17.1Source: Company, Nirmal Bang Institutional ReearchPrice Performance (%)1 M 6 M 1 YrIRB Infra 3.8 (12.8) (42.7)Nifty Index (1.6) (11.2) (18.3)Source: Bloomberg

Institutional EquitiesExhibit 2: Project portfolioSOTP-based target price of Rs235We assign a Buy rating with a target price of Rs235 to IRB Infrastructure based on SOTP valuation. We havevalued the stock via the SOTP route using FCFE methodology for BOT assets and relative valuation (PE ratio)for the EPC business. We believe the FCFE model is the best way to value road assets as BOT projects havea definite concession period and long-term predictable cash flow with a definite capex and debt repaymentstructure. Accordingly, we have arrived at a value of Rs235, comprising Rs151 (64% of SOTP) for BOT assetsand Rs85 (36% of SOTP) for the EPC business. We have not done any valuation for the company’sinvestment in real estate and airport development, as these projects are still at the planning stage.Exhibit 1: SOTP valuationRs./shareOperational DCF based at CoE of 14% 97Under development DCF based at CoE of 16% 54EPC businesst PE ratio (FY13, 8x) 84Total - 235Source: Company, Nirmal Bang Institutional Equities ResearchBOT assets valued at Rs 151/share (64% of SOTP)Our BOT projects model assumes 5-7% of traffic growth and toll rate increase of 5%. We have discounted theFCFE at a COE of 14% for operational projects and 16% for under-development projects. The BOT businessof IRB Infrastructure has one of the most lucrative portfolios in the industry, with 11 projects currently earningrevenue (construction completed) and six others in the construction phase.Project name Project name Stake Equity value (Rsmn) Rs/shareMhaiskar Infrastructure Mumbai - Pune 100% 10,761 32.4IDAA Infrastructure Bharuch- Surat 100% 5,158 15.5Aryan Toll Road Pune -Solapur 100% 1,045 3.1ATR Infrastructure Pune- Nashik 100% 1,955 5.9IRB Infrastructure Patalganga( Kharpada River Bridge 100% 255 0.8NKT Road & Toll Ahmednagar-Karmala-Temburni Road 100% 555 1.7Thane Ghodbunder Toll Road Thane -Ghodbunder Road 100% 2,291 6.9MMK Toll Road Mohol-Kurul-Kamti-Mandrup Road 100% 408 1.2Ideal Road Builders Thane- Bhiwandi Bypass 100% 2,942 8.9IRB Surat Dahisar Tollway Surat Dahisar 90% 4,045 12.2IRDP Kolhapur IRDP Kolhapur 100% 2,674 8.0Operational projects - total - 32,089 97Projects under implementationIRB Amritsar Pathankot Amritsar Pathankot 100% 3,534 10.6IRB Jaipur Tonk Deoli Jaipur Tonk Deoli 100% 7,271 21.9IRB Talegaon Amravati Talegaon Amravati 100% 3,293 9.9IRB Tumkur Chitrudurga Tumkur Chitudurga 100% 3,829 11.5Total Projects under implementation - 17,927 54.0Total BOT asset portfolio - 50,016 151Source: Company, Nirmal Bang Institutional Equities ResearchTwo operational projects (32% of BOT asset value and 48% of toll revenue)The company has a portfolio of 17 BOT assets, of which 11 projects are operational and 6 are underimplementation. However, two operational projects - Mumbai-Pune and Bharuch-Surat - contribute around48% of toll revenue and 32% of the value of BOT assets. Surat-Dahisar project has started tolling andcontributes around 34% of toll revenue, but the project would be commissioned in 2HFY12. During 1QFY12,theTumkur-Chitradurga project started toll collection and the project would be completed by the end of FY14.The remaining projects account for only 19% of toll revenue. The three new projects (Jaipur – Deoil, Amritsar– Pathankot, Telegaon – Amravati) will start contributing to revenue from 2HFY13. We expect these projectsto account for around 22% of total toll revenue in FY14, which would be the first full year of operations of theseprojects.42IRB

Institutional EquitiesExhibit 3: Project-wise toll revenue trendNet sales (Rsmn) FY09 FY10 FY11 FY12E FY13E FY14EMumbai-Pune 1 2,882.6 3,062.6 3,215.7 3,916.7 4,112.6 4,318.2Bharuch-Surat - 662.8 1,396.5 1,586.3 1,796.4 2,016.7Pune -Solapur 127.1 133.0 147.5 185.4 198.4 219.0Pune -Nashik 164.0 180.7 228.6 250.1 288.0 314.9Patalganga (Kharpada) River Bridge 70.5 67.2 68.6 73.4 78.6 84.1Ahmednagar-Karmala-Temburni Road 113.5 134.6 154.3 165.1 202.2 224.9Thane-Ghodbunder Road 268.6 277.3 330.1 353.2 377.9 489.3Mohol-Kurul-Kamti-Mandrup Road 65.5 63.0 68.6 73.4 89.5 99.5Thane-Bhiwandi Bypass 586.6 567.2 564.1 638.4 683.0 730.6Surat-Dahisar 208.3 2,069.3 2,261.1 2,503.4 2,678.7 2,866.2IRDP Kolhapur - - - 302.5 529.1 566.1Amritsar-Pathankot - - - - - 1,081.0Jaipur Tonk Deoli - - - - 342.1 1,529.3Talegaon- Amravati - - - - - 711.3Tumkur- Chitudurga - - - 223.7 324.6 478.0Total toll collection 4,487 7,218 8,435 10,272 11,701 15,729YoY (%) - 61 17 22 14 34Source: Company, Nirmal Bang Institutional Equities ResearchMumbai-Pune projectThe company secured Mumbai - Pune Expressway and NH-4 projects on BOT basis in August 2004 for aconcession period of 15 years. The project involved four-laning and improvement of NH-4 (completed inSeptember 2006), toll collection and operation and maintenance of Mumbai- Pune Expressway. The total costof the project was Rs13bn, which included an upfront fee of Rs9.2bn to MSRDC (Maharashtra State RoadDevelopment Corporation). The project was funded through equity of Rs1.05bn, debt of Rs11.8bn and internalaccruals of Rs 152mn. This is the most significant asset in the company’s portfolio, which contributes around35% of BOT revenue and 21% of BOT value.Exhibit 4: Mumbai-Pune Expressway details(Rsmn) (%)Project cost 12,920 CoE 14Debt 11,870 Interest rate (Fixed) 10.5Equity 1,050 Equity IRR 68Concession period 15Year Traffic growth 5Equity value 10,761 Toll rate hike 16% (every third year)Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 5: Mumbai-Pune Expressway- financials(Rsmn) FY09 FY10 FY11 FY12E FY13E FY14-20EToll revenue 2,883 3,063 3,216 3,917 4,113 38,194YoY (%) 23.0 6.2 5.0 21.8 5.0 -EBITDA 2,332 2,551 2,618 3,208 3,368 31,301PAT 508 611 840 1,293 1,485 20,601Source: Company, Nirmal Bang Institutional Equities ResearchBharuch-Surat projectThe company got this project in January 2007 to expand and improve NH-8 on BOT basis for a concessionperiod of 15 years. The total project cost was Rs14.6bn, including an upfront fee of Rs5bn to NHAI. Theproject was funded through equity and internal accruals of Rs1.9bn and debt of Rs12.7bn. The project hasstarted tolling from 15 September 2009, contributing around 12% of BOT revenue and 11% of BOT assetvalue.43IRB

Institutional EquitiesExhibit 6: Bharuch-Surat project detailsRsmn (%)Project cost 14,040 COE 14Debt 12,110 Interest rate 10.75Equity 1,930 Equity IRR 32Concession period 15 Years Traffic growth 7Equity value 5,158.22 Toll rate hike WPI linkedSource: Company, Nirmal Bang Institutional Equities ResearchExhibit 7: Bharuch-Surat project financials(Rsmn) FY10 FY11 FY12E FY13E FY14-22EToll revenue 1,396 1,586 1,796 2,017 28,898YoY (%) 111 14 13 12 -EBITDA 1,191 1,384 1,581 1,449 23,023PAT (385) 56 192 342 11,287Source: Company, Nirmal Bang Institutional Equities ResearchEPC segment valued at 8x on PE ratioThe company’s EPC business derives revenue from in-house projects and enjoys a higher margin. For mostconstruction players, road project is a low-margin business where they typically have 8-12% EBITDA margin.However, IRB Infrastructure registers 20-25% margin due to efficiencies it has built up over the years, likemining licence for aggregates, minimal sub-contracting, and its own fleet of construction equipment. We havevalued the E&C business of the company at a PE multiple of 8x FY13E earnings (lower end of five yearhistorical range of 8x-16x for EPC players).Exhibit 8: EPC business performance(Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 5,672 12,124 16,704 20,906 33,322YoY (%) 113.8 37.8 25 .2 59 .4EBITDA 1,013 2,746 4,283 4,704 7,331EBITDA margin (%) 17.9 22.6 25.6 22.5 22.0PAT 490 1,542 2,243 2,341 3,615Order book 58,978 89,592 117,412 - -Source: Company, Nirmal Bang Institutional Equities ResearchMultiples based on consolidated earningsExhibit 9: P/BV valuation trend(x)4.54.03.53.02.52.01.51.00.50.0Sep-08 Jun-09 Mar-10 Dec-10 Sep-11P/B value4 year avgSource: Company, Nirmal Bang Institutional Equities ResearchExhibit 10: P/E valuation trend(x)302520151050Sep-08 Sep-09 Sep-10 Sep-11P/E4 year avgSource: Bloomberg, Nirmal Bang Institutional Equities Research44IRB

Institutional EquitiesExhibit 11: BOT asset portfolioInvestment ArgumentsLeading toll road operator with in-house execution facilitiesIRB infrastructure is a premier toll road developer and operator with in-house integrated project executioncapabilities. The company has 17 road projects (11 are operational and 6 under implementation), or around11% of the Golden Quadrilateral project. The company’s road portfolio, as per lane km, comprises 40% inMaharashtra, 31% in Gujarat, 10% in Karnataka, 9% in Rajasthan, 6% in Punjab and 4% in Goa. It has an inhouseconstruction business which undertakes the construction of road projects and O&M activities, includingtoll collection, pertaining to BOT projects. This not only captures the entire value chain in-house, but alsoreduces the company’s dependence on third-party contractors/sub-contractors. Further, this also enables abetter control over costs, timelines and quality.Project name Toll Length(km) % holding Project cost Project IRR(%) Equity IRR (%)Mumbai - Pune T 206 100% 12,920 21% 68%Bharuch-Surat T 65 100% 14,040 8% 32%Pune -Solapur T 26 100% 630 21% 75%Pune-Nashik T 30 100% 740 30% 221%Patalganga (Kharpada) River Bridge T 1 100% 320 17% 108%Ahmednagar-Karmala Temburni Road T 60 100% 368 27% 61%Thane-Ghodbunder Road T 15 100% 2,485 12% 61%Mohol-Kurul-Kamti-Mandrup Road T 33 100% 180 35% 84%Surat-Dahisar T 240 90% 25,870 6% 30%IRDP Kolhapur T 50 100% 4,300 3% 20%Panaji, Goa T 65 100% - - -Amritsa-Pathankot T 102 100% 14,417 10% 13.0%Jaipur Tonk Deoli T 146 100% 17,057 11% 16.2%Talegaon Amravati T 102 100% 8,851 11% 18.8%Tumkur-Chitradurga T 114 100% 10,800 14% 18%Ahmedabad-Vadodara T 108 100% 49,200 - -Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 12: BOT project detailsProjectRevenue share/Fee/GrantConcessionConcessionperiod(yrs)endingToll rate hikeMumbai-Pune Upfront payment to MSRDC of Rs9.2bn 15 Aug-2019 18% every third yearBharuch-Surat Upfront fee to NHAI Rs5bn 15 Jan2022 WPI linked, reset every year(July)Thane Bhiwandi Bypass 18.5 May-2017 5-6% escalationThane Ghodbunder Upfront fee to MSRDC of Rs1.4 bn 15 Dec-2020 5-6% escalationPune-Solarpur 16 Mar-2019 5-6% escalationPune Nashik 18 Sep-2021 5-6% escalationKarmala-Tembhurni 15 Dec-2015 5-6% escalationKharpada Bridge 17.8 Aug-2015 5-6% escalationMohol-Mandrup 16 May-2016 5-6% escalationSurat -Dahisar Revenue share of 38% 12 Feb-2021 WPI linked, reset every (September)IRDP Kohlapur Negative grant of Rs270mn 30 Jan-2039 5-6% escalationTumkur Chitradurga 26 Jun-2037 3% +40% of WPIUnder ConstructionTalegoan-Amravati Grant of Rs2.16bn 22 2031 3% +40% of WPIJaipur Tonk Deoli Grant of Rs3.06bn 25 2034 3% +40% of WPIAmritsar Pathankot Grant of Rs3.06bn 20 2029 3% +40% of WPIGoa-Panaji3% +40% of WPIAhmedabad--Vadodara Premium of Rs 3.09bn 24 3% +40% of WPISource: Company, Nirmal Bang Institutional Equities Research45IRB

Institutional EquitiesExhibit 13: BOT toll revenue trend(Rsmn) (%)3,000302,500252,000201,50015Exhibit 14: Project- wise toll revenue trend (1QFY12)Pune - Solapur; 1.5BOT Revenue (%)Pune - Nashik; 2.0NKT; 1.3 Kharpada; 0.8Thane - Ghodbunder;MMK; 0.72.5Tumkur-Chitradurg; 4.1Mumbai - Pune; 35.4TBB - 4 (Mumbra); 5.61,000500105Bharuch-Surat; 12.1-1QFY11 2QFY10 3QFY10 4QFY10 1QFY12BOT revenue%YoY0Surat-Dahisar; 33.8Source: Company, Nirmal Bang Institutional Equities ResearchSource: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 15: State-wise market shareIRB Infrastructure is top beneficiary of traction in road segmentNHAI is expected to tender road projects of around 24,000km in the next three years, of which around6,000km is expected to be awarded in the next six months. During the past six months (April 2011 onwards),NHAI has awarded projects worth Rs164bn (around 1,851km) and has given a clear timeline (with project wisedetails) to award projects worth around Rs483bn in the next six months. Out of the recently awarded projects,the company has already secured one mega project worth Rs49bn (construction cost Rs36bn) with aconcession period of 25 years. The company is targeting incremental orders worth Rs25bn to Rs30bn inFY12, which translates into 13% of projects that will be awarded by NHAI during the year. As one of India’slargest integrated players in the road space, the company would be a natural beneficiary of the multi-foldopportunity in the sector.States Maharashtra Gujarat Rajasthan Punjab Karnataka GoaNH/SH NH 3,4,8,9,17,50, SH,141,149 NH 8 , NE-1 NH12 NH15 MH 4 NH 4ATotal km 633 390 146 102 114 69Total lane km 2672 2095 585 410 684 276Road Portfolio as per lane km (%) 47 19 10 7 12 5GQ length in km (comprising 11.07% of total GQ length) 246 287 - - 114 -Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 16: NHDP project statusPhaseI II III IV V VI VIITotal length (KM) 7,609 7,300 12,109 14,799 6,500 1,000 700 50,017Completed till date (KM) 7,076 5,683 2,294 0 596 - - 15,649Completion rate as a % of total 93.0 77.8 18.9 - 9.2 - - 31.3Completion from 30 April 2010- 31 March 2011 (KM) 97 616 645 - 353 - - 1,711Under implementation (UI) (KM) 513 1,038 5,805 765 1,918 0 41 10,080UI as a % of total 6.7 14.2 47.9 5.2 29.5 0.0 5.9 20.2Balance length for award (BFA) (KM) 20 421 4,010 14,034 3,986 1,000 659 24,130BFA as a % of total 0.3 5.8 33.1 94.8 61.3 100.0 94.1 48.2Investments ($ bn) 1.26 6.60 9.97 8.85 3.71 3.71 34.09Source: NHAI, Company, Nirmal Bang Institutional Equities ResearchTotal46IRB

Institutional EquitiesExhibit 18: Operating cash flow trendExhibit 17: Projects likely to be awardedProject cost break up (Rsbn) RFP stage RFQ stageNHAI projects - Phase III 17.4 27.3Phase IV,IVA & IV B 32.5 135.4Phase V 51.3 28.4Phase VI - 11.3Phase VII - 2.7Nhai projects - BOT (annuity) - 7NHAI projects -OMT - 5.4NE-II - 26.9Other clients 18.8 51.7Total 120 296.1Source: NHAI, Company, Nirmal Bang Institutional Equities ResearchStrong operating cash flow for financing equity commitmentIRB Infrastructure has a portfolio of 17 projects (11 projects are operational and 6 under implementation) witha daily gross toll collection of Rs30mn, which is growing at around 14-16% per annum. On the other hand, forthe existing projects, including the recently awarded ultra mega project, the equity commitment could be in therange of Rs11bn over FY12-13, which could be funded through internal accruals. Thus, existing cash flowsare sufficient to meet equity funding requirement of its projects without any dilution.Y/E March (mn) FY08 FY09 FY10 FY11 FY12E FY13EEBIT 3,623 3,526 6,661 9,331 9,678 12,166(Inc.)/Dec in working capital (1,586) (1,421) 1,849 1,314 (957) (610)Cash flow from operations 2,038 2,105 8,510 10,645 8,721 11,556Other income 1,435 1,148 2,009 2,918 761 837Depreciation 1,016 1,144 1,819 2,254 3,865 5,081Interest paid (-) (1,958) (1,377) (2,494) (3,572) (4,183) (4,862)Tax paid (-) (412) (405) (812) (1,463) (1,587) (2,115)Dividends paid (-) (15) (223) (429) (753)Net cash from operations 2,104 2,393 8,604 10,027 7,577 10,497Source: NHAI, Company, Nirmal Bang Institutional Equities ResearchHowever, on completion of existing projects, its debt/equity ratio would increase to 1.9x in FY13 (excluding thedebt of the recently won Ahmedabad-Vadodara mega project). If we include the debt of the mega project, thedebt-equity ratio would increase to 2.3x in FY16, without considering the incremental project. This wouldrestrain growth and may lead to equity dilution.Exhibit 19: Debt/equity ratio(x)2.502.001.90 1.931.861.501.44 1.431.000.50-FY09 FY10 FY11 FY12E FY13ESource: Company, Nirmal Bang Institutional Equities Research47IRB

Q1FY10Q2FY10Q3FY10Q4FY10FY101QFY112QFY113QFY114QFY11FY111QFY12Institutional EquitiesPartially hedged against sharp rise in interest rateDuring the past one year, Reserve Bank of India raised its key policy rate 12 times to 8.25%. This hasincreased the interest outflow for construction and infrastructure companies. However, IRB Infrastructure ishedged to some extent from the rise in interest rates. As many as 6 out of its 11 operational projects are debtfree and 21% of total debt (Mumbai-Pune Expressway) is fixed at 10.6% for the remaining tenure of the loan.Other projects which are in the construction phase like Surat-Dahisar project (around 10% of total debt) andthree new projects, namely Talegaon-Amravati, Amritsar-Pathankot and Panaji-Goa, are fixed at 10.5% for theconstruction period of 30 months, or the end of construction, whichever is earlier.Exhibit 20: Interest outflow vs average interest rate trend(Rsmn) (%)6,0005,0004,0003,0002,0001,000-FY08 FY09 FY10 FY11 FY12E FY13E1098765Interest outflowAverage interest rateSource: Company, Nirmal Bang Institutional Equities ResearchRobust EPC order book of Rs117bn to drive revenue growthThe company has order book of Rs117bn (EPC order book of Rs96.5bn and O&M order book (operation andmaintenance of operational toll based projects) of Rs 20.8bn) to be executed over the next 3-4 years. EPCdivision’s order backlog stayed flat during 2QFY10-3QFY11, as it managed to win only one project in FY11(Tumkur-Chitradurga). Ahmedabad-Vadodara project increases the company’s backlog from Rs90bn at theend of 3QFY11 to around Rs119bn, improving revenue visibility. The company registers higher EBITDAmargin for the EPC division, in the range of 18-25%, as compared to industry average of 8-12%. This isprimarily driven by lower sub-contracting, large fleet of equipment, and stone aggregates from its own mines(40-42% of raw material costs for constructing roads).Exhibit 21: Order book trend –segment wise(Rsmn)140120100806040200EPC Ongoing BOT Project BOT Projects in O&M Phase BOT projects-LOA received (Const yet to commence)Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 22: EPC segment financial trend(Rsbn) (%)3530303325252021151720101256-15FY09 FY10 FY11 FY12E FY13ENet sales (LHS)EBIDTAM % (RHS)Source: Bloomberg, Nirmal Bang Institutional Equities Research48IRB

Institutional EquitiesExhibit 23: Project- wise order book1.36.431.610.89.7(%)Ahmedabad VododraTumkur ChitradurgaSurat DahisarIRDP kohlapurPanji GoaAmritsar PathankotJaipur Tonk DeoliExhibit 24: Order book trendAmount (Rsbn)Ongoing BOT projects 46.87BOT projects in O&M phase 20.76BOT projects-LOA received, construction yet to commence 44.07Total 111.7Talegaon Amravati6.50.35.59.3Sindhudurg AirportSource: Company, Nirmal Bang Institutional Equities ResearchSource: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 25: Company StructureSource: Company, Nirmal Bang Institutional Equities Research49IRB

Institutional Equities1QFY12 performanceReported robust revenue growth of 57% (YoY) driven by the construction business. Construction revenuerose by 81% due to pick-up in project execution.EBITDA margin, at blended level, declined by 760bps to 41% due to higher revenue from the lowermargin segment (EPC).Interest costs rose by 77.6% due to increased draw-down of debt for the Surat-Dahisar project.Exhibit 26: Quarterly performanceRsmn 1QFY11 4QFY11 1QFY12 (YoY %) (QoQ %)Net sales 5,120 7,670 8,013 56.5 4.5Total expenditure 2,627 4,523 4,719 79.6 4.3EBITDA 2,493 3,147 3,295 32.2 4.7EBITDA margin (%) 48.7 41.0 41.1 - -Interest costs 661 1,398 1,174 77.6 (16.0)PBDT 1,832 1,749 2,120 15.7 21.2Depreciation 537 587 602 12.1 2.6Other income 217 229 282 30.0 23.1PBT 1,512 1,390 1,800 19.0 29.5Tax 303 336 443 46.2 31.8PAT(before minority interest) 1,209 1,055 1,358 (52.0) (41.0)Minority interest 33 27 16 (51.5) (40.7)PAT(after minority interest) 1,176 1,028 1,342 14.1 30.5Source: Company, Nirmal Bang Institutional Equities Research50IRB

Institutional EquitiesFinancial performanceExhibit 27: Revenue trend segment-wise(%)120100806040200Revenue to witness a CAGR of 37% during FY11-13Out of Rs117bn order book of the EPC segment, Rs46.8bn worth of projects are in active stage ofconstruction and would be completed by FY13, while Rs36bn worth Ahmedabad-Vadodara project wouldbegin construction from 1QFY13, which has improved long-term revenue visibility. Based on this, we expectthe EPC segment’s revenue to show a CAGR of 41% between FY11-13. BOT toll revenue is expected towitness a CAGR of 19%, primarily driven by revision in toll rate and completion of projects. Subsequently, weexpect net sales to show a CAGR of 37% to Rs31.9bn and Rs45.8bn in FY12 and FY13, respectively.44 39 33 3356 61 67 67FY09 FY10 FY11 FY12 FY13ConstructionBOT Toll RevenueSource: Company, Nirmal Bang Institutional Equities ResearchEBITDA to register CAGR of 26%2674Exhibit 28: Revenue growth trend(Rsmn) (%)50,00045,00040,00035,00030,00025,00020,00015,00010,0005,000-FY09 FY10 FY11 FY12E FY13ENet sales% YoYSource: Bloomberg, Nirmal Bang Institutional Equities ResearchWe expect EBITDA to grow at a CAGR of 26% to Rs 13.5bn in FY12 and 17.2bn in FY13 primarily driven byrobust growth in revenue. However, EBITDA margin would come down by 700bps to 38% in FY13 from 45%in FY11 due to increase in the contribution of low margin EPC segment’s revenue to total revenue, from 67%in FY11 to 74% in FY13.Exhibit 29: Consolidated EBITDA margin trendExhibit 30: EBITDA and EBITDA growth80706050403020100(%)50484644424038363432FY09 FY10 FY11 FY12E FY13ESource: Company, Nirmal Bang Institutional Equities Research(Rsmn)(%)20,0004818,0004616,0004414,0004212,0004010,000388,0006,000364,000342,00032-30FY09 FY10 FY11 FY12E FY13EEBITDAGrowth(YoY)Source: Bloomberg, Nirmal Bang Institutional Equities ResearchNet profit to register CAGR of 11%Five BOT projects worth Rs82bn would be operational over FY12 to FY13, which would increase thedepreciation and interest costs. Subsequently net profit growth would be subdued and grow at a CAGR of11% between FY11 to FY13. The decline in profitability and increase in debt post commissioning of BOTassets would depress the return ratios over the same period. We expect the RoE to come down by 160bps to17.3% and RoCE by 90bps to 8.9% in FY13 over FY11.51IRB

Institutional EquitiesExhibit 31: Return ratio trend(%)201816141210864FY09 FY10 FY11 FY12E FY13ERoE (%) RoCE (%)Exhibit 32: Project detailsSource: Company, Nirmal Bang Institutional Equities ResearchAppendixUltra-mega Ahmedabad-Vadodara project – Call on traffic diversionIRB Infrastructure recently won NHAI’s Ahmedabad-Vadodara project worth Rs49bn. The project comprisessix-laning of the two-lane Ahmedabad-Vadodara section of NH-8 (102km) and improvement of existingAhmedabad-Vadodara Expressway (93km). The project would be based on the Design-Build-Finance-Operate-Transfer toll (DBFOT) basis with a concession period of 25 years. The total construction cost of theproject is estimated at Rs36bn over a three-year period, starting from 1QFY13. The company’s bid to pay anannual premium of Rs3.1bn (annual increase of 5%) for tolling rights seems to be aggressive when comparedwith the L2 bidder.CategoryScope of the projectProject costConcession periodToll collection rightsTrafficRevenuePremium payable to NHAIDetailsSix-laning of Ahmedabad-Vadodara section on NH-8 (102km) and improvement of existing Ahmedabad-Vadodara expressway (93 km)Total project cost Rs49.2 bn (includes construction cost of Rs35bn)25 years ( including construction period of three years)Toll collection of expressway from April 2012 and from NH-8 on completion of construction.Management expects 47kPCUs on NH-8 and 37k PCUs on expressway in FY11.Management expects Rs1.4bn revenue in FY13 (from expressway) and toll collection on the NH-8 of Rs5.5bn in FY16.Rs3.1bn in FY13, going up by 5% every year.Source: Company, Nirmal Bang Institutional Equities ResearchIRR of 14% with 30% traffic diversionNH-8 and the Expressway are competing roads. On completion of NH-8 in FY16, projected toll rate will be50% higher than the Expressway. This could lead to a traffic diversion to the Expressway and could potentiallyreduce returns due to lower utilisation of NH-8. The company has factored in 20% diversion while bidding andhad targeted an IRR of 16%. However, we have factored in 30% of diversion and an IRR of 14%, at Rs14/share, which we have not included in our valuation. We expect the project to incur losses in the first nineyears of its operations.Exhibit 33: Project specificationsParameterDetailsTotal length of road (km) 195Six laning of Ahmedabad-Vadodara section of NH-8 102Improvement of existing Ahmedabad-Vadodara expressway 93Total project cost (Rsbn) 49.2Debt(Rsbn) 36.4Equity (Rsbn) 12.8Rs/share (based on DCF) 14Source: Company, Nirmal Bang Institutional Equities Research52IRB

Institutional EquitiesFinancialsExhibit 34: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 9,919 17,049 24,381 31,941 45,863% growth 35.4 71.9 43.0 31.0 43.6Raw material costs 4,682 7,851 11,812 15,884 24,884Staff costs 425 710 929 1,375 2,120Other expenses 438 497 700 1,140 1,611Total expenditure 5,545 9,058 13,442 18,398 28,615EBITDA 4,374 7,990 10,939 13,543 17,247Growth (%) 6.2 82.7 36.9 23.8 27.4EBITDA margin (%) 44.1 46.9 44.9 42.4 37.6Other income 296 490 645 761 837Interest 1,377 2,494 3,572 4,183 4,862Gross profit 3,293 5,986 8,012 10,121 13,222Growth (%) 22.8 81.8 33.9 26.3 30.6Depreciation 1,144 1,819 2,254 3,865 5,081Profit before tax 2,149 4,167 5,759 6,256 8,141Tax 378 133 1,118 1,587 2,115Effective tax rate (%) 17.6 3.2 19.4 25.4 26.0Net profit 1,772 4,034 4,641 4,669 6,025Growth (%) 40.0 127.7 15.0 0.6 29.1Minority interest 13 179 117 27 58Net profit after MI 1,759 3,855 4,524 4,642 5,967Growth (%) 54.4 119.2 17.4 2.6 28.5Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 36: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity 3,324 3,324 3,324 3,324 3,324Reserves 13,977 17,075 21,002 25,644 31,611Net worth 17,301 20,399 24,326 28,968 34,935Minority Interest 599 779 896 922 981Short-term loans 117 117 5,116 7,675 11,512Long-term loans 24,741 29,035 41,139 48,322 53,502Total loans 24,859 29,152 46,255 55,997 65,014Deff. tax liablity (net) 182 267 232 232 232Total liabilities 42,940 50,597 71,709 86,119 101,161Gross block 24,601 40,185 41,317 62,494 83,870Depreciation 4,440 5,511 7,695 11,560 16,641Net block 20,161 34,674 33,622 50,934 67,229Capital work-in-progress 14,545 8,802 25,085 25,085 25,085Long-term investments 1,108 451 551 633 728Inventories 2,054 1,698 1,638 2,625 3,770Debtors 130 297 397 525 754Cash 4,147 5,102 12,000 8,068 6,109Other current assets 3,995 4,380 6,349 8,751 12,565Total current assets 10,326 11,477 20,383 19,969 23,198Creditors 1,303 1,587 4,842 6,126 8,796Other current liabilities 1,908 3,229 3,099 4,375 6,283Total current liabilities 3,210 4,816 7,941 10,501 15,078Net current assets 7,116 6,661 12,443 9,468 8,120Misc. expenses. 10 9 9 - -Total assets 42,940 50,597 71,709 86,119 101,161Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 35:Cash flowY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 3,526 6,661 9,331 9,678 12,166Inc./(dec) in working capital (1,421) 1,849 1,314 (957) (610)Cash flow from operations 2,105 8,510 10,645 8,721 11,556Other income 1,148 2,009 2,918 761 837Depreciation 1,144 1,819 2,254 3,865 5,081Interest paid (-) (1,377) (2,494) (3,572) (4,183) (4,862)Tax paid (-) (405) (812) (1,463) (1,587) (2,115)Dividends paid (-) (223) (429) (753) - -Net cash from operations 2,393 8,604 10,027 7,577 10,497Capital expenditure (-) (8,114) (10,604) (17,510) (21,177) (21,377)Net cash after capex (5,721) (2,000) (7,483) (13,600) (10,880)Inc./(dec.) in long-term borrowing 2,676 2,574 20,685 9,742 9,017Inc./(dec.) in investments 2,047 381 (6,382) (83) (95)Equity issue/(buyback) (96) 0 (4) - -Cash from financial activities 4,626 2,955 14,380 9,668 8,922Change in cash (1,095) 955 6,898 (3,932) (1,958)Opening cash 5,221 4,147 5,102 12,000 8,068Closing cash 4,147 5,102 12,000 8,068 6,109Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 37:Key ratiosY/E March FY09 FY10 FY11 FY12E FY13EEPS (x) 5.3 11.6 13.6 14.0 18.0ValuationsPE ratio (x) 31.0 14.1 12.0 11.7 9.1Price /CEPS (x) 18.8 9.6 8.0 6.4 4.9Price / BV (x) 3.2 2.7 2.2 1.9 1.6EV /sales (x) 7.5 4.6 3.6 3.2 2.5EV /EBITDA (x) 12.5 6.8 5.0 4.0 3.2Margins (%)EBIDTA margin 44.1 46.9 44.9 42.4 37.6EBIT margin 32.6 36.2 35.6 30.3 26.5PBT margin 21.7 24.4 23.6 19.6 17.8Net margin 17.7 22.6 18.6 14.5 13.0Returns (%)RoCE 6.2 11.8 9.8 8.4 8.9RoNW 10.2 18.9 18.6 16.0 17.1Working capital T/O daysInventory T/O 75.6 36.3 24.5 30.0 30.0Debtors T/O 4.8 6.4 5.9 6.0 6.0Loans and adv. T/O 147.0 93.8 95.0 100.0 100.0Creditors T/O 47.9 34.0 72.5 70.0 70.0DuPont methodNPM (PAT/sales) 0.2 0.2 0.2 0.1 0.1Total asset T/O 0.2 0.3 0.3 0.4 0.5Equity multiplier 2.5 2.5 2.9 3.0 2.9Gearing ratioNet debt/equity (x) 1.1 1.2 1.4 1.6 1.7Total debt/equity (x) 1.4 1.4 1.9 1.9 1.9Source: Company, Nirmal Bang Institutional Equities Research53IRB

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Institutional EquitiesGMR Infrastructure9 February 2012Reuters: GMRI.BO; Bloomberg: GMRI IN3QFY12 Result UpdatePerformance Broadly in Line Barring Exceptional ItemGMR Infrastructure reported 3QFY12 net sales growth of 47% at Rs 19.9bn,primarily driven by robust growth in the airport and EPC segments, while otherincome rose 550% to Rs952mn driven by an exceptional item of Rs372mn.However, EBITDA increased 17.9% (lower than revenue growth) to Rs 4.49bn dueto an exceptional item of Rs 1.15bn included in operational expenses. As aresult, the company reported a net loss of Rs1.08bn for 3QFY12, (higher thanBloomberg estimate of a loss of Rs631mn and our estimate of a loss ofRs548mn). If we adjust for the exceptional item, net loss stands at Rs 291mn,which is below our estimate. We have revised our FY12E earnings estimatesdownwards from a net profit of Rs816mn to a net loss of Rs2.88bn and FY13Enet profit of Rs3.22bn (lower by 32.6% from Rs4.78bn). However, we maintain ourBuy rating on the stock with a target price of Rs39 based on SOTP valuation.Key highlights of segment-wise performance:The airport segment reported robust net revenue growth of 43% YoY at Rs8.94bnand EBITDA increased 44% YoY to Rs2.5bn, while EBITDA margin was flat at28% on the back of strong traffic growth across Delhi, Hyderabad and Maleairports. However, the airport segment reported a loss because of capacitycharges of Delhi airport post commercialisation, posting net loss of Rs1.15bn. Webelieve the airport segment is performing well on the operational matrix front andpost revision of aero tariff, the segment will start reporting profit.Power revenue rose 17% YoY Rs5.92bn (up 17% YoY), but EBITDA declined37% YoY to Rs 508mn due to an exceptional item of Rs180.7mn and lower PLF(plant load factor) because of shortage of gas.Road segment reported muted revenue growth of 3% YoY in the southern regionat 1bn due to the monsoon season.The EPC segment reported revenue of Rs4bn (up 389% YoY, 40% QoQ) primarilyled by execution of construction works at Rajahmundry power project.Valuation: We believe the company would report net loss even in 4QFY12, primarilydue to higher capacity charges at Delhi airport. However, the consultation paperrecently released by the regulator has proposed a revision in aero charges from 1April’2012, which will enable the company to post a net profit and eliminate theregulatory overhang relating to the airport sector. However, regulatory uncertaintyrelated to fuel availability for the power sector remains, but the government has givenan assurance of a positive solution to the issue. We believe the concerns of power andairport sectors have been largely priced in the CMP and clarity on these issues will bepositive for GMR. We maintain our Buy rating on the stock with a target price of Rs39.BUYSector: InfrastructureCMP: Rs31Target Price: Rs39Upside: 26%Amit Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 3,892.4Mkt Cap (Rsbn/US$bn) 121.2/2.552 Wk H / L (Rs) 45/18Daily Vol. (3M NSE Avg.) 7,031,538Price Performance (%)1 M 6 M 1 YrGMR 36.9 5.2 (13.4)Nifty Index 12.9 4.9 1.0Source: BloombergY/E March (Rsmn) 3QFY11 2QFY12 3QFY12 YoY (%) QoQ (%) 9MFY11 9MFY12 YoY (%)Net sales 13,588 18,123 19,993 47.1 10.3 38,118 56,751 48.9Total expenses 9,775 13,109 15,499 58.6 18.2 26,970 42,264 56.7EBITDA 3,813 5,014 4,494 17.9 (10.4) 11,148 14,487 30.0EBITDAM (%) 28.1 27.7 22.5 - - 29.2 25.5 -Other income 146 700 952 550.4 36.0 962 2,463 156.1Depreciation 2,357 2,675 2,678 13.6 0.1 5,998 8,112 35.2Interest costs 2,941 3,922 4,239 44.1 8.1 7,815 11,885 52.1PBT (1,339) (884) (1,472) - - (300) (3,047) -Tax (820) 586 443 - - (525) 1,683 -RPAT (519) (1,470) (1,915) - - 225 (4,730) -PAT (Post MI) (223) (625) (1,078) - - 773 (2,369) -Source: Company, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesExhibit 1: Financial summaryY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 40,192 45,665 57,738 74,958 1,05,535YoY (%) 75.1 13.6 26.4 29.8 40.8EBITDA 10,668 13,643 15,553 19,967 40,252EBITDAM (%) 26.5 29.9 26.9 26.6 38.1Adj. net profit 2,794 1,581 (1,313) (2,888) 3,224EPS growth (%) 33 (43) (183) NA NAAdj. EPS 0.72 0.41 NA NA 0.83P/BV (x) 0.9 1.8 1.3 1.3 1.3PER (X) 43 76 NA NA 37EV/EBITDA 19.0 19.5 19.3 18.9 10.0RoE (%) 4.3 2.4 NA NA 4.2RoCE (%) 5.2 4.6 4.3 5.0 9.4Source: Company, Nirmal Bang Institutional Equities ResearchChange in earnings estimatesWe have revised our revenue estimate upward by 5.4% for FY12E to factor in higher fuel revenue at Male airportand also higher revenue from the EPC segment. However, we downgrade EBITDA by 7.7% for FY12E due tolower PLF at power plants, and also increased share of EPC and fuel revenue in top-line, which has lower margin.Subsequently, our earnings estimate has changed from a net profit of Rs816mn to a net loss of Rs2.88bn forFY12E. For FY13E, we raise our EBITDA estimate by 6% driven by the revision in aero tariff, but reduce net profitestimate by 32.6% to Rs 3.22bn due to increase in interest costs and higher tax provisioning. Despite change inearnings estimates; we have maintained our target price of Rs39 based on SOTP valuation.Exhibit 2: Change in earnings estimates(Rsmn) Old New Variation (%)Y/E March FY12E FY13E FY12E FY13E FY12E FY13ENet sales 71,096 1,05,284 74,958 1,05,535 5.4 0.2EBITDA 21,644 38,014 19,967 40,252 (7.7) 5.9PAT (post MI) 816 4,784 (2,888) 3,224 - (32.6)Source: Company, Nirmal Bang Institutional Equities ResearchExceptional item- negative impact of Rs 787mnThe company has reported exceptional item of Rs 1.15bn which is included in operating expenses and incomefrom stake sale in IPC of Rs 387mn which is included in other income. This has a net negative impact in our P&Laccount to the tune of Rs787mn. We believe most of item are non-recurring in nature and we have not taken theminto consideration for our future earnings estimates.Exhibit 3: Details of exceptional itemExceptional items – negative impact on P&LAmount (Rsmn)Accounting National Aviation Company India (NACIL) receivables in DIAL and GHIAL on receipt 504Charges for non-recovery of ADF collection charges in DIAL 105GEL provision towards receivables from BPCL, pending settlement of a dispute 190Payment of customs duty by GEL under protest for import of replacement hot path for gas turbine 190Interest charges on account of loan borrowed for Sinar Mas acquisition, corresponding revenues of whichwill be consolidated from next quarterTotal negative impact in P&L 1,159Exceptional Items – positive Impact in P&LIncome recognised on 30% stake sale in Island Power (IPC) to Petronas 372Net impact- negative in P&L 787Source: Company, Nirmal Bang Institutional Equities Research17056GMR

Institutional EquitiesSegmental performanceAirport segment: Robust traffic growthDelhi International Airport (DIAL) has reported traffic growth of 29% YoY at 9.96mn and reported EBITDAmargin of 26% for the quarter, but due to higher capacity charges DIAL has reported net loss of Rs2.28bn.Hyderabad airport has reported traffic growth of 12% YoY at 2.27mn and reported EBITDA margin of64%.Turkey witnessed muted traffic growth of 6% YoY at 3.2mn due to seasonality factors and reportedEBITDA margin of 53%.Male airport reported traffic growth of 27% QoQ at 0.76mn and reported blended margin of 12%.Exhibit 4: Airport segment’s performanceRsmn 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 YoY (%) QoQ (%)Net revenue 6,263 8,715 8,429 8,687 8,944 43.0 3.0EBITDA 1,740 2,059 2,476 2,649 2,503 44.0 (6.0)EBITDA margin (%) 27.8 23.6 29.4 30.5 28.0 - -PAT(Before minority interest) (578) (1,740) (1,697) (2,104) (2,042) - -PAT(After minority interest) (308) (893) (924) (1,087) (1,152) - -Source: Company, Nirmal Bang Institutional Equities ResearchPower segment: Lower PLFs due to maintenance shutdown and short of gas supplyPlants have operated at lower PLFs due to shortage of gas and maintenance shutdown. (GPCPL(Chennai) operated at PLF of 55%, Vemagiri operated at 39%, and GEL (barge-mounted) plant operatedat 58%. Merchant tariff was Rs3.85/unit for the quarter.The company continued to make progress on the Rajahmundry gas-based power project (90-92 %completed), which is expected to be commissioned by the end of 4QFY12. However, gas supply for thisproject remains uncertain.Exhibit 5: Power segment’s performanceRsmn 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 YoY (%) QoQ (%)Gross revenue 5,066 6,011 6,875 5,432 5925 17.0 9.1EBITDA 811 1,055 1,327 905 508 (37.4) (43.9)EBITDA margin (%) 16.0 18.0 19.0 17.0 9.0 - -PAT 322 370 483 76 (843) - -PAT after minority interest 316 278 404 (93) (886) - -Source: Company, Nirmal Bang Institutional Equities ResearchRoad, EPC and other segmentsRoad segment reported revenue growth of 3.3% at 1bn YoY on account of traffic growth of 3% across theboard.The EPC segment reported revenue of Rs4bn (up 389% YoY, 40% QoQ) primarily led by execution ofconstruction works at Rajahmundry power project.Exhibit 6: Road segment’s performance(Rsmn) 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 YoY (%) QoQ (%)Gross revenue 983 989 1,003 1,002 1015 3.3 1.3EBITDA 823 786 854 868 878 6.7 1.2EBITDA margin (%) 84.0 79.0 85.0 87.0 87.0 - -PAT (108) 16 (25) 11 (12) - -PAT (post MI) (126) 1 (51) (13) (42) - -Source: Company, Nirmal Bang Institutional Equities Research57GMR

Institutional EquitiesRatings track - GMR InfrastructureDate Rating Market price (Rs) Target price (Rs)26 September 2011 BUY 28 3929 September 2011 BUY 27 3911 November 2011 BUY 26 3911 November 2011 BUY 23 3918 November 2011 BUY 21 396 January 2012 BUY 23 3912 January 2012 BUY 28 3958GMR

Institutional EquitiesGMR Infrastructure26 September 2011Initiating CoverageReuters: GMRI.BO; Bloomberg: GMRI INOn Recovery PathGMR Infrastructure, a leading infrastructure company, has underperformed theNifty in the past three years by 55% because of multiple issues like BalanceSheet concerns post leveraged buyout of Intergen, funding constraints for megaexpansion plan, overhang of regulatory issues and pressure on profitability.Looking at the recent developments like adequate raising of capital for near-termexpansion, sale of Intergen stake and expected other positive developments likeimprovement in profitability and clarity on regulatory issues, we believe theconcerns have been largely priced in the CMP of GMR Infrastructure andprovides a good investment opportunity for long-term investors. We assign aBuy rating and a target price of Rs39 to the stock based on SOTP valuation.Blend of improvement in profitability and growth: Post commercial operations ofprojects like Delhi airport, Turkey airport and shifting of Barge mount power plant, thecompany has started incurring losses due to higher capacity charges. We believerobust growth in traffic coupled with cost-cutting measures will improve profitability andloss-making projects will turn FCF positive in FY12, staging a turnaround in the nexttwo years (favourable tariff outcome at Delhi airport to expedite the process). Threethermal power projects of 2.7GW are in advanced stage of construction and slated forcommercial operations in FY12-13, which will drive growth.Projects under construction well funded: The company has divested stake andbooked all losses pertaining to Intergen in 4QFY11, which has released equity capitalof Rs 9.58bn and eased rising leverage concerns. Apart from this, the company hasraised around $950mn (for power and airport subsidiary), which is sufficient to meetthe near-term funding requirements of the project pipeline.Clarity expected on regulatory issues: The company continues to face a lot ofregulatory issues like enhanced project costs, renewal of suspended ADF andincremental ADF of Rs17bn, rate of return on regulated base and gas/coal availabilityfor power projects under construction. We believe the current market price seems tobe factoring in most of these uncertainties and our earnings model is based on a worstcase scenario. Hence, clarity on these issues, which is expected in the next two-threemonths, will be positive for the stock.Valuation: We assign a Buy rating and a SOTP-based target price of Rs39 to GMRInfrastructure. In our target price, 75% is contributed by operational projects and theremaining 25% from projects at various stages of development. Key contributors to ourTP of Rs39 comprise Rs20 from airports business (including real estate), Rs14 frompower generation and coal mining, and Rs3 from the road segment.BUYSector: InfrastructureCMP: Rs28Target Price: Rs39Upside: 39%Amit Srivastavaamit.srivastava@nirmalbang.com+91-22-3926 8116Nitin Aroranitin.arora@nirmalbang.com+91-22-3926 8169Key DataCurrent Shares O/S (mn) 3,892.4Mkt Cap (Rsbn/US$bn) 110.4/2.252 Wk H / L (Rs) 61/26Daily Vol. (3M NSE Avg.) 4,080,979Share holding (%)3QFY11 4QFY11 1QFY12Promoter 70.7 71.2 71.4FII 13.2 12.8 12.6DII 8.3 8.2 8.1Corporate 1.4 1.2 1.2General Public 6.4 6.7 6.8One Year Indexed Stock PerformanceY/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13ENet Sales 40,192 45,665 57,738 71,096 105,284YoY (%) 75.1 13.6 26.4 23.1 48.1EBIDTA 10,668 13,643 15,553 21,644 38,014EBIDTAM (%) 26.5 29.9 26.9 30.4 36.1Adj. Net Profit 2,794 1,581 (1,313) 811 4,777EPS Growth (%) 33.0 (43.4) (183.0) 161.8 489.2Adj. EPS 0.7 0.4 (0.3) 0.2 1.2P/BV (x) 0.8 1.7 1.2 1.2 1.2PER (X) 41.8 73.9 NA 144.0 24.4EV/EBIDTA 18.7 19.2 19.0 15.6 9.5ROE (%) 4.3 2.4 NA 1.0 5.8ROCE (%) 5.2 4.6 4.3 5.7 9.4Source: Company, Nirmal Bang Institutional Equities ResearchPrice Performance (%)1 M 6 M 1 YrGMR Infra 0.5 (24.1) (51.7)Nifty Index (1.6) (11.2) 18.3Source: Bloomberg

Institutional EquitiesExhibit 1: SOTP valuationSOTP -based target price of Rs39We assign a Buy rating and a target price of Rs39 to GMR Infrastructure. We have valued the stock via the SOTP routeusing DCF methodology, as most projects are long term in nature and have a fixed concession period with a strong andpredictable cash flow.We have used varied cost of equity across projects to factor in the different businesses and execution risks. For instance,the cost of equity has been assumed at 14-15% for airport projects (a mix of assured and market-driven returns) and 17%for realty projects. For power projects, the cost of equity has been considered in the range of 14-16%, depending onfactors such as proportion of merchant power, fuel supply arrangement and the stage of development. For road projects,the cost of equity has been assumed at 14% for annuity-based projects and 16% for toll-based projects.Accordingly, we have arrived at a valuation of Rs39 comprising Rs20 (54% of SOTP) for airport projects (including realestate), Rs14 (35% of SOTP) for power and coal mining projects, Rs3 (8% of SOTP) for road projects and the balancerepresents cash. In our SOTP valuation, we have not factored in projects which are still at the planning stage. In our TP,75% is contributed by operational projects and the remaining 25% by projects that are at various stages of development.Airports Asset value GMR stake Value of stake Project cost Value/shareDIALcore 30,032 54% 16,218 12,760 4.2DIAL real estate - - 38,155 - 10HIALcore 34,998 63% 22,049 29,200 5.7HIAL real estate - - 9,900 - -SGHIA 8,320 40% 3,328 29,315 0.9Total 73,351 89,649 - 20Power MW Equity value GMR stake Value of stake Rs/shareGMR Energy 220 5,739 100% 5,739 1.47GMR Power Corporation 200 6,781 51% 3,458 1.74Vemagiri Power Generation 389 6,677 100% 6,677 1.72GMR Kamalanga Energy 1,400 22,588 80% 18,070 4.64Rajahmundry 768 7,306 100% 7,306 1.88Emco Energy 600 5,818 100% 5,818 1.49Total 5,417 54,910 - 47,070 12Valuation- mining assets Mining reserves(mt) Equity value (Rsmn) Stake (%) Value of stake Equity value/ share (Rs)PT Barasentosa Lestari, Indonesia 110 5,875 100% 5,875 1.5Homeland Energy Group 270 3,620 56% 2,027 0.6Mining assets value/share (Rs ) 2.1Project name Route length (km) Value (Rsmn) Stake (%) Value of GMR stake Rs/shareTambaram-Tindivanam 93 2,041 61% 1,245 0.3Tuni - Anakapalli 59 2,711 61% 1,694 0.4Adloor-Gunla-Pochanpalli 103 2,543 100% 2,543 0.7Ambala-Chandigarh 35 (175) 100% (174) (0.0)Faruknagar-Thondapalli-Jadcherla 58 4,206 100% 4,206 1.1Tindivanam-Ulundurpet 73 1,324 100% 1,324 0.3Total 421 - - 10,838 2.8Net cash - - - - 2.0Price target - - - - 39Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 2: GMR Infrastructure –Valuation trend(x)6050403020100Sep-07 Sep-08 Sep-09 Sep-10 Sep-11EV /EBITDA5 year avgSource: Bloomberg, Nirmal Bang Institutional Equities Research(x)5.04.54.03.53.02.52.01.51.00.50.0Sep-07 Sep-08 Sep-09 Sep-10 Sep-11P/B5 year avgSource: Bloomberg, Nirmal Bang Institutional Equities Research60GMR Infrastructure

Institutional EquitiesInvestment ArgumentsAirport portfolio - Focus on profitability (54% of SOTP value)GMR Infrastructure currently has a portfolio of four airport assets, two of which are domestic (New Delhi andHyderabad) and two international projects which include Sabiha Gokcen International Airport (SGIA), Istanbul,and Male International Airport, Maldives. The Hyderabad airport is a greenfield project while Delhi, SabihaGokcen and Male airports are brownfield projects.We have valued the airports' core business at Rs41bn based on FCFE valuation method, given the steadyand recurring cash flow during the concession period. Airports' core assets contribute 22.5% to our SOTPvaluation. If we include the value of real estate development, the airport assets account for 54% of our SOTP.Exhibit 3: Airport portfolioStake Capex (Rsbn) Project status Passenger traffic (mn) Development rightsDelhi airport 54% 12.7 Operational 30.0 250-acre landH’bad airport 63% 29.2 Operational 7.59 1,500-acre landSabiha 40% 29.3 Operational 12.20 N/AMale airport 77% 13.9 Brownfield-U/I 2.50 N/ASource: Company, Nirmal Bang Institutional Equities ResearchExhibit 4: Airport valuationAirports (Rsmn) Asset value GMR stake Value of stake Project cost Value/share CoEDIALCore 30,032 54% 16,218 12,760 4.2 15%DIAL Real estate - - 38,155 - 10 -HIALCore 34,998 63% 22,049 29,200 5.7 16%HIAL Real estate - - 9,900 - - -SGHIA 8,320 40% 3,328 29,315 0.9 15%Total 73,351 - 89,649 - 20 -Source: Company, Nirmal Bang Institutional Equities ResearchAirport assets: Focus on profitabilityAirport assets, which are capital intensive in nature, have higher capacity charges and are loss-making in theinitial two-three years. The company has completed two brownfield expansions (DIAL and SGIA) and onegreenfield expansion (GHIAL) in the past three years. The company has recently bagged the brownfieldexpansion project at Male airport, which is profitable and has operating cash flow, and it would be fundedthrough internal accruals. Hyderabad airport has turned profit-making in 4QFY11 and started having operatingcash flow.Delhi airport and Sabiha Gokcen airport projects were completed in the past one year and due to highercapacity charges have reported losses, which led consolidated financials to show losses. SGIA is witnessingrobust traffic growth and is expected to turn around in the next three quarters. Profitability of Delhi airport willbe based on clarity by the Airports Economic Regulatory Authority (AERA) on tariff determination for airportsand the rate of return on regulated asset base as well as renewal of suspended ADF and incremental ADF ofRs17bn. Based on the current tariff, with a hybrid model; we expect the Delhi airport to turn around in FY14,registering cash profit and turning FCF positive in FY12.Exhibit 5: Passenger traffic trend (Delhi airport) (Hyderabad airport)(mn Pax) (%)8807606405204032(20)1(40)0(60)Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12Domestic (Pax Traffic) International (Pax Traffic) % Growth % GrowthSource: Company, Nirmal Bang Institutional Equities Research(mn Pax) (%)1.8301.6201.4101.201(10)0.8(20)0.6(30)0.4(40)0.2(50)0(60)Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12Domestic (Pax Traffic) International (Pax Traffic) % Growth % GrowthSource: Bloomberg, Nirmal Bang Institutional Equities Research61GMR Infrastructure

Institutional EquitiesExhibit 6: Road project portfolioRoad portfolio scaling highGMR Infrastructure has a operational road portfolio of six operational BOT projects, three based on tollcollection and three on annuity, aggregating Rs22.7bn. During FY11, the company achieved financial closurefor three more road projects which are under construction, namely the Hyderabad- Vijayawada toll highway,the Chennai Outer Ring annuity road project and the Hungund-Hospet toll highway which are expected toachieve CoD (commercial date ) during FY13. This translates into a road length of nearly 421km operationaland 310km under construction. The company has now shifted its focus from normal road projects toexpressways, highways of longer stretch, mega projects, etc to leverage on its financial qualification andproject execution capability. The company has already been short-listed for one mega expressway projectworth Rs 60bn ($1.3bn).Road Projects GTAEPL GTTEPL GPEPL GACEPL GJEPL GUEPLLocation Tuni-Anakapalli Tambaram-Tindivanam GMR Pochanpalli GMR Ambala-Chandigarh Faruknagar-jadcherla Tindivanam-UlundurpetStake (%) 61 61 100 100 100 100Length km 59 93 103 35 58 73Project cost (Rsmn) 2,950 3,620 7,043 4,993 5,155 8,817Scope of work 2 to 4 lanes 2 to 4 lanes 2 to 4 lanes 2 to 4 lanes 2 to 4 lanes 2 to 4 lanesCoD Dec-2004 Oct-2004 Mar-2009 Nov-2008 Feb-2009 Jul-2009Concession period 17.5 years from Jun-2002 17.5 years from Jun-2002 20 years from Sep-2006 20 years from May-2006 20 years from Aug-2006 20 years from Oct -2006Concession type Annuity Annuity Annuity Toll Toll TollUnder constructionGHVEPL GCORRPL GHHEPLLocation Hyderabad-Vijayawada Chennai outer ring road Hungund-HospetStake (%) 74 90 51Length (km) 181 29 99Project cost (Rsmn) 21,934 11,668 16509Scope of work 2 to 4/6 6 lanes& 2 service lanes 2 to 4 lanesCoD Jul-2012 Jul-2012 Dec-2012Concession period 25 years from Apr-2010 20 years from Jun-2010 19 years from Sep-2010Concession Type Toll Annuity TollSource: Company, Nirmal Bang Institutional Equities ResearchWe have considered a combined value of Rs11.7bn for six road projects in our SOTP valuation using theFCFE methodology. Three annuity road projects contribute Rs6bn and three toll road projects constituteRs5.7bn, resulting in a valuation of Rs2.90 per share. We have not included the valuation of the projects thatare under construction.Exhibit 7: Road project valuationProject name Route length (km) Value (Rsmn) Stake Value of GMR stake Rs/shareTambaram-Tindivanam 93 2,041 61% 1,245.1 0.3Tuni - Anakapalli 59 2,711 61% 1,694.2 0.4Adloor-Gunla-Pochanpalli 103 2,543 100% 2,543.1 0.7Ambala-Chandigarh 35 (175) 100% (174.9) (0.0)Faruknagar-Thondapalli-Jadcherla 58 4,206 100% 4,206.5 1.1Tindivanam-Ulundurpet 73 1,324 100% 1,324.1 0.3Total 421 - - 10,838.2 2.8Source: Company, Nirmal Bang Institutional Equities Research62GMR Infrastructure

Institutional EquitiesExhibit 8: Upcoming Power ProjectsCommissioning of power projects (4x of existing) to drive next leg of growthGMR Infrastructure has three operational power generation plants in India having a total capacity of 839MW,which are expected to increase by 2,768MW over FY12-13. This is due to (a) Brownfield expansion atRajmundry to 768MW during 1QFY13E; (b) Commissioning of first coal-fired plant at Kamalanga of 1,400MWduring 2HFY13 (c) Commissioning of 600MW Emco plant in Maharashtra during 2HFY13E. All the abovementioned projects are in advanced stage of construction. Hence, we believe the projects would be completedon time. Apart from this, around 5.7GW of installed capacity, which we have not considered in our valuation, isat different stages of planning and development and would be commissioned over FY14-17. We believe thegradual completion of the projects would keep the growth momentum intact, with the contribution of powersegment increasing from 35% in FY11 to 52% of revenue by FY14.Project Capacity (MW) Total Project Cost RemarksRajamundry 768MW Rs32.5bn Incurred project cost of Rs24.5bn till June 201185% of the project completed, expected COD in 1QFY13Kamalanga 1,050MW Rs64bn Incurred project cost of Rs25.2bn till June 201156% of the project completed, ,expected COD in 2HFY13EPC contract awarded to SEPCO, ChinaEmco Energy 600 MW Rs34.8bn Incurred project cost of Rs11.2bn till June 201167% of the project completed, expected COD in 2HFY13Chhattisgarh 1,320 MW Rs82.9bn Incurred project cost of Rs13bn till June 201194.8% of engineering activity, order placement of BOP package completedConstruction work started, may be operational in 4QFY14GMR Energy Singapore 800 MW SG$1.12bn Financial closure achievedExpected COD in 3QFY14Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 9: Power project portfolioProjects under development Fuel Capacity (MW) CODKamalanga,Orissa Coal 1,400 Mar-12Emco,Warora, Maharashtra Coal 600 Jun-12Raikhera,Chhattisgarh Coal 1,370 Feb-14SJK Power, Shahdol, Madhya Pradesh Coal 1,370 Dec-14Total Coal 4,740Rajamundry Energy, Andhra Pradesh Gas 768 Mar-12Island Power, Singapore Gas 800 Nov-13Total Gas 1,568Alaknanda ,Uttarakhand Hydro-power 300 Mar-15Upper Karnali Hydro-power 900 Dec-15Talong, Arunachal Pradesh Hydro-power 160 Jun-16Bajoli Holi, Himacahal Pradesh Hydro-power 180 Jul-16Upper Marsyangdi, Nepal Hydro-power 600 Oct-16Total - 2,140 -Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 10: Planned power generation capacity additionPlanned power generation capacity addition (MW)Year FY10 FY11 FY12E FY13E FY14EGradual capacity additionexpected from FY12-131616Total 823 839 839 3,607 7,147Source: Company, Nirmal Bang Institutional Equities Research-2,7683,54063GMR Infrastructure

Institutional EquitiesExhibit 11: Concerns related to projectsVerticalsDelhi airportHyderabad airportPower sectorCoal mines in Indonesia and South Africa are natural hedgeGMR Infrastructure has bought 100% stake in PT Barasentoso Lestari, Indonesia, an undeveloped mine inIndonesia for a consideration of $100mn and recently increased the stake in HEG to 55%, a step to mitigatecoal-availability issues and fluctuating coal-price risks. We believe owning mining assets abroad is a bigpositive for the company, considering the visible shortage of coal in India. The company is estimated to have 3power plants of 3.37GW by FY14 based on coal.The total extractable coal reserve of the mine is 110mt. At full production capacity, it will have an output of5mtpa.The valuation on the basis of US$1.5/tn translates into a mine value of $160mn and equity value ofRs1.5/share.Homeland Energy has a 74% stake in two mine assets which has reserves of around 270mt. Thecompany expects initial production of 5.5mtpa, which would be ramped up to 16mtpa. The valuation onthe basis of US$1/tn translates into a mine value of US$85m, resulting in a contribution of Rs0.6/share.Regulatory issues overdone and clarity expectedDuring the past three years, GMR Infrastructure has underperformed by around 55% versus Nifty due tomultiple issues related to airport and power sectors like 1) Regulatory uncertainty on tariff determination forairports, 2) Treatment for real estate and monetisation in Delhi airport by AERA, 3) Gas allocation and coalavailability for upcoming and existing power projects, 4) Single-till approach for Hyderabad airport, 5) Renewalof ADF (temporarily suspended by Supreme Court until further clarity from the regulatory authority), and 6)Enhanced capex and incremental ADF. We believe the current market price seems to be factoring in most ofthese uncertainties and our earnings model is based on the worst case scenario in respect of these issues.Hence, clarity on some of the issues, which is expected in the next two-three months would be positive for thestock.ConcernsNo clarity on time frame for land monetisation of 205 acre in near future.Regulatory uncertainty on tariff determination for airportsRenewal of ADF (temporarily suspended by Supreme Court until further clarity from the regulatory authority),Enhanced capex, incremental ADFAERA in favour of reduction in the value of real estate from regulated asset base (that is used for determining airport changed)AERA in favour of a single till model for tariff setting.Project execution delayPressure on merchant tariffLower PLF for projectsIssue regarding coal availabilityIssue regarding gas availabilityNo PPAs for under-construction projectsSource: Company, Nirmal Bang Institutional Equities Research64GMR Infrastructure

Institutional EquitiesFavorable outcome expected for ADF (Airport Development Fee)Based on our interaction with the company’s management on this issue, we believe the regulator hasrecognised the ADF requirement for project viability and may allow continuation of ADF for remaining amountout of Rs18.3bn. Apart from that, the enhanced capital cost Rs127.6bn (as against Rs128.6bn spent) hasbeen approved for Delhi International Airport (DIAL) and we expect ADF approval for an incremental Rs17bnto bridge the funding gap in coming months. The tenure of the ADF levy has been worked out as 51 and 62months, respectively, as against earlier approved of 36 months from March 2009.Exhibit 12: Funding plan for DIALSourceValue (Rsbn)Equity 25.0Rupee term loan 36.5External commercial borrowing 16.2Interest-free lease/trade deposits 14.7ADF -Approved earlier by MOCA 18.3 Collected Rs11bn until March 2011 (i.e. In 25 months).Temporarily suspendedADF-Additional 17.0Project cost approved 127.6Cost disallowed 1Total project cost 128.6Source: AERA, Company, Nirmal Bang Institutional Equities ResearchAdequately funds for projects under constructionThe company has raised Rs 13.6bn through preference shares in power subsidiary and Rs 14.7bncompulsorily convertible preference shares (CCPS) in the airports vertical which would be used for generalcorporate purpose. Apart from that the company has got the released equity capital of Rs 9.58bn bydivestment of equity stake in Intergen. We believe this is sufficient for near-term equity commitments of aroundRs25bn for the project pipeline over FY12-13. The investments in the energy vertical would be used to fundthe expansion plans of projects like: (a) Brownfield expansion at Vemagiri to 768MW, (b) 1,400MW powerplant at Kamalanga in Orissa, (c) 600MW Emco plant in Maharashtra, and (d) 1,370MW power plant inChhattisgarh. In the airports vertical, the company already has three operating airports and only one is underconstruction (Male airport), which will be funded through internal accruals.Exhibit 13: Fund raising through convertible instrumentsGMR Energy -Holding companyDate Security issued Amount (Rsmn)9 April 2010 Compulsorily convertible into equity shares 9,000 Tamesak holdings,3 June 2010 Convertible instrument 4,650 IDFC, Argonaut Ventures and AscentGMR Airport holdings(Holding company of airport assets)31 March 2011 Compulsorily convertible preference shares 8,932Macquarie SBI Infrastructure investments Standard Chartered private equity,JM financial-old lane india corporate6 July 2011 Compulsorily convertible preference shares 5,846 -Source: Company, Nirmal Bang Institutional Equities Research65GMR Infrastructure

Institutional EquitiesExhibit 14: Company structureSustainable and growing asset portfolioGMR Infrastructure is India's leading infrastructure asset owner managing four airports (two operating airportsin India at New Delhi and Hyderabad and the airports at Istanbul, Turkey, and Male, Maldives. It also has threeoperational power plants totaling 839MW and an under-construction portfolio of 8.4GW. In the road segment,the company has six operational projects totaling 421km and three under-construction projects totaling 310kmwith a project cost of Rs 30bn.GMR HoldingsGMR InfrastructureGMR Energy GMR Highways holding GMR Airports holdingOthersOperating Companies:GMR Energy (100%)GMR Power Corporation (51%)Vemagiri Power Generation (100%)Assets under development:Rajahmundry (100%)GMR Kamalanga Energy (80%)Operating companies:GMR Tambaram Tindivanam (61%)GMR Tuni Anakapalli (61%)GMR Pochanpalli (100%)GMR Ambala Chandigarh (100%)GMR Jadcherla (100%)GMR Ulundurpet (100%)Operating companies:GMR Hyderabad Int’l. Airport (63%)Delhi International Airport (54%)Sabiha Gokcen Int’l Airport (40%)GMR Male Int’l Airport (77%)GMR Krishnagari SEZ (100%)GMR Aviation (GAPL) (100%)GMR Chhattisgarh Energy (100%)Emco Energy (100%)Talong Hydro Power (100%)Holi Bajoli Hydro Power (100%)Himtal Hydro power Co. (80%)Assets under development:GMR Hyderabad Vijayawada (74%)Chennai Outer Ring Road (90%)Hungund-Hospeth (51%)GMR Upper Karnali (73%)GMR Badrinath Hydro Power(100%)GMR Coastal Energy (100%)Island Power Singapore (100%)Coal assets:Indonesia (100%)HEG, South Africa (56%)Source: CompanyExhibit 15: Growth pathSource: Company, Nirmal Bang Institutional Equities Research66GMR Infrastructure

Institutional Equities1QFY12 performanceRevenue grew by 51% due to consolidation of Male airport, improvement in gas availability and alsoproject execution improved in the EPC segment. Traffic at Delhi and Hyderabad airports increased by22% and 15% YoY, respectively, driving strong operating performance of these airportsReported a loss of Rs667mn, mainly due to higher interest costs and depreciation charges due tocommissioning of T3 terminal at Delhi airport.Interest expenses climbed higher by 56%YoY due to short-term loans taken for DIAL.Management expects tariff charges to be fixed by the airport regulator by the end of CY11.Also expectsSGIA airport to turn around in the next 3-4 quarters.Losses in road projects contracted, and the management expect a turnaround by the year-end.Exhibit 16: Quarterly performanceY/E March (Rsmn) 1QFY11 4QFY11 1QFY12 YoY (%) QoQ (%)Net sales 12,313 19,620 18,635 51.3 (5.0)Total Expenses 8,539 15,214 13,656 59.9 (10.2)EBITDA 3,775 4,405 4,980 31.9 13.1EBITDA margin (%) 30.7 22.5 26.7 - -Other income 673 611 812 20.7 32.9Depreciation 1,648 2,612 2,758 67.4 (6.3)Interest 2,383 2,945 3,724 56.3 (137.8)Exceptional item - (9,839) - - -PBT 416 (9,930) (691) - -Tax 98 764 655 568.4 (106.1)Reported PAT 318 (10,693) (1,346) - -Minority interest 34 624 679 - -Adj PAT 284 (10,069) (667) - -Source: Company, Nirmal Bang Institutional Equities Research67GMR Infrastructure

Institutional EquitiesFinancial analysisNear-term revenue growth to be led by airportsNet sales are likely to show a CAGR of 35% to Rs71bn and Rs105bn in FY12E and FY13E, respectively. Theairports segment has started contributing significantly to the revenue from 3QFY11, considering robust growthin passenger traffic and completion of the DIAL phase-I. The contribution from power projects is likely to startrising from FY13 onwards, as a major portion of the expanded capacity would start contributing to revenue.Exhibit 17: Net salesExhibit 18: Segment-wise revenue break-up(Rsbn)105(%)Revenue break up (% of total)60172340465871504030201048153747 4740 40343220 1921441739FY07 FY08 FY09 FY10 FY11 FY12E FY13ECAGR 34.4%-FY09 FY10 FY11 FY12E FY13EPower Projects Road and other Projects AirportsSource: Company, Nirmal Bang Institutional Equities ResearchSource: Bloomberg, Nirmal Bang Institutional Equities ResearchTurnaround in profitabilityWe expect GMR Infrastructure’s EBITDA margin to expand from 24.2% in FY11 to 36% in FY13 on the backof improving margins from DIAL and HIAL airports. We expect profitability to be under pressure during FY12due to higher depreciation and interest costs post-commercialization of DIAL. Thereafter, in our view, thereported profit is likely to show a CAGR of 312% over FY11-13, largely driven by operating leverage ofhigh-margin assets such as HIAL and DIAL and negative base in FY11.Exhibit 19: EBIDTA margin trendExhibit 20: Net profit growth trend(%)4036(Rsbn)21353026 27302730122578 7201510FY08 FY09 FY10 FY11 FY12E FY13EFY09 FY10 FY11 FY12E FY13ECAGR 33%Source: Company, Nirmal Bang Institutional Equities ResearchSource: Bloomberg, Nirmal Bang Institutional % Equities Research68GMR Infrastructure

Institutional EquitiesFinancialsExhibit 21: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ETotal revenue 44,762 51,234 64,250 82,766 118,681Growth (%) 65.9 14.5 25.4 28.8 43.4Less: Annual fee to AAI 4,570 5,569 6,513 11,670 13,397Net revenue 40,192 45,665 57,738 71,096 105,284% YoY 75.1 13.6 26.4 23.1 48.1Total expenditure 29,524 32,022 42,185 49,452 67,269EBITDA 10,668 13,643 15,553 21,644 38,014EBITDA margin (%) 26.5 29.9 26.9 30.4 36.1Depreciation 3,898 6,122 8,609 10,787 15,905EBIT 6,770 7,521 6,944 10,857 22,110EBIT (%) 15.1 14.7 10.8 13.1 18.6Interest and finance charges 3,682 8,503 12,301 12,613 17,640Other income 214 - 1,573 650 646Profit before tax 3,301 1,932 (2,244) (1,106) 5,116Taxes 530 (322) 239 343 367Adj PAT before minority interest 2,771 2,254 (2,483) (1,449) 4,749MinorityiInterest 23 (673) 1,170 2,260 29Reported PAT after minority interest 2,794 1,581 (1,313) 811 4,777Growth (%) 33.0 (43.4) (183.0) (161.8) 489.2Reported PAT 2,794 1,581 (9,298) 811 4,777% YoY 33.0 (43.4) (688.3) 108.7 489.2Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 23: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity share capital 3,641 3,667 3,892 3,892 3,892Reserves and surplus 61,070 63,003 73,442 74,253 79,030Net worth 64,711 66,670 77,334 78,145 82,922Long term loans 106,602 162,294 189,107 226,078 244,000Short term loans 13,636 46,080 53,189 36,803 39,721Total debt 120,238 208,374 242,296 262,881 283,721Minority Interest 18,061 17,902 19,981 17,721 17,692Deferred tax liabilities 192 2,535 764 100 100Foreign currency monetised item 69 - (74) - -Total liabilities 203,271 297,480 358,450 376,996 402,585Gross block 114,326 148,896 243,702 271,779 308,651Less: Depreciation 17,810 23,416 31,503 42,290 58,195Capital work in progress 54,639 103,830 94,898 104,388 114,827Expen. during construction period 13,271 - - - -Net block 164,426 229,310 307,098 333,877 365,283Investments 13,109 46,411 29,741 30,336 30,943Inventories 1,319 1,159 1,846 2,225 3,026Sundry debtors 6,609 8,649 13,199 13,972 20,036Cash and bank balances 24,665 16,827 33,730 12,314 9,161Loans and advances 12,612 13,156 18,516 20,408 29,264Total current assets 45,383 41,408 74,921 56,547 69,115Total current liabilities 19,647 19,653 53,898 43,764 62,755Net current assets 25,736 21,755 21,023 12,783 6,360Total assets 203,271 297,480 358,450 376,996 402,585Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 22:Cash flowY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 6,770 7,521 (10,230) 10,857 22,110Inc./(dec) in working capital (5,474) 187 31,004 (13,178) 3,270Cash flow from operations 1,295 7,708 20,774 (2,321) 25,380Other income (450) (916) 16,711 650 646Depreciation 3,898 6,122 8,609 10,787 15,905Interest paid (-) (3,417) (7,620) (14,485) (12,613) (17,640)Tax paid (-) (998) (511) (2,434) (343) (367)Dividends paid (-) - - (87) - -Net cash from operations 328 4,784 29,088 (3,840) 23,924Capital expenditure (-) (30,388) (98,733) (77,920) (37,566) (47,311)Net cash after capex (30,059) (93,949) (48,832) (41,407) (23,387)Inc./(dec.) in borrowings 38,663 85,582 26,243 20,585 20,841Inc./(dec.) in investments 139 (1,860) 13,530 (595) (607)Issue of common stock inconsolidated entities6,981 839 22,745 - -Equity issue/(buyback) - - 14,000 - -Cash from financial activities 45,783 84,562 76,518 19,990 20,234Change in cash 15,724 (9,387) 27,686 (21,416) (3,153)Opening cash 8,942 24,665 16,827 33,730 12,314Closing cash 24,665 16,827 33,730 12,314 9,161Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 24 :Key RatiosY/E March FY09 FY10 FY11 FY12E FY13EAdj. EPS (Rs/share) 0.7 0.4 (0.3) 0.2 1.2Cash EPS (Rs/share) 1.7 2.0 (0.2) 3.0 5.3Valuation ratiosPE ratio (x) 41.8 73.9 (89.0) 144.0 24.4Price/sales (x) 2.6 2.3 1.8 1.4 1.0Price /BV (x) 0.8 1.7 1.2 1.2 1.2EV /sales (x) 4.5 5.1 4.6 4.1 3.0EV /EBITDA (x) 18.7 19.2 19.0 15.6 9.5Margins (%)EBITDA margin 26.5 29.9 26.9 30.4 36.1EBIT margin 15.1 14.7 10.8 13.1 18.6Returns (%)RoCE 6.0 5.4 4.7 5.9 9.7RoNW 4.4 2.4 N/A 1.0 5.9Gearing ratiosNet debt/ equity (x) 1.5 2.9 2.7 3.2 3.3Total debt/equity (x) 1.9 3.1 3.1 3.4 3.4Turnover daysInventory turnover 21.1 16.4 16.4 16.4 16.4Debtors turnover 53.9 61.6 61.6 61.6 61.6CA turnover 104.3 105.2 40.0 90.0 90.0Creditors turnover 160.2 140.0 193.0 193.0 193.0Asset turnover 2.6 2.9 3.8 3.3 2.6Source: Company, Nirmal Bang Institutional Equities Research69GMR Infrastructure

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Institutional EquitiesBharat Heavy Electricals30 January 2012Reuters: BHEL.BO; Bloomberg: BHEL IN3QFY12 Result UpdateResults in line, barring cancellation of ordersBoosted by strong order execution, Bharat Heavy Electricals (BHEL) reported 3QFY12revenue of Rs105.5bn, translating to a healthy growth of 19.2% YoY. The topline wasin line with our estimate and Bloomberg consensus estimate of Rs106.4bn andRs105.7bn, respectively. However, cancellation of orders worth Rs58.5bn (1,500MW)was a key negative, which we did not envisage. The cancelled orders accounted for4% of BHEL’s 3QFY12 order backlog of Rs1,465bn, owing to which we expect its stockprice to remain under pressure in the short run. However, over a one-year period, weremain optimistic considering the healthy pipeline of orders, relative currencyadvantage and likely imposition of import duty on Chinese equipment. We retain ourBuy rating on BHEL with a target price of Rs327.Higher provision impacts margins, low order intake affects working capital: A65% YoY rise in other expenses (due to higher provisions and freight) suppressedprofits, with EBITDA and PAT staying flat YoY at Rs18.8bn and Rs14.3bn,respectively. Adjusted for the same, the numbers are largely in line with our estimates.Lower customer advances due to not winning any BTG/EPC orders during the quarterincreased the working capital cycle, a situation which we expect to reverse once BHELreceives large orders.Near-term order inflow visibility improving: BHEL has already received Letter ofIntent (LoI) for the Abhijit group’s 1x300MW Kaizen Power project(Rs6.3bn) and for sixoil rigs from Oil & Natural Gas Corporation (Rs7.7bn), which are yet to be included inthe order book. In addition, we expect BHEL to win: (a) EPC of 1x500MWVindhyanchal TPP from NTPC (Rs32bn), (b) Two turbines from Bulk tender I, and (c)Four boilers and three turbines order from Bulk tender II (Rs74bn). Also, the biggestorder that is likely to be tendered in the near term is 5x800MW Bijapur TPP of NTPC,for which we consider BHEL to be a favourite considering its track record in NTPCprojects. Things are also progressing on the Rajasthan State Electricity Board project(environment clearance received) and boiler portion of Bulk tender I (Supreme Courthearing over, the judgement pending) where BHEL is assured of order win.Outlook: We believe the short-term pressure on BHELs share price after the negativesentiment due to order cancellations offers a good entry point from a one-year horizon.Likely order wins in the near term will lead to improvement in customer advances,leading to pressure on working capital easing. Also, the likely imposition of import dutyon Chinese equipment and prospects of winning a large order from Indian Railways willact as positive triggers. We believe BHEL offers value at the current PE of 9.6x FY13EEPS and order backlog-to-sales ratio of 3.5xFY11 revenue.BUYSector: Capital GoodsCMP: Rs274Target Price: Rs327Upside: 19%Chirag Muchhalachirag.muchhala@nirmalbang.com+91-22-3926 8092Key DataCurrent Shares O/S (mn) 2,447.6Mkt Cap (Rsbn/US$bn) 669.7/13.452 Wk H / L (Rs) 463/223Daily Vol. (3M NSE Avg.) 4,328,928Price Performance (%)1 M 6 M 1 YrBHEL 13.6 (24.9) (38.3)Nifty Index 9.4 (9.2) (9.3)Source: BloombergY/E March (Rsmn) 3QFY11 2QFY12 3QFY12 % Chg (YoY) % Chg (QoQ) 9MFY11 9MFY12 % Chg (YoY)Net revenue 88,493 102,986 105,480 19.2 2.4 236,574 279,722 18.2Raw material costs 48,098 61,180 60,137 25.0 (1.7) 135,833 162,817 19.9Staff costs 13,487 13,491 13,377 (0.8) (0.8) 39,506 39,878 0.9Other operating expenses 7,932 11,192 13,113 65.3 17.2 19,122 31,378 64.1Total expenditure 69,517 85,863 86,626 24.6 0.9 194,461 234,073 20.4EBITDA 18,976 17,123 18,853 (0.6) 10.1 42,113 45,650 8.4OPM (%) 21.4 16.6 17.9 17.8 16.3Depreciation 1,447 1,888 1,861 28.6 (1.4) 4,057 5,459 34.5EBIT 17,529 15,234 16,992 (3.1) 11.5 38,056 40,191 5.6Interest costs 145 96 145 0.0 50.4 242 329 36.1Other income 3,270 4,668 3,911 19.6 (16.2) 9,360 12,524 33.8PBT 20,654 19,806 20,758 0.5 4.8 47,174 52,385 11.0Tax 6,623 5,686 6,432 (2.9) 13.1 15,045 15,785 4.9Net profit 14,031 14,120 14,326 2.1 1.5 32,129 36,601 13.9NPM (%) 15.9 13.7 13.6 13.6 13.1Diluted EPS 5.7 5.8 5.9 13.1 15.0Source: Company, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

1Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q10Institutional Equities4Q101Q112Q113Q114Q111Q122Q12Exhibit 1: Financial summaryY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 262,123 328,611 415,661 472,890 528,016EBITDA 36,434 53,054 78,367 87,102 95,084Net profit 31,144 42,961 60,148 64,800 69,569EPS (Rs) 12.8 17.6 24.6 26.5 28.4EPS growth (%) 9.8 37.4 39.4 7.8 7.4EBITDA margin (%) 13.9 16.1 18.9 18.4 18.0PER (x) 21.4 15.6 11.2 10.3 9.6P/BV (x) 5.2 4.2 3.3 2.8 2.3EV/EBITDA (x) 15.6 10.8 7.3 6.6 5.9Dividend yield (%) 1.5 2.1 2.7 3.0 3.0RoCE (%) 28.1 34.1 40.5 34.9 31.2RoE (%) 26.4 29.8 33.3 29.1 26.1Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 2: Segmental snapshotY/E March 3QFY11 2QFY12 3QFY12 YoY (%) QoQ (%) 9MFY11 9MFY12 YoY (%)Revenue (Rsmn)Power 55,023 77,973 87,115 58.3 11.7 179,303 222,891 24.3Industry 37,775 29,603 23,668 (37.3) (20.0) 68,262 69,800 2.3Revenue mix (%)Power 59.3 72.5 78.6 72.4 76.2Industry 40.7 27.5 21.4 27.6 23.8EBIT (Rsmn)Power 17,133 13,159 16,560 (3.3) 25.8 42,025 39,237 (6.6)Industry 3,730 8,004 7,486 100.7 (6.5) 9,030 19,223 112.9EBIT margin (%)Power 31.1 16.9 19.0 23.4 17.6Industry 9.9 27.0 31.6 13.2 27.5Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 3: Order book position(Rsbn)1,600(Rsbn)1,6001,2001,200800800400400--Source: Company, Nirmal Bang Institutional Equities ResearchOpening order book Order intake Order backlog72BHEL

Institutional EquitiesExhibit 4: Likely order wins until FY13No of unitsProject Boilers Turbinesmw perunitLikely OrderSize (Rsbn)Kaizen Power (Abhijit group) 1 1 300 6Vindhyanchal TPP (NTPC) 1 1 500 32Bulk tender 1 - Deemed L2 status 5 2 660 71Bulk tender 2 - Deemed L2 status 4 3 800 74Rajasthan SEB 2 2 660 60BHEL Tamil Nadu SEB JV 2 2 800 63BHEL Madhya Pradesh SEB JV 2 2 800 63BHEL Maharashtra SEB JV 2 2 660 52Total 19 15 421Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 5: Mega orders lined up by Indian RailwaysPlace Scope of work shortlisted bidders CommentsMarhaura, Bihar Diesel locomotives (1,000 units) BHEL GE JV, Electro Motive Diesel Inc Combined order size for Bihar is estimated atMadhepura, Bihar Electric locomotives (800 units) GE, Alstom SA, Bombardier Inc, Siemens AGRs650bn, Order expected in FY13, BHEL GE JV hasbright chance to bag diesel locomotive contractKanchrapara, WestBengalRail coach factoryBombardier, Alstom, Siemens, CAF, HyundaiRotem, Standler Rail - ABB - Titagarh JV,Hitachi, Kawasaki - Texmaco JVCould go to BHEL on nomination basis, order sizeestimated at Rs210bnPalakkad, Kerala Rail coach factory NA Could go to BEML on nomination basisDankuni, West Bengal Engine component factory NA BHEL-Alstom JV to participateSource: Indian Railways, media articles, Nirmal Bang Institutional Equities ResearchRating trackDate Rating Market price (Rs) Target price (Rs)27 January 2012 Buy 281 32773BHEL

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Institutional EquitiesBharat Heavy Electricals27 January 2012Initiating CoverageReuters: BHEL.BO; Bloomberg: BHEL INNegatives Priced InBharat Heavy Electricals (BHEL) has corrected 43.5% in the 9MFY12 period onconcerns over loss of market share and decline in operating margin because ofover-supply situation in the BTG industry. We believe the recent correction haspriced in likely negatives for BHEL and at the CMP of Rs281, the stock is tradingat an attractive valuation of 9.9x FY13E EPS of Rs28.4 (near the six-year low of8.8x). With an existing order backlog of Rs1,610bn and secured order pipeline ofRs383bn over FY11-13E, it offers healthy earnings visibility. Aided by rupee fall,BHEL’s competitive position has strengthened to counter Chinese equipmentimports and also against domestic peers. In addition, a healthy operating marginof 18.9% in FY11 compared to 10-11% margins of peers provides BHEL thehighest leeway in price under-cutting. Factoring in total order inflow assumptionof Rs900bn over FY11-13E, we believe BHEL offers value, especially consideringits cash balance of Rs39/Rs50 in FY11/FY13E, respectively. We value BHEL at11.5x FY13E EPS of Rs28.40 assigning a TP of Rs327 and a Buy rating.Highest order inflow visibility likely for next two years: In our BTG universe,BHEL provides highest order inflow visibility due to its deemed L2 status in two NTPCbulk tenders, higher value EPC orders from its JV with SEBs and being the most pricecompetitive player in the sub-critical BTG market. We would like to highlight thatBHEL, which has so far won 16 super-critical boiler and turbine generator (TG) setorders is scheduled to bag 17 boiler and 13 TG set orders over FY11-13E, amountingto Rs383bn (accounting for 23.7% of its current order book).Rupee depreciation to strengthen competitive position: Favourable currencymovement with the rupee depreciating 13.6% against the yuan over the past sixmonths has partly offset the competitive edge of Chinese vendors. Although importcosts for local BTG firms will go up, BHEL benefits the most, with its least importcontent at 31% versus over 70% for peers. Also, the rate of depreciation in the rupeeversus the euro (BHEL’s import currency) is only 2.3% versus 11.5% against the yen(import currency of L&T, BGR and JSW Energy), providing it relative currencyadvantage. We expect the rupee fall advantage to sustain, with our house view of theaverage rupee-dollar rate at Rs54.50 for FY13E. We believe the upcoming BTGtenders of private IPPs could throw a surprise, with BHEL getting a few large orderswhich could lead to investors regaining their faith in BHEL and a re-rating of its stock.Highest leeway in price under-cutting: With a robust operating margin of 18.9% inFY11 compared to 10-11% operating margin of its peers, BHEL has the highestleeway for resorting to price under-cutting. Surpassing the minimum order thresholdlevel for achieving full technology transfer and higher indigenisation content as well aslowest capital investment per MW required for setting up additional capacity, providesfurther cost competitiveness to BHEL.Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 262,123 328,611 415,661 472,890 528,016EBITDA 36,434 53,054 78,367 87,102 95,084Net profit 31,144 42,961 60,148 64,800 69,569EPS (Rs) 12.8 17.6 24.6 26.5 28.4EPS growth (%) 9.8 37.4 39.4 7.8 7.4EBITDA margin (%) 13.9 16.1 18.9 18.4 18.0PER (x) 21.9 16.0 11.4 10.6 9.9P/BV (x) 5.3 4.3 3.4 2.8 2.4EV/EBITDA (x) 16.1 11.1 7.6 6.8 6.0Dividend yield (%) 1.5 2.1 2.7 3.0 3.0RoCE (%) 28.1 34.1 40.5 34.9 31.2RoE (%) 26.4 29.8 33.3 29.1 26.1Source: Company, Nirmal Bang Institutional Equities ResearchBUYSector: Capital GoodsCMP: Rs281Target Price: Rs327Upside: 16.4%Chirag Muchhalachirag.muchhala@nirmalbang.com+91-22-3926 8092Key DataCurrent Shares O/S (mn) 2,447.6Mkt Cap (Rsbn/US$bn) 691.3/13.852 Wk H / L (Rs) 463/223Daily Vol. (3M NSE Avg.) 4,279,424Share holding (%)1QFY12 2QFY12 3QFY12Promoter 67.7 67.7 67.7FII 13.2 13.4 13.5DII 12.7 13.4 13.5Corporate 4.2 3.6 3.8General Public 2.2 2.3 2.6One Year Indexed Stock Performance110100908070605040Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12BHARAT HEAVY ELEPrice Performance (%)1 M 6 M 1 YrBHEL 16.8 (29.3) (38.3)Nifty Index 9.4 (9.2) (9.3)Source: BloombergNSE S&P CNX NIFTY INDEXPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesOutlook & valuationWe acknowledge that along with other BTG manufacturers, BHEL will witness pressure on margins and a fallin market share, as it is likely to lose the most being the market leader. The order inflow of BHEL has beenstagnant over the past three years at Rs600bn/15,000MW per annum. We expect total order inflow ofRs900bn over FY11-13E. We also expect the growth momentum in revenue to slow down from 28.2% CAGRreported over FY08-11 to 12.7% CAGR over FY11-13E. We believe the fall in operating margin will be limitedto 50bps/40bps in FY12E and FY13E, respectively, as most of the revenue during these two years would flowfrom the existing order backlog of Rs1,610bn. As a result, EBITDA/PAT would show CAGRs of 10.2% and7.6%, respectively, over FY11-13E. Our estimates are broadly in line with consensus estimates.BHEL has traded at an average PE of 25.9 times one-year forward EPS over the past six years. However,considering the concerns over falling margins and market share, the stock has witnessed a significant deratingof 43.5% over the 9MFY12 period. At the current market price of Rs281, BHEL is trading at PE ratio of10.6x FY12E and 9.9x FY13E EPS; near its six-year low PE of 8.8x. We believe the recent correction haspriced in likely negatives and the stock offers value at current levels, considering the fact that the companyhad a cash balance of Rs39/share in FY11, which is likely to go up to Rs50/share in FY13E. We value BHELat 11.5x FY13E EPS of Rs28.4 with a target price of Rs327 and assign a Buy rating.Exhibit 1 - Our estimates versus Bloomberg consensus projections(Rsmn) FY12E FY13EY/E March NBIE Consensus (%) NBIE Consensus (%)Net revenue 472,890 491,210 (3.7) 528,016 548,580 (3.7)EBITDA 87,102 93,159 (6.5) 95,084 101,229 (6.1)EBITDA margin (%) 18.4 19.0 (60)bps 18.0 18.5 (50)bpsPAT 64,800 65,928 (1.7) 69,569 71,482 (2.7)PAT margin (%) 13.7 13.4 30bps 13.2 13.0 20bpsEPS (Rs) 26.5 27.0 (1.9) 28.4 29.2 (2.7)Source: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 2: Stock price movement versus Bloomberg consensus estimatesEPS (Rs)34Price (Rs)500314002830025200Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12Consensus FY12 (LHS) Consensus FY13 (LHS) Price (RHS)Source: Bloomberg, Nirmal Bang Institutional Equities Research76Bharat Heavy Electricals

Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-06Jul-06Oct-06Apr-06Jul-06Apr-06Jul-06Oct-06Oct-06Jan-07Apr-07Jul-07Jan-07Apr-07Jul-07Jan-07Apr-07Jul-07Institutional EquitiesOct-07Oct-07Oct-07Jan-08Apr-08Jul-08Jan-08Apr-08Jul-08Jan-08Apr-08Jul-08Oct-08Oct-08Oct-08Jan-09Apr-09Jul-09Jan-09Apr-09Jul-09Jan-09Apr-09Jul-09Oct-09Oct-09Oct-09Jan-10Apr-10Jul-10Jan-10Apr-10Jul-10Jan-10Apr-10Jul-10Oct-10Oct-10Oct-10Jan-11Apr-11Jul-11Jan-11Apr-11Jul-11Jan-11Apr-11Jul-11Oct-11Jan-12Oct-11Oct-11Jan-12Jan-12Exhibit 3: One-year forward valuation chartsEV/EBITDAPrice (Rs)6005004003002001000(x)6050403020100Price 15 18 21 24 27 30P/EAverageP/EPrice (Rs)6005004003002001000(x)6050403020100Price 15 18 21 24 27 30P/EAverageP/BVPrice (Rs)600500400300200100-(x)1614121086420Price 4 5 6 7 8Source: Bloomberg, Nirmal Bang Institutional Equities ResearchP/BVAverageHighest order inflow visibility over next two yearsAmid the expected lull in BTG order placement activity over the next two years, BHEL offers highest inflowvisibility compared to peers. BHEL has deemed L2 status in two NTPC bulk tenders, implying that onmatching L1 bidder’s price it will be automatically considered as L2 bidder irrespective of its bid amount andawarded the projects accordingly. BHEL will receive four boilers and three turbines order from the recentlyconcluded NTPC bulk tender II of 9x800MW equipment worth Rs74bn. It has received four turbines orderfrom the first NTPC bulk tender of 11x660MW equipment out of which it has already booked two turbines inits FY11 order inflow. It will also be receiving order for five boiler of 660MW each from the first bulk tender, asand when the contract is awarded on conclusion of the Supreme Court litigation between NTPC and Ansaldo.BHEL also has L1 status on EPC orders for two 2x660MW plants of Rajasthan SEB at Suratgarh andChhabra, out of which it is likely to receive one EPC order worth Rs60bn as per the terms of the contract.Also, it is likely to receive EPC orders from its three JVs with the SEBs of Tamil Nadu, Madhya Pradesh andMaharashtra by the end of FY13. The collective order size of these secured orders works out to Rs383bn,translating into 23.7% of its current order book size and 42.5% of our order inflow expectation over FY11-13Eof Rs900bn.77Bharat Heavy Electricals

Institutional EquitiesExhibit 4: Likely order wins by FY13 endNo of unitsProject Boilers Turbinesmw perunitLikely OrderSize (Rsbn)Bulk tender 1 - Deemed L2 status 5 2 660 71Current statusBulk tender 2 - Deemed L2 status 4 3 800 74 Bids opened, order likely in FY12Boiler order stuck in Supreme court case, 2 turbines booked in orderinflow in FY11, 2 likely to be booked in FY12Rajasthan SEB 2 2 660 60 L1 status, coal mine awaiting environment clearance, likely in FY12BHEL Tamil Nadu SEB JV 2 2 800 63 Coal linkage, environment clearance pending, order expected in FY12BHEL Madhya Pradesh SEB JV 2 2 800 63 In process of finalising a strategic partner, order likely in FY13BHEL Maharashtra SEB JV 2 2 660 52 Land acquisition pending, order likely in FY13Total 17 13 383Source: Company, Nirmal Bang Institutional Equities ResearchJV route with SEBs is a smart strategyThe JV route adopted by BHEL to set up power plants in partnership with respective SEBs by picking up aminority stake is a sound business strategy, in our opinion. It serves multiple purpose as: (1) Picking up astake in the JV ensures better utilisation of the huge cash lying on the books of BHEL (Rs96bn as on endFY11), (2) Guarantees the EPC contract award to BHEL as it is a co-promoter, (3) The order is received onnegotiated price basis and not through competitive bidding, thus ensuring better margins, and (4) Likelihoodof earning higher returns on investment by selling the equity stake, acquired at book value, once the powerplant gets operational.BHEL already has four JVs with different state electricity boards. It has already received 3x800MW ordersfrom its JV with Karnataka SEB. It is likely to get 2x800MW order from its Tamil Nadu JV in FY12, while theother two JVs - in Madhya Pradesh, for 2x800MW and in Maharashtra for 2x660 MW - are likely tomaterialise in FY13. BHEL is also in discussion with other states like Gujarat, Orissa, Andhra Pradesh,Punjab, Uttar Pradesh, West Bengal and Tripura to form similar JVs to set up power plants.Favourable currency movement to offset edge of Chinese vendors…Chinese BTG vendors have been able to make inroads in India’s power equipment segment primarily onaccount of their BTG products being priced ~25% lower than that of Indian manufacturers. The priceadvantage was on account of (a) Undervalued yuan, (b) Lower interest rates in China, (c) Bulk manufacturingleading to economies of scale, and (d) Lack of any duty payable in India. Chinese vendors have captured29%/23% of Indian BTG market over the 11 th /12 th Five Year Plan period, respectively, thereby negativelyimpacting market leader BHEL the most. However, over the past six months, the rupee has depreciated13.6% against the US dollar (USD) (since 1 August 2011), while on the other hand, the Chinese yuan (CNY)has appreciated 1.9% against the USD over the same period. The favourable movement of currency on bothaccounts has resulted in the rupee depreciating against the CNY by 13.6% over the past six months, thusmaking Chinese imports costlier by that extent. This will partly offset the price advantage of Chinese vendorsin the near term. We expect the rupee depreciation advantage to sustain, with our house view of the averagerupee-dollar rate of Rs54.50 for FY13E.Exhibit 5: Depreciating rupee against US dollar(USDINR)5452504846444240Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12Source: Bloomberg, Nirmal Bang Institutional Equities Research78Bharat Heavy Electricals

Institutional EquitiesExhibit 6: Appreciating Chinese yuan against US dollar(USDCNY)6.606.506.406.306.20Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12Source: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 7: Net impact of rupee depreciating strongly against Chinese yuan(INRCNY)0.1500.1450.1400.1350.1300.1250.1200.1150.110Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12Source: Bloomberg, Nirmal Bang Institutional Equities Research…while aiding BHEL more than other domestic playersEven though the rupee depreciation will shield domestic BTG manufacturers from Chinese imports, it will alsolead to rise in costs of their own imported components. BHEL has an upper hand over other domestic playersbecause of the least quantum of imports in total manufacturing costs of BTG (around 31% in FY11)compared to over 70% imported components procured by domestic peers as they are executing their initialorders. On the other hand, BHEL also has relative currency advantage as it imports from its Europeantechnology partner (Alstom for boilers and Siemens for turbines) while L&T, BGR and JSW aredependent on their Japanese technology partner (Mitsubishi, Hitachi and Toshiba respectively). Overthe past six months (since 1 August 2011) the rupee has depreciated against the euro by only 2.3%compared to 11.5% depreciation against the JPY.79Bharat Heavy Electricals

Institutional EquitiesExhibit 8: Depreciating rupee against Japanese yen(INRJPY)2.001.901.801.701.601.501.40Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12Source: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 9: Depreciating rupee against the euro(EURINR)72706866646260Source: Bloomberg, Nirmal Bang Institutional Equities ResearchUpcoming BTG tenders could throw a surpriseChinese BTG vendors have garnered a majority market share in orders placed by private sector IPPsbecause of their cost competitiveness. Companies like Reliance Power, Adani Power and Lanco Infratechhave placed large orders with Chinese companies in order to benefit from cost savings as BTG account for50% of total costs of setting up a power plant. However, with the rupee depreciating against the CNY, thingscould change for the better for Indian players. We expect Indian BTG vendors to be more aggressive inupcoming mega BTG tenders, listed in Exhibit 10. As the rupee has depreciated 13.6% against the CNY,Chinese cost competitiveness has been partly offset. We expect the results of forthcoming BTG tenders tothrow a positive surprise, with BHEL likely to win a few large private sector IPP orders, which could lead tore-imposition of faith in BHEL and a re-rating of its stock.Exhibit 10: Upcoming BTG contractsApr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12Company Project Location Units ScopeAdani Power Kutchh TPP Mundra, Gujarat 5x660 BTGAdani Power Dahej TPP Bharuch, Gujarat 4x660 BTGAdani Power Pench TPP Chhindwara, MP 2x660 BTGNTPC Bijapur TPP Kudgi, Karnataka 5x800 BTGJindal Power 4 projects Jharkhand & Orissa 10x660 or 8x800 BTGJaiprakash Power Bina TPP Sagar, MP 1x660-700 BTGLuxor Energy (Sanali group) Bijapur TPP Bijapur, Karnataka 2x660 EPCNTPC Vindhyachal TPP Vindhyanchal, MP 1x500 BTGKaizen Power (Abhijit group) Vishakhapatnam TPP APSEZ, AP 1x300 EPCSource: Industry, Nirmal Bang Institutional Equities Research80Bharat Heavy Electricals

Institutional EquitiesHighest leeway for price under-cuttingAlthough BHEL has been ceding market share to new private sector BTG vendors, we feel the company iskeeping the ace up its sleeve when it comes to real competitive pricing. At the current operating margin of18.9%, BHEL has the highest leeway when it comes to resorting to price under-cutting, as other BTGvendors are operating at 10-11% operating margin. Also, with 16 super-critical sets under execution,BHEL has surpassed the minimum order threshold requirement for indigenisation and absorption of supercriticaltechnology from its partners (Alstom for boilers and Siemens for turbines), thereby increasing itslocalisation content and achieving better price realisation. This indigenisation will help BHEL to become moreprice competitive and cushion the likely pressure on margins in the upcoming BTG tenders.Exhibit 11: Super-critical thermal sets under executionNo of unitsProject Client MW sets Boiler TGKrishnapatnam TPP APGenco 800 2 -Barh TPP NTPC 660 2 2Bara TPP Jaypee group 660 3 3Yeramarus TPP BHEL KPCL JV 800 2 2Edlapur TPP BHEL KPCL JV 800 1 1Bellary TPP KPCL 700 1 1Mouda TPP NTPC bulk tender I 660 - 2Lalitpur TPP Bajaj group 660 3 3Deosar TPP DB Power 660 2 2Total sets under execution 16 16Source: Company, Nirmal Bang Institutional Equities ResearchLowest fall in return ratios compared to peersCompared to the new players setting up manufacturing facility for BTG equipment, BHEL will witness thelowest fall in RoCE over FY11-13E, despite increasing its installed capacity from 15GW to 20GW, highest inthe industry, by the end of March 2012. The manufacturing plants and assets of BHEL, which have beendepreciated over the past several decades, will ensure that despite the brown-field expansion, RoCE/RoE willstay healthy in FY13 at 31.2%/26.1% (a fall from 40.5%/33.3%, respectively, in FY11). On the other hand, asmost of the new players are embarking on fresh green-field expansion, they will take a substantially higherknock on their return ratios. As the capital employed by BHEL is the lowest in the industry, its investment perMW will also be lowest, resulting in improved cost competitiveness.Also, one of the prime reasons for the declining return ratios of BHEL is the huge cash on its booksamounting to Rs96.3bn in FY11, accounting for 53% of its total balance sheet size. The cash balanceis further expected to increase by 27.5% to Rs122.8bn in FY13E due to execution of the existingorders in its order book as well as lower requirement of capex. As a result, cash per share willincrease from Rs39 in FY11 to Rs50 in FY13E. As BHEL is a candidate for disinvestment in FY12/13,any buyback or special dividend from BHEL will reduce the quantum of cash and improve returnratios significantly.Exhibit 12: Capex outlay of BTG vendorsBoilerTurbineIndian vendorsCapacityCapex per Capacity Planned Capex perPlanned capexadditionMW addition capexMW(Rsmn)(MW)(Rsmn)(MW) (Rsmn) (Rsmn)BHEL 5,000 8,000 1.6 5,000 8,000 1.6L&T - Mitsubishi 4,000 8,000 2 4,000 12,000 3BGR Energy - Hitachi 4,000 14,000 3.5 4,000 30,000 7.5Thermax - Babcock Wilcox 3,000 8,200 2.7 - - -GB Engineering - Ansaldo 2,000 NA - - - -Bharat Forge - Alstom - - - 5,000 17,000 3.4JSW - Toshiba - - - 3,000 10,000 3.3Source: Company, Nirmal Bang Institutional Equities Research81Bharat Heavy Electricals

Institutional EquitiesExhibit 13: Falling return ratios due to high cash on its books(%)45403530252015105041343531283326302926FY09 FY10 FY11 FY12E FY13ERoCERoESource: Company, Nirmal Bang Institutional Equities ResearchExhibit 14: High cash balance of BHEL(Rsbn)140120100806040344240 394450(Rs)605040302020100FY08 FY09 FY10 FY11 FY12E FY13ECash balance (Rsbn) (LHS)Cash per share (Rs) (RHS)0Source: Company, Nirmal Bang Institutional Equities ResearchHuge opportunity in renovation and modernisation of old BTG unfoldingA huge opportunity is unfolding in the area of life extension, renovation and modernisation of older thermalpower projects. According to CEA (Central Electricity Authority), under the 12th Five Year Plan (2012-17), lifeextension works have been identified for 72 thermal units having an aggregate capacity of 16,532MW andrenovation and modernisation works have been identified for 23 units with an aggregate capacity of4,971MW. A substantial part of the equipment required for these projects is supplied by BHEL. Around 68%of the aggregate capacity planned for life extension works and around 96% of the aggregate capacityplanned for renovation and modernisation works have been supplied by BHEL. Considering its leadershipposition in sub-critical BTG projects and its widespread vendor base, BHEL is strategically positioned tobenefit from this opportunity.Increased opportunities in railways segmentIndian Railways is in the process of awarding two mega projects to build electric engines and diesel enginesat its factories in Madhepura and Marora, respectively, both located in Bihar. It is planning to award 800electric engine and 1,000 diesel engine orders for total estimated contract value of Rs650bn. While GE,Alstom, Bombardier and Siemens AG are competing for the electric engine contract, BHEL is competing forthe diesel engine contract in a JV with GE against Electro Motive Diesel Inc. We believe there are brightchances of the BHEL-GE JV winning the diesel locomotive contract, which will result in a large value orderaccruing to BHEL. Further, Indian Railways has ambitious plans of expanding its current rail network of66,000km by an additional 25,000km by 2020. As a result, it will embark on heightened rolling stockprocurement in the 12 th Five Year Plan period (2012-17) covering coaches, diesel engines, electric enginesand wagons. BHEL has a strong product portfolio catering to the railways segment and will be a keybeneficiary of forthcoming mega orders lined up by Indian Railways.82Bharat Heavy Electricals

Institutional EquitiesExhibit 15: Railways segment portfolio of BHELCategory Key products Market segmentsRolling stockElectric locomotives (AC/DC) (5,000 HP)Electric Multiple Unit (EMU) coachesDiesel electric shunting locomotives (up to 1,400 HP)RailwaysElectrical Three-phase AC/AC electric locomotives (6,000 HP) RailwayspropulsionThree-phase AC/AC diesel electric locomotives (4,000 HP)equipmentDiesel electric multiple units (DEMU)Diesel electric locomotives (up to 3,100 HP)25KV AC electric multiple units (EMU)Three-phase AC/AC EMU (GTO)Kolkata Metro propulsion systemThree-phase AC/AC EMU (IGBT)Track machines Diesel electric tower car RailwaysSource: Company, Nirmal Bang Institutional Equities ResearchExhibit 16: Mega orders lined up by Indian RailwaysPlace Scope of work shortlisted bidders CommentsCement, steel and fertiliser plants,thermal power stations, ports,metro railwaysMarhaura, Bihar Diesel locomotives (1,000 units) BHEL GE JV, Electro Motive Diesel Inc Combined order size for Bihar is estimated atMadhepura, Bihar Electric locomotives (800 units) GE, Alstom SA, Bombardier Inc, Siemens AGRs650bn, Order expected in FY13, BHEL GE JV hasbright chance to bag diesel locomotive contractKanchrapara, WestBengalRail coach factoryBombardier, Alstom, Siemens, CAF, HyundaiRotem, Standler Rail - ABB - Titagarh JV,Hitachi, Kawasaki - Texmaco JVCould go to BHEL on nomination basis, order sizeestimated at Rs210bnPalakkad, Kerala Rail coach factory NA Could go to BEML on nomination basisDankuni, West Bengal Engine component factory NA BHEL-Alstom JV to participateSource: Indian Railways, media articles, Nirmal Bang Institutional Equities ResearchNon-core avenues for revenue traction improvingTo counter the slowdown in domestic BTG market, BHEL has increased its focus on overseas markets. It isreceiving orders from the Middle East and African countries regularly, while it has also started to bid forthermal plants in Bangladesh and Indonesia against Chinese and Korean players. Increasing the exportcontent is likely to be a growing trend in future. In addition, its industrial segment portfolio comprisingproducts for transmission, transportation and industrial segments are scaling up. BHEL is increasinglygetting aggressive in the transmission line segment. In fact, in PGCIL tenders for 400/220KV substationcategory, BHEL has garnered the second-highest market share of 32% so far in FY12 (untilOctober) compared to 0% share over the past two years. We expect the revenue traction from noncoreverticals to improve further compared to the level of 21% of revenue in FY11.Exhibit 17: Industry segment product profileTransmission Transportation Industrial products(7 to 9% of revenue) (3 to 5% of revenue) (12 to 15% of revenue)Transformers Traction machines Industrial machinesSwitchgears Traction control gears Industrial TG/Boiler setsIndustrial control gears DESL CompressorsCapacitors AC Loco/DG sets Oil field equipmentInsulatorsValvesHVDC/Transmission projectsSource: Company, Nirmal Bang Institutional Equities Research83Bharat Heavy Electricals

1Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q10Institutional Equities4Q101Q112Q113Q114Q111Q122Q12FinancialsStrong execution of its high order backlog led to BHEL registering robust revenue growth of 28.2% CAGRover FY08-11. It managed to garner more than 50% share of BTG order inflows in the 11 th and 12 th Five YearPlan periods. Expansion of installed capacity from 6GW to 15GW over the past five years further aidedhigher revenue traction. Strong operational efficiency led by efficient sub-contracting and control over workingcapital led to healthy improvement in operating margin during the same period. As a result, the growth inrevenue transpired to an equally robust growth in profitability as well. EBITDA/PAT posted healthy28%/28.1% CAGR over FY08-11 respectively. In the past three years, BHEL has managed to garner orderinflows worth 15,000MW each, which translates to Rs600bn annual order inflow. As on 2HFY12 end, BHELhad an outstanding order book position of Rs1,610bn, providing it earnings visibility of 3.9x FY11 revenue.However, considering the high base effect, the growth in percentage terms henceforth will be lower. Weexpect BHEL to report revenue CAGR of 12.7% over FY11-13E. Considering the increased competitiveintensity in domestic BTG market, we are factoring in 90bps operating margin erosion over FY11-13E,leading to EBITDA CAGR of 10.2% over the same period, while higher depreciation on account of increasedinstalled capacity is likely to lead to 130bps fall in net profit margin. Consequently, PAT CAGR will be lowerover FY11-13E at 7.6%.Exhibit 18: Order book position(Rsbn)1,600(Rsbn)1,6001,2001,200800800400400--Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 19: Revenue trendOpening order book Order intake Order backlog(Rsmn)600,00033(%)35500,000400,000300,000200,000252614123025201510100,00050FY09 FY10 FY11 FY12E FY13ERevenue % Growth0Source: Company, Nirmal Bang Institutional Equities Research84Bharat Heavy Electricals

Institutional EquitiesExhibit 20: Profitability trend(Rsmn)100,00090,00080,00070,00060,00050,00040,00030,00020,00010,000018.9 18.4 18.016.113.914.513.111.913.7 13.2FY09 FY10 FY11 FY12E FY13EEBITDA PAT EBITDA margin PAT margin(%)20181614121086420Source: Company, Nirmal Bang Institutional Equities ResearchKey risks to our Buy recommendation:Any delay/cancelation of its existing orders can adversely impact revenue traction.Delay/cancellation in setting up of power plants under its JVs with SEBs will affect order inflow visibility.Sharp appreciation of the rupee against other currencies (particularly US dollar, Chinese yuan andJapanese yen) will affect the competitive position of BHEL with respect to Chinese imports as well asdomestic peers85Bharat Heavy Electricals

Institutional EquitiesExhibit 21: Quarterly summaryY/E March (Rsmn) 2QFY11 1QFY12 2QFY12 YoY (%) QoQ (%) 1HFY11 1HFY12 YoY (%)Net revenues 83,284 71,257 102,986 23.7 44.5 148,081 174,242 17.7Raw material 49,641 41,500 61,180 23.2 47.4 87,734 102,679 17.0Staff costs 12,641 13,010 13,491 6.7 3.7 26,018 26,501 1.9Other operating expenses 6,301 7,073 11,192 77.6 58.2 11,190 18,265 63.2Total expenditure 68,583 61,582 85,863 25.2 39.4 124,943 147,445 18.0EBITDA 14,702 9,675 17,123 16.5 77.0 23,138 26,797 15.8Depreciation 1,341 1,709 1,888 40.8 10.5 2,610 3,597 37.8EBIT 13,361 7,965 15,234 14.0 91.3 20,528 23,200 13.0Interest costs 59 88 96 62.6 9.5 98 184 88.9Other income 3,242 3,944 4,668 44.0 18.4 6,090 8,612 41.4PBT 16,544 11,822 19,806 19.7 67.5 26,521 31,628 19.3Tax 5,121 3,667 5,686 11.0 55.1 8,422 9,352 11.1Net profit 11,423 8,155 14,120 23.6 73.1 18,099 22,275 23.1Equity capital (FV: Rs 2) 4,895 4,895 4,895 4,895 4,895No. of shares (mn) 2,448 2,448 2,448 2,448 2,448Diluted EPS (Rs) 4.7 3.3 5.8 7.4 9.1As % of net revenuesRaw material costs 59.6 58.2 59.4 59.2 58.9Staff costs 15.2 18.3 13.1 17.6 15.2Other operating expenses 7.6 9.9 10.9 7.6 10.5EBITDA 17.7 13.6 16.6 15.6 15.4Net profit 13.7 11.4 13.7 12.2 12.8Tax rate 31.0 31.0 28.7 31.8 29.6Segmental snapshotY/E March 2QFY11 1QFY12 2QFY12 YoY (%) QoQ (%) 1HFY11 1HFY12 YoY (%)Revenue (Rsmn)Power 70,547 57,803 77,973 10.5 34.9 124,280 135,776 9.2Industry 16,608 16,529 29,603 78.2 79.1 30,487 46,132 51.3Revenue Mix (%)Power 80.9 77.8 72.5 80.3 74.6Industry 19.1 22.2 27.5 19.7 25.4EBIT (Rsmn)Power 14,185 9,518 13,159 (7.2) 38.3 24,892 22,677 (8.9)Industry 3,368 3,733 8,004 137.6 114.4 5,300 11,737 121.5EBIT Margin (%)Power 20.1 16.5 16.9 20.0 16.7Industry 20.3 22.6 27.0 17.4 25.4Source: Company, Nirmal Bang Institutional Equities Research86Bharat Heavy Electricals

Institutional EquitiesFinancialsit 1: Exhibit 22: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 262,123 328,611 415,661 472,890 528,016% growth 32.8 25.4 26.5 13.8 11.7Raw material costs 164,685 198,857 230,817 290,731 329,280Staff costs 29,837 65,395 53,967 57,226 61,412Other overheads 31,167 11,305 52,510 37,831 42,241Total expenditure 225,689 275,557 337,294 385,788 432,933EBITDA 36,434 53,054 78,367 87,102 95,084% growth (2.6) 45.6 47.7 11.1 9.2EBITDA margin (%) 13.9 16.1 18.9 18.4 18.0Other income 14,974 16,486 17,011 17,862 18,755Interest 307 335 547 663 829Gross profit 51,101 69,205 94,831 104,300 113,010% growth 8.1 35.4 37.0 10.0 8.4Depreciation 2,731 3,371 4,756 7,148 8,709Profit before tax 48,370 65,834 90,075 97,152 104,301% growth 9.2 36.1 36.8 7.9 7.4Tax 17,106 22,800 29,945 32,351 34,732Effective tax rate (%) 35.4 34.6 33.2 33.3 33.3Net profit 31,263 43,034 60,130 64,800 69,569Extraordinary items (119) (73) 18 - -Reported net profit 31,144 42,961 60,148 64,800 69,569PAT margin 11.9 13.1 14.5 13.7 13.2% growth 9.3 37.7 39.7 7.8 7.4EPS (Rs) 12.8 17.6 24.6 26.5 28.4% growth 9.8 37.4 39.4 7.8 7.4DPS (Rs) 4.0 5.4 7.3 8.0 8.0Payout (%) 31.1 31.0 29.5 30.2 28.1Source: Company, Nirmal Bang Institutional Equities Researchit 2: Exhibit 23: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity 4895 4895 4895 4895 4895Reserves 124,493 154,278 196,643 238,534 285,193Net worth 129,388 159,174 201,538 243,429 290,088Short-term loans 1,494 1,278 1,634 11,634 9,084Total loans 1,494 1,278 1,634 11,634 9,084Deferred tax liability net (18,403) (15,272) (21,636) (18,429) (14,988)Liabilities 112,479 145,179 181,536 236,633 284,184Gross block 52,249 65,801 80,497 110,119 122,119Depreciation 37,545 41,647 46,488 53,636 62,345Net block 14,704 24,154 34,009 56,483 59,774Capital work-in-progress 11,570 15,501 17,622 - -Long-term Investments 523 798 4,392 7,892 11,392Inventories 78,370 92,355 109,630 123,801 136,917Debtors 159,755 206,888 273,546 326,488 379,014Cash 103,147 97,901 96,302 108,838 122,842Other current assets 27,739 32,000 35,469 40,960 45,734Total current assets 369,011 429,143 514,947 600,087 684,507Creditors 58,529 75,798 96,019 100,045 109,834Other current liabilities 224,801 248,619 293,415 327,784 361,655Total current liabilities 283,329 324,417 389,434 427,829 471,489Net current assets 85,682 104,726 125,514 172,258 213,018Total assets 112,479 145,179 181,536 236,633 284,184Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 3: Exhibit 24: Cash flow statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 33,703 49,683 73,611 79,953 86,375(Inc.)/dec. in working capital 12,444 (24,290) (22,387) (34,208) (26,756)Cash flow from operations 46,147 25,393 51,224 45,745 59,619Other income 14,974 16,486 17,011 17,862 18,755Depreciation 2,731 3,371 4,756 7,148 8,709Interest paid (-) (307) (335) (547) (663) (829)Tax paid (-) (22,130) (19,669) (36,308) (29,145) (31,290)Dividends paid (-) (9,736) (13,321) (17,747) (22,910) (22,910)Net cash from operations 31,678 11,925 18,388 18,036 32,054Capital expenditure (-) (12,612) (16,752) (16,733) (12,000) (12,000)Net cash after capex 19,066 (4,827) 1,656 6,036 20,054Inc./(dec.) in short-term borrowing 542 (216) 356 10,000 (2,550)Inc./(dec.) in borrowings 542 (216) 356 10,000 (2,550)(Inc.)/dec. in investments (440) (275) (3,593) (3,500) (3,500)Cash from financial activities 101 (491) (3,237) 6,500 (6,050)Others 119 73 (18) 0 0Opening cash 83,860 103,147 97,901 96,302 108,838Closing cash 103,147 97,901 96,302 108,838 122,842Change in cash 19,287 (5,246) (1,599) 12,536 14,004Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 4: Exhibit 25: Key ratiosY/E March FY09 FY10 FY11 FY12E FY13EPer share (Rs)EPS 12.8 17.6 24.6 26.5 28.4Book value 53 65 82 99 119Valuation (x)P/E 21.9 16.0 11.4 10.6 9.9P/BV 5.3 4.3 3.4 2.8 2.4EV/EBITDA 16.1 11.1 7.6 6.8 6.0EV/Sales 2.2 1.8 1.4 1.2 1.1Return ratios (%)RoCE 28.1 34.1 40.5 34.9 31.2RoE 26.4 29.8 33.3 29.1 26.1Profitability ratios (%)EBITDA margin 13.9 16.1 18.9 18.4 18.0EBIT margin 12.9 15.1 17.7 16.9 16.4PAT margin 11.9 13.1 14.5 13.7 13.2Turnover ratiosAsset turnover ratio (x) 2.5 2.6 2.5 2.3 2.0Debtor days 222 230 240 252 262Inventory days 109 103 96 102 110Creditor days 130 139 152 150 145Solvency ratios (x)Debt-equity 0.01 0.01 0.01 0.05 0.03Interest coverage 110 148 134 121 104Source: Company, Nirmal Bang Institutional Equities Research87Bharat Heavy Electricals

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Institutional Equities3QFY12 Pharma Sector Preview12 January 2012Sector PreviewForex losses to play spoilsportWe expect strong operating performance in 3QFY12 of companies under our coverageuniverse, driven by marketing exclusivity for some products in the US, rupeedepreciation (11%QoQ) and acquisitions. On an aggregate basis, we expectrevenue/PAT growth of 18%/16%YoY respectively, mainly driven by the US market,which in addition to rupee depreciation, will also benefit from acquisitions (Sun Pharma-Taro, Cadila Healthcare-Nesher) and launch of products having marketing exclusivity(Glenmark Pharma-Malarone, Sun Pharma/Cadila Healthcare-Gemzar). Margins are likelyto expand 70bps, helped by a weak rupee for Sun Pharma and Cipla, even as forexlosses of Cadila and Glenmark drag it lower. Extension of the deadline for chargingforex losses/gains to P&L account from March 2012 to March 2020, may, however, helpcompanies to mask forex losses. Cumulatively, we forecast forex losses of Rs2.4bn forcompanies under our coverage; Cadila and Glenmark would be most affected becauseof their forex loans. We upgrade Sun Pharma (higher currency assumption) to Buy fromHold, while we maintain our respective ratings on other stocks.Praful Bohrapraful.bohra@nirmalbang.com+91-22-3926 8175Earnings upgrade for Sun Pharma, Cipla on weak rupee: As per our in-house view, India’sexternal account is likely to deteriorate further this year with the current account deficitwidening, inability to attract capital inflows and pressure on forex reserves from maturing shorttermforex debt, which is likely to continue exerting pressure on the rupee. We now factor in anaverage rupee-dollar rate of 54.5/$ for FY13 (Rs51/$ earlier). Owing to this, we haveupgraded our FY13 EPS estimates for Sun Pharma and Cipla (the major beneficiaries ofa weak rupee) due to low hedging and no forex debt, by 11% and 10%, respectively.Consequently, we upgrade Sun Pharma’s rating from Hold to Buy with a revised targetprice of Rs592 (from Rs532 earlier), while we retain our Sell rating on Cipla with arevised TP of Rs296 (from Rs268 earlier). While Glenmark and Cadila will benefit from aweak rupee as well, their mark-to-market (MTM) losses on forex loans will neutralise theoverall positive impact and we thus retain our earlier earnings estimates.Domestic growth to be monitored closely: Recent data by All India Organisation ofChemists and Druggists (AIOCD) indicates an uptick in industry growth (21% in Novemberversus less than 15% in the previous five months) and company managements’ comments onthe same will be closely monitored. Most of the companies have undergone restructuring in thepast 2-3 quarters (realignment of marketing spends, field force restructuring etc) and webelieve the same will reflect in revenues from FY13 onwards. Other factors to watch out for arethe impact of forex losses/gains, the Impact of contraction in EU/emerging market economies,updates on regulatory hurdles (consent decrees, warning letters etc) and the outlook onmargins.Net Sales EBITDA RPAT(Rsmn) CMP (Rs) Rating TP (Rs) 3QFY12E YoY (%) QoQ (%) 3QFY12E YoY (%) QoQ (%) 3QFY12E YoY (%) QoQ (%)Sun Pharma 519 Buy 592 19,241 20.2 1.6 6,974 58.3 (11.0) 5,736 63.8 (4.0)Cipla 339 Sell 296 17,574 13.1 (2.6) 4,083 28.3 4.3 2,871 23.4 (7.1)Cadila 678 Hold 737 13,436 15.2 8.7 2,590 1.1 9.2 1,001 (38.2) (2.5)Glenmark 304 Buy 362 9,979 31.6 (5.5) 1,019 (41.5) (54.9) 487 (55.5) (12.8)Torrent Pharma 551 Buy 715 6,417 11.1 (6.1) 1,112 (3.3) (21.0) 749 (2.6) (25.1)Source: Bloomberg, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesSun Pharmaceutical Industries: The company is one of the major beneficiaries of steep rupeedepreciation (vis-à-vis the US dollar) and is likely to report strong numbers for the quarter. We expectrevenues to grow 20%YoY led by continued strong performance in the domestic market (seen up 11%YoYand 18%YoY excluding the discontinued third-party manufacturing business and value added tax), Taro(expected revenue US$129mn versus US$102mn in 3QFY11) and rupee depreciation (almost 42% of Sun’srevenue comes from the US). We expect moderation in Taro’s margins, but consolidated margins willcontinue to be positively impacted by higher closing stock valuation, which should lead to 870bpsYoYimprovement in overall margins. Sun’s revenues are largely not hedged (management had indicatedsignificantly lower hedges than US$300mn as at the end of FY11), and would benefit from rupeedepreciation (not factored in our estimates). We have assumed 10% tax rate and higher minority payments(due to strong performance at Taro), despite which we expect PAT to grow 64%YoY.Exhibit 1: Financials(Rsmn) 3QFY11 2QFY12 3QFY12E YoY (%) QoQ (%)Net revenue 16,011 18,946 19,241 20.2 1.6EBITDA 4,405 7,840 6,974 58.3 (11.0)EBITDA margin (%) 27.5 41.4 36.2 - -PAT 3,502 5,977 5,736 63.8 (4.0)PAT excluding forex 3,502 5,245 5,376 53.5 2.5Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 2: Change in earnings estimatesFY12EFY13E(Rsmn) Old New Change (%) Old New Change (%)Revenue 73,903 75,304 1.9 82,512 93,032 12.7EBITDA 26,448 27,025 2.2 28,054 31,631 12.7EBITDA margin (%) 35.8 35.9 - 34.0 34.0 -PAT 21,937 22,422 2.2 24,479 27,259 11.4Source: Nirmal Bang Institutional Equities ResearchCipla: The company’s policy of cash flow hedging on month-on-month basis and lack of front-end set-ups ininternational markets will cushion its margins, as compared to peers, and drive a strong 23%YoY growth inprofits. Revenue growth is likely to be tepid at 13%YoY, despite the steep rupee depreciation, due toselective bidding in Anti-Retroviral (ARV) tenders. Domestic growth, as reported by the AIOCD, has pickedup pace of late, and we expect the company to report 12%YoY growth. We assume Rs1.5bn revenue fromIndore SEZ, but remain guarded on our overall export assumption as we continue to believe that most of therevenue from Indore is from products transferred from other sites and that lower participation in ARV tenderswill continue to drag down volumes. We expect margins to be positively impacted because of rupeedepreciation, better product mix (lower ARV sales) and expect 270bps YoY and 150bps QoQ improvement.In our margin assumptions, we have considered lower DEPB benefits and forex gains of Rs100mn.Exhibit 3: Financials(Rsmn) 3QFY11 2QFY12 3QFY12E YoY (%) QoQ (%)Net revenue 15,537 18,043 17,574 13.1 (2.6)EBITDA 3,182 3,914 4,083 28.3 4.3EBITDA margin (%) 20.5 21.7 23.2 - -PAT 2,327 3,090 2,871 23.4 (7.1)PAT excluding forex 2,327 2,950 2,791 19.9 (5.4)Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 4: Change in earnings estimate(Rsmn) Old New Change (%) Old New Change (%)Sales 69,066 69,066 0.0 75,903 79,948 5.3EBITDA 15,894 15,894 0.0 17,248 18,949 9.9EBITDA margin (%) 23.0 23.0 - 22.7 23.7 -PAT 11,392 11,392 0.0 12,594 13,884 10.2Source: Nirmal Bang Institutional Equities Research903QFY12 Preview

Institutional EquitiesCadila Healthcare: We expect yet another subdued performance by the company as it struggles to maintainits growth momentum in its domestic formulations and consumer businesses. Growth will primarily be drivenby international markets, which, in addition to the steep rupee depreciation, will also benefit from recentacquisitions. Revenue from the US (seen up 44%YoY; aided by rupee depreciation and Nesher acquisition),Japan (seen up 23%YoY on a low base) and Hospira joint venture (seen up 34%YoY led by Gemzar launch)will be key contributors. EBITDA margin will be dragged down to 19% (down 270bpsYoY, 10bpsQoQ) byforex losses, absence of DEPB benefits and integration of Nesher Pharma. Excluding forex losses, weexpect EBITDA margin of 22.4%. The key highlight, however, is likely to be the sharp increase in interestcosts, which, we believe, will rise 4x YoY because of a steep Rs9bn increase in debt in 2QFY12 and MTMforex losses (we have factored in Rs788mn of forex losses), which would drive PAT to Rs1bn, down38%YoY and 3%QoQ. Excluding forex losses, we expect PAT of Rs2.01bn, up 24%YoY and 17%QoQ.Exhibit 5: Financials(Rsmn) 3QFY11 2QFY12 3QFY12E YoY (%) QoQ (%)Net revenue 11,668 12,364 13,436 15.2 8.7EBITDA 2,562 2,371 2,590 1.1 9.2EBITDA margin (%) 22.0 19.2 19.3 - -PAT 1,620 1,027 1,001 (38.2) (2.5)PAT excluding forex 1,626 1,726 2,013 23.8 16.6Source: Company, Nirmal Bang Institutional Equities ResearchGlenmark Pharmaceuticals: The company’s performance will be marred by forex losses of Rs1.1bn on itsUS$350mn forex loan, which, consequently, would drag profits down by 55%YoY and 13%QoQ. Revenuegrowth is expected to be at a healthy 32%YoY, aided by rupee depreciation, products launched withmarketing exclusivity like Malarone in the US and market share gains in Oxycodone and its oralcontraceptive portfolio. We have also included US$5mn of licensing income from Salix in our estimates. Weexpect domestic business to register 16%YoY growth in a seasonally strong quarter, while rest-of-the-worldmarkets are likely to post 32%YoY growth, in line with FY12 guidance. We believe EBITDA margin will getnegatively impacted by forex losses, excluding which we expect a margin of 21.5% and PAT of Rs1.45bn.Exhibit 6: Financials(Rsmn) 3QFY11 2QFY12 3QFY12E YoY (%) QoQ (%)Net revenue 7,585 10,557 9,979 31.6 (5.5)EBITDA 1,741 2,256 1,019 (41.5) (54.9)EBITDA margin (%) 23.0 21.4 10.2 - -PAT 1,096 559 487 (55.5) (12.8)PAT excluding forex 906 1,409 1,454 60.5 3.2Source: Company, Nirmal Bang Institutional Equities ResearchTorrent Pharmaceuticals: The company’s 3QFY12 performance will be driven by global markets, notably aseasonally strong US market (revenue seen up 57%YoY helped by a low base and rupee depreciation),Brazil (seen up 20%YoY aided by currency depreciation) and Germany (seen up14% YoY on tenders wonrecently). Domestic growth is expected to underperform industry growth, as we expect recent restructuringactivities undertaken by the company (realignment of marketing expenditure) to reflect with a lag. We havefactored in forex losses of Rs199mn in our estimates, as the company has hedged almost 80% of its exportproceeds, which, we believe, will negatively impact earnings. Owing to this, our margin assumption for thequarter stands at 17.3%, lower by 258bps YoY and 326bps QoQ. Excluding the forex loss, we expect 20.4%EBITDA margin. We also factor in lower export benefits (in the absence of DEPB benefits) and Rs100mn ofdossier income in our estimates (likely to recur in all quarters of FY12, as stated by the management earlier),which consequently drives our PAT to Rs749mn, down 3%YoY and 25%QoQ. Excluding forex losses, weexpect PAT of Rs913mn, up 19%YoY.Exhibit 7: Financials(Rsmn) 3QFY11 2QFY12 3QFY12E YoY (%) QoQ (%)Net revenue 5,775 6,833 6,417 11.1 (6.1)EBITDA 1,150 1,407 1,112 (3.3) (21.0)EBITDA margin (%) 19.9 20.6 17.3 - -PAT 769 1,000 749 (2.6) (25.1)PAT excluding forex 769 930 914 18.8 (1.8)Source: Company, Nirmal Bang Institutional Equities Research913QFY12 Preview

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.Institutional EquitiesSun Pharmaceutical IndustriesReuters: SUN.BO; Bloomberg: SUNP IN1 November 2011Initiating CoverageFairly ValuedWith a 20% re-rating in PE multiple in the past 18 months, we believe SunPharma’s growth trajectory and Taro-related upside are well captured in theshare price, leaving little scope for any error. While the premium valuation willstay – led by strong domestic market positioning, healthy Balance Sheet androbust capital efficiency – we see limited levers for PE multiple expansion,especially in view of stagnating Para IV pipeline and the risk of potential liabilityfrom Protonix litigation. We assign a Hold rating to the stock with a target priceof Rs513, implying a 2% upside from the CMP.Upside discounted; Near-term performance contingent on various factors: With a20% re-rating of PE multiple in the past 18 months, we believe Sun Pharma’s growthtrajectory and Taro-related upside are well captured in the share price, leaving littlescope for error. Our estimates are broadly in line with consensus estimates and webelieve the company’s near-term performance is contingent on numerous factors the,outcome of which will decide stock movement, either way. On the negative side, astagnating Para IV pipeline and the risk of potential liability from Protonix litigation willcap PE multiple expansion, while value unlocking through potential acquisitions andspeedy resolution of Caraco issue are key upside risks.Domestic formulations business looks promising: Even as the industry struggles tomaintain volume growth in domestic market, Sun Pharma stands out from the crowdowing to a) Its high exposure towards lifestyle diseases (60% of portfolio), b)Leadership in key therapies like psychiatry, neurology, cardiology ophthalmology,orthopaedics and gastro-enterology, and c) Its ability to gain market share (4.4%currently as per AIOCD). With a 20%CAGR in the past five years, Sun Pharma isamong the fastest growing companies in India and has consistently outpaced industrygrowth. We believe the outperformance will continue and expect the company’sdomestic revenue to show 18%CAGR over FY11-13E.Taro operational turnaround is the key: Strategically, we believe Taro is an excellentfit for Sun Pharma, given its strong US presence and minimal product overlap. Theimportant driver, however, is its operational turnaround. Taro’s EBITDA margin hasimproved substantially from 22% in 2010 to 31% in 1HCY11, partly driven by lowerremediation charges and stagnant R&D expenses. Even then, we note the margins arelower than Sun’s base business margin of 32-33% and are likely to decline insubsequent quarters on increased competition and higher R&D expenditure.Valuation: We value Sun Pharma at 22.5x FY13E EPS of Rs23, at a 25% premium toour target sector multiple of 18x, to arrive at a target price of Rs513, implying a 2%upside from the CMP. Our target multiple is at a 15-20% premium to peers like Ciplaand Dr Reddy’s Laboratories, which we believe is justified, given the superior marginprofile and potential value unlocking through acquisitions.Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13ERevenue 42,723 41,028 58,341 72,364 80,136YoY (%) 27.3 (4.0) 42.2 24.0 10.7EBITDA 18,640 13,633 19,672 23,722 26,124EBITDA (%) 43.6 33.2 33.7 32.8 32.6Adj PAT 18,178 13,512 18,609 21,845 23,609YoY (%) 22.3 (25.7) 37.7 17.4 8.1Fully DEPS 17.6 13.0 18.0 21.1 22.8RoE (%) 30.2 18.2 21.5 21.2 19.6RoCE (%) 26.8 15.3 18.4 18.1 17.4P/E (x) 28.7 38.6 28.0 23.8 22.1EV/EBITDA (x) 27.1 37.9 25.6 20.9 18.7Source: Company, Nirmal Bang Institutional Equities ResearchHOLDSector: PharmaceuticalCMP: Rs503Target Price: Rs513Upside: 2%Praful Bohrapraful.bohra@nirmalbang.com+91-22-3926 8175Key DataCurrent Shares O/S (mn) 1,036Mkt Cap (Rsbn/US$bn) 519.5/10.652 Wk H / L (Rs) 603/392Daily Vol. (3M NSE Avg.) 1,166,923Share holding (%) Q4FY12 QFY12 Q2FY11Promoter 63.7 63.7 63.7FII 18.5 18.6 19.1DII 7.1 7.2 6.5Corporate 5.1 5.1 5.1General Public 5.6 5.5 5.6One Year Indexed Stock Performance130120110100908070Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11SUN PHARMA INDUPrice Performance (%)1 M 6 M 1 YrSun Pharma 9.1 8.3 15.1Nifty Index 6.8 (8.2) (13.7)Source: BloombergNSE S&P CNX NIFTY INDEXPlease refer to the disclaimer towards the end of the document.

Feb-10Apr-10Jun-10Aug-10Oct-10Dec-10Feb-11Apr-11Jun-11Aug-11Oct-11Feb-10Apr-10Jun-10Institutional EquitiesAug-10Oct-10Dec-10Feb-11Apr-11Jun-11Aug-11Oct-11We are 6% below consensus estimate on FY13 PATOur revenue and PAT estimates are broadly in line with consensus estimates for FY12, although 4% belowthe lower end of the management’s revenue guidance of 28-30% as we have not excluded VAT (notdisclosed separately) and discontinued third party revenue from our FY11 base. Adjusting for third partyrevenue and assuming 3% VAT, we believe our estimates would meet the lower end of the management’sguidance. On a high base, Sun’s guidance is impressive and possibly driven by: a) Strong growth trajectoryin India; management expects 18-20% growth b) Full first year reflection of Taro integration, as last year’sbase includes six months’ revenue, c) Upside from a large pending US pipeline of 151 ANDAs, d) Upsidefrom niche opportunities like Taxotere, Prandin, Gemzar etc, and e) Rising contribution from emergingmarkets.Our FY13 revenue and PAT expectations are 7%/6% below consensus estimates, as we expect domesticgrowth to moderate to 16% in FY13 led by a high base of FY12 and slowing growth momentum in domesticmarket. We also expect modest growth in Taro following increased competition in core therapies and in keyproducts like Imiquimod cream, which constitutes 5% of our FY12 revenue estimate for Taro.Exhibit 1: Our expectations vs consensus estimates(Rsmn)NBIEestimatesBloombergconsensusVariation(%) NBIEBloombergconsensusVariation(%)Revenue 72,364 73188 (1.1) 80,136 86,116 (6.9)EBITDA 23,722 24099 (1.6) 26,124 28,632 (8.8)EBITDA margin (%) 32.8 32.9 (15bps) 32.6 33.2 (65bps)PAT 21,845 21296 2.6% 23,609 25,144 (6.1)Source: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 2: Consensus revenue estimate(Rsmn)90,00080,00070,00060,00050,00040,000Exhibit 3: Consensus PAT estimate(Rsmn)30,00025,00020,00015,00010,000BBG FY12 BBG FY13 NBIE FY12 NBIE FY13Source: Bloomberg, Nirmal Bang Institutional Equities ResearchBBG FY12 BBG FY13 NBIE FY12 NBIE FY13Source: Bloomberg, Nirmal Bang Institutional Equities Research94Sun Pharma

Oct-05Apr-06Oct-06Apr-07Oct-07Apr-08Oct-08Institutional EquitiesApr-09Oct-09Apr-10Oct-10Apr-11Oct-11Fairly valuedWith a 20% expansion in PE multiple post announcement of Taro acquisition in June 2010, we believe SunPharma’s strong earnings trajectory and Taro-related upsides are well captured in its share price, leavinglittle scope for further appreciation. In the near term, we believe the stock’s performance is contingent onnumerous factors the, outcome of which will decide stock movement, either way. On the negative side, astagnating Para IV pipeline and the risk of potential liability from Protonix litigation will cap PE multipleexpansion, while value unlocking through potential acquisitions and speedy resolution of Caraco issues arekey upside risks.We assign a Hold rating and a target price of Rs513 to the stock, implying an upside of 2% from the currentlevel. Our target price is pegged at: a) 25% premium to our target sector multiple of 18x, b) 35% premium tofive-year average multiple, and c) 70% premium to Sensex against a 15% average premium historically,owing to its strong defensive appeal and significantly higher margin profile than Sensex companies.Exhibit 4: PER – Sun’s multiple has expanded 20% post announcement of Taro acquisition(x)3025201510Announcement ofTaro acquisition50Source: Bloomberg, Nirmal Bang Institutional Equities ResearchSun Pharma scores the best on our valuation framework and we believe the premium valuation is justified bya) Strong domestic franchise, with more than 60% contribution from chronic therapies and leadershipposition in key therapies like CVS, CNS etc b) Balance sheet strength, with a net cash of ~US$1bn c)Management track record, with a strong execution record and a disciplined M&A strategy, and d) RoE andRoCE of 22%/18% respectively, driven by its best-in-class margin profile.Exhibit 5: Target price calculationSector PE (x) 18.0Premium to sector 25%Sun's PE (x) 22.5FY13E EPS 22.8a) Base business value 513b) Para IV value 0Target Price (a+b+c) 513Source: Nirmal Bang Institutional Equities ResearchExhibit 6: Premium to sector, Sensex justified(%)12010080604020-(20) Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11(40)(60)Premium/discount to SectorSource: Bloomberg, Nirmal Bang Institutional Equities ResearchPremium/discount to Sensex95Sun Pharma

Institutional EquitiesRating RationaleDomestic formulations - Stand out from the crowdWith a 20% CAGR over the past five years, Sun Pharma is among the fastest growing companies in Indiaand has one of the most profitable domestic franchises contributing over 50% to profit. Even as otherdomestic players struggle to maintain volume growth, the company stands out from the crowd owing to: a)High exposure to lifestyle diseases (60% of portfolio), b) Leadership in key therapies like psychiatry,neurology, cardiology ophthalmology, orthopaedics and gastro-enterology, and c) Its ability to gain marketshare (4.4% currently as per AIOCD), without expanding its field force in large numbers or venturing in nonurbanmarkets. Also, we believe competition risks are minimal for Sun Pharma as the company enjoys astrong relationship with specialists and super-specialists, which takes a substantial amount of time to build.We thus believe the company will be able to maintain its growth trajectory and expect 18% CAGR (excludingVAT and discontinued third party revenue) in domestic revenue over FY11-13E.Exhibit 7: Domestic formulations–Therapy-wise break-up(%) Exhibit 8: Domestic formulations revenue trendGynecology &Urology, 7Others, 8Musculo-skeletalOpthalmology, 5& pain, 5Gastroenterology,11Diabetelogy, 14Anti-asthmatic andAnti-allergic, 4Source: Company, Nirmal Bang Institutional Equities ResearchNeuro Psychiatry,28Cardiology, 19Exhibit 9: Sun’s (including Taro) US portfolio break-up(Rsmn) (%)35,0004030,000353025,000252020,0001515,00010510,00005,000(5)(10)0(15)FY07 FY08 FY09 FY10 FY11 FY12E FY13EDomestic revenuesSource: Company, Nirmal Bang Institutional Equities ResearchStrong US growth led by Para IV opportunities/acquisitionsSun Pharma’s US revenue has shown 49% CAGR over FY07-11, led by monetisation of key ParaIV/exclusive opportunities like Protonix (GERD), Eloxatin (oncology) and Trileptal (CNS) as well asTaro acquisition. These products have together contributed ~US$500mn over FY08-11, as per ourestimate. Its base business – excluding Taro and Para IV opportunities – has largely remainedmuted with 9% CAGR (as per our estimate) over the past four years.Exhibit 10: US revenue growth trendGrowth rateSkinCNS53CVS20Pain15Allergy13Oncology12Metabolism 7Cough/Cold 6Others10Source: Company, Nirmal Bang Institutional Equities Research89(US$ mn)9008007006005004003002001000FY08 FY09 FY10 FY11 FY12E FY13EBase business revenues Para IV TaroSource: Company, Nirmal Bang Institutional Equities Research96Sun Pharma

Institutional EquitiesTaro – Operational turnaround is the keyStrategically, we believe Taro is an excellent fit for Sun Pharma, given its strong US portfolio and minimalproduct overlap (Taro has a strong dermatology and OTC portfolio, where Sun is minimally present); theimportant driver, however, is operational turnaround. Taro’s EBITDA margin has improved substantially from22% in CY10 to 31% in 1HCY11, partly driven by lower remediation charges (as the warning letter for itsCanadian facility was withdrawn) and R&D expenses. Even then, we note the margins are lower than Sun’sbase business margins of 32-33% and are likely to subside in the subsequent quarters on increasedcompetition and higher R&D expenditure.Exhibit 11: Taro’s margins improved significantly in 1HCY11(%)302520151050CY07 CY08 CY09 CY10 CY11E CY12E CY13ESource: Company, IndustryInitial focus is to step up R&D investmentSun Pharma’s initial focus is to step up Taro’s R&D investment, which has largely remained stagnant ataround US$35mn over the past three years. We believe this possibly points to a weak future pipeline; thiswas also indicated by Sun’s management at recent conference calls. Taro currently has two NDAs underdevelopment, both of which are in early stages, and 24 ANDAs pending approval. For FY12, Sun Pharmahas given a guidance of over 6% R&D expenditure, almost 100bps higher than the previous year.Exhibit 12: Taro’s R&D largely stagnant over past three years(US$ mn) (%)401635302520151050Source: Company, IndustryCY06 CY07 CY08 CY09 CY101412108642097Sun Pharma

Institutional EquitiesExhibit 13: Sun’s Para IV settlementsBrandnameGeneric nameWe factor in 8% revenue CAGR over next two yearsNotwithstanding a strong 1H2011, we expect Taro’s growth to moderate going forward and factor in 8%revenue CAGR over the next two years as we believe Taro’s future pipeline will be weak because of stagnantR&D expenditure over the past three years. Consistent to our muted expectations, Taro, in its 2QCY11 SECfiling, cited increasing competition to have a negative impact on its sales and margins in the coming quarters.Our estimates assume US$19mn and US$36mn of revenue in FY12 and FY13 from the launch of Imiquimodcream (Market size: US$293mn, five-player market with Nycomed and Perrigo controlling ~90% of themarket), for which Taro has received approval in April 2011, but the launch has not yet been confirmed. Weexpect Taro’s base business margins to stabilise around 28.5% in CY11E and CY12E, lower than 1HCY11average of 31%, as we expect an increase in R&D expenses. Taro accounts for 26% and 24% of our FY12and FY13 revenue forecasts, respectively.Excluding Taro, we expect flat US revenue growthExcluding Taro, we expect Sun Pharma’s base US revenue to remain flat over FY11-13E because of lack ofmaterial product opportunities and higher base of FY11, led by one-time sales of Pantoprazole and Eloxatin.Barring Taxotere, Gemzar and Prandin, we do not foresee any large scale opportunities that can swingearnings materially. We have factored in US$68mn and US$49mn from Taxotere in our FY12 and FY13revenue estimates, respectively, while we have included Prandin in our FY13 revenue estimate on the expiryof six-month marketing exclusivity. Caraco’s progress on remediation has been slower than expected and wedo not see meaningful contribution before FY13. Even if Caraco warning letter issue is resolved, we believethe ramp-up will only be gradual as we believe the USFDA will closely scrutinise each product before itreaches the market.Brand sales(US$mn)LaunchyearCommentsExelon rivastigmine 346 2010 Launched along with Watson in July 2010Astelin azelastine 259 2011 Apotex launched under licence from Meda Pharma in March-2010; Sun Pharma yet to receive approvalcarbidopa,Orion has settled with Wockhardt and Sun; Wockhardt has FTF and will launch in September 2012. PostStalevo levodopa and138 2012marketing exclusivity period, Sun Pharma will also launch its product.entacaponeComtan entacapone 96 2013 Will launch on 1 April,2013, post Wockhardt's marketing exclusivity.Namenda memantine 1,338 2015 Shared with multiple players.Ethyol amifostine 80 2008 Launched along with Watson in July 2010.Clarinex desloratadine 205 NA Settled with Schering; likely launch on 1 July 2012 with 8-9 other players.Depakote divalproex 786 NA -lexapro escitalopram 2,818Paediatrics exclusivity expired on 12 March 2011; Teva is FTF; Caraco will launch after AG, FTF andanother generic player’s launch; Multiple filers with tentative approvals (8-9); We expect the productlaunch in October 2012.Allegra fexofenadine Hcl 29 NASource: Bloomberg, USFDA, Industry98Sun Pharma

Institutional EquitiesExhibit 14: Sun’s Para IV pipelineBrand Form API InnovatorSales First patent(US$mn) expiry CommentsUS district court upheld Otsuka's patents till 20 April 2015. Sun has appealedAbilify Tablet aripiprazole Otsuka 4598 20 Apr 2005 against the ruling and the verdict is awaited. Four other companies includingTeva, Sandoz, Apotex and Synthon are in litigationActonel Tablet risedronate P&G (& Merck) 792 22 Nov 2011 Judgement awaitedAllegra-D24ER tabletfexofenadine/pseudoephedrineAventis 500 11 Nov 2012 Dr Reddy’s has launched the generic versionAllegra Tablet fexofenadine Hcl Aventis 29 26 May 2014 Matter settled with AventisBoniva Injection ibandronate Roche 695 17 Mar 2012 Five companies including Sun have tentative approvalCrestor Tablet rosuvastatin Astrazeneca 2797 8 Jan 2016 Shared FTF with 7-8 playersCymbaltaDelayedreleasecapsuleduloxetine Eli Lilly 3172 11Jun 2013Focalin Tablet dexmethylphenidate Novartis 21 4 Dec 2015 -Shared FTF with 6-7 players; US district court ruled against generic filers inApril 2011Gabitril Tablet tiagabine Cephalon 51 30Sep 2011 Sun is likely to launch in March 2012 after the expiry of pediatric exclusivityGlumetzaExtendedreleasetabletmetformin Depomed 42 19 Sep 2016Gleevec Tablet imatinib Novartis 1285 4 Jul 2015 Sun is the FTF.Lunesta Tablet eszopiclone Sepracor 792 16 Jan 2012Lyrica Capsule pregabalin pfizer 1443 8 Oct 2013 Multiple FTF filers.Sun has filed for 500 mg and 1gm; Multiple players in 500mg; Lupin has FTF on1gmShared FTF with multiple players; Launch likely in November 2013 or May 2014in case of grant of pediatric exclusivity.Nexium IV Injection esomeprazole Astrazeneca 6290 27 Nov 2014 Ranbaxy has settled with AstraZeneca, to launch in May 2014 along with TevaNisapan ER tablet niacinKos Pharmaceuticals(Abbott Labs)Plavix Tablet clopidogrel Bristol-Myers Squibb 6166 Expired1139 20 Sep 2013 Teva is most likely the FTF.Apotex lost the litigation against Sanofi/BMS and paid US$441mn in 2010 for itsat-risk launch; Paeditric exclusivity ands on 17 May 2012.Precedex Injection dexmedetomidine Hospira (Orion) 107 6 Sep 2011 Sandoz is the FTF; Caraco is the only other company to be sued.Protonix IV For injection pantoprazole Wyeth / Altana 80 19 Jan 2011 Sun is likely the FTF.RyzoltExtendedreleasetablettramadol ER Purdue Pharma 15 10 May 2014 Judgement awaited.Strattera Capsule atomoxetine Eli Lilly 524 26 May 2017Temodar Capsule temozolomide Schering 391 11 Feb 2014Uroxatral ER tablet alfuzosin Sanofi-Aventis 247 18 Jan 2011 Multiple FTFs.Xyzal Tablet levocetirizine Ucb And Sepracor 177 24 Sep 2012 Synthon is the FTF.YazTabletdrospirenone andethinyl estradiolSource: Bloomberg, USFDA, IndustryBayer Corp 751 29 Oct 2013 Judgement awaited.Eli Lilly won the litigation on appealing in the US federal court, which overruledthe earlier decision and thus the generic competition is delayed. Sun is the FTFwith 6-7 other playersTeva is the FTF and has settled with Merck for launch in August 2013; Sun ispara IV and will mostly launch after Teva99Sun Pharma

Institutional EquitiesEarnings CAGR of 13% over FY11-13EWe expect Sun’s revenue to show 17% CAGR over FY11-13E, led by continued traction in its chronicfocused domestic business (18% CAGR), Rest of the world markets (22% CAGR) and US revenue (21%CAGR) are driven by niche opportunities like Taxotere, Gemzar, Prandin and contribution from Taro. Therecan be upside to our estimates if Sun Pharma is able to resolve Caraco issue by FY13. We expect themargins to cumulatively decline by 112bps over FY11-13E, owing to lower margins at Taro and decliningcontribution from high margin Para IV opportunities. We assume higher tax rates in FY13, as tax benefits forTaro are likely to deplete in FY12, which consequently drives our expected 13% CAGR in PAT, 6% belowconsensus estimate. Decline in margins and increase in the proportion of low-yield cash will consequently willdrive RoE/RoCE lower by 188bps/98bps over FY11-13E.Exhibit 15: Sun’s financial profileSource: Company; Nirmal Bang Institutional Equities ResearchStrong Balance Sheet gives flexibility to pursue inorganic growthWith cash on its books at US$1bn, Sun Pharma has already stated its intention to grow in the US and otherlarge emerging markets (Russia, Brazil, China, Mexico, etc) beyond the current footprint through acquisitions.Given its history of buying underperforming assets and then turning them around, we believe the companymay be looking at a similar option. As earlier indicated by the management, the company is looking for asizeable entity to further scale up operations, rather than making small acquisitions. Current yield on cash(plus investments) is 3%, as most of the cash is deployed in long-dated mutual fund schemes and is valuedestructive (adjusted for cash plus investments, its RoCE stands at an impressive 27%). We believe anyvalue unlocking through potential acquisition will be positive for Sun Pharma.Key risks(Rsmn) (%)90,0005080,00070,00060,00050,00040,00030,00020,00010,0000FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13ERevenue PAT EBITDA marginUnfavorable ruling in the Protonix case can lead to substantial penalty. Even assuming 1x of profit, theamount can be as high as US$300mn. This may also delay its acquisition plan.Prolonged Caraco issue will lead to downgrade in FY13 earnings, as we believe consensus is expectinga resolution by FY13Higher-than-expected price erosion in Taxotere would lead to earnings downgrade, as it contributes7%/4% to our FY12/13 EPS estimates, respectively. Marketing transition from Caraco post January2012, may lead to supply disruption and confusion in the market place.454035302520151050100Sun Pharma

Institutional EquitiesExhibit 16: Quarterly summaryY/E March (Rsmn) 1QFY11 4QFY11 1QFY12 YoY (%) QoQ (%)Net revenue 13,997 14,633 16,357 16.9 11.8Total raw material costs 3,357 3,132 4,071 21.3 30.0% of revenue 24.0 21.4 24.9 - -Staff costs 1,246 2,540 2,786 123.6 9.7% of revenue 8.9 17.4 17.0 - -Other expenses 3,235 4,525 4,026 24.5 -11.0% of revenue 23.1 30.9 24.6 - -EBITDA 6,160 4,436 5,474 (11.1) 23.4EBITDA margin (%) 44.0 30.3 33.5 - -Other income (87.6) 659.3 653.1 (845.5) (0.9)Interest Income 203.2 448.4 315.5 55.3 (29.6)Depreciation 402 482.1 647.2 61.0 34.2PBT (before exceptional items) 5,873 5,062 5,796 (1.3) 14.5Exceptional items - - - - -PBT (after exceptional items) 5,873 5,062 5,796 (1.3) 14.5Tax 97 22.4 142.7 47.1 537.1Minority interest 133.1 611.9 643.1Reported PAT 5,643 4,428 5,010 (11.2) 13.2PAT margin(%) 40.3 30.3 30.6 - -Source: Company; Nirmal Bang Institutional Equities Research101Sun Pharma

Institutional EquitiesFinancialsExhibit17: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 42,723 41,028 58,341 72,364 80,136% growth 27.3 (4.0) 42.2 24.0 10.7Raw material costs (8,556) (10,977) (14,607) (18,091) (20,835)Staff costs (3,401) (4,008) (7,996) (11,578) (12,822)R&D expenses (3,099) (2,083) (3,077) (4,500) (5,129)Others (9,028) (10,326) (12,990) (14,473) (15,226)Total expenditure (24,084) (27,394) (38,670) (48,642) (54,012)EBITDA 18,640 13,633 19,672 23,722 26,124% growth 20.2 (26.9) 44.3 20.6 10.1EBITDA margin (%) 43.6 33.2 33.7 32.8 32.6Other income 868 910 1,386 1,701 1,883Interest 1,217 1,139 1,342 1,810 2,000Depreciation (1,233) (1,533) (2,041) (2,586) (2,869)Profit before tax 19,492 14,149 20,358 24,647 27,139% growth 21.9 (27.4) 43.9 21.1 10.1Tax (712) (679) (836) (1,232) (1,900)Effective tax rate (%) 3.7 4.8 4.1 5.0 7.0Net profit 18,781 13,471 19,522 23,415 25,239% growth 21.1 (28.3) 44.9 19.9 7.8Extraordinary items (603) 41 (913) (1,569) (1,629)Reported net profit 18,178 13,512 18,609 21,845 23,609% growth 22.3 (25.7) 37.7 17.4 8.1EPS (Rs) 17.6 13.0 18.0 21.1 22.8% growth 22.3 (25.7) 37.7 17.4 8.1DPS (Rs) 13.7 13.8 3.5 4.2 4.6Payout (%) 17.7 24.6 22.7 24.2 24.2Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 19: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity 1,036 1,036 1,036 1,036 1,036Reserves 69,414 77,254 93,798 110,365 128,271Net worth 70,449 78,289 94,833 111,401 129,306Short-term loans 117 695 695 695 695Long-term loans 1,672 1,016 3,561 557 557Total loans 1,789 1,712 4,256 1,252 1,252Deferred tax liabilities/(assets) (679) (890) (3,652) (3,652) (3,652)Minority interest 1,970 1,932 8,472 10,041 11,670Liabilities 73,529 81,042 103,908 119,041 138,576Gross block 24,730 27,401 44,265 48,765 53,265Depreciation 6,851 8,013 10,053 12,639 15,508Net block 17,879 19,388 34,212 36,126 37,757Capital work-in-progress 1,571 1,448 1,448 1,448 1,448Long-term investments 18,595 30,664 22,310 25,770 32,890Inventories 9,757 10,739 14,794 18,294 20,279Debtors 8,811 11,748 11,716 14,487 16,060Cash 16,690 6,073 21,936 25,769 32,892Other current assets 7,425 8,562 11,726 14,500 16,074Total current assets 42,683 37,121 60,172 73,050 85,304Creditors 2,543 2,408 7,517 9,455 10,499Other current liabilities 4,655 5,171 6,717 7,897 8,323Total current liabilities 7,198 7,579 14,234 17,352 18,822Net current assets 35,485 29,542 45,938 55,697 66,482Total assets 73,529 81,042 103,908 119,041 138,576Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 18:Cash flowY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 17,407 12,100 17,631 21,136 23,255Inc.(/dec )in working capital 1,029 (4,664) (1,310) (7,107) (4,088)Cash flow from operations 18,435 7,437 16,321 14,029 19,167Other income 868 910 1,386 1,701 1,883Depreciation 1,233 1,533 2,041 2,586 2,869Interest paid (-) 1,217 1,139 1,342 1,810 2,000Tax paid (-) (712) (679) (836) (1,232) (1,900)Dividends paid (-) (2,547) (3,214) (3,321) (4,098) (5,278)Net cash from operations 18,495 7,126 16,932 14,796 18,743Capital expenditure (-) (7,925) (2,548) (16,864) (4,500) (4,500)Net cash after capex 10,570 4,577 68 10,296 14,243Inc./(dec.) in short-term borrowing (251) 578 - - -Inc./(dec.) in long-term borrowing 604 (656) 2,544 (3,004) -Inc./(dec.) in preference capital - - - - -Inc./(dec.) in borrowings 353 (77) 2,544 (3,004) -(Inc./(dec). in investments (11,035) (12,069) 8,354 (3,460) (7,120)Equity issue/(buyback) - - - - -Cash from financial activities (10,682) (12,146) 10,899 (6,464) (7,120)Others 4,413 (3,049) 4,897 - -Opening cash 12,389 16,690 6,073 21,936 25,769Closing cash 16,690 6,073 21,936 25,769 32,892Change in cash 4,302 (10,618) 15,864 3,833 7,123Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 20:Key ratiosY/E March FY09 FY10 FY11 FY12E FY13EPer share (Rs)Reported EPS 17.6 13.0 18.0 21.1 22.8Adjusted EPS 17.6 13.0 18.0 21.1 22.8DPS 13.7 13.8 3.5 4.2 4.6BV/share 68.0 75.6 91.6 107.6 124.9Dividend payout (%) 17.7 24.6 22.7 24.2 24.2Performance ratios (%)RoE 30.2 18.2 21.5 21.2 19.6RoCE 26.8 15.3 18.4 18.1 17.4Valuation ratios (x)P/E 28.7 38.6 28.0 23.8 22.1P/BV 7.4 6.7 5.5 4.7 4.0EV/Net Sales 11.8 12.6 8.6 6.9 6.1EV/EBITDA 27.1 37.9 25.6 20.9 18.7Efficiency ratiosAsset turnover (x) 0.8 0.6 0.7 0.8 0.7Working capital/sales (x) 0.5 0.7 0.5 0.5 0.5Receivable days 75 110 73 73 73Inventory days 83 100 93 92 92Payable days 75 110 73 73 73Source: Company, Nirmal Bang Institutional Equities Research102Sun Pharma

Institutional EquitiesTorrent Pharmaceuticals24 January 20123QFY12 Result UpdateReuters: TORP.BO; Bloomberg: TRP INExports drive performanceTorrent Pharmaceuticals’ (TPL) adjusted PAT of Rs535mn for 3QFY12 wassignificantly below our/consensus estimates, even as revenue growth was broadlyin line. Domestic growth was weak (as expected) while exports continued to driveoverall growth, partly aided by a weak rupee. We expect domestic growth toremain muted for another quarter before the company reaps in the benefits of fieldforce/marketing spend restructuring; meanwhile, exports will continue to driveoverall growth. TPL’s performance for the 9MFY12 period is broadly in line withour expectations (adjusted PAT is 71% of our FY12E estimate) and we will reviewour numbers post the conference call (scheduled on 25 January 2012). Wemaintain our Buy rating on the stock with a target price of Rs715.Transition to AS30 boosts earnings: The company’s reported PAT of Rs839mn (up9%YoY; down 17%QoQ) was boosted by the adoption of AS30 standard, adjusting forwhich PAT stood at Rs535mn, significantly below our estimate of Rs749mn (we hadassumed Rs199mn forex loss) and consensus estimate of Rs869mn (no forex loss builtin). Revenue growth (up 21% YoY, 2% QoQ) was 9% above our estimate (in line withconsensus estimate) as export revenues were better than expected, partly on account ofa weak rupee and possibly strong growth in the US (up 67%YoY; a seasonally strongquarter), Brazil (up 27%YoY; partly aided by currency depreciation) and Germany (up14%YoY; on recently won tenders). Contract manufacturing growth normalised (up10%QoQ) after a weak 2QFY12 performance which was hurt by channel inventory buildup.Margins stood at 17.3%, in line with our estimate but 100bps lower than consensusestimate, as other expenditure increased by a sharp 200bpsYoY. Margins for the9MFY12 period stood at 20.5% and seem to be on course to achieve our FY12 estimateof 19.3%.Outlook: While 3QFY12 results were weak, we believe FY13 will be a strong year forTPL as domestic growth rebounds (benefitting from the recent restructuring),international markets attain further scale and margins improve (led by break-even in theUS, higher capacity utilisation at Sikkim facility and greater contribution from India andBrazil). Valuation at 11x FY13E EPS is at a steep discount to peers/historical averageand offers a strong risk-reward proposition. We maintain our Buy rating on the stock.BUYSector: PharmaceuticalCMP: 548Target Price: Rs715Upside: 30%Praful Bohrapraful.bohra@nirmalbang.com+91-22-3926 8175Key DataCurrent Shares O/S (mn) 84.6Mkt Cap (Rsbn/US$mn) 46..4/925.852 Wk H / L (Rs) 687/497Daily Vol. (3M NSE Avg.) 19,803Price Performance (%)1 M 6 M 1 YrTorrent 2.9 (17.6) (6.9)Nifty Index 7.0 (10.4) (12.1)Source: BloombergY/E March (Rsmn) 3QFY11 2QFY12 3QFY12 YoY (%) QoQ (%) 9HFY11 9HFY12 YoY (%)Net revenue 5,775 6,833 6,966 20.6 1.9 17,000 20,274 19.3Total material costs 1,771 2,221 2,223 25.5 0.1 5,244 6,403 22.1% of revenue 30.7 32.5 31.9 30.8 31.6Staff costs 979.2 1160.7 1199.2 22.5 3.3 2,893 3474.7 20.1% of revenue 17.0 17.0 17.2 17.0 17.1R&D expenses 347.9 317.1 349.2 0.4 10.1 992 996 0.4% of revenue 6.0 4.6 5.0 5.8 4.9Other expenses 1,528 1,728 1,980 29.6 14.6 4,426 5,248 18.6% of revenue 26.4 25.3 28.4 26.0 25.9EBITDA 1,150 1,407 1,215 5.6 (13.6) 3,447 4,153 20.5EBITDA margin (%) 19.9 20.6 17.4 20.3 20.5Other income 18.2 42.5 23.4 28.6 (44.9) 65 90.3 38.3Interest 34.5 29.3 1.5 (95.7) (94.9) 93 71.3 (23.1)Depreciation 161.3 200.7 197 22.1 (1.8) 458 599.6 30.9PBT 972 1,219 1,040 6.9 (14.7) 2,961 3,572 20.6Tax 203.2 211.5 200.6 (1.3) (5.2) 688 699.5 1.7Reported PAT 769 1,008 839 9.1 (16.7) 2,273 2,873 26.4PAT margin (%) 13.3 14.7 12.0 - - 13.4 14.2 -Adj. PAT 769 856 535 (30.4) (37.5) 2,273 2,395 5.3Source: Company, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesExhibit 1: Financial summaryY/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13ERevenue 16,307 19,160 22,265 25,054 28,810YoY (%) 20.4 17.5 16.2 12.5 15.0EBITDA 2,587 4,208 4,092 4,843 5,922EBITDA (%) 15.9 22.0 18.4 19.3 20.6Reported PAT 1,928 2,312 2,702 3,293 4,203YoY (%) 43.2 19.9 16.8 21.9 27.7Fully DEPS 22.8 27.3 31.9 38.9 49.7RoE (%) 33.2 31.2 29.2 28.9 29.9RoCE (%) 20.3 27.1 22.6 22.3 23.6P/E (x) 25.1 20.1 17.2 14.1 11.0EV/EBITDA (x) 18.9 11.3 11.6 9.8 7.9Source: Company, Nirmal Bang Institutional Equitites ResearchExhibit 2: Actuals versus our estimates, Bloomberg estimatesParticulars (Rsmn) Actuals Our estimates Variation (%) Bloomberg estimates Variation (%)Revenues 6,966 6,417 8.6 6674 4.4EBITDA 1,215 1,112 9.2 1231 (1.3)EBITDA margin (%) 17.4 17.3 11bps 18.4 (100bps)Reported PAT 839 749 12.0 869 (3.4)Source: Company, Nirmal Bang Institutional Equities ResearchRating historyDate Rating Market price (Rs) Target price (Rs)1 November 2011 Buy 575 71512 January 2012 Buy 551 715104Torrent Pharmaceuticals

Institutional EquitiesTorrent Pharmaceuticals25 January 2012Conference call UpdateReuters: TORP.BO; Bloomberg: TRP INTorrent Pharmaceuticals (TPL) organised a conference call for analysts on 25January 2012 to discuss its 3QFY12 results. Following are the key takeaways:Domestic sales at Rs2.3bn, up 8%YoY, remained muted owing to lower growthin acute therapies (up 4%YoY), primarily gastro-intestinal. Chronic therapygrowth stood at a healthy 15%YoY.US sales stood at Rs638mn, up 67% YoY. Constant currency growth was at51% YoY. TPL launched Olanzapine ODT (CNS drug, negligible market share)and Donepezil (Alzheimer’s drug, double-digit market share) during the quarter.The company plans to launch three more products in 4QFY12. Total drug filingsstood at 65, total approvals at 34 and total drugs launched at 18.Brazil sales were atRs1.2bn, up 27% YoY. There were no one-offs, andconstant currency growth stood at 21%YoY. TPL, which introduced twoproducts in the past nine months, expects to launch three to four products innext six months.Other expenditure includes realised forex loss of Rs180mn (we had estimatedRs99mn) as against Rs70mn gain in 3QFY11.Other operating income includes dossier licencing income of Rs95mn (ourestimate Rs100mn).Margins were negatively impacted by around 1%, as the DEPB (dutyentitlement pass book) scheme benefits (5% of global sales) expired, althoughthey were partly offset by the DDS, or duty drawback scheme, (2% of globalsales).TPL plans to increase its field sales force size by 15% in domestic market for itsplanned acute therapy division, after which the total field force size will be closeto 3,000 medical representatives.The company has completely hedged its revenues and receivables againstcurrency fluctuations for the next next nine months.Interest costs were low on account of debt repayment and higher returns onsurplus funds.The company expects revenues from its AstraZeneca tie-up to start flowingfrom FY13 onwards.BUYSector: PharmaceuticalCMP: 549Target Price: Rs715Upside: 30%Praful Bohrapraful.bohra@nirmalbang.com+91-22-3926 8175Key DataCurrent Shares O/S (mn) 84.6Mkt Cap (Rsbn/US$mn) 46..4/926.152 Wk H / L (Rs) 687/497Daily Vol. (3M NSE Avg.) 19,585One Year Indexed Stock Performance12011010090807060Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12Price Performance (%)TORRENT PHARMA NSE S&P CNX NIFTY INDEX1 M 6 M 1 YrTorrent 3.1 (16.6) (7.0)Nifty Index 9.4 (9.2) (9.3)Source: BloombergTPL has given capex guidance of around Rs2-2.5bn for FY13.We have a Buy rating on the stock with a target price of Rs715.Please refer to the disclaimer towards the end of the document.

Institutional EquitiesRating historyDate Rating Market price (Rs) Target price (Rs)1 November 2011 Buy 575 71512 January 2012 Buy 551 71524 January 2012 Buy 548 715106Torrent Pharmaceuticals

Institutional EquitiesTorrent Pharma1 November 2011Initiating CoverageReuters: TORP.BO; Bloomberg: TRP INRe-rating DueTorrent Pharma’s strong domestic business, with 60% of its portfolio focusedon chronic therapies, and increasing scale in international business willcatapult it to the next phase of growth, leading to 25% earnings CAGR overFY11-13E and sustainable RoE of 30%. A steep 10-25% discount in PE multipleversus other mid-cap stocks implies the market is underplaying the positivesand we believe the stock would get re-rated closer to comparable peers. Weassign a Buy rating to the stock with a target price of Rs715, implying an upsideof 24% from the current market price.Stock trading at steep discount to peers, merits attention: Torrent’s currentvaluation discount of 10-25% relative to mid-sized peers and 35% relative to thesector sharply undervalues the company’s strong earnings CAGR of 25% expectedover FY11-13E (higher than the sector’s earnings CAGR of 15-16%), significantlyhigher RoE/RoCE of 30%/24% than peers, under-leveraged Balance Sheet and one ofthe best managed working capital cycle in the industry. Moreover, its strong focus onthe chronic disease segment augurs well for long-term growth, justifying a re-ratingcloser to mid-cap peers.Investors’ concerns on margins front fully priced in: Recent correction in one-yearforward PE multiple from 15x in June 2011 to 12.8x (15% fall versus 9% for the sector)has fully priced in investors’ concerns on the company’s tepid near-term margins, inour view. We forecast a cumulative 218bps improvement in margins over the next twoyears, helped by break-even in the US business and operating leverage in otherinternational geographies as the scale increases, which consequently drives our FY13PAT 7% above consensus estimate. Torrent has shown marked improvement with a162bps YoY expansion in margins in 1HFY12 and the management’s guidance of 19-20% margins in FY12 indicates this improvement in sustainable.Gaining scale in key geographies:Torrent derives 60% of its domestic revenue fromthree of the fastest growing therapies (cardiovascular, central nervous system andanti-diabetes) and is therefore likely to maintain above industry growth trajectory, whileits expansion in rural/Tier-II markets will ensure strong volume growth as thesemarkets are growing at the rate of 25-30% per year, nearly 2x the growth in urbanmarkets. With increasing scale, the US business is expected to break even in FY13,while Brazil, its largest market outside India, is expected to grow in line with theindustry on the back of planned new launches (30-35 launches in next four years).Valuation: Based on our valuation framework, we value Torrent Pharma at 14.4xFY13E EPS of Rs50 to arrive at a target price of Rs715. Our TP is pegged at a 20%discount to our target sector multiple of 18x, lower than the current discount of 30%and a 10% premium to its historical five-year average.Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ERevenue 16,307 19,160 22,265 25,054 28,810YoY (%) 20.4 17.5 16.2 12.5 15.0EBITDA 2,587 4,208 4,092 4,843 5,922EBITDA (%) 15.9 22.0 18.4 19.3 20.6Adj PAT 1,928 2,312 2,702 3,293 4,203YoY (%) 43.2 19.9 16.8 21.9 27.7Fully DEPS 22.8 27.3 31.9 38.9 49.7RoE (%) 33.2 31.2 29.2 28.9 29.9RoCE (%) 20.3 27.1 22.6 22.3 23.6P/E (x) 26.4 21.0 18.0 14.8 11.6EV/EBITDA (x) 19.8 11.9 12.1 10.3 8.3Source: Company, Nirmal Bang Institutional Equities ResearchBUYSector: PharmaceuticalCMP: Rs575Target Price: Rs715Upside: 24%Praful Bohrapraful.bohra@nirmalbang.com+91-22-3926 8175Key DataCurrent Shares O/S (mn) 84.6Mkt Cap (Rsbn/US$bn) 49.0/1.052 Wk H / L (Rs) 687/497Daily Vol. (3M NSE Avg.) 33,474Share holding (%)Q4FY11 Q3FY11 Q2FY11Promoter 71.5 71.5 71.5FII 3.7 4.3 4.9DII 12.8 12.7 12.3Corporate 4.1 3.8 3.8General Public 7.9 7.7 7.5One Year Indexed Stock Performance130120110100908070Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11TORRENT PHARMANSE S&P CNX NIFTY INDEXPrice Performance (%)1 M 6 M 1 YrTorrent 7.4 (3.3) 5.1Nifty Index 7.8 (7.4) (11.5)Source: BloombergPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesWe are 7% above consensus estimate on FY13 PATOur PAT estimate for FY12 is broadly in line with consensus, despite our estimate on margins being 138bpshigher than consensus as we expect depreciation to increase in 2HFY12, in line with the past trend. Thevariance in FY13 earnings, however, stems from our higher-than-consensus margin forecast of 20.6%, led byincreased contribution from Brazil and India (the top two geographies in terms of profitability), break-even inthe US business, higher capacity utilisation at the recently commissioned Sikkim facility and operatingleverage as other international geographies attain scale. We also assume marginally lower tax rate of 17% inFY13, helped by the Sikkim facility, which consequently drives our PAT 7% above consensus estimate.Exhibit 1: Our expectations versus consensus estimates(Rsmn)NBIEBloomberg VariationBloomberg VariationNBIECons.(%)Cons.(%)Revenue 25,054 25,179 (0.5) 28,810 29,632 (2.8)EBITDA 4,843 4,521 7.1 5,922 5,463 8.4EBITDA margin (%) 19.3 18.0 138bps 20.6 18.4 212 bpsPAT 3,293 3269 0.7% 4,203 3,922 7.2Source: Nirmal Bang Institutional Equities ResearchExhibit 2: Key revenue assumption(Rsmn) FY11 FY12E YoY growth (%) FY13E YoY growth (%)India 8,353 9,689 16.0 11,240 16.0Latin America 3,519 4,095 16.4 5,005 22.2Germany 2,986 3,360 12.5 3,482 3.6US 1,093 1,760 61.0 2,130 21.1Europe 1,244 1,440 15.8 1,600 11.1RoW markets 1,276 1,440 12.9 1,600 11.1Russia and CIS 584 600 2.7 700 16.7Contract manufacturing 2,096 2,480 18.3 2,880 16.1Source: Nirmal Bang Institutional Equities ResearchExhibit 3: Bloomberg consensus revenue trendExhibit 4: Bloomberg consensus earnings trend(Rsmn)33,000(Rsmn)4,50030,0004,0003,50027,0003,00024,000Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11BBG FY12 BBG FY13 NBIE FY12 NBIE FY13Source: Bloomberg, Nirmal Bang Institutional Equities Research2,500Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11BBG FY12 BBG FY13 NBIE FY12 NBIE FY13Source: Bloomberg, Nirmal Bang Institutional Equities Research108Torrent Pharma

Institutional EquitiesRating RationaleSteep discount to peers unjustifiedWe believe Torrent Pharma’s current valuation discount of 10-25% relative to other mid-sized peers and 35%relative to the sector sharply undervalues the company’s strong earnings CAGR of 25% expected over FY11-13E (higher than the sector’s earnings CAGR of 15-16%), significantly higher RoE/RoCE of 30%/24% thanpeers, underleveraged balance sheet and one of the best managed working capital cycle in the industry.Moreover, the company’s strong focus on the chronic segment augurs well for long-term growth, justifying are-rating closer to mid-cap peers.Torrent Pharma currently trades at a steep 10-25% discount to mid-cap peers like Glenmark Pharmaand Biocon, despite a comparable growth profile, significantly higher return ratios and a healthybalance sheet. Historically, the stock has traded at a low PE multiple owing to: a) Relatively lower scale ofoperations, b) Concerns related to muted domestic growth and that of its German subsidiary, Heumann, andc) Muted margin profile. The company’s domestic business has recovered sharply, showing a 16% CAGRover the past two years, while it achieved break-even at Heumann in FY10. Further, the break-even at its USbusiness and operating leverage in key international geographies will drive a cumulative 218bps improvementin margins over FY11-13E. While Glenmark and Biocon get a premium because of their research anddevelopment (R&D) pipeline, we note the valuation discount is too steep as with increased scale Torrent’sfinancial profile now compares well with these two companies, thereby justifying a re-rating closer to them.Exhibit 5:Premium/discount to Biocon(%)2010-(10) Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11(20)(30)(40)(50)(60)(70)(80)Source: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 6: Premium/discount to Glenmark(%)15010050-Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11(50)(100)(150)Source: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 7:Revenue profile - compares well with peersExhibit 8: Profitability gap with peers is narrowing down(Rsmn)45,00040,00035,00030,00025,00020,00015,00010,0005,0000FY09 FY10 FY11 FY12E FY13EGlenmark Biocon Torrent Pharma(Rsmn)7,0006,0005,0004,0003,0002,0001,0000FY09 FY10 FY11 FY12E FY13EGlenmark Biocon Torrent PharmaSource: Bloomberg estimate for Biocon; Nirmal Bang Institutional EquitiesResearchSource: Bloomberg estimate for Biocon; Nirmal Bang Institutional EquitiesResearch109Torrent Pharma

Institutional EquitiesExhibit 9: Peer comparisonCompany EPS CAGR (FY11-13) (%) ROE (%) P/E (x) P/BV (x)Torrent Pharma 25.0 29.9 11.6 3.1Biocon 11.1 17.9 15.8 2.7Glenmark Pharma 26.0 21.3 13.5 2.6*Bloomberg estimatesSource: Nirmal Bang Institutional Equities ResearchConcerns on margins front fully priced inThe recent PE multiple correction, from 15x in June 2011 to 12.8x (15% fall versus 9% decline for the sector),has fully priced in investors’ concerns regarding the company’s tepid near-term margins, and we believe agradual improvement in margins over the next two years will narrow its discount compared with peers. Torrenthas shown a marked improvement with a 162bps YoY expansion in 1HFY12 and the management’s guidanceof 19-20% margins in FY12 indicates the improvement in margins is sustainable. We forecast a cumulative218bps improvement in margins over the next two years, led by higher capacity utilisation at its recentlycommissioned Sikkim facility, break-even at the US business and operating leverage as other internationalgeographies attain scale.Exhibit 10:PE(x)302520151050Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11Exhibit 11: P/BV(x)6543210Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11Source: Bloomberg, Nirmal Bang Institutional Equities ResearchSource: Bloomberg, Nirmal Bang Institutional Equities ResearchStrong free cash flow generation, return ratiosWe expect Torrent to generate Rs2.1bn free cash flow by FY13, significantly higher than Rs1.4bnin FY11, led by strong operational performance and a remarkably well-managed working capitalcycle (of 41 days, perhaps the lowest in the industry). This is despite a planned capex of Rs4bnover the next two years, almost equal to the Rs4.8bn capex in the past five years. We expectstrong earnings growth, coupled with margin expansion and increased capacity utilisation level atthe recently commissioned Sikkim facility, to drive a cumulative 76bps/106bps improvement inRoE/RoCE, respectively, by FY13.Exhibit 12:Strong FCF generationExhibit 13: Return ratios(Rsmn)2,5002,0001,5001,000(%)353025201533.220.331.227.129.2 28.922.6 22.329.923.650010-5(500)(1,000)FY07 FY08 FY09 FY10 FY11 FY12E FY13E0FY09 FY10 FY11 FY12E FY13EROE (%) ROCE (%)Source: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities Research110Torrent Pharma

Oct-05Apr-06Oct-06Apr-07Oct-07Apr-08Oct-08Apr-09Oct-09Apr-10Oct-10Apr-11Oct-11Institutional EquitiesAssign Buy rating with a target price of Rs715Based on our valuation framework, we value Torrent Pharma at a 20% discount to our target sector multiple of18x FY13E EPS of Rs50 to arrive at a target price of Rs715, implying a 24% upside from the current marketprice. At our target multiple, Torrent will trade at a 10% premium to its past five-year average, at 10-15%discount to Glenmark and Biocon (owing to their R&D premium) and ~10% premium to the Sensex, which, webelieve is justified by its strong growth profile, Balance Sheet strength, and relatively higher capital effeciencyas compared to companies figuring in the Sensex.Exhibit 14: Target price calculationSector PE (x) 18Premium to sector (%) (20)Torrent's PE (x) 14.4FY13E EPS 50a) Base business value 715b) Para IV value 0Target price (a+b+c) 715Source: Nirmal Bang Institutional Equities ResearchExhibit 15: Premium/discount to Sensex and sector(%)10080604020-(20)(40)(60)(80)(100)Premium to SensexPremium to SectorSource: Bloomberg, Nirmal Bang Institutional Equities Research111Torrent Pharma

Institutional EquitiesBest bet on domestic pharma growth storyChronic disease segment focus + Rural expansion = Strong domestic growthWe believe Torrent Pharma is the one of the best bets on the domestic pharma growth story, with a balancedmix of a strong chronic disease drug portfolio and volume growth in rural/Tier-II markets. Torrent derives 60%of its domestic revenue from three of the fastest growing therapies - CVS, CNS and diabetes - and is thereforelikely to maintain its above industry growth trajectory. On the other hand, its expansion in rural/Tier-II marketswill ensure strong volume growth, as these markets are growing at 25-30% every year, nearly 2x the growth inurban markets. Domestic market growth is important, as it contributes 50-60% to profitability and is animportant driver of higher-than-market RoE. We expect 15% domestic revenue CAGR over the next two years,as the benefits of recent field force addition start reflecting in revenue and also as contribution from ruralmarkets increases.Exhibit 16: Domestic formulations- Therapy-wise break-upOther, 5%Gastro-Intestinal,19%Neuro-Psychiatry,21%Source: Company; IndustryPainManagement, 4%Anti-Infectives,13%Cardiovascular,33%Exhibit 18: Growth break-up for Torrent’s portfolioExhibit 17: Domestic formulations revenue trendSource: Company, Nirmal Bang Institutional Equities ResearchChronic inclined portfolio ensures above-industry growthTorrent derives nearly 60% of its domestic revenue from three therapies - CVS, CNS and anti-diabetes - whichin turn has helped the company grow at an impressive 17% CAGR over FY06-11, significantly higher than theindustry growth of 14%. Particularly, in core therapies - CVS (market share of 4.3% - MAT March 2011) andCNS (market share of 5.5% - MAT March 2011) - its growth has been relatively strong at 17% and 19%CAGR, respectively, over FY06-11. Key growth drivers for these therapies (increasing urbanisation, risingstress level, etc) remain intact and we thus believe the outperformance will continue.Growth rates (%) FY07 FY08 FY09 FY10 FY11 Five-year CommentsCAGRCVS 38.8 14.4 7.0 16.1 8.8 16.5 Together, these therapies constitute 60% ofAnti diabetec 38.8 61.8 24.8 16.1 (17.6) 21.8 domestic portfolioCNS 60.8 3.0 7.0 10.5 21.2 18.9Anti-infectives 12.8 (17.0) 7.0 27.7 36.4 11.8 Ramp-up in the past two years led byGastro-intestinal 25.6 7.9 7.0 16.1 15.4 14.2increased penetration in rural marketsOthers 85.1 34.9 (14.4) 16.1 44.3 29.0Pain management 73.5 (13.7) 7.0 16.1 15.4 16.5Source: Company, Nirmal Bang Institutional Equities ResearchStrong brand equityAnti-Diabetec, 5%(Rsmn) (%)9,00038.8458,000407,0006,0005,0004,0003,0002,0001,00007.9 7.0Torrent enjoys strong brand equity with doctors, with six brands in the top 300 and 36 brands in leadershipposition in their respective molecular segments. This has helped Torrent to retain market share across coretherapies, even while the other smaller players lost market share. Over the past five years, Torrent’s marketshare in CNS improved by 100bps to 7.6%, while it managed to maintain CVS market share at 6.2% despitesevere competition.16.1FY06 FY07 FY08 FY09 FY10 FY11Domestic Revenues YoY Growth (%)15.435302520151050112Torrent Pharma

Institutional EquitiesExhibit 19: Market share trend in top therapiesExhibit 20: Revenue contribution from top 10 brands(%)98765432107.46.66.2 6.2Source: Company; Industry6.77.8 7.8 7.7 7.66.4 6.4 6.2FY06 FY07 FY08 FY09 FY10 FY11CardiovascularNeuro-Psychiatry(%)454035302520151050Sun Pharma Cipla Glenmark Cadila Torrent Pharma LupinRegular launch of products fills portfolio gapRegular product launch to fill portfolio gap as well as to widen coverage is an important part of Torrent’sdomestic market strategy. Over the past five years, the company has consistently launched 40-50 productseach year (except in FY09), in line with its larger peers. Importantly, new products launched have accountedfor nearly half of its incremental growth during this period. With planned launches of 50-60 products in FY12,we believe the new launches will continue to remain a key driver for domestic business.Exhibit 21: Domestic Growth break-upExhibit 22: New product Introductions(%)18161412108642-(2)FY08 FY09 FY10 FY11Volume Growth New products (introduced last year) New products (introduced current year)6050403020100555249433815FY06 FY07 FY08 FY09 FY10 FY11Source: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities ResearchRise in field force strength to increase market coverageLike most peers,Torrent has also increased its field force by a massive 1,250 medical representatives (~44%increase) over the past two years, as it expanded aggressively in Tier-II/rural markets as well as foray intonewer therapies like gynaecology. Its current field force stands at 4,059 medical representatives (MRs) andthe focus in now on improving productivity rather than further addition of MRs. Although better than theprevious years, Torrent’s field force productivity at Rs2.5mn/MR is among the lowest (as most of the field forceaddition was done recently) in the industry and has huge scope for improvement. We believe the benefits ofrecent field force addition are still to reflect in revenue and should lead to strong recovery in 2HFY12.113Torrent Pharma

Institutional EquitiesExhibit 23: Field force addition4,5004,0003,5003,0002,9542,761 2,8123,3644,0592,5002,0001,5001,000500Source: Company, IndustryRural expansion revives growth in acute therapy portfolioTorrent’s expansion in rural/Tier-II markets has revived its growth in key acute therapies – the top two acutetherapies such as anti-infectives and gastro-intestinal have registered 36% and 15% YoY growth, respectively,in FY11. With a field force size of nearly 400 people, Torrent intends to significantly enhance its presence inrural/Tier-II markets, which are growing at 25-30% every year, nearly 2x the growth in urban markets.Gaining scale in international marketsBrazilian business on strong footing02007 2008 2009 2010 2011With a 6.8% market share, Torrent is the largest and the best-positioned Indian player to capitalise on stronggrowth prospects in Brazil, a US$15bn market growing at 15% for the past five years. The company hassuccessfully replicated its Indian model, building a strong portfolio of 27 products across key therapies likeCVS, CNS and anti-diabetes. Further, 31 products are awaiting approval, of which six are likely to beapproved during FY12, as per the management. The company’s revenue CAGR of 16% over FY09-11 haslargely been in line with the market coverage, and we forecast 18% revenue CAGR growth over FY11-13E asthe pace of new launch picks up (the company plans to launch 30-35 products by 2014-15).Exhibit 24: Brazil portfolio break-upCNS, 41%Oral Anti-Diabetes, 19%CVS, 41%Exhibit 25: Brazil revenue trend(Rsmn) (%)4,0005044.244.93,500453,00040352,500302,000251,5002017.215.1 151,000105006.2500FY06 FY07 FY08 FY09 FY10 FY11Revenues Growth YoY (%)Source: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities ResearchHeumann operations stabilisingSimilar to Dr Reddy’s Laboratories’ experience with Betapharm, Torrent’s acquisition of Heumann (based inGermany) in FY06 for Rs172mn backfired as the market dynamics changed from branded-generic to genericgeneric,leading to significant price decline subsequently. While Torrent, through a series of cost-cuttingmeasures (sales force reduction from 130 to 15, shift in manufacturing of over 25 products to India, etc),managed to break-even Heumann in FY10, it still remains a drag, with only 3% contribution to overall profit.With no fresh tenders coming up, we incorporate a 5% decline in Heumann’s tender-based business (55% ofrevenue) and 22% CAGR in non-tender based revenue (remaining 45%) over FY11-13E with stable marginson the back of planned launch of 12 products in FY12.114Torrent Pharma

Institutional EquitiesExhibit 26: Heumann – Revenue, PAT trend(Rsmn)3,000Source: Company2,5002,0001,5001,000500(500)US revenues inching up0Torrent’s US revenue has scaled up from US$6mn in FY09 to US$25mn in FY11, led by market share gains inkey products like Citalopram (anti-depression; 28% market share) and Zolpidem (Insomnia;~22% marketshare). This is impressive, considering its relatively late entry in the US. While most of its pipeline is focusedonly on ’me-too’ generics, we believe Torrent will continue to grow strongly on a low base and throughmonetisation of its pending pipeline of 32 products. We forecast a 47% CAGR in US revenue over FY11-13E,led by planned launch of 10-12 products over the next two years and market share gains in its existingportfolio. Importantly, the US market is closer to break-even (the management has given guidance of breakevenin FY13) and should increasingly contribute to earnings as revenue gains scale.Exhibit 27: US revenue to rise on low base, monetisation of pending product pipeline(Rsmn)2,5002,000FY06 FY07 FY08 FY09 FY10 FY11RevenuePAT1,7602,1301,5001,0009091,093500278Source: Company; Industry0FY09 FY10 FY11 FY12E FY13EContract manufacturing agreements provide revenue stabilityWe believe the product partnership pacts with MNCs provide a proxy play on the international growthopportunity, saving the risk of setting up front ends. Besides the one-time milestone income which boosts cashflow, such contracts ensure long-term revenue stability. Leveraging its strong manufacturing capabilities,Torrent recently entered into product partnerships with two MNCs – AstraZeneca (18 branded genericproducts for 9 emerging markets) and an undisclosed company (50 products on non-exclusive basis forvarious emerging markets) to supply branded generics for emerging markets.While both these partnerships are more medium-term opportunities, with no contribution to our earningsestimates for the next two years, we note that milestone income from these companies will continue to boostcash flow. So far, Torrent has received Rs920mn as milestone income, while the management expectsadditional income in the current year. In the near term, we expect contract manufacturing revenue to bedriven largely by the Novo Nordisk contract, which has ensured stable revenue (13% CAGR over the pastthree years) so far. Torrent recently commissioned a new facility at Indrad with a capacity to manufactureadditional 26mn vials, which coupled with the rising diabetic population in India, will drive our expected 16%revenue CAGR over the next two years.115Torrent Pharma

Institutional EquitiesExhibit 28: Contract manufacturing agreements ensure revenue stability(Rsmn)3,0002,5002,0001,5001,0005000FY08 FY09 FY10 FY11 FY12E FY13ESource: Company; IndustryKey risksSlowing growth in domestic market – Torrent derives almost 40% of its revenue from the domesticmarket and will thus be highly impacted if there is a slowdown. Moreover, if the recent field force additionfails to scale up as expected, its margins will get further impacted owing to high fixed cost base, therebydelaying the re-rating of the stock. We however, believe the company will relatively be better-off thanpeers in case of a slowdown because of higher portfolio inclination towards chronic therapiesPricing pressure in rest of Europe (excluding Heumann): Torrent derives almost 6% of its revenuefrom Europe, which is currently reeling under intense pricing pressure. While Torrent is countering thisthrough new product launch (has identified 30 products for launch by FY15) and increasing itsgeographical reach through direct field force presence in Romania and UK, we believe any delay in newproduct approvals or further price cut will adversely affect our estimates.Russia operations volatile: Torrent’s Russian operations have been highly volatile, hurt by highpayment default, poor liquidity condition and regulatory changes. Over the past two years, Russianrevenue declined by 6% CAGR, even on a low base. The company is currently consolidating its presencein the Russian market by renegotiating the credit limit with distributors, which should reflect in revenuefrom FY13 onwards. We have assumed a moderate 9% CAGR over FY11-13E in Russia, which may beimpacted if the company’s efforts do not pay off.Currency risk: Torrent derives almost 60% of its revenue from exports, mainly in terms of US dollar, euroand Brazilian real. Fluctuation in currency exchange rates may affect realisation and lead to negativeimpact on profitability.116Torrent Pharma

Institutional Equities2QFY12 performance – Key highlightsTorrent reported a strong 18% YoY growth in revenue, led by strong performance across key geographieslike the US (up 57% YoY), Brazil (up 34% YoY), Germany, primarily Heumann (up 28% YoY), and rest-ofthe-worldmarkets excluding India (up 20% YoY). Indian market growth was muted at 7% YoY, in line withexpectation.Margins stood at 20.6%, up 39bps YoY but down 306bpsQoQ, as 1QFY12 included higher dosserlicensing income of Rs170mn as against Rs96mn in 2QFY12.Reported PAT stood at Rs1bn, up 31%YoY, helped by better operating performance and lower tax rateon commissioning of Sikkim facility.Exhibit 29: 2QFY12 performanceRsmn 2QFY11 1QFY12 2QFY12 YoY (%) QoQ (%) 1HFY11 1HFY12 YoY (%)Net revenue 5,815 6,475 6,833 17.5 5.5 11,225 13,308 18.6Total material costs 1,832 1,959 2,221 21.2 13.4 3,473 4,180 21.2% of revenue 31.5 30.3 32.5 - - 30.9 31.4 -Staff costs 991 1,115 1,161 17.1 4.1 1,913 2,276 17.1% of revenue 17.0 17.2 17.0 - - 17.0 17.1 -R&D expenses 329 330 317 (3.6) (3.8) 643.8 647 (3.6)% of revenue 5.7 5.1 4.6 - - 5.7 4.9 -Other expenses 1,488 1,540 1,728 16.1 12.2 2,899 3,268 16.1% of revenue 25.6 23.8 25.3 - - 25.8 24.6 -EBITDA 1,175 1,531 1,407 19.7 (8.1) 2,297 2,938 19.7EBITDA margin (%) 20.2 23.6 20.6 20.5 22.1Other income 25 24 43 71.4 74.2 47.1 67 71.4Interest 34 41 29 (13.3) (27.7) 58.2 70 (13.3)Depreciation 155 202 201 29.7 (0.6) 296.9 403 29.7PBT (before exceptional items) 1,012 1,313 1,219 20.5 (7.2) 1,989 2,532 20.5Exceptional items 0.0 (1.0) (8.0) 0.0 (9.0)PBT (after exceptional items) 1,012 1,313 1,211 1,989 2,524Tax 250 287 212 (15.3) (26.4) 484.5 499 (15.3)Reported PAT 762 1,025 1,000 31.2 (2.5) 1,504 2,025 31.2PAT margin(%) 13.1 15.8 14.6 - - 13.4 15.2 -Source: Company, Nirmal Bang Institutional Equities Research117Torrent Pharma

Institutional EquitiesFinancialsExhibit 30: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 16,307 19,160 22,265 25,054 28,810% growth 20.4 17.5 16.2 12.5 15.0Raw material costs (5,348) (5,710) (6,965) (7,878) (9,200)Staff costs (2,565) (3,162) (3,895) (4,406) (4,993)R&D expenses (1,119) (1,202) (1,388) (1,485) (1,683)Others (4,687) (4,879) (5,924) (6,442) (7,012)Total expenditure (13,719) (14,953) (18,173) (20,211) (22,888)EBITDA 2,587 4,208 4,092 4,843 5,922% growth 27.6 62.6 (2.8) 18.4 22.3EBITDA margin (%) 15.9 22.0 18.4 19.3 20.6Other income 238 216 347 413 449Interest costs (393) (291) (387) (426) (420)Depreciation (423) (661) (626) (815) (887)Profit before Tax 2,009 3,472 3,427 4,015 5,064% growth 34.8 72.8 (1.3) 17.2 26.1Tax (78) (1,160) (725) (723) (861)Effective tax rate (%) 3.9 33.4 21.2 18.0 17.0Net profit 1,931 2,312 2,702 3,293 4,203% growth 43.4 19.7 16.8 21.9 27.7Extraordinary items (88) 0 0 0 0Reported net profit 1,844 2,312 2,702 3,293 4,203% growth 36.9 25.4 16.8 21.9 27.7Adjusted net profit 1,928 2,312 2,702 3,293 4,203% growth 43.2 19.9 16.8 21.9 27.7Reported EPS (Rs) 21.8 27.3 31.9 38.9 49.7% growth 36.9 25.4 16.8 21.9 27.7Adjusted EPS (Rs) 22.8 27.3 31.9 38.9 49.7% growth 43.2 19.9 16.8 21.9 27.7DPS (Rs) 4.0 6.0 8.0 9.7 12.4Payout (%) 21.5 25.6 29.1 29.1 29.1Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 32: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity 423 423 423 423 423Reserves 6,086 7,887 9,801 12,137 15,119Net worth 6,509 8,310 10,224 12,560 15,542Short-term loans 505 488 192 222 252Long-term loans 4,321 4,736 5,529 6,099 6,694Total loans 4,826 5,224 5,721 6,321 6,946Deferred tax liability 584 499 480 480 480Minority interest 0 0 16 16 16Liabilities 11,919 14,033 16,440 19,377 22,984Gross block 7,206 8,129 9,643 11,643 13,643Depreciation 2,094 2,718 3,287 4,102 4,989Net block 5,113 5,411 6,355 7,540 8,654Capital work-in-progress 534 1,098 2,186 2,186 2,186Long-term Investments 190 190 200 247 610Inventories 2,645 3,236 5,048 4,340 5,084Debtors 2,666 2,982 3,404 4,006 4,693Cash 2,300 3,883 4,788 5,073 6,417Liquid Investments 1,204 1,221 1,260 1,260 1,260Other current assets 1,923 1,506 2,106 2,375 2,782Total current assets 10,738 12,828 16,606 17,054 20,235Creditors 3,134 3,836 6,994 5,537 6,271Other current liabilities 1,522 1,660 1,913 2,113 2,430Total current liabilities 4,656 5,496 8,907 7,650 8,701Net current assets 6,082 7,333 7,699 9,403 11,534Total assets 11,919 14,033 16,440 19,376 22,984Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 31:Cash flowY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 2,164 3,547 3,466 4,028 5,035Inc./(dec.) in working capital (562) 100 426 (1,589) (1,052)Cash flow from operations 1,603 3,647 3,892 2,439 3,983Other income 238 216 347 413 449Depreciation 423 661 626 815 887Interest paid (-) (393) (291) (387) (426) (420)Tax paid (-) (78) (1,160) (725) (723) (861)Dividends paid (-) (346) (396) (592) (787) (957)Net cash from operations 1,446 2,677 3,161 1,732 3,082Capital expenditure (-) (458) (1,487) (2,601) (2,000) (2,000)Net cash after capex 987 1,190 560 (268) 1,082Inc./(dec.) in short-term borrowing 324 (18) (296) 30 30Inc./(dec.) in long-term borrowing 905 416 792 570 595Inc./(dec.) in borrowings 1,228 398 497 600 625Inc./(dec). in investments (849) (17) (48) (47) (363)Cash from financial activities 380 381 449 553 262Others (250) 12 (104)Opening cash 1,183 2,300 3,883 4,788 5,073Closing cash 2,300 3,883 4,788 5,073 6,417Change in cash 1,116 1,583 905 285 1,344Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 33:Key ratiosY/E March FY09 FY10 FY11 FY12E FY13EPer share (Rs)Reported EPS21.8 27.3 31.9 38.9 49.7Adjusted EPS22.8 27.3 31.9 38.9 49.7DPS4.0 6.0 8.0 9.7 12.4BV/share76.9 98.2 120.8 148.4 183.7Dividend payout (%)21.5 25.6 29.1 29.1 29.1Performance ratios (%)RoE33.2 31.2 29.2 28.9 29.9RoCE20.3 27.1 22.6 22.3 23.6Valuation ratios (x)P/E26.4 21.0 18.0 14.8 11.6P/BV7.5 5.9 4.8 3.9 3.1EV/Net sales3.1 2.6 2.2 2.0 1.7EV/EBITDA19.8 11.9 12.1 10.3 8.3Efficiency ratiosAsset turnover (x) 1.1 1.0 0.9 0.9 1.0Working capital/sales (x) 0.2 0.1 0.1 0.1 0.1Receivable days 61 59 59 61 61Inventory days 61 64 87 66 66Payable days 83 94 140 100 100Source: Company, Nirmal Bang Institutional Equities Research118Torrent Pharma

.Institutional Equities3QFY12 IT Sector Preview2 January 2012Sector PreviewDollar revenues to be soft, but rupee to boost performanceWeak dollar revenue growth on lower billing days, but rupee’s fall to help: We expectall the IT companies in our coverage universe – Infosys, Wipro, Tata Consultancy Services(TCS) and HCL Technologies - to post 2-3% QoQ volume growth in 3QFY12. Lower billingdays and planned maintenance shutdowns by clients in the manufacturing vertical are likelyto lead to low single-digit volume growth. An additional headwind in 3QFY12 is adversecross-currency, with the US dollar strengthening by nearly 5% QoQ against the euro, 2.4%against the British pound and 3.6% versus the Australian dollar (quarterly average). Weexpect cross-currency fluctuations to hit reported dollar revenue growth in 3QFY12 by 150-200bps and put pressure on billing rates. Thus, we expect just 1-2% QoQ dollar revenuegrowth. However, in rupee terms, steep rupee depreciation (11.4% QoQ on the quarterlyaverage) will boost rupee revenue growth to 10-13% QoQ. We expect Infosys, for example,to get adversely impacted by US$22.5mn owing to adverse cross-currency movements, whilein rupee terms a benefit of Rs5.8bn is expected owing to rupee depreciation; thus on a netbasis, in rupee terms, a positive impact of Rs4.7bn on revenues is likely on account ofcurrency movements in 3QFY12.Rupee’s weakness to boost margins across-the-board: Owing to the rupee’s weakness,we expect a combined 162bps QoQ rise in EBITDA margins of our IT coverage universeduring 3QFY12 to 26.6% (25% in 2QFY12). We expect TCS to report an expansion of162bps QoQ, Infosys 171bps QoQ, Wipro 106bps QoQ and HCL Tech 187 bps QoQ. Withno major salary hikes effected in 3QFY12, the rupee will provide a strong margin tailwind,given the high leverage of IT companies to rupee depreciation.Infosys, HCL Tech bottom-lines to outperform: We expect Infosys and HCL Tech toregister net profit growth in 3QFY12 of 16.3% QoQ and 16.6% QoQ, respectively, while TCSand Wipro are expected to report 9.3% and 6% growth, respectively. Given the significantlyhigher hedged positions of the latter two companies (US$1.3bn and US$1.7bn, respectively)we expect them to report higher forex losses compared to Infosys and HCL Tech.We cut FY13 rupee estimates further on a deteriorating external account: As per ourhouse view, India’s external account is likely to deteriorate further this year with the currentaccount deficit widening, inability to attract capital inflows and pressure on forex reservesfrom maturing short-term forex debt, which is likely to continue exerting pressure on therupee. We now factor in an average rupee-dollar rate of 54.5 for FY13 (51 earlier). Owing tothis, we upgrade FY13E revenue, EBITDA and EPS for all top-tier IT companies. We raiseFY13E EPS for TCS by 6.2%, for Infosys by 6.5%, for Wipro by 4.7% and for HCL Tech by10.8%. We upgrade Infosys and HCL Tech to Buy from Hold and believe they willbenefit more from rupee depreciation given their relatively lower hedged positions,apart from attractive valuations at 15.2x and 9.6x FY13E EPS, respectively. While weexpect TCS to report strong earnings growth in FY13 as lower hedged positions for that yearensure lower forex losses compared to FY12, valuations are stretched, thus limitingsignificant upside. We also upgrade PE multiples of all four stocks - 17.5x for TCS (17xearlier), 17.5x for Infosys (16x), 15x for Wipro (14x) and 12.5x for HCL Tech (12x).Harit Shahharit.shah@nirmalbang.com+91-22-3926 8068(Rsmn) (Rs) (Rs) Sales EBITDA EBITDAM (%) RPATCompany Reco CMP Target Price 3QFY12 QoQ (%) YoY (%) 3QFY12 QoQ (%) YoY (%) 2QFY12 3QFY12 3QFY12 QoQ (%) YoY (%)Infosys Buy 2,765 3,210 91,021 12.4 33.3 29,806 18.6 26.1 31.0 32.7 22,170 16.3 24.5TCS Hold 1,161 1,232 131,077 12.7 30.2 40,236 18.9 37.9 29.1 30.7 26,662 9.3 13.6Wipro Hold 399 422 96,554 7.2 20.9 18,734 13.4 14.6 18.3 19.4 13,788 6.0 4.6HCL Tech.* Buy 388 504 52,221 12.3 16.3 9,901 24.6 56.0 17.1 19.0 5,791 16.6 44.9Grand Total 370,874 11.1 30.2 98,678 18.3 30.7 25.0 26.6 68,411 11.4 17.0Source: Company, Nirmal Bang Institutional Equities Research; Note: Numbers for Infosys, TCS and Wipro are based on IFRS, while for HCL Tech they are based on USGAAP; * HCL Tech follows a June-ending financial year and thus estimates are for 2QFY12.Please refer to the disclaimer towards the end of the document.

Institutional EquitiesExhibit 1: FY13 earlier estimates, revised estimates – Strong rupee tailwindCompany Earlier estimates Revised estimates Change (%)TCSRevenues (Rsmn) 594,196 623,391 4.9EBITDA margin (%) 29.3 30.4 107bpsEPS (Rs) 66.3 70.4 6.2InfosysRevenues (Rsmn) 410,258 434,020 5.8EBITDA margin (%) 32.2 33.3 113bpsEPS (Rs) 172.2 183.4 6.5WiproIT service revenues (Rsmn) 330,115 351,568 6.5Consolidated revenues (Rsmn) 441,223 462,750 4.9EBITDA margin (%) 20.5 21.6 114bpsEPS (Rs) 26.9 28.2 4.7HCL TechnologiesRevenues (Rsmn) 243,418 263,995 8.5EBITDA margin (%) 18.3 19.3 93bpsEPS (Rs) 36.4 40.3 10.8Source: Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 2: Comparison - NBIE Research estimates vs. Bloomberg consensus projectionsCompany Bloomberg Consensus NBIE Research Difference (%)TCSRevenues (Rsmn) 127,056 131,077 3.2EBITDA margin (%) 30.7 30.7 3bpsNet profit (Rsmn) 28,391 26,662 (6.1)InfosysRevenues (Rsmn) 89,270 91,021 2.0EBITDA margin (%) 32.3 32.7 42bpsNet profit (Rsmn) 21,871 22,170 1.4WiproRevenues (Rsmn) 94,343 96,554 2.3EBITDA margin (%) 21.3 19.4 (191bps)Net profit (Rsmn) 15,096 13,788 (8.7)HCL TechnologiesRevenues (Rsmn) 49,574 52,221 5.3EBITDA margin (%) 17.2 19.0 175bpsNet profit (Rsmn) 5,388 5,791 7.5Source: Bloomberg, Nirmal Bang Institutional Equities Research1203QFY12 Preview

Institutional EquitiesCompanySales growth(% QoQ)EBITDA marginexpansion (Bps – QoQ)PAT growth(% QoQ)Infosys 12.4 171 16.3TCS 12.7 162 9.3Wipro 7.2 106 6.0HCL Technologies 12.3 187 16.6CommentsIT service volumes to grow 3.4% QoQ, consolidated revenues to grow2.2% QoQ in US dollar terms to $1,785mn, 12.4% QoQ in rupee terms toRs91bn; cross-currency to have $22.5mn adverse impact; margins torise 171bps QoQ primarily on rupee depreciation, with net profit to surge16.3% QoQ to Rs22.2bn; lower hedges to ensure lower forex lossRevenues to grow 1.8% QoQ in dollar terms to $2,570mn, volumegrowth to come in at 3.4% QoQ, to slow down on lower billing days andplanned shutdowns by manufacturing clients, billing rates to remainunder pressure; rupee revenues to surge 12.7% QoQ to Rs131.1bn onweak currency; margins to rise 162bps QoQ on rupee depreciation; netprofit to rise 9.3% QoQ to Rs26.7bn, profit growth to trail EBITDA growthowing to forex losses on outstanding hedges of $1.3bn for 3QFY12IT volumes to grow 2.1% QoQ, dollar revenues to grow 0.8% QoQ to$1,484mn (guidance US$1,500-1,530mn) as adverse cross-currencymovements reduce dollar revenues, rupee IT revenues to grow 10.8%QoQ to Rs75.7bn, consolidated revenues to grow 7.2% QoQ toRs96.6bn; IT margin to rise 85bps QoQ aided by rupee fall, consolidatedmargin to rise 106bps QoQ; net profit to rise 6% QoQ to Rs13.8bn, lowerthan EBITDA growth on forex losses owing to higher hedge book of$1.7bn.Software service volumes to grow 3.3% QoQ; consolidated dollarrevenues to rise 2.2% QoQ to $1,024mn, while rupee revenues to rise12.3% QoQ to Rs52.2bn on rupee depreciation; margins to surge187bps QoQ on weak rupee, which is expected to lead to 16.6% QoQrise in net profit to Rs5.8bn; lower hedge book to ensure lower forexlosses.Source: Nirmal Bang Institutional Equities ResearchExhibit 3: Key operating metrics, 3QFY12E (%, QoQ)Company Volume growth Blended pricingRevenue growth($)Rupee revenue growthUS$ revenues(mn)Rupee revenues(Rsmn)TCS 3.4 (1.6) 1.8 12.7 2,570 131,077Infosys* 3.2 (1.0) 2.2 12.4 1,785 91,021Wipro** 2.1 (1.1) 0.8 10.8 1,484 75,687HCL Tech.$ 3.3 (0.7) 2.2 12.3 1,024 52,221Source: Nirmal Bang Institutional Equities Research;* For Infosys, volume growth and blended pricing are only for IT services and consulting, while revenue growth and revenues are for the consolidated entity.** Only for Wipro’s combined IT services business; volume growth and blended pricing are for pure IT services, while revenue growth and revenues are for thecombined IT services business including BPO.$ Volume growth and blended pricing are only for software services, while revenue growth and revenues are for the consolidated entity; HCL Tech follows a Juneendingfinancial year and thus estimates are for 2QFY12.1213QFY12 Preview

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Institutional EquitiesInfosys12 January 20123QFY12 Result UpdateReuters: INFY.BO; Bloomberg: INFO INRupee depreciation drives performanceInfosys’ 3QFY12 results on the revenue, margin and profit fronts were aboveour expectations led by rupee depreciation. However, given the subduedguidance for 4QFY12, the stock witnessed an 8.4% battering on the boursestoday. Our estimates already factor in a reasonable 11.3% US dollar revenuegrowth in FY13. As per our house view, owing to a deteriorating externalaccount, the rupee is likely to depreciate further in FY13 and we factor in anaverage rupee-dollar rate of 54.5 for FY13. We maintain our stance that Infosysis likely to be a key beneficiary of a weak rupee owing to lower hedgedpositions, with valuations at 14.1x FY13E EPS reasonable and we thereforemaintain our Buy rating on the stock.Revenues led by rupee depreciation; volumes in line: Infosys reported a 14.8%QoQ increase in 3QFY12 revenue to Rs93bn (our estimate Rs91bn, consensusRs91.5bn); in dollar terms, revenues came in at US$1,806mn, ahead of our estimateof US$1,785mn, with volumes growing 3.1% QoQ, nearly in line with our estimate of3.2% QoQ. Pricing was stable (our estimate 1% QoQ decline), which is a positive in aquarter that saw cross-currency headwinds. The IT major’s key verticals - financialservices and insurance (FSI) and manufacturing (MFG) - grew 3.1% and 4.8% QoQ,respectively, in dollar terms, another positive sign in a seasonally weak quarter.Margins surge on rupee weakness: The IT major reported a 268bps QoQ rise inmargins to 33.7%, above our estimate by 95bps and consensus estimate by 89bps.This was driven by rupee depreciation, which led net profit to rise 24.4% QoQ toRs23.7bn (against our estimate of Rs22.2bn and consensus estimates of Rs22.6bn).Cautious stance for 4QFY12 expected; weak rupee to prop up FY13 earnings:Infosys’ stock took an 8.4% hit today on cautious 4QFY12 guidance. However, in ourview, the caution was expected in the wake of delays in finalisation of IT budgets. Webelieve our FY13 dollar revenue growth estimate of 11.3% adequately factors inslower growth owing to the uncertain economic outlook. Also, as per our house view,the rupee is likely to remain weak owing to a worsening external account, which willboost FY13 EPS. We maintain our Buy rating on the stock with a TP of Rs3,125.BUYSector: ITCMP: Rs2,588Target Price: Rs3,125Upside: 21%Harit Shahharit.shah@nirmalbang.com+91-22-3926 8068Key DataCurrent Shares O/S (mn) 574.2Mkt Cap (Rsbn/US$bn) 1,486.2/28.852 Wk H / L (Rs) 3,390/2,162Daily Vol. (3M NSE Avg.) 1,399,338Price Performance (%)1 M 6 M 1 YrInfosys (5.5) (7.3) (23.4)Nifty Index 1.4 (12.6) (17.6)Source: BloombergY/E March (Rsmn) 3QFY11 2QFY12 3QFY12 QoQ (%) YoY (%) 9MFY11 9MFY12 Chg (%)Net revenues 71,060 80,990 92,980 14.8 30.8 202,510 248,820 22.9Software development expenses 38,470 45,110 50,520 12.0 31.3 110,420 139,200 26.1Gross profit 32,590 35,880 42,460 18.3 30.3 92,090 109,620 19.0SG&A expenses 8,960 10,740 11,110 3.4 24.0 25,690 31,410 22.3EBITDA 23,630 25,140 31,350 24.7 32.7 66,400 78,210 17.8Depreciation 2,160 2,330 2,360 1.3 9.3 6,400 6,890 7.7EBIT 21,470 22,810 28,990 27.1 35.0 60,000 71,320 18.9Other Income 2,900 3,870 4,220 9.0 45.5 7,960 12,520 57.3Income before income tax 24,370 26,680 33,210 24.5 36.3 67,960 83,840 23.4Tax 6,570 7,620 9,490 24.5 44.4 17,910 23,840 33.1Net profit 17,800 19,060 23,720 24.4 33.3 50,050 60,000 19.9Diluted EPS (Rs) 31.2 33.4 41.5 24.4 33.3 87.6 105.0 19.9Gross profit margin (%) 45.9 44.3 45.7 45.5 44.1EBITDA margin (%) 33.3 31.0 33.7 32.8 31.4EBIT margin (%) 30.2 28.2 31.2 29.6 28.7Net profit margin (%) 25.0 23.5 25.5 24.7 24.1Source: Company, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ERevenues 216,930 227,420 275,010 343,033 426,873YoY (%) 30.0 4.8 20.9 24.7 24.4EBITDA 71,880 78,520 89,640 110,343 144,784EBITDA (%) 33.1 34.5 32.6 32.2 33.9Adj. PAT 59,750 62,190 68,230 84,272 105,047YoY (%) 28.2 4.1 9.7 23.5 24.7FDEPS (Rs) 104.6 108.8 119.4 147.5 183.9RoE (%) 36.2 28.7 27.1 27.8 28.4RoCE (%) 33.7 25.1 23.1 23.9 25.9P/E (x) 24.8 23.8 21.7 17.6 14.1EV/EBITDA (x) 19.1 16.9 14.7 11.5 8.4Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 1: Actuals vs NBIE, Bloomberg consensus estimates(3QFY12) Actuals NBIE estimatesBBG consensus % variation from % variation fromestimates NBIE estimates BBG consensusRevenues (Rsmn) 92,980 91,021 91,497 2.2 1.6EBITDA (Rsmn) 31,350 29,806 30,033 5.2 4.4EBITDA margin (%) 33.7 32.7 32.8 97bps 89bpsEPS (Rs) 41.51 38.80 39.61 7.0 4.8Source: Company, Bloomberg, Nirmal Bang Institutional Equities ResearchKey result data pointsVolumes and pricing - consolidatedVolumes up 3.1% QoQ; on-site volumes up 1.4% QoQ, offshore volumes up 3.6% QoQBlended pricing up 0.4% QoQ; on-site billing rates up 1.2% QoQ and offshore rates up 0.7% QoQUtilisation rate, including trainees, at 69.9%, marginally lower from 70.2% in 2QFY12Utilisation rate, excluding trainees, at 77.4%, marginally higher as compared with 77.3% in 2QFY12In FY12, utilisation is likely to remain at a lower level compared with FY11, given the need for thecompany to have enough bench strength to take advantage of higher growth, if it comes through; wefactor in a utilisation rate, including trainees, of 70.4% in FY12 as compared with 72% in FY11, while theutilisation rate, excluding trainees, is expected at 77.2% (78.9% in FY11); the company is comfortablewith a 76-80% utilisation range.Volumes and pricing – IT services and consultingVolumes up 3.1% QoQ; on-site volumes up 1.4% QoQ, while offshore volumes up 3.8% QoQBlended pricing marginally lower by 0.1% QoQ; on-site rates up 1.4% QoQ, offshore rates down 0.6%QoQUtilisation rate, including trainees, at 67.6%, down from 68.5% in 2QFY12Utilisation rate, excluding trainees, at 76.4%, marginally up from 76.3% in 2QFY12Exhibit 2: IT service volume detailsHours worked (mn) 3QFY11 2QFY12 3QFY12 QoQ (%) YoY (%)Onsite 10.1 11.3 11.4 1.4 13.2Offshore 26.4 27.8 28.8 3.8 9.2Total 36.5 39.0 40.3 3.1 10.3Source: Company124Infosys

Institutional EquitiesService lines (US$ terms)Business operation services – Up 3.4% QoQ at US$1,161mn, of which:Application development: Up 3.4% QoQApplication maintenance: Up 4.4% QoQTesting services: Down 0.3% QoQInfrastructure management: Up 8.8% QoQProduct engineering services: Up 9.5% QoQBusiness process management: Down 0.4% QoQConsulting and systems integration – Up 1.4% QoQ to US$553mn; a clear sign that discretionaryspending is coming offProducts, platforms & solutions – Down 17.2% QoQ to US$92mn, of which:Product revenues: Up 18.2% QoQOthers: Up 3.4% QoQIndustry verticals (US$ terms)Financial services and insurance (FSI): Up 3.1% QoQ to US$637mn; a decent performance byInfosys’ largest vertical in a seasonally weak quarter, which, in our view, is an encouraging signManufacturing (MFG): Up 4.8% QoQ to US$369mn; another positive sign during the quarterRetail, logistics, CPG & life sciences (RCL): Up 4.5% QoQ to US$418mnEnergy and utilities, communications and services (ECS): Up 1.6% QoQ at US$382mn;communications and services registers a 2.5% QoQ fall while on a YoY basis, this is the fifthconsecutive quarter of decline for this vertical, which continues to underperformGeographies (US$ terms)US: Up just 1% QoQ to US$1,151mn; a disappointing performance for the quarterEurope: Up by a strong 13.6% QoQ to US$408mn; a positive, despite the European sovereign debtcrisis and is an indication that European enterprises are using offshoring more in order to cutcosts, given the economic stress the region is undergoingEmployee dataGross addition of 9,655 employees, net addition at 3,266; total employee base at 145,088Standalone attrition declines marginally to 15.4% (15.6% in 2QFY12)Rupee EPS upgraded again due to currency fall; dollar guidance cut againInfosys has raised FY12 rupee revenue guidance from Rs335-340.9bn to Rs342.73-342.94bn, thusraising it by a marginal 0.5% at the upper end and implying a growth rate of 24.6-24.7% YoY; this hasbeen entirely owing to rupee depreciation, given that the IT major has again reduced its dollar revenuegrowth guidance to 16.4% YoY growth as compared with 17.1-19.1% YoY growth earlierRupee EPS guidance has also been upgraded by 1.3% to Rs147.13 from Rs143.02-145.26 earlierExhibit 3: Revised guidance – Led by rupee depreciation(FY12) Earlier guidance Revised guidance % chg*Revenues (US$bn) 7.08-7.20 7.029-7.033 (2.3)Basic EPADS (US$) 3.02-3.06 3.0 (2.0)Revenues (Rsbn) 335.01-340.88 342.73-342.94 0.5EPS (Rs) 143.02-145.26 147.13 1.3Source: Company; * From the upper end of the guidance125Infosys

Institutional EquitiesValuationInfosys’ stock saw an 8.4% hit on the bourses today owing to subdued 4QFY12 guidance of 0-0.2% QoQrevenue growth. Our estimates already factor in a reasonable 11.3% US$ revenue growth in FY13. As perour house view, India’s external account is likely to deteriorate further this year, with a widening currentaccount deficit, inability to attract capital inflows and pressure on forex reserves from maturing short-termforex debt continuing to exert pressure on the rupee. We factor in an average rupee-dollar rate of 54.5/$ forFY13. We maintain our stance that Infosys is likely to be a key beneficiary of a weak rupee owing to lowerhedged positions, with valuations at 14.1x FY13E EPS reasonable, and we therefore maintain our Buyrating on the stock with a target price of Rs3,125, even as the stock is likely to trade range-bound until thenext key trigger, the announcement of FY13 guidance in April 2012. Worse-than-expected volume growthin FY13 and currency appreciation are key downside risks to our call.Rating HistoryDate Rating CMP Target Price (Rs)2 June 2011 Hold 2,812 2,9001 July 2011 Sell 2,907 2,90012 July 2011 Hold 2,794 2,87512 August 2011 Sell 2,374 2,29823 September 2011 Sell 2,354 2,33830 September 2011 Sell 2,550 2,35412 October 2011 Sell 2,681 2,37823 November 2011 Hold 2,651 2,74621 December 2011 Hold 2,667 2,7552 January 2012 Buy 2,765 3,210126Infosys

Institutional EquitiesInfosys TechnologiesInitiating CoverageReuters: INFY.BO; Bloomberg: INFO INA structural storyWe believe Infosys Technologies, going forward, needs to make structuralchanges in its business model to move away from the headcount-based modelof growth, which involves recruitment of experienced personnel, stepping uplocal hiring, recruitment of domain experts and consultants and investment insolutions and platforms, thereby leading to increase in the cost base andstructurally lower margins. This, we expect, will drive multiple de-rating. Weexpect the IT bellwether to register 16.3% EPS CAGR over FY11-13E, thesecond-lowest among peers. We initiate coverage on Infosys with a Hold ratingand a target price of Rs2,900.A structural story – Changes in model, lower margins and valuation: Goingforward, we believe Infosys needs to focus more on driving future revenue throughhigher revenue productivity, which will involve strengthening consulting capabilities,step up local hiring, increase experienced personnel and make investments insolutions and platforms. All these measures will lead to an uptick in the cost base andexert pressure on margins. Our margin estimate for FY13 is below consensusestimate (30.5% vs 31.3%) as is our EPS estimate (Rs161.5 vs Rs171.4). We believethis downturn in the margin profile is structural and goes beyond traditional margindrivers like wage inflation, currency and utilisation. Consequently, we believe themultiple accorded to Infosys should also witness a de-rating.Second-lowest EPS CAGR vs top-tier peers: We expect the company to record16.3% EPS CAGR over FY11-13E as compared with 20.6% revenue CAGR mainly onaccount of margin pressure owing to higher cost per employee, higher SG&A costsand investments in non-linear growth initiatives (over 100 bps annual margin declineover FY11-13E). This is the second-lowest among top-tier peers. Owing to slowerearnings growth, we expect RoE to decline 170 bps over the period, from 27.1% inFY11 to 25.4% in FY13.Valuation: Infosys stock has traded at an average PE of 20x 1-year forward earningsover the past five years (EPS CAGR of 22.7%). Going forward, given our expectationsof 16.3% EPS CAGR over FY11-13E and structural changes likely to take place, webelieve the stock should command a discount to its historical average. The stockcurrently trades at 17.4x FY3E EPS. We initiate coverage on Infosys with a Holdrating and a TP of Rs2,900, implying a PE multiple of 18x FY13E EPS and an upsideof 3% from CMP.HOLDSector: ITCMP: Rs2,812Target Price: Rs2,900Upside: 3.1%Harit Shahharit.shah@nirmalbang.com+91-22-3926 8068Key DataCurrent Shares O/S (mn) 574.2Mkt Cap (Rsbn/US$bn) 1,614.3/3652 Wk H / L (Rs) 3,499/2,590Daily Vol. (3M NSE Avg.) 1,426,330Share holding (%)Q2FY11 Q3FY11 Q4FY11Promoter 16.0 16.0 16.0FII 55.8 55.7 54.6DII 8.0 8.4 9.0Corporate 6.4 6.0 6.7General Public 13.9 13.8 13.7One Year Indexed Stock PerformanceY/E Mar (Rs mn) FY09 FY10 FY11 FY12E FY13ERevenues 216,930 227,420 275,010 336,514 400,030YoY (%) 30.0 4.8 20.9 22.4 18.9EBITDA 71,880 78,520 89,640 106,307 122,154EBITDA (%) 33.1 34.5 32.6 31.6 30.5Adj. PAT 59,750 62,190 68,230 80,811 92,252YoY (%) 28.5 4.1 8.9 18.4 14.2FDEPS (Rs) 104.6 108.8 119.4 141.4 161.5ROE (%) 36.2 28.7 27.1 26.8 25.4ROCE (%) 36.2 28.7 27.1 26.8 25.4P/E (x) 26.9 25.8 23.5 19.9 17.4P/BV (x) 8.4 6.7 5.9 4.9 4.1Source: Company, Nirmal Bang Institutional Equities ResearchPrice Performance (%)1 M 6 M 1 YrInfosys (3.3) (7.9) 8.2Nifty Index (2.7) (6.2) 12.5Source: BloombergPrices as on 1 June 2011

Institutional EquitiesInvestment ArgumentsStructural change in business model, margin profile and earnings multipleOn 15 April 2011, Infosys announced its guidance for FY12. The IT major gave a guidance of 18-20%revenue growth in US dollar terms, which was in line with street estimates. However, it sprung an absoluteshocker on the EPS front, guiding a mere 5.5-7.3% YoY growth in rupee EPS – in the range of Rs126.05-128.21. In a strong demand environment, the single-digit EPS growth guidance was a major dampener. Toput this into proper perspective, Bloomberg consensus EPS estimates for FY12 were around Rs151 prior tothe IT major‟s 4QFY11 results announcement and FY12 guidance, up by as much as 18% versus the upperend of its EPS guidance. Not surprisingly, the market hammered the stock by nearly 10%, with Rs182bn of itsmarket capitalisation getting wiped out in a single trading session.Exhibit 1: Pre & post-FY12 guidance – Elevated expectations come crashing down(Rs)3,3503,250Elevated expectationspre-resultsbuild upDisappointing guidance precipitatessteep stock decline, multiple de-rating(x)23223,150213,050202,950192,85016-Mar-11 22-Mar-11 28-Mar-11 3-Apr-11 9-Apr-11 15-Apr-1118PriceForward PE (RHS)Source: C-lineGoing forward, we believe Infosys needs to focus more on future revenue growth through higher revenueproductivity rather than the traditional linear effort-based model that has been the case so far. This will entailgreater investments in building consulting capabilities, local hiring on the sales and delivery fronts, increasingthe experience profile of its employees through a greater proportion of lateral hiring (as seen over the pastseveral quarters, lateral hiring in FY11 was at its highest-ever level both in absolute numbers and as apercentage of gross hires), investing in solutions and platforms to de-link revenue growth from employeeaddition and being perceived by clients as a “business solution provider” rather than a mere IT vendor, whichwill lead to closer relationships with CEOs and the boards of client organisations and thereby ensure a moresignificant role in planning their business transformation strategies.All these measures will lead to an uptick in the cost base and thus exert pressure on margins, as they will beincurred upfront whereas the benefits from them will be back-ended and are likely to flow through over aperiod of time. We believe this downturn in the margin profile is structural in nature and goes beyond themore traditional margin drivers like wage cost inflation, currency and utilisation rate. Consequently, withstructural changes in the business model away from linearity and a structural downturn in margins, webelieve the multiple accorded to Infosys should also witness a de-rating.Dissecting Infosys’ FY12 guidanceWe take a closer look at key components of Infosys‟ FY12 guidance, which provides some clues as to the ITmajor‟s stance on growth going forward and more importantly on pricing and margins, given its exalted statusas a premium-priced player not willing at any cost to compromise on profitability for growth. This isparticularly important in the context of the ever-increasing competition in the IT sector, with peers, notablyTCS and Cognizant Technology Solutions (CTS) having handsomely outperformed Infosys in recent timesboth on growth and profitability, as well as the urgent need for Indian IT companies in general, includingInfosys, to make investments to drive structural changes in their business models to de-link revenue growthfrom headcount increases.128Infosys Technologies

Institutional EquitiesNo issues regarding revenue guidanceInfosys has guided revenue to grow by around 18-20% yoy in US dollar terms in FY12 to US$7.13-7.25bn.This was in line with ours as well as and street expectations. Consensus estimate was around 25% growth(our expectation 23.9% growth). Rupee revenue growth guidance came in at 15.4-17.3% (Rs317.27-322.70bn), lower than dollar growth on account of a lower rupee-dollar rate taken for conversion (Rs44.50for FY12 vs Rs45.52 realised rate in FY11). Read in conjunction with its hiring target, the IT major expectsto hire a gross of 45,000 employees in FY12, it‟s highest-ever (gross of 43,120 people hired in FY11). Thus,it is clear that Infosys is not witnessing any issues on the demand front and we do not foresee major hiccupsin terms of revenue growth going forward.Our estimates vs consensus: On the revenue front, our forecasts are more or less in line with consensusexpectations, with FY12 revenue expected at Rs336.5bn (Bloomberg consensus estimate Rs332.9bn) andFY13 revenue at Rs400bn (consensus estimate Rs399.7bn).Margin guidance - Key indicator of subdued earnings growthWe believe it is Infosys‟ margin guidance that caught the street by surprise. The IT major has given guidanceof a steep 300 bps YoY decline in EBITDA margin in FY12, compared with a 100-150 bps fall expected bythe market. The major components of this expected margin decline are wage inflation (100 bps impact),currency appreciation (100 bps) and lower employee utilisation (100 bps). The company‟s guidance takesinto consideration rupee-dollar rate of Rs44.50 and pricing at the same level as in 4QFY11. Thus, in absoluteterms, the company has guided an EBITDA of Rs95.5bn at the upper end, higher by just 6.6% YoY.Our estimate vs consensus: On the EBITDA margin front, our forecasts are in line with consensusestimates for FY12 but below consensus estimates in FY13, with margins in FY12 at 31.6% (consensus31.6%) and in FY13 at 30.5% (consensus 31.3%). While consensus estimates appear to factor in rangeboundmargins post FY12, we expect a 105 bps margin decline owing to rising cost per employee (up fromUS$ 26,681 in FY11 to US$ 30,090 in FY13) and increasing SG&A costs. We believe hiring a greater numberof lateral employees will drive up costs per employee.Exhibit 2: Components of Infosys operating margin guidance for FY12(%)352732.629.619113(5)(1.0) (1.0) (1.0)FY11 Currency Wage inflation Utilisation FY12ESource: CompanyHowever, we look beyond the more traditional margin drivers and believe that going forward in context of anincreasingly competitive business environment and with peers like TCS and Cognizant handsomely outperformingit in terms of growth and profitability post-recession, Infosys will more likely focus on revenuegrowth to recoup lost ground and will more likely have to compromise on its much-vaunted premium pricingstrategy, with the attendant negative impact on the margin profile.129Infosys Technologies

Institutional EquitiesEPS guidance - A shockerInfosys guided for a rupee EPS of Rs126.05-128.21 in FY12, implying growth of just 5.5-7.3% YoY overFY11. This was the biggest dampener for the street. To put this into perspective, street consensus EPSestimates for FY12 stood at Rs151, higher by 18% from the company‟s guidance. Post FY12 guidance,consensus EPS estimates declined to Rs142.5. The reduced EPS growth guidance was mainly on account ofthe likely margin contraction and slower 6.6% YoY growth in EBITDA in absolute terms. Infosys has alreadyregistered two consecutive years of single-digit EPS growth, in FY10 and FY11, and a third consecutive yearof the same clearly did not enthuse the street.Our estimates vs consensus: On the EPS front, our forecasts are below consensus, both FY12 as well asFY13, with FY12E EPS at Rs141.4 (consensus Rs143.1) and FY13E EPS at Rs161.5 (consensus Rs171.4).Thus, our estimate is 6% below consensus EPS estimate in FY13 owing mainly to lower EBITDA marginforecast by us.The bigger picture – A structural change in the business modelWe look beyond the usual issues faced by the company such as wage inflation and currency movement, andgive a perspective on the bigger structural issues that it is likely to face going forward and their likely impacton the IT major‟s margin profile.Current business model – Headcount-led growth for revenue, ‘bulge mix’ for marginsOver the past several years, Indian IT companies in general and Infosys in particular have followed what canbe described as a „linear growth model‟ – driving revenue growth primarily through headcount additions. Thelow-cost advantage enjoyed by India over developed markets like the US led to significant demand forexecuting IT outsourcing projects from low-cost, offshore locations like India thus leading to strong demandfor talent to leverage the growth opportunity. Indian IT and BPO exports grew at a CAGR of 22.2% overFY05-11 (US$59bn in FY11 from US$17.7bn in FY05), with Infosys out-performing the industry, clocking arevenue CAGR of 25% over the same period (US$6bn in FY11 from US$1.6bn in FY05). Over the sameperiod, the total direct employment created by the IT and BPO industry has grown from 1.1mn in FY05 to2.5mn in FY11 (including the domestic IT market), while Infosys‟ employee base has grown from 36,750 inFY05 to 130,820 in FY11.Exhibit 3: Infosys revenue and headcount growth – Direct correlation(US$ mn)6,500(Nos.)140,0005,200112,0003,90084,0002,60056,0001,30028,0000FY05 FY06 FY07 FY08 FY09 FY10 FY110RevenuesEmployees (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchOn the margin front, Infosys has relied on the „bulge mix‟ strategy to keep the average cost per employee(CPE) low. The IT major has typically recruited a majority of its employees in the 0-3 years‟ experience band(non-laterals), thus ensuring that CPE remains at lower levels. Over the period FY05-11, Infosys cumulativelyadded over 200,000 employees, with the share of non-laterals at nearly 75% (nearly 150,000). It was only inFY11 that the IT major significantly stepped up lateral recruitment (36.8% of gross addition), partly to meetthe surge in demand in the sector. With employee costs forming the lion‟s share of an IT firm‟s cost base,including Infosys (54% of revenue in FY11), the „bulge mix‟ has been a key driver of managing the marginprofile. Over FY05-11, Infosys has been able to keep margins within a 310 bps range, with its lowest marginsseen in FY08 (31.4%) and highest in FY10 (34.5%).130Infosys Technologies

Institutional EquitiesExhibit 4: Bulge mix – Non-lateral share of gross addition kept at higher levels(Nos.) (%)50,0009040,0008230,0007420,0006610,000580FY05 FY06 FY07 FY08 FY09 FY10 FY1150Gross additionsNon-lateralsSource: Company, Nirmal Bang Institutional Equities ResearchExhibit 5: Keeping revenue, cost per employee and margins range-bound(US$ '000) (%)6035523444333632283120FY05 FY06 FY07 FY08 FY09 FY10 FY1130EBITDA margins (RHS)Revenues per employeeSource: Company, Nirmal Bang Institutional Equities ResearchPresent conundrum – Growth or margins? We expect greater focus on the formerWe believe Infosys is at present facing a key strategic issue related to the way the IT major is likely toapproach its business going forward – should it maintain its focus on its long-followed strategy of notcompromising on profitability for growth, or should it instead go for growth and sacrifice margins in theprocess? Infosys has so far been able to manage both – revenue growth as well as profitability, havinggrowth revenues at a 25% CAGR over the past 6 years and maintained margins within a 310 bps band overthe same period through the bulge mix. It has adopted the „safe‟ route, focusing more on organic growth andbeing very selective on acquisitions. Given the significant growth opportunity for the sector, this strategy hasworked very well thus far for Infosys.However, as the IT major‟s clients have emerged from the 2008 global recession, it is apparent that Infosyshas not been able to get out of the blocks as fast as its competitors, notably TCS and CTS, both of whichhave outperformed it over the past seven quarters. TCS has added incremental revenue of US$764mn over1QFY10-4QFY11, compared with US$480mn for Infosys. CTS, on the other hand has added more revenuethan Infosys over 1QFY10-4QFY11 (2QCY09-1QCY11 for CTS as it has a December-ending financial year).The former has added US$595mn over the period. TCS‟ revenue in 4QFY11 was 40% higher than Infosys ascompared with a 32% gap in 1QFY10, while for CTS, the US-based IT major‟s revenue was nearly 86% ofInfosys in 4QFY11/1QCY11 as compared with just 69% in 1QFY10/2QCY09. Thus, TCS‟ revenue gap withInfosys has ballooned to US$643 mn in 4QFY11 as compared with US$359 mn in 1QFY10, while Infosys‟revenue gap with CTS has shrunk from US$345 mn in 1QFY10/2QCY09 to US$231mn in 4QFY11/1QCY11.131Infosys Technologies

Institutional EquitiesExhibit 6: Infosys revenue differential vs TCS and Cognizant – Increasingly unfavourable(US$ mn)700(US$ mn)4006203605403204602803802403001QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11TCS over InfosysInfosys over Cognizant (RHS)200Source: Respective companies, Nirmal Bang Institutional Equities ResearchNote: Cognizant has a December-ending fiscal year. Hence, 1QFY10=2QCY09 and 4QFY11=1QCY11.Consequently, Infosys has fallen behind in the race. Going forward, we expect Infosys to focus on drivingrevenue growth more aggressively with a view to recouping lost ground. This could exert pressure onrealisation to an extent, as the IT major will then have to be more liberal giving volume discounts to clients.Even as the IT major has stated that it does not expect to change its strategy in terms of maintaining its„industry-leading margins‟ (increasingly under threat from TCS), we believe this will be a difficult act to followin the light of ever-increasing competition in the sector and a demanding client base looking to cut costs asmuch as possible. Thus, Infosys‟ exalted status as a premium-priced service provider is unlikely to remain forlong, particularly in the current environment. We expect this to exert pressure on margins going forward. Sofar, Infosys has been reluctant to pursue any such opportunities that are likely to be margin-dilutive. The onemajor company that the IT major did attempt to acquire that would have been margin-dilutive buttransformational from a business perspective – the UK-based SAP consulting firm, Axon Group – went theway of HCL Technologies. We believe in an effort to recoup lost ground, Infosys could also drive a moreaggressive acquisition strategy going forward.Structural change in business model – Likely to lead to structurally lower marginsWe believe a structural change in Infosys‟ business model is necessary in the light of limitations of the lineargrowth model, as we have discussed in the industry section of this report. From the current linear growthmodel, which links revenue growth to headcount increase, Infosys needs to focus on improving revenueproductivity per employee from the current levels and invest more in solutions and platforms to break the linkbetween revenue and headcount growth. For this purpose, the IT major has to focus on building strongconsulting capabilities, for which it will need to increase the experience profile of its employees as it slowlyreduces dependence on „bulge mix‟ to manage margins. This has already been seen over the past fewquarters, with the proportion of laterals to total gross hires having risen significantly. In FY11, the totalnumber of laterals as well as the proportion of lateral hires to total hires was at an all-time high. Thus, thisstructural change is already being witnessed in the IT major‟s business model. It should be noted that in4QFY11, Infosys’ lateral hiring decreased QoQ, but we believe this is more of an aberration.132Infosys Technologies

Institutional EquitiesExhibit 7: Lateral hires as a percentage of gross hires – On a steady upswing(Nos.) (%)15,0005012,000409,000306,000203,0001001QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11Gross additions Laterals % of gross additions (RHS)0Source: Company, Nirmal Bang Institutional ResearchExhibit 8: Lateral hiring leads to a rise in cost per employee(US$ '000)3028262422201QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11Source: Company, Nirmal Bang Institutional Equities ResearchNote: Annualised for the quartersInfosys will also need to make investments in solutions and platforms, such as platform-based BPO (theacquisition of McCamish Systems), retail (ShoppingTrip 360) and communications (Flypp). All thesemeasures will lead to an uptick in its cost base and thus exert pressure on margins, as they will be incurredupfront, whereas the benefits from these investments will be back-ended and are likely to flow through over aperiod of time. We believe this downturn in the margin profile is structural in nature and goes beyondtraditional margin drivers like wage cost inflation, currency movement and employee utilisation rate.Business model has changed; lower dependence on commoditised ADM servicesEven as we argue for a structural change away from the linear growth model given its limitations, it would beincorrect to say that there has been no change in Infosys‟ business model over the past few years. The ITmajor has steadily increased the revenue share of new services (services other than commoditisedapplication development and maintenance - ADM revenues) in total revenue. Higher-end services likepackage implementation, consulting, software products, systems integration and IT infrastructuremanagement have registered strong growth over the past few years and in FY11 accounted for 61% ofInfosys‟ revenue, up from 47% in FY05. These services have posted a CAGR of 30.5% over FY05-11,compared with company average of around 25% and 18.6% CAGR for ADM services. Thus, Infosys hassteadily moved higher up the value chain over the years.133Infosys Technologies

Institutional EquitiesExhibit 9: Non-ADM revenue – On the rise(US$ mn) (%)4,000653,200602,400551,60050800450FY05 FY06 FY07 FY08 FY09 FY10 FY1140ADM revenues Non-ADM revenues Non-ADM revenues as a % of sales (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchBulge mix strategy prevents improvement in revenue productivityOwing to the IT major‟s dependence on the linear growth model, it has depended mainly on the bulge mix tokeep its costs low and maintain margins. Consequently, this has also had its impact on revenue productivity,given the lower experience profile of employees and consequently, relatively lower value addition capabilitiesas compared with lateral employees. Thus, even as the service line mix of the IT major has improved and isnow less dependent on ADM than ever before, revenue productivity has remained stagnant.Exhibit 10: Bulge mix limits increase in revenue and cost per employee(US$ '000)605244362820FY05 FY06 FY07 FY08 FY09 FY10 FY11Revenues per employeeCost per employeeSource: Company, Nirmal Bang Institutional Equities ResearchStructural changes should lead to multiple de-ratingThus, going forward we expect Infosys‟ margins to be impacted in two ways. Firstly, as the managementtakes steps to address its under-performance relative to peers, it is likely to focus more on growth and bewilling to sacrifice margins to achieve that objective, and secondly, we expect the cost base to increaseowing to front-loaded expenses related to hiring of a greater share of laterals and consultants fromcompetitors like IBM and Accenture to drive revenue productivity, which will raise the average cost peremployee. The benefits from these investments on the other hand are expected to flow through over a periodof time (back-ended). We model for around 100 bps annual margin declines each in FY12E and FY13Eowing to higher employee and S&M costs. Consequently, with structural changes in the business modelaway from linearity and a structural downturn in margins, we believe the multiple accorded to Infosys shouldalso witness a de-rating.134Infosys Technologies

Institutional EquitiesSecond-lowest EPS CAGR vs top-tier peersWe expect Infosys to record a 16.3% EPS CAGR over the period FY11-13E as compared with a 20.6%revenue CAGR over the period, mainly on account of margin pressure expected owing to higher cost peremployee, higher SG&A costs and investments in non-linear growth initiatives like solutions, platforms andintellectual property (over 100 bps annual margin decline over FY11-13E). This is the second-slowest amongtop-tier peers (26.2% CAGR for HCL Technologies, 17.5% for TCS and 13.7% for Wipro). Owing to slowerearnings growth, we expect RoE to decline 170 bps over the period, from 27.1% in FY11 to 25.4% in FY13.Exhibit 11: Infosys EPS CAGR vs peers – A laggard(%)302622181410TCS Infosys Wipro HCL TechSource: Nirmal Bang Institutional Equities ResearchExhibit 12: Infosys RoE profile – On a downtrend(%)454035302520FY07 FY08 FY09 FY10 FY11 FY12E FY13ESource: Company, Nirmal Bang Institutional Equities ResearchReorganisation to manage growth – Distraction in an environment of strong growthInfosys‟ board, in its meeting held on 30 April 2011 approved the appointment of K.V. Kamath, the nonexecutivechairman of ICICI Bank, as its chairman effective 21 August 2011 after current chairman and cofounderN.R. Narayanamurthy steps down on 20 August 2011. Mr Narayanamurthy has been appointed aschairman emeritus, Kris Gopalakrishnan, the current CEO, has been appointed as executive co-chairmanand S.D. Shibulal, the current COO, as new CEO and MD, all effective 21 August 2011. The appointmentsare, in our view, a vote in favour of continuity, given the continuation of the trend of allowing promoters thechance to run the organisation. So far, Infosys has been following the practice of changing its CEOs regularlyto give its founders a chance to run the company, with Nandan Nilekani succeeding N.R .Narayanamurthy asthe CEO after the latter stepped down in March 2002, followed by the current CEO, S. Gopalakrishnan, inJune 2007. We believe what is of greater importance is how Infosys is able to manage the aspirations of itssecond line of senior management. To this end, the IT major is likely to appoint key members of its executivecouncil to board positions ahead of its annual general meeting scheduled to be held on 11 June 2011. Twopositions that are vacant are those of T.V. Mohandas Pai and K. Dinesh, who stepped down recently.135Infosys Technologies

Institutional EquitiesInfosys as part of its reorganisation process has reorganised its verticals into 4 major groups – FinancialServices and Insurance (FSI), Manufacturing (MFG), Energy, Utilities, Communications and Services (ECS)and Retail, CPG and Life Sciences (RCL). FSI is headed by Ashok Vemuri, MFG by B.G. Srinivas, ECS byPrasad Thrikutam and RCL by U.B. Pravin Rao. In terms of service lines, the IT major has classified theseinto three key heads – business operations services (BOS), business transformation services (BTS) andbusiness innovation services (BIS). BOS will involve „run the business‟ service lines like applicationmaintenance, software testing, infrastructure management services and BPO and will be headed byChandra Shekar Kakal. BTS involves „change the business‟ services like enterprise solutions, consulting,systems integration and some part of application development and is headed by Steve Pratt. BIS involvesintellectual property like software platforms, products and co-creation solutions and the segment is headedby Subhash Dhar.Infosys‟ reorganisation exercise went on for several months and this we believe is not a good sign for the ITmajor, as it could be a signal that there are some disagreements within the company regards the direction itneeds to take. The fact that K. Dinesh, a co-founder and T.V. Mohandas Pai, the ex-CFO and Head ofHuman Resources, Education & Research resigned recently is another sign that there could be discontentbrewing within the ranks. In such reorganisation exercises, some high-profile exits are almost a certainty andthis has been the case not just with Infosys but also with its peer, Wipro. Thus, in our view the biggestchallenge for Infosys is to ensure that it is able to meet the growth aspirations of its second line ofleadership. In the medium-term, the company will also have to grapple with readjusting to the neworganisation structure.In a year of strong demand, we believe such internal issues are a distraction and shift the focus ofmanagement away from client acquisition, growth and operational focus. Infosys‟ peer Wipro is alsoundergoing a similar transition. Unsurprisingly, both these firms have significantly under-performed peers,TCS, CTS and HCL Tech in terms of revenue and profit growth over the past several quarters. We expectInfosys to continue to report inferior operating metrics vis-à-vis peers going forward (22% dollar revenueCAGR over FY11-13E v/s 24.6% for TCS).Exhibit 13: Infosys vs peers – Second-lowest revenue CAGRCompany Revenue (US$ mn) CQGR Incr. revs.1QFY10 4QFY11 (%) (US$ mn)Infosys Technologies 1,122 1,602 5.2 480Wipro* 1,033 1,400 4.4 368TCS 1,481 2,245 6.1 764HCL Technologies$ 607 914 6.0 307Cognizant Tech. Solutions@ 777 1,371 8.5 595Source: Respective companies, Nirmal Bang Institutional Equities Research* Only Wipro’s combined IT service revenue is taken for comparison.$ HCL Tech follows a June-ending financial year. Thus, 1QFY10=4QFY09 and 4QFY11=3QFY11.@ Cognizant follows a December-ending financial year. Thus, 4QFY11=1QCY11.Exhibit 14: Peer comparison – Future revenue growthCompany Revenue (US$ mn) CAGRFY11 FY13E (%)Infosys Technologies 6,041 8,989 22.0Wipro* 5,221 7,624 20.8TCS 8,187 12,701 24.6HCL Technologies 3,544 5,357 22.9Source: Respective companies, Nirmal Bang Institutional Equities Research* Only Wipro’s combined IT service revenues are taken for comparison.136Infosys Technologies

Institutional EquitiesKey RisksHigher-than-expected volume growth in FY12 and FY13 will lead to the company outperforming ourrevenue estimates and consequently, margin and EPS estimatesAny major acquisition could boost EPS above our estimatesLower-than-expected wage cost inflation may lead to higher-than-forecasted margins, EPS growthRupee depreciation will lead to better realisations than forecast by us and thus upgrade in revenue,margins and EPS estimatesFinancial performance4QFY11 – Not so enthusing performance, volume dips for the first time after seven quartersRevenueInfosys registered a tepid 1.1% QoQ growth in revenues in 4QFY11 to US$1.6bn, barely meeting the lowerend of its guidance. In rupee terms, top-line grew 2% QoQ to Rs72.5bn. A major disappointment was the factthat consolidated volume saw a 0.9% QoQ decline (1.5% QoQ for pure IT services and consulting), the firsttime in the past seven quarters since 1QFY10. The company attributed the poor performance to delay at theclient side, in terms of releasing IT budget. Blended pricing improved 2% QoQ, the only positive during thequarter. The revenue performance was well below our estimates of US$1.66bn revenue in dollar terms andRs74.9bn in rupee terms, mainly owing to volume contraction.MarginsThe IT major registered a disappointing 120 bps QoQ decline in EBITDA margins in 4QFY11, again wellbelow our estimates of a 50-bps fall QoQ. This was owing to slower sales growth recorded as well as aconsiderably lower utilisation rate (75.2% excluding trainees vs 80.7%% in the previous quarter).Net profitOwing to the poor performance on the revenue and margin fronts as well as higher taxes (effective tax rate27.8% vs 27% in the previous quarter), Infosys reported a tepid 2.1% QoQ growth in net profit to Rs 18.2bn(below our estimate of Rs18.5bn).FY11 – Volume drives top-line, lower margins exert pressure on bottom-line growthRevenueInfosys reported a strong 25.7% YoY growth in revenues in the fiscal FY11 to US$ 6.04 bn (US$ 4.8 bn inFY10). In rupee terms, revenue growth came in at 20.9% to Rs 275 bn (Rs 227.4 bn in FY10). The IT majorreported a 21.3% YoY growth in volumes, aided by a 3.7% YoY growth in blended pricing to US$ 33.6/hour.Onsite volumes grew 30% YoY, while onsite pricing grew 3.2% YoY to US$ 73.4/hour, while offshorevolumes grew 19% YoY and offshore pricing saw a modest decline of 0.4% YoY. Taking only IT services andconsulting, total volumes grew 23.3% YoY with blended pricing growing 1.8% YoY to US$ 38.4/hour, withonsite volumes growing 25.3% YoY and onsite pricing by 5.4% YoY to US$ 74.9/hour, while offshorevolumes grew 22.6% YoY and offshore pricing fell by 3.2% YoY to US$ 24.5/hour.MarginsInfosys reported a steep 193 bps YoY decline in EBITDA margins to 32.6% (34.5% in FY10). This is thesteepest margin decline recorded in a fiscal year since FY04 (203 bps decline). Higher employee costs (up85 bps YoY as a % of sales) was a key driver for the lower margin profile, as the IT major saw a 14.2% rise incost per employee (US$26,683 v/s US$23,366 in FY10), as compared with a 12.4% increase in revenues peremployee (US$ 49,396 v/s US$ 43,942 in FY10). This was on account of a record number of lateral hiresduring the fiscal, at 15,883, 36.8% of total gross hires during the year, also a record. This is a clear reflectionof 2 things – the sudden demand for talent during the year owing to the strong growth in demand, leading tothe IT major having to recruit a higher proportion of laterals, which are billable from Day 1 as opposed to a 6month training period required for freshers), and secondly, a reflection of a slow and steady push towardshigher revenue productivity from the IT major, given the limitations of the current linear-based model. This islikely to push up the average cost per employee for Infosys.137Infosys Technologies

Institutional EquitiesNet profitExhibit 15: Infosys financial performanceOn account of the margin decline witnessed, as well as higher taxes (effective tax rate of 26.7% v/s 21.3% inFY10), net profit saw a single-digit growth of 8.9% YoY to Rs68.2bn (Rs62.2bn in FY10). This is the secondconsecutive year of single-digit net profit growth for Infosys.Y/E March (Rs mn) 4QFY10 3QFY11 4QFY11 QoQ (%) YoY (%) FY10 FY11 YoY (%)Net Sales 59,440 71,060 72,500 2.0 22.0 227,420 275,010 20.9Operating Costs 39,240 47,430 49,260 3.9 25.5 148,900 185,370 24.5EBITDA 20,200 23,630 23,240 (1.7) 15.0 78,520 89,640 14.2EBITDA Margin (%) 34.0 33.3 32.1 (1.2) (1.9) 34.5 32.6 (1.9)Other Income 2,520 2,900 4,150 43.1 64.7 9,900 12,110 22.3Depreciation 2,310 2,160 2,220 2.8 (3.9) 9,420 8,620 (8.5)Profit before Tax 20,410 24,370 25,170 3.3 23.3 79,000 93,130 17.9Tax 4,410 6,570 6,990 6.4 58.5 16,810 24,900 48.1Tax rate (%) 21.6 27.0 27.8 0.8 6.2 21.3 26.7 5.5Net Profit 16,000 17,800 18,180 2.1 13.6 62,190 68,230 9.7Source: CompanyKey assumptionsRevenueWe forecast 22% CAGR in revenue in US dollar terms for Infosys over FY11-13E to US$9bn in FY13(US$6bn in FY11). In rupee terms, we expect 20.6% CAGR, slightly lower than dollar revenue growth, onaccount of rupee appreciation over the period. We expect core volume in IT services to clock a healthy20.1% CAGR and IT service revenue to clock a slightly higher 21.2% CAGR in dollar terms, boosted byhigher pricing (1% CAGR in blended billing rates).Exhibit 16: Infosys revenue, growth forecasts(US$ mn) (%)10,000308,000246,000184,000122,00060FY10 FY11 FY12E FY13ETotal revenuesRevenue growth (RHS)0Source: Company, Nirmal Bang Institutional Equities ResearchMarginsWe forecast margins to decline by around 100 bps annually, given the need to drive structural changes in thebusiness model and move away from linear growth, which will lead to higher average cost per employee(expect CPE at US$30,090 in FY13 vs US$26,683 in FY11). Higher S&M costs are also expected to do theirbit to exert pressure on margins apart from wage cost inflation. Management‟s focus on growth is also likelyto lead to a greater willingness to sacrifice margins to an extent. We forecast a 16.7% CAGR in EBITDA overthe period FY11-13E.138Infosys Technologies

Institutional EquitiesExhibit 17: Infosys EBITDA, margin forecasts(Rs mn) (%)135,00035122,00034109,0003396,0003283,0003170,000FY10 FY11 FY12E FY13E30EBITDAEBITDA margins (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchNet profitWe forecast a 16.3% CAGR in net profit for Infosys over FY11-13E, which is more or less in line with EBITDACAGR over the period.Exhibit 18: Infosys net profit, growth forecasts(Rs mn) (%)100,0002580,0002060,0001540,0001020,00050FY10 FY11 FY12E FY13E0Net profitNet Profit growth (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchValuationWe believe going forward Infosys will need to focus on driving a structural change in its business model witha greater focus on revenue productivity. The company will need to hire a greater proportion of lateral hires toachieve this, which will push up the average CPE, a key factor we expect will exert pressure on margins.Traditional margin levers like bulge mix we believe will become increasingly less relevant in the quest forgreater revenue productivity. Our EBITDA margin forecast for FY13 at 30.5% is 206 bps below FY11 marginof 32.6% and below Bloomberg consensus estimate of 31.3%. Owing mainly to this factor, our FY13E EPSestimate of Rs161.5 is 6% below consensus estimate of Rs 171.4.We believe the lower margin profile is structural in nature and should also lead to a multiple de-rating for thestock. Infosys has traded at an average PE of 20x one-year forward earnings over the past five years, whilethe IT major has recorded EPS CAGR of 22.7% over the same period. Going forward, given ourexpectations of 16.3% EPS CAGR over FY11-13E, which is the second-slowest among its top-tier peers andthe structural changes that are likely to take place in its business model, we believe the stock shouldcommand a discount to its historical average. The stock currently trades at 17.4x FY3E EPS, which webelieve is fairly valued. We assign a Hold rating to Infosys Technologies and a target price of Rs 2,900,implying a PE multiple of 18x FY13E EPS and an upside of 3% from the current market price.139Infosys Technologies

Institutional EquitiesExhibit 19: Infosys PE band chart(Rs)4,0003,2002,4001,60025x20x15x10x800Source: Bloomberg, Nirmal Bang Institutional Equities ResearchCompany background0Apr-05 Jun-06 Sep-07 Dec-08 Mar-10 May-11Infosys Technologies is India‟s second-largest software services company, with US$6bn in revenue in FY11.The company is an end-to-end IT and BPO services provider, offering services ranging from softwaredevelopment, maintenance, technology and management consulting, testing, systems integration,engineering services, BPO and package implementation. Infosys offers these services to a variety of industryverticals, namely banking, financial services and insurance (BFSI), manufacturing, retail and consumerpackaged goods, telecommunications, life sciences, transportation, and energy and utilities. Infosys derives amajor portion of its revenue from the North American market (over 65% of revenue in FY11). The IT majorhas grown its revenue, EBITDA and net profit at CAGR of 25.2%, 25.1% and 23.8%, respectively, over theperiod FY05-11 and had 130,820 employees on its rolls as on 31 March 2011.140Infosys Technologies

Institutional EquitiesFinancialsExhibit 19: Income statementY/E March (Rs mn) FY09 FY10 FY11 FY12E FY13ENet Sales 216,930 227,420 275,010 336,514 400,030% growth 30.0 4.8 20.9 22.4 18.9Personnel Costs 114,120 120,930 148,560 183,516 220,272SG&A and Other Costs 30,930 27,970 36,810 46,691 57,604Total Expenditure 145,050 148,900 185,370 230,207 277,876EBITDA 71,880 78,520 89,640 106,307 122,154% growth 37.2 9.2 14.2 18.6 14.9EBITDA margin (%) 33.1 34.5 32.6 31.6 30.5Other income 4,730 9,900 12,110 13,150 13,936Gross Profit 76,610 88,420 101,750 119,458 136,090% growth 28.9 15.4 15.1 17.4 13.9Depn. & Amortisn. 7,670 9,420 8,620 9,135 9,718Profit Before Tax 68,940 79,000 93,130 110,323 126,372% growth 29.0 14.6 17.9 18.5 14.5Tax 9,190 16,810 24,900 29,511 34,120Effective tax rate (%) 13.3 21.3 26.7 26.8 27.0Profit After Tax 59,750 62,190 68,230 80,811 92,252% growth 28.2 4.1 9.7 18.4 14.2Reported Net Profit 59,750 62,190 68,230 80,811 92,252% growth 28.2 4.1 9.7 18.4 14.2EPS (Rs) 104.6 108.8 119.4 141.4 161.5% growth 28.2 4.1 9.7 18.4 14.2DPS (Rs) 37.2 23.5 54.8 35.4 40.4Payout (%) 35.7 21.6 45.9 25.0 25.0Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 20: Balance SheetY/E March (Rs mn) FY09 FY10 FY11 FY12E FY13EEquity Capital 2,860 2,860 2,860 2,860 2,860Reserves 189,080 237,870 270,170 327,344 392,612Net Worth 191,940 240,730 273,030 330,204 395,472Other Non-Current Liabilities 2,820 3,460 3,190 3,190 3,190TOTAL LIABILITIES 194,760 244,190 276,220 333,394 398,662Intangible Assets 6,920 8,290 8,250 8,250 8,250Gross Block 74,180 81,340 94,010 107,471 121,472Depreciation 27,530 36,950 45,570 54,705 64,423Net Block 46,650 44,390 48,440 52,766 57,049Investments 0 11,900 1,230 1,230 1,230Other Non-Current Assets 10,180 14,540 19,050 19,050 19,050Debtors 36,720 34,940 46,530 59,763 76,508Unbilled Revenues 7,500 8,410 12,430 13,792 17,488Cash & Bank 109,930 121,110 166,660 210,479 256,663Other Current Assets 4,110 32,540 10,040 12,258 14,616Total Current Assets 158,260 197,000 235,660 296,292 365,275Current Liabilities 26,330 31,110 35,530 43,314 51,312Provisions 920 820 880 880 880Total Current Liabilities 27,250 31,930 36,410 44,194 52,192Net Current Assets 131,010 165,070 199,250 252,098 313,083TOTAL ASSETS 194,760 244,190 276,220 333,394 398,662Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 21:Cash flowY/E March (Rs mn) FY09 FY10 FY11 FY12E FY13EEBIT 64,210 69,100 81,020 97,172 112,436(Inc.)/Dec in working capital (4,600) (18,460) 5,550 (9,029) (14,801)Cash flow from operations 59,610 50,640 86,570 88,143 97,635Other income 4,730 9,900 12,110 13,150 13,936Depreciation & Amortisation 7,670 9,420 8,620 9,135 9,718Financial Expenses 0 0 0 0 0Tax paid (9,020) (16,810) (24,900) (29,511) (34,120)Dividends paid (24,940) (15,690) (36,650) (23,637) (26,984)Net cash from operations 38,050 37,460 45,750 57,280 60,184Capital expenditure (11,870) (6,800) (14,570) (13,461) (14,001)Net cash after capex 26,180 30,660 31,180 43,819 46,183(Inc.)/Dec. in investments 720 (20,150) 13,750 0 0Equity issue/(Buyback) 0 0 0 0 0Cash from Financial Activities 720 (20,150) 13,750 0 0Others 680 670 620 0 0Opening cash 82,350 109,930 121,110 166,660 210,479Closing cash 109,930 121,110 166,660 210,479 256,663Change in cash 27,580 11,180 45,550 43,819 46,183Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 22:Key RatiosY/E March FY09 FY10 FY11 FY12E FY13EReturn RatiosRoE (%) 36.2 28.7 27.1 26.8 25.4RoCE (%) 36.2 28.7 27.1 26.8 25.4Operating RatiosRevenue growth (%) 30.0 4.8 20.9 22.4 18.9EBITDA margins (%) 33.1 34.5 32.6 31.6 30.5EBITDA growth (%) 37.4 9.2 14.0 18.6 14.9Net Profit growth (%) 28.5 4.1 8.9 18.4 14.2Total Volume Growth (%) 14.4 6.8 23.3 22.1 18.1Blended Pricing Growth (%) (3.1) (4.1) 1.8 0.7 1.1RPEs (Rs mn) 2.21 2.08 2.25 2.36 2.43RPEs (US$ '000) 47.60 43.94 49.40 52.47 54.65Personnel Costs/Sales (%) 52.6 53.2 54.0 54.5 55.1SG&A & Other Costs/Sales (%) 14.3 12.3 13.4 13.9 14.4Dep./Gross Block excl. Land (%) 10.3 11.6 9.2 8.5 8.0Valuation ratiosPER (x) 26.9 25.8 23.5 19.9 17.4P/BV (x) 8.4 6.7 5.9 4.9 4.1Price/sales (x) 7.4 7.1 5.9 4.8 4.0EV/EBITDA (x) 20.9 18.5 16.1 13.2 11.1Dividend Payout (%) 35.7 21.6 45.9 25.0 25.0Source: Company, Nirmal Bang Institutional Equities Research141Infosys Technologies

142Institutional Equities

Institutional EquitiesHCL Technologies17 January 20122QFY12 Result UpdateReuters: HCLT.BO; Bloomberg: HCLT INVolumes ahead of expectations; we maintain BuyHCL Technologies reported volume growth of 4.8% QoQ in 2QFY12, aheadof our estimate of 3.3% QoQ. Apart from this, over US$1bn worth of orderwins during the quarter ensure decent revenue visibility for FY13, a keystreet concern. At the current market price, the stock trades at a reasonable10.5x FY13E EPS. We retain our Buy rating with a TP of Rs504.Volume growth impressive: HCL Technologies reported 2% QoQ growth indollar revenues at US$1,022mn (our estimate US$1,024mn, consensus estimatesUS$1,020mn), while rupee revenue growth stood at 12.8% QoQ (Rs52.5bn vs.our estimate of Rs52.2bn and consensus estimates of Rs52bn). A key positivewas that software service volume growth was ahead of expectations at 4.8% QoQ(our estimate 3.3%), while blended pricing declined 1% QoQ. Software servicerevenues grew 3.8% QoQ to US$736mn (our estimate US$727mn). A negativewas that infrastructure management services (IMS) witnessed QoQ decline of2.9% to US$239mn (our estimate US$252mn), for the first time since 1QFY05 (inover seven years). BPO revenues were flat at US$46.4mn, ahead of our estimateof US$44.4mn.Margins rise on weak rupee, drive net profit: The company reported a 141bpsQoQ rise in EBITDA margin to 18.5% and a 156bps QoQ rise in EBIT margin to15.8%. EBIT margin was below our estimate by 54bps, but above consensusestimates by 91bps. Rupee depreciation was the key driver of margin expansion,which led to a 15.3% QoQ rise in net profit to Rs5.7bn (marginally below ourestimate by 1.2%, but above consensus estimates by 4.9%) despite higher forexlosses of Rs758mn (Rs179mn forex loss in 1QFY12).We maintain Buy rating on the stock: Strong volume growth along with morethan US$1bn worth of deals won are likely to ensure decent revenue visibility forFY13, a key concern for the street, particularly after Infosys’ subdued 4QFY12dollar revenue guidance. At the CMP, the stock trades at 10.5x FY13E EPS. Wemaintain our Buy rating on the stock, with a target price of Rs504.BUYSector: ITCMP: Rs425Target Price: Rs504Upside: 19%Harit Shahharit.shah@nirmalbang.com+91-22-3926 8068Key DataCurrent Shares O/S (mn) 690.8Mkt Cap (Rsbn/US$bn) 293.9/5.852 Wk H / L (Rs) 526/538Daily Vol. (3M NSE Avg.) 1,278,612Price Performance (%)1 M 6 M 1 YrHCL Tech. 3.2 (14.1) (10.3)Nifty Index 6.8 (11.0) (12.2)Source: BloombergY/E June (Rsmn) 2QFY11 1QFY12 2QFY12 QoQ (%) YoY (%) 1HFY11 1HFY12 Chg (%)Revenues 38,884 46,513 52,452 12.8 34.9 75,965 98,965 30.3Direct costs 26,613 31,871 35,141 10.3 32.0 51,959 67,012 29.0Gross profit 12,271 14,642 17,311 18.2 41.1 24,006 31,953 33.1SG&A expenses 5,924 6,693 7,609 13.7 28.4 11,625 14,302 23.0EBITDA 6,347 7,949 9,702 22.1 52.9 12,381 17,651 42.6Depreciation & amortisation 1,239 1,309 1,395 6.6 12.6 2,488 2,704 8.7EBIT 5,108 6,640 8,307 25.1 62.6 9,893 14,947 51.1Other income (net) 54 238 89 (62.6) 64.8 59 327 454.2Forex gains/(losses) (134) (179) (758) 323.5 465.7 (789) (937) 18.8Income before income tax 5,028 6,699 7,638 14.0 51.9 9,163 14,337 56.5Tax 1,031 1,728 1,911 10.6 85.4 1,855 3,639 96.2Equity investee and minority interest - (3) - - - - (3) -Net profit 3,997 4,968 5,727 15.3 43.3 7,308 10,695 46.3Diluted EPS (Rs) 5.8 7.1 8.2 15.5 42.0 10.6 15.3 45.0Gross profit margin (%) 31.6 31.5 33.0 31.6 32.3EBITDA margin (%) 16.3 17.1 18.5 16.3 17.8EBIT margin (%) 13.1 14.3 15.8 13.0 15.1Net profit margin (%) 10.3 10.7 10.9 9.6 10.8Source: Company, Nirmal Bang Institutional Equities Research(US GAAP numbers)Please refer to the disclaimer towards the end of the document.

Institutional EquitiesExhibit 1: Key financialsY/E June (Rsmn) FY09 FY10 FY11 FY12E FY13ERevenues 105,910 125,882 160,342 200,128 255,655YoY (%) 40.0 18.9 27.4 24.8 27.7EBITDA 23,065 25,785 27,488 36,360 49,920EBITDA (%) 21.8 20.5 17.1 18.2 19.5Adj. PAT 12,770 13,058 17,095 21,848 28,074YoY (%) 13.5 2.3 30.9 27.8 28.5FDEPS (Rs) 18.3 18.7 24.5 31.4 40.3RoE (%) 23.4 20.5 22.1 23.7 25.3RoCE (%) 22.2 18.5 16.4 19.6 22.8P/E (x) 23.2 22.7 17.3 13.5 10.5EV/EBITDA (x) 13.1 11.6 10.8 8.1 5.8Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 2: Actual performance versus our, Bloomberg consensus estimatesParticulars Achieved NBIE estimates % variation BBG consensus % variationIT service volumes (mn) 20.7 20.0 3.6 - -Blended billing rates (US$/hour) 35.5 35.4 0.2 - -Consolidated revenues (US$mn) 1,022 1,024 (0.2) 1,020 0.2Consolidated revenues (Rsmn) 52,452 52,221 0.4 51,988 0.9EBITDA (Rsmn) 9,702 9,901 (2.0) 9,293 4.4EBITDA margin (%) 18.5 19.0 (46bps) 17.9 62bpsEBIT (Rsmn) 8,307 8,551 (2.9) 7,758 7.1EBIT margin (%) 15.8 16.4 (54bps) 14.9 91bpsNet profit (Rsmn) 5,727 5,796 (1.2) 5,460 4.9Source: Company, Bloomberg, Nirmal Bang Institutional Equities ResearchExhibit 3: Change in key estimatesParticulars Earlier estimates Revised estimates % changeFY12ERevenues (US$mn) 4,218 4,135 (2.0)Revenues (Rsmn) 204,130 200,128 (2.0)EBITDA (Rsmn) 37,175 36,360 (2.2)EPS (Rs) 31.3 31.4 0.1FY13ERevenues (US$mn) 4,841 4,688 (3.2)Revenues (Rsmn) 263,995 255,655 (3.2)EBITDA (Rsmn) 50,888 49,920 (1.9)EPS (Rs) 40.3 40.3 0.0Source: Nirmal Bang Institutional Equities Research144HCL Technologies

Institutional EquitiesKey result data pointsSegmental details – Volumes above expectations; IMS revenues fall after seven yearsSoftware service revenues were up 3.8% QoQ at US$736mn (ahead of our estimate of US$727mn) –Volume growth was an impressive 4.8% QoQ, well ahead of our estimate of 3.3% QoQ, but blendedpricing fell 1% QoQInfrastructure management service (IMS) revenues were down 2.9% QoQ at US$239mn – This was amajor disappointment for the quarter; IMS revenues have declined for the first time since1QFY05 (in more than seven years), with the India systems integration (SI) business being adrag on revenues for the segment; rupee depreciation also led to a decline in dollar revenuesfrom the India SI business.BPO revenues were flattish at US$46.4mn – Ahead of our estimate of US$44.4mnExhibit 4: Segmental revenue break-up(US$mn) 2QFY11 1QFY12 2QFY12 QoQ (%) YoY (%)Software services 618 709 736 3.8 19.2Infrastructure services 197 246 239 (2.9) 21.4BPO services 50 47 46 (0.2) (6.3)Total 864 1,002 1,022 2.0 18.3Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 5: Software services – Operating metricsParticulars 2QFY11 1QFY12 2QFY12 QoQ (%) YoY (%)Revenues (US$ mn)Onsite 359 409 428 4.5 19.2Offshore 259 300 309 2.8 19.2Total 618 709 736 3.8 19.2Volumes (mn)Onsite 4.5 5.1 5.3 5.7 17.5Offshore 13.1 14.7 15.4 4.6 17.9Total 17.6 19.8 20.7 4.8 17.8Billing rates (US$/hour)Onsite 79.0 81.0 80.1 (1.1) 1.4Offshore 19.8 20.4 20.0 (1.7) 1.1Blended 35.1 35.9 35.5 (1.0) 1.2Source: Company, Nirmal Bang Institutional Equities ResearchSoftware services - service line break-up (US$ terms)Enterprise application services – Up 4.9% QoQEngineering and research and development (R&D) services – Up 3.6% QoQCustom application services – Up 3.2% QoQIndustry verticals (US$ terms)Retail & CPG – Up 5.6% QoQ, another strong performance from this verticalManufacturing – Up 3.7% QoQEnergy-Utilities-Public Sector – Down 18.4% QoQ; given that revenues from the IMS businesswitnessed a decline, this is an indication that the business is partly focused on this verticalMedia, publishing and entertainment – Down 4% QoQFinancial services – Up 2.8% QoQHealthcare – Up 15.4% QoQTelecom – Down 4% QoQ145HCL Technologies

Institutional EquitiesGeographies (US$ terms)North America – Up by a strong 7.4% QoQ, a key growth driver for the quarter and a positive sign, giventhat the IT major’s largest market has shown an encouraging performanceEurope – Up 2.7% QoQRest of the World – Down 16.6% QoQ; as mentioned above, it was the India SI business that was adrag on the IMS business and geographically, this region has been impactedEmployees and utilisation rateGross hires at 7,804 in 2QFY12; net hires at 2,556Total employee base at 83,076 at the end of 2QFY12Attrition in IT services down to 15.3% (15.8% in 1QFY12)Utilisation rate, including trainees, at 69.6% (69.7% in 1QFY12)Utilisation rate, excluding trainees, at 76.1% (76.5% in 1QFY12)ValuationHCL Technologies’ 2QFY12 results were encouraging on the volume growth front. Strong order wins of overUS$1bn during the quarter, in our view, address a key concern of the street regarding revenue visibility forFY13. Thus, with good revenue visibility for FY13 and reasonable valuation of 10.5x FY13E EPS, the stockremains one of our top picks in the information technology sector. We maintain our Buy rating on thestock, with a target price of Rs504.146HCL Technologies

Institutional EquitiesHCL TechnologiesInitiating CoverageReuters: HCLT.BO; Bloomberg: HCLT INStrong EPS growth, high RoE at attractive valuationWe expect HCL Technologies to register strongest EPS CAGR versus peers(26.2% over FY11-13E versus 17.5% for TCS, 16.3% for Infosys and 13.7% forWipro) driven by strong revenue growth and margin expansion led by betterutilisation, pricing and lower BPO losses. Owing to strong earnings growth,we expect RoE to expand from 21.8% in FY11 to 24.6% in FY13. The stockcurrently trades at 13.3x FY13E EPS, which we believe is attractive given theearnings growth and RoE expansion. We initiate coverage on HCLTechnologies with a Buy rating and a target price of Rs620.Fastest EPS growth among top-tier IT firms: We expect HCL Tech to recordstrongest EPS CAGR of 26.2% over FY11-13E compared with peers (17.5% forTCS, 16.3% for Infosys and 13.7% for Wipro) driven by strong revenue growth(dollar revenue CAGR of 22.9%) and margin expansion of 50 bps each in FY12and FY13 led by better utilisation, pricing and lower BPO losses. We expect theinfrastructure management services (IMS) business to remain the key driver ofrevenue growth (nearly 30% CAGR over the period). In terms of margins, weexpect 50-bps expansion each in FY12 and FY13, which along with lower forexlosses will drive our expected 26.2% EPS CAGR over FY11-13E. Owing to strongearnings growth, we expect the company’s RoE to expand from 21.8% in FY11 to24.6% in FY13. Our sales, EBITDA and EPS expectations for FY11, FY12 andFY13 are largely in line with consensus estimates.Strong EPS CAGR, RoE expansion profile available at attractive valuation:Even as HCL Tech is expected to report 26.2% CAGR in earnings over FY11-13E, which is the highest among its top-tier peers, current stock valuation at 13.3xFY13E EPS is fairly attractive, implying a price earnings-to-growth (PEG) ratio ofjust 0.51x. HCL Tech is coming out of a period of three years of stagnant earnings(FY07-10 EPS CAGR of -0.7%) and given our strong growth forecast over FY11-13E and RoE expansion, we believe at 13.3x FY13E EPS the risk-return ratio atcurrent levels is skewed towards returns.Valuation: HCL Tech is our top pick in the IT sector. We initiate coverage on HCLTech with a Buy rating and a target price of Rs620, implying a PE multiple of 16xFY13E EPS and an upside of 20.6% from the CMP.BUYSector: ITCMP: Rs514Target Price: Rs620Upside: 20.6%Harit Shahharit.shah@nirmalbang.com+91-22-3926 8068Key DataCurrent Shares O/S (mn) 687.5Mkt Cap (Rsbn/US$bn) 353.6/7.952 Wk H / L (Rs) 528/347Daily Vol. (3M NSE Avg.) 867,626Shareholding (%)Q1FY11 Q2FY11 Q3FY11Promoter 65.2 64.8 64.7FII 22.6 23.3 23.1DII 5.7 5.8 6.0Corporate 3.3 3.0 2.9General Public 3.2 3.1 3.4One Year Indexed Stock PerformanceY/E June (Rs mn) FY09 FY10 FY11E FY12E FY13ERevenue 105,910 125,886 160,388 199,243 238,377YoY (%) 40.0 18.9 27.4 24.2 19.6EBITDA 23,065 25,965 27,335 34,844 42,937EBITDA (%) 21.8 20.6 17.0 17.5 18.0Adj. PAT 12,770 13,263 16,681 21,745 26,559YoY (%) 13.5 3.9 25.8 30.4 22.1FDEPS (Rs) 18.6 19.4 24.4 31.7 38.8RoE (%) 23.4 20.8 21.8 24.2 24.6RoCE (%) 22.2 18.8 16.6 18.4 19.8P/E (x) 27.6 26.6 21.1 16.2 13.3EV/EBITDA (x) 15.8 14.2 13.1 9.9 7.7Source: Company, Nirmal Bang Institutional Equities ResearchPrice Performance (%)1 M 6 M 1 YrHCL Tech (1.3) 25.1 41.0Nifty Index (2.7) (6.2) 12.5Source: Bloomberg

Institutional EquitiesInvestment ArgumentsFastest EPS growth among top-tier IT firms led by revenue growth, margin expansionWe expect HCL Technologies to record strongest EPS growth over FY11-13E compared to peers. Weforecast EPS CAGR of 26.2% over FY11-13E (compared with 17.5% for TCS, 16.3% for Infosys and 13.7%for Wipro) driven by strong revenue growth (dollar and rupee revenue CAGR of 22.9% and 21.9%,,respectively, over FY11-13E - the second-highest after TCS) and margin expansion of 50 bps each in FY12and FY13 led by higher utilisation, pricing and lower BPO losses. Lower foreign exchange losses on legacyforex-hedged positions are also expected to boost net profit.Exhibit 1: EPS CAGR over FY11-13E comparison – HCL Tech leads(%)302622181410TCS Infosys Wipro HCL TechSource: Nirmal Bang Institutional Equities ResearchAfter what has been a difficult 1HFY11 in terms of profitability (EBITDA down 8.2% YoY over 1HFY10compared with a 23.3% growth in revenue, EBITDA margins down 559 bps YoY), margins have startedlooking northwards. In 3QFY11, HCL Technologies reported a 99 bps QoQ expansion in margins owing tohigher utilisation, reduced SG&A costs and lower BPO losses and the company has committed to raisingmargins by another 100 bps in 4QFY11. We expect an 80 bps improvement in 4QFY11 margins owing tohigher utilisation and pricing, and expect the IT major to register a 50-bps margin expansion each in FY12and FY13 owing to higher utilisation, lower BPO losses and a better onsite-offshore ratio, which we expectwill offset key margin headwinds like wage cost inflation and higher S&M costs.This, we expect, will be the driver for the strong earnings growth expected, apart from lower forex losses,which are expected to come down to NIL in FY12 from Rs1.1bn in FY11. Over the past three financial years -from FY08-10 - the IT major’s net profitability has taken a significant hit on account of forex losses incurredby it on its legacy forex positions taken when the rupee was at lower levels of around Rs 40-41 back in 2007.With the rupee not having gone close to that level over the past few years, HCL Technologies had to incursignificant forex losses over the past several quarters, which led to net profit margins taking a big hit. InFY08, FY09 and FY10, the IT major incurred forex losses to the extent of Rs3.1bn, Rs4.9bn and Rs4.8bn,respectively, cumulatively amounting to Rs12.7bn. This led to net profit margins falling to their lowest-everlevel in FY10 (10.4%), with FY10 net profit in absolute terms lower than the FY07 level. With the company’slegacy hedged positions expiring, lower forex losses on these hedges are expected to be another driver ofnet profit growth. In FY11, forex losses are expected to be lower by Rs3.6bn to Rs1.1bn, while in FY12,legacy forex losses will come down to NIL. Thus, the IT major’s net profit margins will get a boost from thisfactor also.148HCL Technologies

Institutional EquitiesExhibit 2: EBITDA margin trends – On the way up(%)19.018.217.416.615.815.01HFY11 3QFY11 4QFY11E 2HFY11E FY11E FY12E FY13ESource: Company, Nirmal Bang Institutional Equities ResearchExhibit 3: Lower forex losses, another driver for improving PAT margin going forward(Rs mn) (%)5,000154,000143,000132,000121,000110FY08 FY09 FY10 FY11E FY12E FY13E10Legacy forex lossesPAT margins (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchFrom a revenue growth perspective, HCL Technologies has performed impressively, with top-line showing a6% compounded quarterly growth rate (CQGR) over the period 4QFY09-3QFY11, better than that of Infosysand Wipro. Even TCS, the only company among the top-tier firms to grow at a faster CQGR than HCLTechnologies, has grown at only a slightly higher rate of 6.1% CQGR over this period.Exhibit 4: Strong revenue growth relative to peersCompany Revenue (US$ mn) CQGR4QFY09 3QFY11 (%)HCL Technologies 607 914 6.0Wipro*$ 1,033 1,400 4.4TCS$ 1,481 2,245 6.1Infosys Technologies$ 1,122 1,602 5.2Source: Respective companies, Nirmal Bang Institutional Equities ResearchNote: * Only Wipro’s combined IT service revenue is taken for comparison.$ Wipro, Infosys and TCS all follow a March-ending financial year. Thus, 4QFY09=1QFY10 and 3QFY11=4QFY11.149HCL Technologies

Institutional EquitiesExhibit 5: HCL Tech IMS business – Key revenue growth driverBusiness Segment Revenue (US$ mn) CQGR Incremental Revenue Incremental Revenue Share4QFY09 3QFY11 (%) (US$ mn) (%)IMS 107 214 10.4 107 34.7Software Services 442 651 5.7 209 68.2BPO 59 50 (23) (9) (2.9)Total 607 914 6.0 307 100.0Source: Company, Nirmal Bang Institutional Equities ResearchGoing forward, we believe HCL Technologies’ strengths in both “run the business” (through infrastructuremanagement services - IMS, 23.4% of 3QFY11 revenue) and “change the business” initiatives (throughenterprise applications revenue and engineering and R&D services, a combined 39.1% of 3QFY11 revenue)will enable the IT major to drive healthy growth. We expect the IMS business to remain the key driver ofrevenue growth (nearly 30% dollar CAGR over FY11-13E) as has been the case over the past few quarters(10.4% dollar revenue CQGR over 4QFY09-3QFY11). The software services business, on the other hand, isexpected to register a 21.5% CAGR in revenue driven mainly by volume growth. We expect the BPObusiness to post a 10.9% CAGR in revenue over the period. Thus, with strong revenue growth, marginexpansion and lower forex losses driving strong earnings growth, we expect the company’s RoE to expandfrom 21.8% in FY11 to 24.6% in FY13. Our sales, EBITDA and EPS expectations for FY11, FY12 and FY13are largely in line with consensus estimates.Exhibit 6: HCL Tech segment-wise revenue growth – IMS, software services to be key driversBusiness Segment Revenue (US$ mn) CAGR Incremental revenue Incremental revenue shareSource: Nirmal Bang Institutional Equities ResearchExhibit 7: Strong earnings growth to drive RoE expansion(%)25FY11 FY13E (%) (US$ mn) (%)IMS 822 1,385 29.8 562 31.0Software Services 2,524 3,728 21.5 1,204 66.4BPO 199 244 10.9 46 2.5Total 3,544 5,357 22.9 1,812 100.02423222120FY10 FY11E FY12E FY13ESource: Company, Nirmal Bang Institutional Equities ResearchValuation at 13.3x FY13E EPS attractive given strong EPS growth, expected RoE expansionEven as HCL Technologies is expected to report 26.2% CAGR in earnings over FY11-13E, which is thehighest amongst its top-tier peers, the IT major’s valuation at 13.3x FY13E EPS are fairly attractive, implyinga price earnings-to-growth (PEG) ratio of just 0.51x. The company is coming out of a period of three years ofstagnant earnings (FY07-10 EPS CAGR of -0.7%) and given the strong growth forecast by us over FY11-13Eand RoE expansion, we believe at 13.3x FY13E EPS the risk-return ratio at current levels is skewed towardsbetter returns.150HCL Technologies

Institutional EquitiesExhibit 8: HCL Tech 5-year PE band chart(Rs)65020x52039026013015x10x5x0Jun-06 Sep-07 Nov-08 Mar-10 May-11Source: C-lineExhibit 9: PAT – Back in growth mode(Rs mn) (%)30,00024,000A return to growth after 3 years ofstagnation232018,00012,0006,0000FY07 FY08 FY09 FY10 FY11E FY12E FY13E1714118PATPAT margins (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchKey RisksProtectionist rhetoric in the USUnemployment has remained at higher levels in the US at 9% in April 2011, according to the Bureau of LaborStatistics. This excludes people who have dropped out of the labour pool on account of being unable to findsuitable employment. Thus, even as the US economy has been showing growth, the fact that theunemployment rate remains high implies that it is by and large a jobless recovery. With high unemploymentrate in the US, the Obama administration has stepped up its rhetoric against outsourcing in an attempt toshow that it is taking steps to address this issue. It enacted the Border Security Bill in August 2010 that raisesthe cost of H1B and L1 visas by US$2,000 each to raise US$600mn to secure its border with Mexico, whichwill increase the cost of business for Indian IT companies. The State of Ohio has also banned outsourcing ofgovernment IT projects to offshore locations. In December 2010, the US Congress and Senate passed theJames Zadroga 9/11 Health and Compensation Act of 2010, which aims to raise US$4.2bn to help victims ofthe 9/11 terrorist attacks by levying a 2% excise tax on goods and services purchased from foreign suppliersbased in countries like India and China, This implies that Indian IT companies will effectively have to bear thecost of paying compensation to 9/11 victims. If the employment situation in the US does not improve, thereare likely to be more protectionist moves by the US government in an attempt to show that it is taking steps toreduce unemployment, which would be a negative for Indian IT companies including HCL Technologies.151HCL Technologies

Institutional EquitiesCurrency volatilityGiven that a major portion of HCL Technologies’ revenue is earned from the US market (54.3% in 3QFY11),any volatility in currency movement, particularly the US dollar against the rupee is likely to adversely impactits business and profitability as it reports quarterly and annual financials in Indian rupees. Every 1%appreciation in the rupee against the greenback typically has an adverse impact of 40 bps on the marginprofile.Wage cost inflationGiven the human resource-intensive nature of the IT sector, salary costs account for a biggest portion of thecost base of any IT company including HCL Technologies. With the demand environment strong for theIndian IT sector, the need for skilled manpower becomes paramount and is likely to lead to higher costs tohire and retain talent. This can adversely impact the margin profile of HCL Technologies, particularly ifcompetitors including global IT firms like IBM and Accenture, offer higher salaries to employees and also itcould lead to higher attrition.Financial performance3QFY11 Results – Strong on all frontsRevenueHCL Technologies reported strong 5.8% QoQ growth in revenue in 3QFY11 at US$914.4mn, while revenuein rupee terms stood at Rs41.4bn, a growth of 6.4% QoQ. These outperformed our estimates, which stood atUS$902 mn and Rs40.4bn, respectively. Volume growth was 4.9% QoQ in the software services segment,with blended pricing up 0.4% QoQ. Offshore volumes grew 5.6% QoQ with its pricing growing 1.5%, whileonsite volumes rose 3% and its pricing was up 1.1% QoQ. The IMS business continued to outperformcompany growth, clocking a strong 8.5% QoQ increase in dollar revenue (9.1% QoQ in rupee terms), whileBPO continues to remain in a state of flux, growing by just 0.6% QoQ in dollar terms and 1.2% QoQ in rupeeterms. HCL Technologies is focusing on moving the BPO business away from commoditised voice servicesto a greater proportion of non-voice services. We expect BPO business to remain a laggard over the nextthree quarters.MarginsHCL Technologies reported an impressive 99 bps QoQ improvement in EBITDA margin in 3QFY11 at 17.3%,above our estimate of a 50 bps QoQ growth. This was led by higher utilisation (offshore utilisation excludingtrainees at 76.3% vs 75% in 2QFY11), better pricing and lower SG&A costs.Net profitExhibit 10: Financial performanceOwing to margin expansion and lower forex losses, HCL Technologies reported a strong 17.1% QoQ growthin net profit to Rs4.7bn, above our estimate of Rs4.2bn. Going forward, with the company’s legacy forexlosses reducing, this will be a key driver of earnings growth.Y/E June (Rs mn) 3QFY10 2QFY11 3QFY11 QoQ (%) YoY (%) 9MFY10 9MFY11 YoY (%)Net Sales 31,321 38,884 41,382 6.4 32.1 92,160 117,347 27.3Operating Costs 25,137 32,537 34,217 5.2 36.1 72,658 97,801 34.6EBITDA 6,184 6,347 7,165 12.9 15.9 19,502 19,546 0.2EBITDA Margin (%) 19.7 16.3 17.3 1.0 (2.4) 21.2 16.7 (4.5)Other Income (144) 54 127 135.2 (188.2) (330) 186 (156.4)Forex gain/(loss) (638) (134) (112) (16.4) (82.4) (3,409) (901) (73.6)Depreciation 1,119 1,239 1,198 (3.3) 7.1 3,908 3,686 (5.7)Profit before Tax 4,283 5,028 5,982 19.0 39.7 11,855 15,145 27.8Tax 783 1,031 1,300 26.1 66.0 2,168 3,155 45.5Tax rate (%) 18.3 20.5 21.7 1.2 3.5 18.3 20.8 2.5Minority Interest 1 0 0 (2) 2Net Profit 3,499 3,997 4,682 17.1 33.8 9,689 11,988 23.7Source: Company152HCL Technologies

Institutional EquitiesKey assumptionsRevenueWe forecast 22.9% CAGR in revenue in US dollar terms for HCL Technologies over FY11-13E at US$5.4bnin FY13 (US$3.5bn in FY11). In rupee terms, we expect a 21.9% CAGR, slightly lower than dollar revenuegrowth, on account of slight rupee appreciation over the period. We expect software service revenue to clock21.5% CAGR in dollar revenue, led mainly by volume growth and slightly higher pricing. In its other businesssegments, we expect the IMS business to continue to outperform, with 28.7% CAGR in revenue likely. TheBPO business, on the other hand, is expected to post 10% CAGR in revenue as the business starts to pickup towards the end of FY12.Exhibit 11: HCL Technologies revenue, growth forecasts(US$ mn)5,500404,400363,300322,200281,100240FY10 FY11E FY12E FY13ETotal revenuesRevenue growth (RHS)20Source: Company, Nirmal Bang Institutional Equities ResearchMarginsAfter a 358 bps YoY decline in FY11 margin, we expect around 50 bps margin expansion each in FY12 andFY13 owing to higher utilisation, improved pricing, better onsite-offshore ratio and lower BPO losses. Weexpect the impact from wage inflation to be less significant than what was the case in FY11, given that duringthe latter year the sudden surge in demand necessitated hiring resources at a short notice, thereby pushingup recruitment, training and overall salary costs. With companies having enough time to plan their employeerequirement in FY12, we expect wage cost inflation to not play as big a role as it did in FY11.Exhibit 12: HCL Technologies EBITDA, margin forecasts(Rs mn) (%)45,00040,00035,00030,00025,00020,000FY10 FY11E FY12E FY13E252321191715EBITDAEBITDA margins (RHS)Source: Company, Nirmal Bang Institutional Equities Research153HCL Technologies

Institutional EquitiesNet profitWe forecast a strong 26.2% CAGR in net profit for HCL Technologies over FY11-13E, driven by the highermargins and lower forex losses as the legacy hedged positions taken by the company in 2007 expire. Wefactor in considerably higher tax rates post-FY11, with a 26% rate in FY12 and 28% in FY13 (21% in FY11).Exhibit 13: HCL Technologies net profit, growth forecasts(Rs mn)30,0003526,0002822,0002118,0001414,000710,000FY10 FY11E FY12E FY13E0Net profitNet Profit growth (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchValuationWe expect the IT major to report the strongest EPS growth over FY11-13E compared to peers (26.2% CAGRvs 17.5% for TCS, 16.3% for Infosys and 13.7% for Wipro) driven by strong revenue growth (22.9% dollarrevenue CAGR over the period, 21.9% rupee revenue CAGR) and 50 bps annual margin expansion in FY12and FY13 owing to higher utilisation, better pricing, improved onsite-offshore ratio and lower BPO losses.Owing to the strong earnings growth, we expect the company’s RoE to expand from 21.8% in FY11 to 24.6%in FY13. Valuation at 13.3x FY13E EPS is also fairly attractive and we believe at current levels, the riskreturntrade-off is skewed towards better returns. We assign a Buy rating to HCL Tech and a target priceof Rs 620, implying a P/E multiple of 16x FY13E EPS and an upside of 20.6% from the CMP.Exhibit 14: HCL Technologies forward PE band(Rs)65020x56047015x38029010x200Jun-10 Sep-10 Dec-10 Mar-11 Jun-11Source: C-line, Nirmal Bang Institutional Equities Research154HCL Technologies

Institutional EquitiesCompany backgroundHCL Technologies is India’s fourth-largest IT services company, with revenue of US$2.7bn in FY10 (Juneendingfinancial year). The company is an end-to-end IT and BPO company, offering services such assoftware development, maintenance, enterprise application services, infrastructure management servicesand BPO. HCL Technologies offers these services to industry verticals like financial services, manufacturing,retail, life sciences, and energy and utilities. HCL Technologies, like its peers, derives a major portion of itsrevenue from North American market (54.3% of revenue in 3QFY11). The company has recordedconsolidated revenue, EBITDA and net profit CAGRs of 30.5%, 27.6% and 16.8%, respectively, over theperiod FY05-10 and had a total of 73,420 employees on its rolls as of 31 March 2011.155HCL Technologies

Institutional EquitiesFinancialsExhibit 15: Income statementY/E June (Rs mn) FY09 FY10 FY11E FY12E FY13ENet Sales 105,910 125,886 160,388 199,243 238,377% growth 40.0 18.9 27.4 24.2 19.6Cost of Revenues 65,483 81,957 109,395 134,513 159,087SG&A Costs 17,362 17,964 23,657 29,886 36,352Total Expenditure 82,845 99,921 133,052 164,399 195,440EBITDA 23,065 25,965 27,335 34,844 42,937% growth 42.2 12.6 5.3 27.5 23.2EBITDA margin (%) 21.8 20.6 17.0 17.5 18.0Other income (2,198) (3,316) (208) 1,241 1,603Financial Expenses 1,059 1,973 924 1,125 1,273Gross Profit 19,808 20,676 26,204 34,960 43,267% growth 27.2 4.4 26.7 33.4 23.8Depn. & Amortisn. 4,494 5,010 4,861 5,498 6,302Profit Before Tax 15,314 15,666 21,343 29,462 36,965% growth 22.1 2.3 36.2 38.0 25.5Tax 2,544 2,403 4,482 7,660 10,350Effective tax rate (%) 16.6 15.3 21.0 26.0 28.0Profit After Tax 12,770 13,263 16,861 21,802 26,615% growth 13.3 3.9 27.1 29.3 22.1Minority Int. &share of equity invest. 0 0 (180) (57) (56)Reported Net Profit 12,770 13,263 16,681 21,745 26,559% growth 13.5 3.9 25.8 30.4 22.1EPS (Rs) 18.6 19.4 24.4 31.7 38.8% growth 13.5 3.9 25.8 30.4 22.1DPS (Rs) 9.2 4.0 6.0 8.0 8.0Payout (%) 48.1 20.3 24.2 24.8 20.3Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 16: Balance SheetY/E June (Rs mn) FY09 FY10 FY11E FY12E FY13EEquity Capital 1,338 1,347 1,347 1,347 1,347Reserves 55,521 69,021 80,972 96,410 116,663Net Worth 56,859 70,368 82,319 97,758 118,011Other Non-Current Liabilities 7,634 7,386 7,386 7,386 7,386Short-term Loans 0 5,486 5,486 5,486 5,486Long-term Loans 29,771 26,632 23,969 21,306 18,642Total Loans 29,771 32,118 29,455 26,791 24,128TOTAL LIABILITIES 94,264 109,872 119,160 131,935 149,525Intangible Assets 45,325 43,122 43,122 43,122 43,122Gross Block 33,282 40,916 48,935 57,901 67,436Depreciation 17,420 22,430 26,770 31,750 37,540Net Block 15,862 18,486 22,165 26,151 29,896Investments 368 707 707 707 707Other Non-Current Assets 8,608 9,640 9,640 9,640 9,640Debtors 27,083 30,496 39,548 50,220 62,043Cash & Bank 18,762 16,599 23,157 33,011 47,038Other Current Assets 10,931 16,665 16,665 16,665 16,665Total Current Assets 56,776 63,760 79,370 99,897 125,746Total Current Liabilities 32,675 25,843 35,844 47,581 59,586Net Current Assets 24,101 37,917 43,526 52,315 66,160TOTAL ASSETS 94,264 109,872 119,160 131,935 149,525Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 17:Cash flowY/E June (Rs mn) FY09 FY10 FY11E FY12E FY13EEBIT 18,571 20,955 22,474 29,346 36,635(Inc.)/Dec in working capital 16,092 (10,679) 949 1,064 182Cash flow from operations 34,663 10,276 23,423 30,411 36,817Other income (2,198) (3,316) (208) 1,241 1,603Depreciation & Amortisation 4,494 5,010 4,861 5,498 6,302Financial Expenses (1,059) (1,973) (924) (1,125) (1,273)Tax paid (2,544) (2,403) (4,482) (7,660) (10,350)Dividends paid (7,192) (3,153) (4,730) (6,306) (6,306)Net cash from operations 26,164 4,441 17,941 22,058 26,793Capital expenditure (43,769) (8,141) (8,019) (8,966) (9,535)Net cash after capex (17,605) (3,700) 9,922 13,092 17,258Inc./(Dec.) in short-term borrowing (202) 5,486 0 0 0Inc./(dec.) in long-term borrowing 29,498 (3,139) (2,663) (2,663) (2,663)Inc./(dec.) in borrowings 29,296 2,347 (2,663) (2,663) (2,663)(Inc.)/Dec. in investments (3,292) (1,371) 0 0 0Equity issue/(Buyback) 5 9 0 0 0Cash from financial activities 26,010 985 (2,663) (2,663) (2,663)Others 308 552 (700) (575) (568)Opening cash 10,049 18,762 16,599 23,157 33,011Closing cash 18,762 16,599 23,157 33,011 47,038Change in cash 8,713 (2,163) 6,558 9,854 14,027Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 18:Key RatiosY/E June FY09 FY10 FY11E FY12E FY13EReturn RatiosRoE (%) 23.4 20.8 21.8 24.2 24.6RoCE (%) 22.2 18.8 16.6 18.4 19.8Operating RatiosRevenue growth (%) 40.0 18.9 27.4 24.2 19.6EBITDA margins (%) 21.8 20.6 17.0 17.5 18.0EBITDA growth (%) 42.2 12.6 5.3 27.5 23.2Net Profit growth (%) 13.5 3.9 25.8 30.4 22.1Total Volume Growth (%) 12.3 11.2 31.2 23.7 19.4Blended Pricing Growth (%) 2.7 9.8 0.2 (0.3) 0.3RPEs (Rs mn) 2.02 2.12 2.30 2.45 2.54RPEs (US$ '000) 41.53 45.54 50.80 54.49 57.14Cost of Sales/Sales (%) 61.8 65.1 68.2 67.5 66.7SG&A & Other Costs/Sales (%) 16.4 14.3 14.8 15.0 15.3Dep./Gross Block excl. Land (%) 13.5 12.2 8.5 8.5 8.5Valuation RatiosPER (x) 27.6 26.6 21.1 16.2 13.3P/BV (x) 6.2 5.0 4.3 3.6 3.0Price/sales (x) 3.3 2.8 2.2 1.8 1.5EV/EBITDA (x) 15.8 14.2 13.1 9.9 7.7Dividend Payout (%) 48.1 20.3 24.2 24.8 20.3Source: Company, Nirmal Bang Institutional Equities Research156HCL Technologies

Institutional EquitiesBata India1 November 2011Reuters: BATA.BO; Bloomberg: BATA IN3QCY11 Result UpdateBuoyant performance continuesFollowing strong revenue growth and improvement in margins, Bata India’s3QCY11 net profit grew 46.8% to Rs304mn (vs our estimate of Rs326mn).Factoring in healthy growth, we have revised revenue guidance upwards by1.7%/2.8% for CY11/12. Improvement in operating margin by 166bps was lowerthan our estimate of 350bps on account of high lease rentals. Followingaggressive retail expansion, revenue growth may lag rental costs in CY11, thusreducing operating margin estimate by 50bps to 15.5%, but we maintain ourCY12 margin estimate. As a result, we have revised net profit estimates by (1.6%)and 2.9% for CY11 and CY12, respectively. Based on 16x CY12 EV/EBITDA, wemaintain our Buy rating on the stock with a revised TP of Rs838 (Rs817 earlier).Aggressive retail expansion led to volume-driven growth: Bata India opened108/68 stores during CY10/1HCY11. On the back of higher penetration throughaggressive store addition and increasing volumes from existing stores the companyreported volume-driven net sales growth of 26.8% in 3QCY11 (versus our estimate of20%) and 23.5% in 9MCY11. Factoring in strong revenue growth, we are revising ournet sales estimates upwards by 1.7%/2.8% for CY11/12.Lower employee costs to improve operating margin: The company is setting upnew stores in the form of K stores (commission stores) where staff costs are lower by2-3% of sales. On higher contribution from K stores, coupled with higher outsourcing at46.3% of sales in 3QCY11 (37.5% in 3QCY10) staff costs were down by 306bps to11.9% for the quarter. However, higher rentals on account of aggressive retailexpansion and higher imported finished goods/raw material costs on account of fallingrupee partially negated the benefits accruing from lower staff costs. Operating marginimproved by 166bps YoY (vs our estimate of 350bps) to 14.4% in 3QCY11.Valuation: Bata India is trading at CY12E P/E of 23.1x and EV/EBITDA of 13.6x, at10-20% discount to other consumer product companies, which is not warranted. Strongrevenue CAGR of 20.1% supported by operating margin improvement of 357bps,working capital efficiency and debt-free Balance Sheet status should result inprofitability CAGR of 36.9%, generate free cash flow of Rs5,022mn and improve RoICby 19.5% over CY10-13E, thereby reporting cash balance of Rs6,428mn in CY13.BUYSector: RetailCMP: Rs725Target Price: Rs838Upside: 16%Jignesh Kamanijignesh.kamani@nirmalbang.com+91-22-3926 8239Saiprasad Prabhusaiprasad.prabhu@nirmalbang.com+91-22-3926 8172Key DataCurrent Shares O/S (mn) 64.3Mkt Cap (Rsbn/US$mn) 46.6/956.252 Wk H / L (Rs) 741/295Daily Vol. (3M NSE Avg.) 820,149Price Performance (%)1 M 6 M 1 YrBata 11.6 69.4 115.5Nifty Index 7.8 (7.4) (11.5)Source: BloombergY/E Dec (Rsmn) 3QCY10 2QCY11 3QCY11 Chg (YoY)% Chg (QoQ)% 9MCY10 9MCY11 Chg (%)Net sales 2,942 4,330 3,729 26.8 (13.9) 9,070 11,202 23.5Net raw material & purchase of finished goods 1,345 2,143 1,712 27.3 (20.1) 4,312 5,246 21.6% of sales 45.7 49.5 45.9 47.5 46.8Employee costs 440 479 444 0.8 (7.3) 1,327 1,379 3.9% of sales 15.0 11.1 11.9 14.6 12.3Other expenses 783 1,011 1,037 32.5 2.6 2,330 2,900 24.5% of sales 26.6 23.3 27.8 25.7 25.9Operating profit 374 697 535 43.3 (23.2) 1,100 1,677 52.4OPM (%) 12.7 16.1 14.4 12.1 15.0Interest costs 1 2 2 107.5 46.5 6 6 (8.1)Depreciation 89 105 108 20.5 3.0 227 297 30.9Other income 25 27 25 0.4 (4.9) 48 77 60.0Extraordinary income - - - - - - 1,094 -PBT 308 617 450 46.2 (27.0) 915 2,545 178.0Provision for tax 101 207 146 44.9 (29.5) 306 737 141.0Effective tax rate 32.7 33.6 32.4 33.4 29.0Reported PAT 207 410 304 46.8 (25.8) 610 1,808 196.6Extraordinary income - - - - - 810Adjusted PAT 207 410 304 46.8 (25.8) 610 998 63.7NPM (%) 7.0 9.5 8.2 6.7 8.9EPS (Rs) 3.2 6.4 4.7 46.8 (25.8) 9.5 15.5 63.7Source: Company, Nirmal Bang Institutional Equities Research

Institutional EquitiesExhibit 1: Financial summaryY/E Dec (Rsmn) CY09 CY10 CY11E CY12E CY13ERevenue 10,917 12,582 15,485 18,459 21,773YoY (%) 10.6 15.3 23.1 19.2 18.0EBITDA 1,295 1,679 2,401 3,084 3,682EBITDA margin (%) 11.9 13.3 15.5 16.7 16.9Reported PAT 672 954 2,197 2,014 2,447Adj PAT 672 954 1,467 2,014 2,447EPS (Rs) 10.5 14.8 22.8 31.3 38.1YoY (%) 10.7 41.8 53.9 37.2 21.5RoE (%) 21.5 26.0 29.4 29.4 28.4RoCE (%) 21.2 26.0 29.3 29.3 28.3RoIC (%) 21.1 28.3 37.4 42.4 47.8P/E (x) 69.3 48.8 31.7 23.1 19.0Price/sales (x) 4.3 3.7 3.0 2.5 2.1EV/ EBITDA (x) 35.6 26.9 18.2 13.6 10.9Source: Company, Nirmal Bang Institutional Equities ResearchOur estimates versus actual performanceOn the back of strong volume growth, Bata India beat our revenue estimate by 5.6% in 3QCY11. On highercontribution from K stores, coupled with higher outsourcing at 46.3% of sales in 3QCY11 compared to 37.5%of sales in 3QCY10, employee costs were lower by 306bps to 11.9% for the quarter. However, higher rentalson account of aggressive retail expansion and higher imported finished goods/ raw material costs on accountof depreciating rupee partially negated the benefits accruing from lower employee costs. The companyreported operating margin of 14.4% (versus our estimate of 16.2%) for 3QCY11. On account of lowerexpansion in operating margin, operating profit and net profit were down by 6.4% and 6.7%, respectively,from our estimates..Exhibit 2: Our estimates versus actualsDescription 3QCY10 2QCY11 3QCY11 YoY(%) QoQ(%) 3QCY11E Devi. (%)Revenue 2,942 4,330 3,729 26.8 (13.9) 3,530 5.6EBITDA 374 697 535 43.3 (23.2) 572 (6.4)EBITDA (%) 12.7 16.1 14.4 166bps (174)bps 16.2 (185)bpsAdjusted PAT 207 410 304 46.8 (25.8) 326 (6.7)Source: Company, Nirmal Bang Institutional Equities ResearchChange in earnings estimatesFollowing strong net revenue growth in 3QCY11, at 26.8%, we increase our CY11/12 revenue guidance by1.7%/2.8% to Rs15,485mn/18,459mn, respectively. On account of aggressive retail expansion, revenue fromnew outlets will lag lease rentals and erode expansion in margins in the near term and factoring in that wereduced CY11 operating margin by 50bps to 15.5%. However, we expect revenue to pick up in CY12 oncethese outlets stabilise. In addition, the company would be able to pass on high input costs with a lag of aquarter or two and therefore we maintain our operating margin estimate for CY12 at 16.7%. Factoring in allthis, we are lowering our net profit estimate by 1.6% to Rs1,467mn for CY11, but upgrade it by 2.8% toRs2,014mn for CY12.Exhibit 3: Change in earnings estimateDescription Earlier assumption New assumption Change (%)(Rsmn) CFY11E CY12E CY11E CY12E CFY11E CY12ENet sales 15,226 17,965 15,485 18,459 1.7 2.8EBITDA 2,437 3,002 2,401 3,084 (1.5) 2.8EBITDA (%) 16.0 16.7 15.5 16.7 (50)bps -Adjusted PAT 1,492 1,958 1,467 2,014 (1.6) 2.9Source: Company, Nirmal Bang Institutional Equities Research158Bata India

Institutional EquitiesBata India26 September 2011Initiating CoverageReuters: BATA.BO; Bloomberg: BATA INA ‘Shoe’ting StarWith a refurbished image, recast outlets, improved footwear collection,extensive distribution channel of 1,250 stores and over 30,000 dealers, and aaggressive retail expansion plan, Bata India should benefit the most from 18%growth in organised domestic footwear industry backed by robust youngpopulation, increasing discretionary income, rising fashion consciousness,expanding organised retail space and low per capita consumption. On the backof strong performance, it is currently trading at 20.9x CY12E EPS of Rs30.48,above its seven-year median of 15.7x and at 12.1x CY12 EV/EBITDA, against amedian of 11.0x. Strong revenue growth of 19% CAGR supported by operatingmargin improvement of 357bps, working capital efficiency and debt-free statusshould drive profitability by 35.7% CAGR, generate free cash flow of Rs4,959mn,improve RoIC by 18.5% over CY10-13 and call for expansion of valuationmultiples. We assign a Buy rating to the stock with a target price of Rs817 basedon 16x CY12 EV/EBITDA.Favourable product mix to drive revenue, profitability: We expect averagerealisation per pair of shoes to show 11.7% CAGR over CY10-13 on the back ofincreased share of high value leather footwear at 63.9% in CY13 from 49.1% in CY10,leading to substantial improvement in gross margin over the same period.Steadily improving profitability: We expect operating margin to improve steadily onthe back of: 1) Lower employee costs as a percentage of sales by decreasingheadcount and rising revenue from K-stores, 2) Higher outsourcing, particularly of lowvalue items like rubber footwear, 3) Better product mix in favour of high value leatherfootwear, 4) Lower freight cost as a percentage of sales, and 5) Better control overother cost heads like power & fuel, rates & taxes, travel & advertisement expenses etc.We expect operating margin to improve by 357bps over CY10-13 to 16.9% in CY13.Renewed focus on retail business growth: Bata India has an aggressive plan toincrease its retail reach and enhance market penetration level. It opened 69 and 108stores in CY09 and CY10, respectively, 68 stores in 1HCY11 alone and is planning toopen up to 100 stores a year with each store area being over 3,000 sq ft. On the backof higher penetration though aggressive store addition, brand repositioning andincreased attention towards organised ladies footwear market, Bata India should reportvolume CAGR of 6.2% over CY10-13 versus 3.4% CAGR over CY07-10.Strong free cash flow, RoIC: We expect Bata India to generate free cash flow ofRs4,959mn over CY10-13 and report surplus cash balance of Rs6,365mn by CY13.Return on invested capital should improve from 28.3% in CY10 to 46.9% in CY13.Considering strong cash flow and higher cash balance, there are strong chances of aspecial dividend or a share buyback programme.BUYSector: RetailCMP: Rs636Target Price: Rs817Upside: 28%Jignesh Kamanijignesh.kamani@nirmalbang.com+91-22-3926 8239Saiprasad Prabhusaiprasad.prabhu@nirmalbang.com+91-22-3926 8172Key DataCurrent Shares O/S (mn) 64.3Mkt Cap (Rsbn/US$mn) 40.9/827.552 Wk H / L (Rs) 741/295Daily Vol. (3M NSE Avg.) 1,086,950Share holding (%)4QCY10 1QCY11 2QCY11Promoter 52.0 52.0 52.0FII 15.0 13.8 14.7DII 14.9 16.3 15.1Corporate 3.0 3.2 4.2General Public 15.1 14.7 14.0One Year Indexed Stock PerformanceY/E Dec (Rsmn) CY09 CY10 CY11E CY12E CY13ENet sales 10,917 12,582 15,226 17,965 21,187EBITDA 1,295 1,679 2,437 3,002 3,583Net profit 672 954 1,492 1,958 2,380EPS (Rs) 10.5 14.8 23.2 30.5 37.0EPS growth (%) 10.7 41.8 56.4 31.3 21.5EBITDA margin (%) 11.9 13.3 16.0 16.7 16.9PE ratio (x) 60.8 42.9 27.4 20.9 17.2Price/sales (x) 3.7 3.2 2.7 2.3 1.9EV/EBITDA (x) 31.2 23.5 15.6 12.1 9.6RoIC (%) 21.1 28.3 38.2 41.5 46.9RoCE (%) 22.0 21.2 26.0 29.7 28.5RoE (%) 22.4 21.5 26.0 29.8 28.6Source: Company, Nirmal Bang Institutional Equities ResearchPrice Performance (%)1 M 6 M 1 YrBata India (9.8) 68.3 89.8Nifty Index 1.8 (14.5) (19.7)Source: Bloomberg

Institutional EquitiesExhibit 1: Comparative valuationComparisonMktCap CMPValuationBata India carried out restructuring during CY02-08. The company’s stock witnessed a re-rating from July2007 following the positive impact of restructuring on financials. As against net sales growth of 13.2%, netprofit showed 26.2% CAGR over CY07-10 and RoCE improved from 19.6% in CY07 to 26% in CY10. On theback of strong performance, the stock is currently trading at 20.9x CY12E EPS of Rs30.48, above its sevenyearmedian of 15.7, and at 12.1x CY12 EV/EBITDA, which is above its seven-year median of 11.0x. Weexpect all-round improvement in performance of the company from the current levels, which calls forexpansion of valuation multiples. Strong revenue CAGR of 19% supported by operating margin improvementof 357bps, working capital efficiency and debt-free status should result in profitability CAGR of 35.7%,generate free cash flow of Rs4,959mn, improve RoIC by 18.5% over CY10-13 and report surplus cashbalance of Rs6,365mn by CY13. Considering the strong cash flow, higher cash balance and debt-free status,there is a strong possibility of special dividend or share buyback. We expect expansion of EV/EBITDA multiplefrom the current level of 12.1x to 16x, in line with other consumer product companies having similar returnratios and growth profile. Based on 16x CY12 EV/EBITDA, we arrive at target price of Rs817 and assign a Buyrating to Bata India.Net sales(Rsbn)EBITDA(%)CAGR (%)FY11-13EPS(Rs)P/E(x)EV/EBITDA(x)(Rsbn) (Rs) FY11 FY12E FY13E FY11 FY12E FY13E Sales EBITDA PAT FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13EBata India* 40.9 636 12.6 15.2 18.0 13.3 16.0 16.7 19.5 33.7 43.3 14.8 23.2 30.5 42.9 27.4 20.9 23.5 15.6 12.1 26.0 29.8 28.6Titan Industries 182.8 206 63.9 84.3 100.5 9.9 9.5 9.7 25.4 24.0 31.0 5.2 6.7 8.4 40.0 30.6 24.5 27.2 21.5 17.7 50.8 47.3 42.9Pantaloon Retail ** 48.5 221 122.1 114.4 137.5 8.6 8.5 8.6 6.1 6.3 33.1 6.5 9.2 11.6 33.9 24.0 19.1 13.6 12.8 10.5 3.3 6.3 7.6Emami 64.9 429 12.5 15.4 18.3 22.9 20.1 20.6 21.1 14.7 21.1 15.4 18.4 22.2 27.9 23.3 19.3 22.8 21.1 17.3 33.6 36.0 35.6Jubilant Food 56.8 878 6.8 10.2 14.2 17.8 18.5 18.6 44.8 48.2 40.8 11.2 15.6 22.3 78.7 56.3 39.4 28.7 30.0 21.4 46.8 43.4 41.9VIP Industries 26.9 950 20.8 9.4 11.6 16.4 18.3 19.6 22.4 33.8 32.3 33.4 40.1 55 28.4 23.7 17.3 21.9 16.2 12.2 53.3 43.4 44.5Shoppers Stop 29.6 362 7.7 29.9 38.0 6.7 5.7 6.0 35.3 28.4 57.7 8.0 9.1 13.2 45.5 39.8 27.3 23.3 19.1 14.2 15.0 14.9 18.3Note: Bata India’s financial year ends in December. Hence, we have taken CY10/11/12 for comparison purpose. Bloomberg estimates for other companies excpet Bata IndiaSource: Bloomberg, Nirmal Bang Institutional Equities ResearchRoE(%)Exhibit 2: EPS growth FY11-13 v/s FY13 P/E multiple(P/E mutiple - FY13)40353025201510500 10 20 30 40 50 60(EPS growth FY11-13)Exhibit 4: PE multiple v/s RoE – FY13(P/E mutiple - FY13)4035302520151050PantaloonRetailEmamiShoppersStopTitanIndustriesVIPIndustriesPantaloonRetailBataIndiaJubilantFoodBataIndiaEmamiSource: Company, Nirmal Bang Institutional Equities ResearchShoppersStopTitanIndustriesJubilant FoodVIPIndustries0 5 10 15 20 25 30 35 40 45(RoE FY13)Exhibit 3: EBITDA growth FY11-13 v/s EV/EBITDA multiple(EV/EBITDA mutiple - FY13)2520151050PantaloonRetailEmamiTitanIndustriesShoppersStopBataIndiaVIPIndustries0 5 10 15 20 25 30 35 40 45 50Exhibit 5: Sales growth FY11-13 v/s FY13 P/S multiple(P/S mutiple - FY13)4.03.53.02.52.01.51.00.50.0PantaloonRetailBataIndiaEmamiVIPIndustriesTitanIndustriesJubilant Food(EBITDA growth FY11-13)Jubilant FoodShoppersStop0 5 10 15 20 25 30 35 40 45(Sales growth FY11-13)160Bata India

Sep-04Sep-04Mar-05Mar-05Sep-04Sep-05Sep-05Mar-05Mar-06Mar-06Sep-05Sep-06Sep-06Mar-06Mar-07Mar-07Sep-06Mar-07Sep-07Sep-07Sep-07Mar-08Mar-08Mar-08Sep-08Sep-08Sep-08Mar-09Mar-09Mar-09Sep-09Sep-09Sep-09Mar-10Mar-10Mar-10Sep-10Sep-10Sep-10Mar-11Mar-11Mar-11Sep-11Sep-11Sep-11Sep-04Sep-04Sep-05Mar-05Mar-05Mar-06Sep-05Sep-05Sep-06Mar-06Mar-06Institutional EquitiesMar-07Sep-06Sep-06Sep-07Mar-07Mar-07Mar-08Sep-07Sep-07Sep-08Mar-08Mar-08Sep-08Sep-08Mar-09Mar-09Mar-09Sep-09Sep-09Sep-09Mar-10Mar-10Mar-10Sep-10Sep-10Sep-10Mar-11Mar-11Mar-11Sep-11Sep-11Sep-11Exhibit 6: One-year forward EV/EBITDA(Rsmn)45,00040,00035,00030,00025,00020,00015,00010,0005,000016x14x12x8x4x(x)3025201510507-year median 11Exhibit 7: One-year forward P/E(Rs)900800700600500400300200100030x25x20x15x10x5x(x)353025201510507-year median 15.7Exhibit 8: One-year forward P/B(Rs)800(x)77006005004003002006x5x4x3x2x654327-year median 3.4100100Source: Bloomberg, Nirmal Bang Institutional Equities Research161Bata India

CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13ECY02CY03Institutional EquitiesCY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13EExhibit 9: Cash flow trendInvestment ArgumentsStrong free cash flowOn the back of strong revenue growth and improving operating margin, operating profit should show 35.7%CAGR over CY10-13. We expect Bata India to become debt-free and hence the benefits of strong salesgrowth and margin improvement will percolate as cash flow. Even after strong sales growth, we don’t expectabsolute increase in ex-cash working capital because of better control over inventory days and exit fromworking capital-intensive real estate venture. We expect cash flow from operations to improve fromRs1,682mn in CY10 to Rs2,461mn in CY13. The company has sold its stake in the joint venture with RDPL(Riverbank Developers Private Limited) for development of modern integrated township project at Batanagarand registered income of Rs1,094mn in 1QCY11. It has incurred a capex of Rs410mn/Rs550mn mainly to setup 69/108 new stores in CY09/10 and modernise old stores. The company incurred a capex of Rs776mn in1HCY11, out of which Rs420mn was on account of capitalisation of its real estate venture, while the remainingmajor portion of Rs350mn was on opening 68 stores in 1HCY11. At an average Rs5mn per store, Bata Indiawill spend around Rs500mn to open 100 outlets each year. We expect the company to incur a capex ofRs600mn each in CY12 and CY13. On the back of strong operating cash flow, lower capex and one-time gainfrom divestment of real estate stake, we expect the company to garner healthy free cash flow of Rs4,959mnover CY10-13, thus improving its cash balance from Rs21.1/share in CY10 to Rs99.0/share in CY13. Onaccount of lower profitability and restructuring, dividend payout was very low until CY10. We expect dividendpayout to increase significantly on the back of strong free cash flow and debt-free balance sheet. There is astrong possibility of special dividend or share buyback to utilise excess cash.Exhibit 10: Improvement in free cash flow(Rsmn)3,000(Rsmn)2,1002,5001,8002,0001,5001,5001,2001,0009005000(500)(1,000)(1,500)CFO CFI CFF6003000(300)Free cash flowNOPLATSource: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities ResearchEnough scope for expansion of already high Return on Invested Capital (RoIC)Bata India was making losses until CY04 because of excess staff at its factories, unionisation of employees,poor product mix, poor brand building and its outlets remaining closed during the peak times resulting in lossof market share and revenue. The company started restructuring activity from CY04 to reduce costs,repositioned its brand image, shut down unviable stores, changed the feel and look of its outlets and improvedshoe line collection/design. The impact of all this is already reflected in the return ratios, with its RoE/RoCErising over CY05-10 to reach to highest level of 26% each in CY10 from 5.6%/7.3%, respectively, in CY05.Similarly, its RoIC increased from 2.2% in CY05 to 28.3% in CY10. We strongly believe there is still enoughscope left for improvement in already high return ratios on the back of strong sales growth momentum, higheroperating margin and improving working capital cycle. On the back of strong operating cash flow, lower capexand one-time gain from divestment of real estate stake in a JV, we expect cash balance to increase toRs6,348mn by CY13. On account of excess cash balance over CY12-13, we expect that after touching a peakof 29.7% in CY11, RoCE would decline to 27.8% in CY13 and thereby not provide a true picture of corebusiness performance. We expect RoIC to improve from 28.3% in CY10 to 46.9% in CY13. We expectexpansion of valuation ratios on the back of strong free cash flow of Rs4,959mn over CY10-13 and improvingRoIC.162Bata India

CY05CY06CY07CY081QCY08CY092QCY083QCY08CY10Institutional Equities4QCY081QCY09CY11E2QCY093QCY09CY12E4QCY09CY13E1QCY102QCY103QCY104QCY101QCY112QCY11Exhibit 11: Northward journey of RoIC(%) (Rsmn)4510,000408,00035306,00025204,000152,000105-Source: Company, Nirmal Bang Institutional Equities ResearchEmployee costs under controlCapital employed Invested capital RoE RoCE RoICOne of the main reasons for losses incurred during CY02-04 was excess staff at its factories and unionisationof employees, resulting in employee costs reaching a decade-high level of 28.5% of sales in CY03. Bata Indiastarted restructuring activity from CY04 onwards to rationalise costs and completed it in CY08. The companyintroduced a voluntary retirement scheme (VRS) in CY04 and severed 1,469 employees during the year.Sales showed 7.9% CAGR over CY03-08 and 12.9% CAGR over CY08-10, but the number of employeesdecreased continuously, from 11,100 in CY04 to 6,853 in CY08 and to 5,776 in CY10. Absolute employeecosts also declined from Rs1,924mn in CY03 to Rs1,768mn in CY10. Through VRS, the company got rid ofhigh-cost employees and also improved productivity. In order to improve quality and to reduce costs, itsfactories were specialised to make footwear of a particular variety. Hosur factory specialises in Hush Puppies,Bangalore factory makes School shoes and Batanagar turns out sports shoes and sandals. All these effortshelped the company to reduce employee costs as a percentage of sales, from 28.5% of sales in CY03 to17.6% of sales in CY08 and to 14.1% of sales in CY10. We strongly believe there is still enough scope toreduce employee costs to 12.1% in CY12 from 14.1% in CY10. Gradual fall in employee costs is alreadyevident from quarterly results, with employee costs as a percentage of sales declining from 17.6% in 1HCY08to 14.5% in 1HCY10 and to 12.5% in 1HCY11. Lower employee costs would be a key factor behind 336bpsimprovement in operating margin expected over CY10-12.Exhibit 12: Growth in employee costs to lag sales growth(%) (Nos)219,000188,000157,000126,00095,00064,00033,00002,000(3)1,000(6)-CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13ENo of employees Employee cost growth (%) Sales growth (%)Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 13: Quarterly employee costs(%) (Rsmn)2019181716151413121110Employee costEmployee cost as % of salesSource: Company, Nirmal Bang Institutional Equities Research50045040035030025020015010050-163Bata India

CY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13ECY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13EInstitutional EquitiesIn line with global standards and accounting for the fact that Bata India is 80-year-old company, its averageemployee costs were as high as Rs0.31mn in CY10 compared to Rs0.21mn in CY06. Considering highaverage employee costs, it is difficult for the company to recruit new employees at a lower salary than what isoffered to existing employees and as a result its employee costs were higher than industry standards. In orderto reduce the impact of higher employee costs, the company is setting up more and more outlets in the form ofK-stores (commission stores) since the past three-and-a-half years. In the case of a K-store, the companyappoints an agent who runs the store and bears all employee costs associated with it, while the company bearall other costs such as store rent, furniture etc. Out of total 1,250 outlets of Bata India, 750 are companyowned,250 are in the form of MEP (Market Extension Programme) while only 250 are K-stores. These K-stores are set up in the past three-and-a-half years. As per the management, majority of new outlets would bein the form of K-stores. The company will provide a commission of 6-8% to the K-store agent, depending onthe turnover of the store. If Bata India has to take employee cost on its books, its employee cost would be~11-12%. On account of better control over employee costs by the K-store agent, savings on this countoutweigh the commission paid to the K-store agent and the company can improve its margin by 2-3% per K-store. Even after the addition of overall 177 stores during CY09-10, employee costs showed 1% CAGR overCY08-10 as against net sales growth of 12.9% CAGR over same period. Similarly, even after addition of 68stores in 1HCY11, employee costs increased by 5.4% YoY in 1HCY11 compared to 22% growth in net salesin 1HCY11. We expect employee costs to show a 12.9% CAGR over CY10-13, lagging behind sales growth of19% CAGR over same period, and as a result employee costs as a percentage of sales should reduce from14.1% in CY10 to 12% in CY13.Exhibit 14: Declining employee costs as percentage of salesExhibit 15: Employee costs saving to outweigh higher commission(%) (Rsmn)2,800292,400262,000231,600201,200178001440011-(Rsmn)600500400300200100-(%)2.52.01.51.00.50.0Employee costAs % of salesCommission on salesCommission as % of salesSource: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities ResearchHigher share of outsourcing to reduce cost of goods soldBata India was predominantly producing low value products like rubber and canvas footwear during CY02-04.This was partially because of the need to utilise excess staff during that period. As employee costs were high,it resorted to outsourcing low value items like rubber, canvas and plastic footwear and utilised the capacity toproduce higher value leather footwear. As witnessed in Exhibit 14, production of rubber/canvas footweardeclined from 20.2mn pairs in CY02 to 8mn pairs in CY10, while production of leather footwear increased from11.8mn pairs to 14.4mn pairs over the same period. The company completely outsourced its requirement oflow value plastic footwear. Share of outsourced products increased from 21.2% of sales in CY01 to 30.6% inCY10 and from 41.5% of cost of goods sold (CoGS) to 64.8% during the said period. We expect this trend tocontinue over CY10-13 also, thereby reducing cost of goods sold. Past performance of the company wasimpacted on account of unionisation of workforce and excess staff at its factories. With a higher share ofoutsourced products, the company would be able to tackle these issues much more effectively. As comparedto the production-led model during CY02-08, the company is now more focused on branding, distribution andworking capital management.164Bata India

CY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13ECY01CY01CY02CY02CY03CY03Institutional EquitiesCY04CY04CY05CY05CY06CY06CY07CY07CY08CY08CY09CY09CY10CY10CY11ECY11ECY12ECY12ECY13ECY13EExhibit 16: Rising share of outsourced itemsExhibit 17: Decreasing output of low value rubber footwear(%)65605550454035302520CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10As % of salesAs % of COGSSource: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities ResearchFavourable product mixAlmost half of Bata India’s volumes during CY01-04 were driven by low margin rubber/canvas and plasticfootwear segment, mainly low value slippers whose price point rather than brand equity was the selectioncriteria for buyers. As against a contribution of 72.2% to sales volume, plastic and rubber/canvas footwearcontributed 42.5% to sales, in value terms, in CY01. The company realised an average Rs66 and Rs75 perpair from plastic and rubber/canvas footwear, respectively, in CY01 as against average realisation of Rs255for leather footwear. The company gradually increased the share of high value leather shoes in its sales mixover CY04-10. Sales of rubber and plastic footwear reduced by 48.9% and 27.6% over CY01-10 to 15.8mnpairs and 8.8mn pairs in CY10 from 30.9mn pairs and 12.2mn pairs, respectively, in CY01. On account ofreduction in the sales of low value footwear and rise in high value leather footwear, the share of leatherfootwear increased to 49.1% in CY10 from 27.8% in CY01, in volume terms. On account of higher realisation,the share of leather footwear increased to 72.3% in CY10 from 57.5% in CY01, in value terms. On the back ofhigher contribution from leather footwear, average realisation per pair almost doubled to Rs256 in CY10 fromRs123 in CY01.Exhibit 18: Sales volume break-upExhibit 19: Sales value break-up(mn pairs)2520151050Leather footwearFootwear-rubber/canvas(%)100908070605040302010020 23 21 20 23 25 21 22 20 18 16 14 132926233344 4652 43 39 46 40375135 352834 36 34 38 434955 59 6426(%)100908070605040302010011 10 10 9 13 13 10 10 9 8 7 6 53128 28 23 23 28 24 21 1916 14 123758 5362 62 65 65 62 66 69 72 77 80 83Leather Rubber/canvas PlasticSource: Company, Nirmal Bang Institutional Equities ResearchLeather Rubber/canvas PlasticSource: Company, Nirmal Bang Institutional Equities ResearchBata India refurbished its image, recast outlets and improved the design and collection of footwear. Today, ithas a wide bouquet of brands targeted at customers as diverse as adventure enthusiasts and well-heeledexecutives. It is recasting itself as a vibrant and contemporary brand for the young. To tap the growth inorganised women’s footwear segment, it has roped in Miss Universe Ximena Navarrette to endorse its MarieClaire range of footwear for young women. The company has continued expansion of Hush Puppies outlets,which is its premium retail brand offering trendy and youthful designs. Leather footwear reported volumegrowth of 20.9% in CY10 as against de-growth of 5.1% and 5.6% reported by low value rubber and plasticfootwear, respectively. As per the management, premium brands contribute significantly to the company’srevenue and its top three brands by way of sales are: 1) Huss Puppies (~6-7% of sales), 2) Weinbrenner and3) Ambassador. Huss Puppies reported growth of ~40%, Weinbrenner ~20-30% and Ambassador ~10-12%.On account of favourable product mix, operating margin improved to 13.3% in CY10, up by149bps. We expectthe trend to continue over CY10-13 and see average realisation per pair showing 11.7% CAGR over CY10-13on the back of higher share of leather footwear, at 63.9% in CY13 from 49.1% in CY10. We expect high valueleather footwear to report volume CAGR of 15.9% over CY10-13, but low value rubber and plastic footwearmay report CAGR de-growth of 5% and 6%, respectively, over the same period.165Bata India

CY01CY01CY02CY02CY03CY03CY04CY04CY05CY05CY06CY06CY07CY07CY08CY08CY09CY09CY10CY10CY11ECY11ECY12ECY12ECY13ECY13ECY01CY01CY02CY02CY03CY03Institutional EquitiesCY04CY04CY05CY05CY06CY06CY07CY07CY08CY08CY09CY09CY10CY10CY11ECY11ECY12ECY12ECY13ECY13EExhibit 20: Sales volume growthExhibit 21: Improving average realisation(%) (%)8.7356.0 6.1 6.7 9305.662520 0.90.9315010(0.4)5(1.9)(3)0(4.1)(6)-5(8.2)(7.5)(9)-10(12)-15(12.3)-20(15)(Rs/pair)500450400350300250200123 129 132 13715010050165178197 207237256291324357Total (RHS) Leather Rubber/canvas PlasticSource: Company, Nirmal Bang Institutional Equities ResearchAverage Leather Rubber/canvas PlasticSource: Company, Nirmal Bang Institutional Equities ResearchSteady improvement in profitabilityOn the back of better product mix, in favour of higher margin leather segment and optimisation of resources,the company achieved good success in controlling other costs also. On account of higher crude oil prices andthereby the rise in transportation costs, we expect freight cost per pair of shoes to increase by 13.6% overCY10-12 to Rs8 per pair in CY12 from Rs7per pair in CY10. However, on the back of better realisation due tohigher share of leather footwear, freight costs as a percentage of sales have declined from 3.6% in CY01 to2.7% in CY10 and are expected to decline further to 2.4% in CY12. In line with the trend in freight cost, othercosts like power & fuel, rates & taxes, travelling & advertisement expenses also witnessed a falling trend.Power & fuel costs as a percentage of sales fell from 3.1% to 2.6% over CY01-10, rates & taxes declined from1.2% to 0.8%, travelling costs from 1.3% to 1% and advertisement costs from 2.1% to 1.4% of sales over thesame period. We expect the company to reduce these cost heads by 10-20bps each over CY10-12, thusimproving the operating margin by 60bps over the same period.Exhibit 22: Freight cost as percentage of sales(%)3.83.63.43.23.02.82.62.42.2(Rs/pair)9876543210Exhibit 23: Other major cost heads as percentage of sales(%)4.03.53.02.52.01.51.00.5Freight cost as % of salesFreight cost per pair (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchPower & fuel Rates & taxes Travelling expenses Advertisement expensesSource: Company, Nirmal Bang Institutional Equities ResearchFrom suffering operating losses over CY02-04, the company has come a long way with an operating profitmargin of 13.3% in CY10. We strongly believe there is enough scope left for improving operating marginsteadily over CY10-13. Key factors driving higher operating margin are: 1) Lower employee costs as apercentage of sales by reducing head count and increasing revenue from K-stores 2) Higher outsourcing,particularly of low value items like rubber footwear, 3) Better product mix in favour of higher value, leatherfootwear, 4) Lower freight costs as a percentage of sales, and 5) Better control over other cost heads likepower & fuel, rates & taxes, travelling & advertisement expenses etc. We expect the operating margin toimprove by 357bps over CY10-13 to 16.9% in CY13. The company is debt-free and in addition the rise indepreciation charges would lag behind the growth in operating margin and as a result, net profit growth shouldoutpace growth in operating profit. Net profit margin should improve by 366bps over CY10-13 to 11.2% inCY13.166Bata India

CY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13E1QCY082QCY083QCY08Institutional Equities4QCY081QCY092QCY093QCY094QCY091QCY102QCY103QCY104QCY101QCY112QCY11Exhibit 24: Enough scope for improvement in margins(%)1815129630(3)(6)(9)Exhibit 25: Quarterly trend in margins(%)1816141210864EBITDA (%) PAT (%)Source: Company, Nirmal Bang Institutional Equities ResearchEBITDA (%) PAT (%)Source: Company, Nirmal Bang Institutional Equities ResearchRenewed focus on retail business growthBata India has an aggressive plan to increase its retail reach and enhance market penetration. Big formatstores would be at the heart of its breakneck expansion plan. As per the management, the large andinternational layout of these stores help in better display of several footwear concepts from the company’s newshoe line collection. Over the past five years, Bata India has completely repositioned its stores by openinglarge format stores, renovating all its existing stores and closing down small and unviable stores. Thecompany has shut down nearly 400 small stores in the past five years and plans to close small stores this yearalso. Currently, Bata India realises 40% of its revenue from south India, while the north, east and westernregions contribute 20% each. The company opened 69 and 108 stores in CY09 and CY10, respectively. It hasalready opened 68 stores in 1HCY11. All these stores are big format stores with an area upwards of 3,000 sq.ft. At an average Rs5mn per store, Bata India would spend around Rs500mn to open 100 outlets each year.The company incurred a capex of Rs776mn in 1HCY11, out of which Rs420mn was on account ofcapitalisation of its real estate venture, while a major portion of the remaining Rs350mn was incurred to open68 stores in 1HCY11.More new stores will be set up in Delhi, Mumbai, Chennai, Hyderabad and Bangalore. The company has alsoincreased brand penetration in smaller markets such as Ahmedabad, Coimbatore, Jaipur, Trichy, Lucknow,Ujjain, Dhanbad, Nagpur, Hubli and Patiala among others. It is planning to open up to 100 stores a year,including 15-20% of stores to sell its premium Hush Puppies brand of footwear. As per the management, thecompany would be present in all the big 35 malls that are due to come up across India this year. Bata Indiawould also expand to rural markets and tier-II and tier-III cities with a population of more than 100,000. Thecompany would penetrate smaller cities and villages through its dealer network, which is currently at over30,000. The company has mandated its sales team to generate a percentage of sales from the rural segmentthough dealer networks from this year onwards. The Bata chain of stores has been completely revamped andis ready with a new look to serve its customers better. The specially designed shoe display systems, uniquefurniture for non-footwear sales, contemporary styling, and great ambience ensure that these new Bata storesprovide a pleasant retail environment to its customers.Betting big on women’s segmentThe footwear retail segment is currently one of the most organised sectors within the retail domain. However,this is purely due to the highly organised nature of men’s footwear segment. The women’s category is largelyunorganised, and in fact as per the industry data, close to 86% is unorganised. With respect to the rest of theworld, this is an anomaly as the women’s category is majorly organised and forms a big chunk of the market.As per CRISIL Research, growth in the organised footwear retailing market would be driven by women and kidsegments. The women’s segment is likely to show 23% CAGR over FY11-13 as against 10% CAGR in themen’s segment in the same period.Thus, for Bata India as a retailer in the women’s footwear category, the market is still largely untapped andhence offers a big opportunity for growth. On account of improved attention towards the ladies segment, itscontribution towards net sales increased from 14-15% three years ago to 20% currently. The company startedpaying royalty for technical know-how to its parent BSO (Bata Shoe Organisation) since the past three yearsand as a result its collection/designs for the ladies segment improved drastically. Bata India has strongpremium brands like Marie Claire, Hush Puppies, North Star, Power etc in the ladies segment.167Bata India

CY06CY07CY08CY09CY10CY11ECY12ECY13ECY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13EInstitutional EquitiesAs per the management, designs/collection for ladies at its Indian stores is as good as those at its stores inSingapore, Thailand, the US or any other country. Currently, almost all of the organised retailers in thewomen’s footwear category are located in metros and Tier-I cities and towns. The Tier-II and Tier-III townshave, over the last few years, seen a spurt in income driven by the service industry boom. Hence, these townsare definitely potential targets. To tap growth in the organised women’s footwear segment, the company ropedin Miss Universe Ximena Navarrette to endorse the Marie Claire range of footwear for young women. With abetter focus on the ladies segment, revenue from this segment should grow at faster rate than the men’ssegment and its contribution should increase from 20% of sales currently.Exhibit 26: Strong growth momentum in ladies segmentExhibit 27: Segmental break-up of footwear industry(%)353032Women,35Kids, 513Organised footwearindustry, Rs77bn25232015101039Overallfootwearindustry,Rs500bn485Men, 600Men Women KidsSource: Crisil, Industry, Nirmal Bang Institutional Equities ResearchSource: Crisil, Industry, Nirmal Bang Institutional Equities ResearchTo improve customer service, the company introduced home delivery service of shoes for the convenienceand comfort of its valued customers. Using this service, customers can now place orders for any footwearwhich they are unable to find in a Bata store and get it home delivered through courier at no extra cost. Thecompany continues to focus on improving its shoe line collection by introducing a fresh range of footwearregularly and outsourcing some of them to fetch better margins.Bata India has seamless access to the benefits of technical research and innovative programmes of the Batagroup from Global Footwear Services, for which it paid a fee of Rs135mn during CY10. The companycontinues to receive guidance and managerial support in its various functions including store layout,marketing, shoe line, upgradation of factories, training of managers and guidance from senior-most managersof the group. The technical collaboration, which expired on 31 December 2010, has been renewed for a furtherperiod of 10 years.On the back of higher penetration though aggressive store addition and increasing volume from existingstores, Bata India should report volume CAGR of 6.2% over CY10-13 as compared to 3.4% CAGR overCY07-10.Exhibit 28: Number of stores addedExhibit 29: Higher penetration to increase sales volume(Nos)(mn pairs)(%)140120100108120100 10070605059.652.3 52.0 51.046.843.3 43.747.545.548.351.254.157.712848060402037676269403020100(4)(8)00(12)Volume sold (LHS) Growth (%)Source: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities Research168Bata India

Institutional EquitiesInstitutional business is another growth driverParent BSO has a strong presence in the industrial shoes segment and enjoys about 20% market share inthisl segment worldwide. Bata India is planning to leverage on the expertise of BSO to bring in latest industrialshoes in India. The company is planning to cater to the requirement of schools, companies, governmentorganisations, army, police forces, mining industry etc. It has applied for enlistment as a supplier of mountain,assault, and regular footwear for the defence forces. The defence sector requires 12mn footwear every yearwhich is supplied by unorganised players currently. Based on the expertise and technical know-how fromBSO, Bata India has installed new machines at its Batanagar plant for manufacturing safety footwear requiredby defence, mining and other industries. Currently, shoe requirement of the industrial sector is met by theunorganised sector, leaving greater scope for an organised player like Bata India, which is known for its qualitystands to penetrate into this market. The industrial segment would provide stable annual demand and help thecompany to maintain its current growth momentum. The company is also expanding its non-retail business byappointing new dealers in unrepresented areas to increase market coverage.Efficient working capital managementMany of company’s retail outlets were closed on a Sunday and operated between 10am-7pm during otherdays. Generally, buyers prefer to buy on a Sunday or post office hours on other days. Bata India was losingout on sales on account of unavailability of its outlets during peak times, resulted in piling up of finished goodsinventory at its stores. Its inventory days increased from 98 days in CY01 to 146 days in CY05. Understandingthe seriousness of this issue, the company’s outlets now remain open on a Sunday and the store timings havebeen increased on other week days. The company is also focusing more on the supply chain and other logistichurdles. Currently, the company has a well organised logistics team at Gurgaon which controls the distributionprocess and ensures that footwear of the right size is available at the right time and at right place to customersall over the country. The company started tracking rapid changes in consumer preference and shoppingpractice so that the right collection is rolled out at outlets, thereby reducing the inventory of dud stock. It is inprocess of reducing product transit lead-times and faster and more frequent deliveries to stores, which wouldreduce finished goods inventory at its stores. On account of these initiatives, the inventory holding periodstarted improving from CY06 onwards. Inventory days reduced gradually from 147 days in CY04 to 99 days inCY10, and we expect it to further improve to 90 days in CY13. The company exited from its real estate venturein 1QCY11, realising Rs1bn in the process. Real estate business was operating at higher inventory level,compared to its footwear business and as a result we expect further improvement in inventory days. Thecompany enjoyed higher credit from its suppliers, with its creditor days ranging 56-96 days during CY02-10.Higher creditor days partially cushioned the impact of higher inventory on its working capital cycle.In order to increase sales from wholesale business, Bata India was giving lenient terms to itsdealer/distributors. The percentage of debtors outstanding for a period exceeding six months was as high as40-50% of total debtors during CY03-06. The company focused on key dealers critical to its revenue andstarted tightening the credit period to others. The percentage of debtors outstanding for a period exceeding sixmonths reduced from 51% in CY05 to 1.3% in CY10. The company controlled its debtor days from 35-40 daysduring CY01-03 to nine days in CY10. Even after aggressive expansion plan, we expect debtor days to remainunder control in CY10-13.On account of better control over inventory, supported by tight debtors days and high credit cycle, ex-cashworking capital both in absolute terms and as a percentage of sales should decline over CY10-13 even afterstrong sales CAGR of 19% over same period. Ex-cash working capital should decline from a low of 5.9% inCY10 to 2.8% in CY13.169Bata India

CY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13ECY01CY02CY03Institutional EquitiesCY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13EExhibit 30: Better inventory to improve working capital(Days)1501209060300(Days)1501301109070Exhibit 31: Declining working capital(Rsmn) (%)2,000301,8001,600251,400201,2001,0001580060010400520000Inventory (RHS) Inventory DebtorsCreditors Other CL ProvisionsSource: Company, Nirmal Bang Institutional Equities ResearchEx-cash WCAs % of salesSource: Company, Nirmal Bang Institutional Equities ResearchCashing out real estate ventureBata India had cumulative 309 acres of land in Batanagar, Kolkata. The company transferred excess262 acres to a special purpose vehicle (SPV) called Riverbank Developers Pvt Ltd (RDPL) to buildan integrated township. The SPV was owned equally by Bata India and Calcutta Metropolitan Group(CMGL). Bata India restructured the agreement with revised terms and conditions for development ofthe township project to ensure faster development of the project and maintain its focus only on corebusiness. As part of the restructuring, Bata India sold its investment and rights in the jointdevelopment agreement and realised a sum of Rs1,094mn in 1QCY11. In addition, the companywould receive 0.324mn sq ft (~160 flats) from the JV. The company would use the said flats for itsemployees or sell them in the open market. We haven’t considered the value of 0.324mn sq ft,amounting to Rs1.3-1.5bn, in our stock valuation and target price.Exhibit 32: Structure of real estate projectSource: Company, Nirmal Bang Institutional Equities Research170Bata India

CY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13ECY01CY02CY03CY04CY05CY06CY07CY08CY09CY10CY11ECY12ECY13EInstitutional EquitiesFinancialsOn the back of restructuring, net sales showed a 13.2% CAGR over CY07-10 to Rs12,582mn in CY10 andoperating margin improved by 542bps to 13.3% over the same period. As a result, operating profit grew at ahealthy 34.7% CAGR. The company reduced its interest costs and financial charges from Rs106mn in CY07to Rs76mn in CY10 and as a result, profit before tax witnessed a robust 37.4% CAGR over CY07-10. Onaccount of accumulated losses, the tax rate was lower in CY07/08. The company started paying full tax fromCY09 onwards. It also improved balance sheet strength by reducing debt from Rs518mn in CY07 to Rs138mnin CY10, thus reducing the debt-equity ratio from 0.21x to 0.03x. The company reduced ex-cash workingcapital as a percentage of sales from 16.7% to 5.9% over the same period. On the back of strong profitabilityand better control over working capital, cash flow from operations increased from Rs425mn in CY08 toRs1,456mn in CY10.Net sales increased by 22% to Rs7,473mn in 1HCY11. The company improved its operating margin by341bps to 15.3% in 1HCY11 and as a result, operating profit increased by 57% to Rs1,142mn. The companyreceived a payment of Rs1,094mn in 1QCY11 from the sale of its stake in Batanagar project. Excluding thisincome, adjusted net profit grew by 72.4% in 1HCY11. Even after addition of 68 stores in 1HCY11, on accountof strong operating cash flow and receipt of Rs1,069mn from its real estate JV, the company became debt-freewith a strong cash balance of Rs1,564mn as of end 1HCY11.We expect the company to add 120 stores in CY11 and 100 stores each in CY12 and CY13 having an area inexcess of 3,000 sq ft. With a higher market penetration on the back of store addition, brand repositioning androbust industry growth, the company should maintain its sales growth momentum. We expect net sales toshow 19% CAGR to Rs21,187mn over CY10-13. We expect the number of shoe pairs sold to witness 6.2%CAGR at 57.7mn pairs and average realisation should improve by 11.7% to Rs357 over same period. Weexpect operating margin to improve by 357bps over CY10-13 to 16.9% in CY13. Key factors that would driveoperating margin higher are: 1) Lower employee costs as a percentage of sales by decreasing head countand increasing revenue from K-stores 2) Higher outsourcing, particularly of low value items like rubberfootwear, 3) Better product mix in favour of higher value, higher margin leather footwear, 4) Lower freight costsas a percentage of sales, and 5) Better control over other cost heads like power and fuel, rate and taxes,travelling and advertisement expenses etc. The company is debt-free and in addition the growth indepreciation charges would lag behind rise in operating margin and as a result it should report higher otherincome on the back of strong cash balance. All this should result in net profit CAGR of 35.7% to Rs2,380mnover CY10-13 and should outpace 28.7% CAGR in operating profit. Net profit margin should improve by366bps over CY10-13 to 11.2% in CY13.Exhibit 33: Sales trendExhibit 34: Margin trend(Rsmn)25,00020,000(%)2015(Rsmn)4,0003,5003,000(%)201515,00010,0005,0001050(5)2,5002,0001,5001,00050010500(10)0(500)(5)Net revenue Growth (%)(1,000)EBITDA PAT EBITDA (%) PAT (%)(10)Source: Company, Nirmal Bang Institutional Equities ResearchSource: Company, Nirmal Bang Institutional Equities Research171Bata India

Key concernsInstitutional EquitiesWith the entry of many multinational companies in domestic market, there will be significant challenges interms of pricing, footwear design/collection, higher branding expanses which the company will have toface. There will also be stiff competition from countries like China, Indonesia, Thailand, Vietnam andBrazil, because their products are more competitive when compared with India.It would be difficult for Indian footwear industry to keep pace with the fast changing fashion trends.Organised retailers in India will also face a threat from 'non-specialist' retailers like apparel retailers whoare now diversifying into the footwear trade by promoting their own brands at competitive prices. BataIndia would meet these challenges by diversifying and opening big format stores in Tier-II and Tier-IIIcities and take the best available space in shopping malls and busy street corners to aggressively marketits products at competitive pricesExhibit 35: Private labels in apparel, footwear segmentsRetailer Apparel brand Footwear brandPantaloon Retail John Miller, Annabelle KnighthoodSpencers Island Monks, Mark Nicolas, Asankhya, Scorez La BonitaMore Blue Earth TrueShoppers Stop Stop, Life, Kashish, Vettorio Fratini -Westside SRC, Gia, 2F4U -Lifestyle Melange, P&Q Shoe MartHypercity Citi, Joojoobs -Reliance Network, Netplay, DNMX Mancini, Tosca, Viviana, Monza, FrisbeeSource: Crisil, Industry, Nirmal Bang Institutional Equities ResearchLease rent has shown 16.8% CAGR over CY00-10 and 29.7% CAGR over CY05-10 compared to salesgrowth of 5.8% CAGR and 12.2% CAGR over the same period. Because of high lease rentals, leaserental costs as a percentage of sales increased from 3.1% in CY01 to 9.2%. We expect lease rental coststo show 20.4% CAGR over CY10-13 and account for 9.5% of sales in CY13 from 9.2% of sales in CY10.Any sharp increase in lease rentals would exert pressure on profitability of the company.BSO owns the Sparx footwear brand, which is available in 27 countries. Bata India registered the Sparxbrand in India in 1978, but has never used it so far. Relaxo Footwear started using the Sparx brand since2004-05 and since then has been making continued investments in it. Of late, Bata India has startedselling footwear under the Sparx brand at its outlets. Relaxo Footwear moved court in 2009 regarding therights of Bata India on Sparx, the outcome of which is still pending. The Sparx brand’s contribution torevenue is very low for Bata India and hence there won’t be significant impact if the court’s verdict goes infavour of Relaxo Footwear.In a setback to organised retailers, a special bench of the Delhi High Court on 23 September 2011 upheldthe levy of service tax on commercial lease rentals announced in the Union Budget 2010-11. The courtsaid the service tax levy will take retrospective effect from 2007. Lease rent constituted 9.2% of BataIndia’s CY10 sales. The company paid lease rent of Rs3,491mn over CY07-10 and is expected to payRs1,416mn in CY11. Considering the service tax of 10.3%, Bata India has to pay service tax of Rs505mnon lease rent of Rs4,907mn over CY07-11. Retailers may challenge the Delhi High Court’s verdict inSupreme Court and thereby defer the adverse impact of service tax burden on their profitability. If the taxis levied, it will reduce Bata India’s CY11 profitability by 10.7% to Rs1,983mn as against our estimate ofRs2,221mn. Following the levy of service tax, lease rent should increase for the entire retail sector and webelieve that Bata India (in line with other retailers) would pass on the service tax burden to consumers.Therefore, we do not expect any adverse impact on the company’s profitability in CY12/13. If Bata India isnot able to pass on the service tax burden to consumers, then its margins will be under pressure by94bps, but such a possibility is very low. Even Bata India’s management has clarified that there would notbe any negative impact on the company’s profitability because of service tax.172Bata India

Institutional EquitiesCompany overviewBata India is the largest footwear retailer in India in terms of numbers of pairs sold as well as revenue,enjoying a big market share in the organised sector on the back of strong presence through 1,250 companystores located over 500 cities across India and over 30,000 dealers on pan India basis. The company enjoysvery strong brand positioning and its products have been winning the hearts of millions of Indians over the lasteight decades of its presence in the country.The company manufactures leather, rubber, canvas and PVC shoes and owns brands like Hush Puppies, DrSchools, Weinbrenner, North Star, Power, Marie Claire, Bubble Gummers, Ambassador, Comfit and WindIndia catering to the requirement of the entire family. It has a range of safety shoes for industrial use and alsosupplies to hospitals, military forces, airlines and other industries. The company has capacity to manufacture64mn pairs of shoes across its five plants located at Batanagar, Faridabad, Bangalore, Patna and Hosursupported by two tanneries for leather supply in Bihar and West Bengal.Globally, BSO is one of the leading footwear retailers and manufacturers with its operations spread across fivecontinents and managed by four regional commercial business units (CBUs). Out of the four CBUs (Batametro markets, Bata emerging markets, Bata branded international, Famous brands) Bata India comes underBata emerging markets CBU. Bata India, incorporated in 1931 and listed in 1973, is the largest entity of BSOin terms of numbers of pairs of footwear sold and the second largest in terms of revenue.Exhibit 36: Shoe styles, brands offered by Bata IndiaMen Women KidsStyle Brand Style Brand BrandCasual Bata, Hush Puppies, North Star Casual Bata, Hush Puppies Bubble Gummers,Formal Bata, Hush Puppies, Comfit, Ambassador Comfort Comfit, SchoolPower, SchoolOutdoor Weinbrenner Daily BataSports Power Fashion Bata, Marie ClarieShoes Bata, Marie Claire, North StarPowerSource: Company, Nirmal Bang Institutional Equities ResearchRestructuring exercise to rationalise costs, improve marginsBata India was making losses until CY04 because of excess staff at its factories, unionisation of employees,poor brand building and its outlets remaining closed during the peak times resulting in loss of market shareand poor product mix. The company started restructuring activity from CY04 to reduce costs, repositioning itsbrand image, shutting down unviable stores, changing the feel and look of its outlets and improving shoelinecollection/design. Because of excess staff and unionisation of employees, employee costs had increased to28.5% of sales in CY03.The company introduced a voluntary retirement scheme (VRS) and severed 1,469 employees in CY04 alone.It reduced employee base from 11,100 in CY04 to 6,853 in CY08 and as a result its employee costs as apercentage of sales reduced from 26.7% in CY04 to 17.6% in CY08. The number of stores making cashlosses reduced from 400 to 74 over the same period. Almost half of its volumes during CY01-04 were drivenby the low margin rubber/canvas segment, mainly low value slippers whose price point rather than brandequity was the selection criteria of buyers. The company gradually increased the share of high margin leathershoes in its sales mix over CY04-10. It also undertook balance sheet cleaning by rationalisation of its inventoryand tightening the receivables cycle. After completing its restructuring over CY04 to CY08, the companyfocused on retail business growth. It added 69 stores in CY09, 108 in CY10 and 68 in 1HCY11, with theaverage store size being 3,000 sq ft.173Bata India

ConsumerdurableClothing andtextileFootwearCommunicationBooks, musicBeauty,personal andhealth careHome decor &furnishingFood &beverageInstitutional EquitiesExhibit 38: Key brands in footwear marketOrganised footwear segment to grow by 17%Indian footwear industry, second only to China with a market share of 13% of the global industry and a marketsize of 16bn pairs, is estimated at Rs500bn (1.8bn pairs). As per CRISIL Research, the overall footwearindustry is expected to show 9.5% CAGR over FY11-13 to Rs600bn in FY13 from Rs500bn in FY11. On theback of favourable demographics such as a robust young population, rising disposable income, increasingurbanisation, rising fashion consciousness among consumers and increasing organised retail space, theorganised retail footwear market is poised to grow show 16.8% CAGR over FY11-13 to Rs105bn in FY13 fromRs77bn in FY11.Two-thirds of India’s population is under 35 years of age and over 60% would be in the working age group of15-60 years until 2050. India’s usage of footwear per consumer per year at 1.64 pairs is lower than of otheremerging countries like China (2.15), Thailand (2.25), Brazil (2.65) and significantly lower than that ofdeveloped countries like the EU (4.38), Japan (4.59), and the US (6.68). Of the total production, over 90% issold in domestic market. Higher share of domestic consumption, but low per capita consumption along withfavourable demographics should lead to a healthy growth rate of India’s footwear Industry. With a strong brandequity and an extensive distribution channel, Bata India should benefit the most.Exhibit 37: Expansion plans of key playersPlayer Existing stores Planned expansionAdidas 750 125Reliance Footprint 16 84Pavers 9 25Bata 1,250 120Catwalk 25 35Liberty 375 50Source: Crisil, industry, Company, Nirmal Bang Institutional Equities ResearchMNC brands sourced from India MNC brands available in India Local brands in IndiaAcme, Clarks, ColeHann, Deichmann, Ecco, Elefanten, Florsheim,Gabor, Hasley, Hush Puppies, Double H, Justin, Marks & Spencer,Nautica, Nike, Nunn Bush, Reebok, Salamander, Stacy Adams,Tony, Lama, Next, BallyAldo, Bally, Clarks, Ecco, Florshiem,Ferragammo, Hush Puppies, Lee Cooper, Lloyd,Marks & Spencer, Nike, Nine West, NewBalance, Reebok, Rockport, Stacy AdamsRed Tape, Bata, Liberty, Khadims, Lakhani,Metro, ActionSource: Industry, Nirmal Bang Institutional Equities ResearchRising share of organised segment in footwear marketThe organised players had ~15% share in the Indian footwear market at Rs77bn in FY11, while balance waswith the unorganised sector, as per CRISIL Research. Out of all retail verticals, footwear is the third largestorganised market in India after consumer durables and clothing. The organised industry in India has been inexistence for a relatively long period. Companies such as Bata India and Liberty have been in existence since1931 and 1954, respectively. Some of the exporters like Khadims, Mahtani Footwear (brand Vi-Ga), MirzaInternational (brand Red Tape) and Tata International (brand Tashi) also turned towards the domestic market,thereby boosting the share of organised footwear market.Exhibit 39: Organised retailers’ market penetration(%)2522.9201519.715.414.0108.5 9.255.02.00Source: Crisil, Industry, Nirmal Bang Institutional Equities Research174Bata India

Institutional EquitiesOf the overall market size, men’s footwear industry is the leader with a share of 48%, followed by womens andkids at 39% and 13%, respectively. Penetration of organised players is high in the men’s segment at 19% ascompared to women’s segment’s 14% and kids’ segment’s 6%. As a result, men’s footwear segmentaccounted for 60% of organised footwear market in FY11, while women’s footwear segment accounted for35% and kids at 5%. However, in recent years there has been the emergence of a number of players focusingon the women and kids segments. On the back of lower base and increased attention towards women and kidsegments, these segments are expected to drive growth of organised footwear retailing. Women’s segment isexpected to show 23% CAGR and the kids’ segment is expected to witness 32% CAGR over FY11-13compared to growth of 10% in the men’s segment. Bata India, with the premium ladies brand Marie Claire andgreater focus on the women’s segment would benefit the most from high growth in this segment. Bata Indiahas also strong brand Bubble Gummers catering to the kids segment. The share of the organised footwearmarket should increase from 15% in FY11 to 18% in FY13.175Bata India

Institutional EquitiesFinancials (Standalone)Exhibit 40: Income statementY/E Dec (Rsmn) CY09 CY10 CY11E CY12E CY13ENet sales 10,917 12,582 15,226 17,965 21,187Growth (%) 10.6 15.3 21.0 18.0 17.9Raw material costs 5,135 5,945 7,140 8,406 9,871Staff costs 1,683 1,768 1,934 2,174 2,542Rental costs 1,012 1,155 1,416 1,689 2,013Freight costs 292 339 381 431 508Commission 193 266 335 413 487Others 1,307 1,430 1,584 1,850 2,182Total expenditure 9,622 10,903 12,789 14,963 17,604EBITDA 1,295 1,679 2,437 3,002 3,583Growth (%) 42.5 29.7 45.2 23.2 19.4EBITDA margin (%) 11.9 13.3 16.0 16.7 16.9Other income 84 153 261 438 537Extraordinary items - - 1,094 - -Interest costs 97 76 60 56 58Gross profit 1,282 1,755 3,731 3,383 4,062Growth (%) 41.1 36.9 112.6 (9.3) 20.1Depreciation 279 325 401 447 493Profit before tax 1,003 1,430 3,330 2,936 3,569Growth (%) 39.6 42.6 132.9 (11.8) 21.5Tax 330 476 1,109 978 1,188Effective tax rate (%) 32.9 33.3 33.3 33.3 33.3Net profit 672 954 2,221 1,958 2,380Growth (%) 10.7 41.8 132.9 (11.8) 21.5Extraordinary items - - 729 - -Reported net profit 672 954 1,492 1,958 2,380Growth (%) 10.7 41.8 56.4 31.3 21.5Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 41: Balance SheetY/E Dec (Rsmn) CY09 CY10 CY11E CY12E CY13EEquity 643 643 643 643 643Reserves 2,685 3,340 5,387 7,003 8,828Net worth 3,328 3,982 6,029 7,645 9,470Short-term loans 104 138 168 178 188Long-term loans 147 - - - -Total loans 251 138 168 178 188Deferred tax liability (241) (311) (211) (123) (16)Liabilities 3,337 3,809 5,986 7,700 9,642Gross block 3,749 4,176 5,279 5,881 6,487Depreciation 2,446 2,644 3,046 3,493 3,986Net block 1,303 1,531 2,233 2,389 2,502Capital work-in-progress 6 3 3 6 6Long-term Investments 173 173 173 173 173Inventories 2,775 2,994 3,446 3,866 4,401Debtors 252 302 386 456 538Cash 562 1,356 2,887 4,500 6,365Other current assets 832 1,442 1,294 1,437 1,695Total current assets 4,421 6,093 8,013 10,259 12,998Creditors 1,933 3,131 3,400 3,904 4,596Other current liabilities 633 860 1,035 1,222 1,441Total current liabilities 2,565 3,991 4,436 5,126 6,037Net current assets 1,855 2,102 3,578 5,133 6,961Total assets 3,337 3,809 5,986 7,700 9,642Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 42:Cash flowY/E Dec (Rsmn) CY09 CY10 CY11E CY12E CY13EEBIT 1,015 1,354 2,036 2,555 3,090Inc./(dec.) in working capital 195 547 56 58 36Cash flow from operations 1,210 1,901 2,092 2,613 3,126Other income 84 153 261 438 537Depreciation 279 325 401 447 493Deferred liabilities (66) (70) 100 88 107Interest paid (-) (97) (76) (60) (56) (58)Tax paid (-) (330) (476) (1,109) (978) (1,188)Dividend paid (-) (7) (73) (174) (343) (555)Extraordinary items - - 1,094 - -Net cash from operations 1,073 1,682 2,604 2,209 2,461Capital expenditure (-) (410) (550) (1,103) (606) (606)Net cash after capex 664 1,132 1,501 1,603 1,855Inc./(dec.) in short-term borrowing 17 34 30 10 10Inc./(dec.) in long-term borrowing (213) (147) - - -Inc./(dec..) in preference capital - - - - -Inc./(dec.) in borrowings (196) (113) 30 10 10Equity issue/(buyback) - - - - -Cash from financial activities (196) (113) 30 10 10Others (173) (225) - - -Opening cash 268 562 1,356 2,887 4,500Closing cash 562 1,356 2,887 4,500 6,365Change in cash 295 794 1,531 1,613 1,865Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 43: Key ratiosY/E Dec CY09 CY10 CY11E CY12E CY13EPer share (Rs)EPS 10.5 14.8 23.2 30.5 37.0Book value 52.0 62.0 93.8 119.0 147.4Valuation (x)P/E 60.8 42.9 27.4 20.9 17.2P/sales 3.7 3.2 2.7 2.3 1.9P/BV 12.2 10.3 6.8 5.3 4.3EV/EBITDA 31.2 23.5 15.6 12.1 9.6EV/sales 3.7 3.1 2.5 2.0 1.6Return ratios (%)RoIC 21.1 28.3 38.2 41.5 46.9RoCE 21.2 26.0 29.7 28.5 27.7RoE 21.5 26.0 29.8 28.6 27.8Margins (%)EBITDA margin 11.9 13.3 16.0 16.7 16.9PBIT margin 9.3 10.8 13.4 14.2 14.6PBT margin 9.2 11.4 21.9 16.3 16.8PAT margin 6.2 7.6 9.8 10.9 11.2Turnover ratioAsset turnover ratio (x) 3.3 3.3 2.5 2.3 2.2Avg. inventory period (days) 104 99 97 93 90Avg. collection period (days) 8 9 9 9 9Avg. payment period (days) 56 71 70 68 68Solvency ratios (x)Debt-equity 0.1 0.0 0.0 0.0 0.0Interest coverage 10.5 17.7 33.8 45.5 52.8Growth (%)Sales 10.6 15.3 21.0 18.0 17.9EBITDA 42.5 29.7 45.2 23.2 19.4PAT 10.7 41.8 56.4 31.3 21.5Source: Company, Nirmal Bang Institutional Equities Research176Bata India

Institutional EquitiesJBF Industries9 February 20123QFY12 Result UpdateReuters: JBFI.BO; Bloomberg: JBF INMargins stabilise at lower levelsAfter heading southwards in 1HFY12, consolidated delta margin per kg hasstabilised at Rs20.1 in 3QFY12 from Rs19 in 2QFY12. However, following weakdemand and inventory pile-up, sales volume declined 6.3% QoQ and as a resultsales/EBITDA declined 2.6%/17.3% QoQ, 7.3%/17% lower than our estimates,respectively. Due to higher other income JBF reported a net profit of Rs712mn,1.9% higher than our estimate. With improvement in demand, sales volumeshould bounce back in FY13. On the back of strong free cash flow of Rs9.2bnover FY12-14E, likely lower forex losses by 70% and RoCE improvement by392bps to 15.6% in FY13E, we expect a re-rating of the stock. We maintain ourBuy rating on it with a target price of Rs180.Lower sales volume limits EBIDTA: Delta margin of chips and POY, which wasunder pressure in 1HFY12, stabilised in 3QFY12. Due to abnormally high film prices,profit was high in 3QFY11 and is not comparable YoY. As the demand environmentwas weak, JBF reduced production by 1.5% YoY to 280,591ton. Following pile-up ofinventory, sales volume declined at a fast pace of 6.1% YoY and 6.3% QoQ to205,899ton. Due to lower volume, revenue declined 2.6% QoQ to Rs18bn, 7.3% belowour estimate. Blended delta margin per kg stabilised at Rs20.1 in 3QFY12 compared toRs19 in 2QFY12. However, due to lower volume, other costs per kg of sales increasedby 23.3% QoQ to Rs11.6 and as a result EBITDA of Rs1,752mn was 17% lower thanour estimate. With recovery in demand, volume should increase in FY13.Higher share of value added products to drive FY13 profit: JBF commissioned30,000tpa thick BOPET film plant at its RAK unit at a cost of US$45mn in February2012. It is de-bottlenecking Indian operations to produce more of value added productslike POY or PET chip rather than textile grade chip in FY13. Higher share of valueadded products is expected to increase profitability in FY13.Valuation: JBF is trading attractively at 1.9x/2.4x FY13E P/E and EV/EBITDA and at0.4x FY13E book value of Rs274, also offering a tax-free dividend yield of 7.2%.BUYSector: PetrochemicalsCMP: Rs111Target Price: Rs180Upside: 62%Jignesh Kamani, CFAjignesh.kamani@nirmalbang.com+91-22-3926 8239Saiprasad Prabhusaiprasad.prabhu@nirmalbang.com+91-22-3926 8172Key DataCurrent Shares O/S (mn) 71.9Mkt Cap (Rsbn/US$mn) 8.0/162.952 Wk H / L (Rs) 191/89Daily Vol. (3M NSE Avg.) 101,323Price Performance (%)1 M 6 M 1 YrJBF Ind. 14.2 (17.3) (29.0)Nifty Index 13.2 5.8 2.2Source: BloombergY/E March (Rsmn) - consolidated 3QFY11 2QFY12 3QFY12 Chg (YoY%) Chg (QoQ%) 9MFY11 9MFY12 Chg (%)Net sales 17,118 18,541 18,063 5.5 (2.6) 45,379 52,571 15.8Net raw material & finished goods purchase 12,025 14,358 13,924 15.8 (3.0) 32,888 40,786 24.0% of sales 70.2 77.4 77.1 72.5 77.6Employee costs 222 257 270 21.8 5.0 631 783 24.1% of sales 1.3 1.4 1.5 1.4 1.5Other expenses 1,838 1,808 2,117 15.2 17.1 5,006 5,525 10.4% of sales 10.7 9.8 11.7 11.0 10.5Operating profit 3,033 2,117 1,752 (42.3) (17.3) 6,853 5,477 (20.1)OPM (%) 17.7 11.4 9.7 15.1 10.4Interest costs 353 323 407 15.5 26.2 1,184 1,001 (15.4)Forex gains / (losses) (including MTM) (346) (630) (1,126) 225.6 78.9 (476) (2,210) 364.4Depreciation 337 371 400 18.8 7.8 978 1,113 13.8Other income 16 18 715 NA NA 99 746 NAPBT 2,014 812 533 (73.6) (34.4) 4,313 1,898 (56.0)Provision for tax 158 52 (179) (213.5) (447.3) 488 (97) (119.8)Effective tax rate 7.8 6.4 (33.6) 11.3 (5.1)PAT before MI 1,856 760 712 (61.7) (6.4) 3,825 1,994 (47.9)Minority interest - - - 401 - (100.0)Adjusted PAT 1,856 760 712 (61.7) (6.4) 3,424 1,994 (41.8)NPM (%) 10.8 4.1 3.9 7.5 3.8 (49.7)EPS (Rs) 25.9 10.6 9.9 (61.8) (6.7) 50.1 27.8 (44.6)Source: Company, Nirmal Bang Institutional Equities ResearchPlease refer to the disclaimer towards the end of the document.

Institutional EquitiesExhibit 1: Financial summaryY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ERevenue 43,098 49,409 64,656 76,649 81,668YoY (%) 54.3 14.6 30.9 18.5 6.5EBITDA 5,185 4,712 9,425 7,190 8,010EBITDA margin (%) 12.0 9.5 14.6 9.4 9.8Forex gain/(loss) - - (945) (2,751) (831)Reported PAT 1,889 1,904 5,850 2,314 4,142Adj PAT 1,963 1,917 5,884 2,314 4,142EPS (Rs) 31.5 30.8 82.1 32.2 57.7YoY (%) 48.3 (2.4) 166.6 (60.8) 79.2RoE (%) 29.6 23.9 50.6 15.1 23.1RoCE (%) 15.8 12.6 22.9 11.7 15.6Dividend yield (%) 4.5 5.4 7.2 7.2 7.2P/B (x) 0.9 0.8 0.5 0.5 0.4P/E (x) 3.5 3.6 1.4 3.5 1.9EV/ EBITDA (x) 3.5 3.9 2.4 3.2 2.4Source: Company, Nirmal Bang Institutional Equities ResearchProduct–wise performanceUtilisation level of PET chips at the RAK unit increased from 56.1% in 2QFY12 to 71.5% in 3QFY12, butfollowing subdued demand and excess supply environment, the company chose to reduce utilisation of itsPOY facility in India and BOPET film facility at RAK unit. Its value added products like POY/BOPET filmreported 10.6%/ 8.1% lower production QoQ. On the back of capacity expansion in 1HFY12, production ofchips was higher at 16.5% YoY, but it was down 2.1% QoQ at 130,477ton in 3QFY12. On account of lowerdemand and inventory pile-up, consolidated sales volume witnessed 6.1% YoY and 6.3% QoQ decline, led byPOY (11.5% QoQ fall), and film (8.1% decline). As its main raw materials PTA/MEG prices increased bothYoY and QoQ, production costs increased YoY as well as QoQ. Its realisation from chips increased20.3%/2.7% YoY/QoQ to Rs80.2/kg and from PoY 18.2%/4.6% YoY/QoQ, respectively, to Rs96.3/kg.Realisation in PET chips increased 28.2%/4.9% YoY/QoQ, respectively, to Rs80.3/kg. On account of demandmismatch,prices of BOPET film which had risen abnormally in 3QFY11, corrected 31.4% YoY. However, theywere up 7.7% QoQ at Rs125/kg.Delta margins, which witnessed a southward journey in 1HFY12, stabilised in 3QFY12. The company’s deltamargin (sales less raw material costs) in chip stood at ~Rs10.6/kg in 3QFY12, up by ~9.7% QoQ. Withstabilisation of cotton prices, delta margin of POY increased by ~12.1% QoQ to ~Rs25.3/kg in 3QFY12 andthat of film increased by ~8.2% to Rs60.5/kg. Following slowdown in the US/EU, operating profit of its RAKunit was impacted 23.9% QoQ to Rs764mn. Even after 11.5% QoQ lower volume in POY, operating profit atits Indian operations was less impacted, down 11.3% QoQ at Rs988mn. On the back of capacity addition inthick film and de-bottlenecking of POY capacity, share of value added products should increase in FY13.Further, because of lower forex loss of Rs831mn expected in FY13E compared to Rs2,751mn in FY12E,profitability should bounce back in FY13.Exhibit 2: Per kg analysis (Rs/kg)Y/E Mar (Rsmn) 3QFY11 2QFY12 3QFY12 YoY (%) QoQ (%) 9MFY11 9M FY12 YoY (%)Delta chip - India 10.4 9.7 10.6 2.0 9.7 9.8 9.9 1.0Delta - POY 24.3 22.6 25.3 4.0 12.1 22.1 24.3 9.7Delta- pet chip - RAK 9.6 16.5 15.8 64.7 (4.1) 11.2 14.5 29.8Delta- pet film 129.1 55.9 60.5 (53.1) 8.2 88.6 63.6 (28.2)Consolidated delta 23.3 19.0 20.1 (13.9) 5.6 19.8 19.5 (1.5)Consolidated other costs 9.4 9.4 11.6 23.5 23.3 8.8 10.4 18.1EBITDA - India 10.0 8.0 7.8 (22.4) (3.0) 8.2 8.1 (1.9)EBITDA - RAK, 17.9 12.4 9.7 (45.9) (22.0) 14.3 10.6 (26.0)EBITDA - consolidated 13.8 9.6 8.5 (38.5) (11.7) 10.7 9.1 (15.6)Source: Company, Nirmal Bang Institutional Equities ResearchNote: Delta idicates sales price less cost of raw materials178JBF Industries

Institutional EquitiesExhibit 3: Prodcut-wise performanceY/E Mar (Rsmn) 3QFY11 2QFY12 3QFY12 YoY (%) QoQ (%) 9MFY11 9M FY12 YoY (%)Production (ton)Chip 111,976 133,275 130,477 16.5 (2.1) 361,618 366,513 1.4POY 58,165 64,452 57,635 (0.9) (10.6) 159,188 170,938 7.4Sales (ton)Chip 56,264 74,147 69,711 23.9 (6.0) 219,758 197,776 (10.0)POY 57,046 64,754 57,316 0.5 (11.5) 153,576 170,458 11.0Realisation (Rs/kg)Chip 66.7 78.1 80.2 20.3 2.7 62.5 79.8 27.7POY 81.5 92.0 96.3 18.2 4.6 75.8 95.4 25.9Revenue (Rsmn)Chip 3,750 5,790 5,590 49.1 (3.5) 13,727 15,781 15.0POY 4,650 5,960 5,520 18.7 (7.4) 11,642 16,270 39.7RAK unit’s production (ton)Pet chip 96,384 60,258 76,899 (20.2) 27.6 255,137 221,678 (13.1)Film 18,433 16,944 15,580 (15.5) (8.1) 55,687 49,130 (11.8)Sales (ton)Pet chip 88,232 64,367 63,355 (28.2) (1.6) 208,617 188,167 (9.8)Film 17,790 16,461 15,517 (12.8) (5.7) 55,567 47,568 (14.4)Realisation (Rs/kg)Pet chip 62.7 76.6 80.3 28.2 4.9 60.7 78.3 29.0Film 182.1 116.0 125.0 (31.4) 7.7 138.1 127.5 (7.7)Revenue (Rsmn)Pet chip 5,530 4,930 5,090 (8.0) 3.2 12,659 14,735 16.4Film 3,240 1,910 1,940 (40.1) 1.6 7,677 6,063 (21.0)Source: Company, Nirmal Bang Institutional Equities ResearchOur estimates versus actual performanceThe company reported net sales of Rs18,063mn, 7.3% lower than our estimate of Rs19,492mn for 3QFY12,mainly due to sales volume lower by 6.1% YoY and 6.3% QoQ as against our estimate of 3% growth YoY.After witnessing pressure in 1HFY12, delta margin stabilised at Rs20.1 per kg in 3QFY12 from Rs19 per kg in2QFY12. However, following lower sales volume, other costs including overheads increased 23.3% QoQ toRs11.6 per kg. As a result the company reported EBITDA of Rs1,752mn, 17% below our estimate ofRs2,110mn. It booked forex loss of Rs1,126 (~Rs500mn due to Japanese yen/US$ loss on derivative productsand the rest due to Re/US$ loss). The company acquired 33.3% stake in its RAK unit held by Citi Venture (inthe form of preferential shares) in 2HFY11 and made RAK a 100% subsidiary. To facilitate holdings by CitiVenture, JBF created a subsidiary in Singapore, which was holding stake in RAK. With the exit of Citi Venture,the management of JBF has decided to close its Singapore arm and hold stake in RAK directly. As all assetsof the Singapore subsidiary got transferred to JBF (at book value) with this restructuring, the depreciation ofrupee led the company to realise translation gains of Rs0.7bn, which were booked under other income in3QFY12. It will not have any impact on cash flow of the company. Its RAK unit is exempted from income tax.Excluding translation gains, on account of higher forex loss booked by its Indian operations, the domesticoperations reported a loss and as a result the company witnessed tax credit in 3QFY12. On the back of higherother income and tax credit, net profit was 1.8% higher than our estimate.Exhibit 4: Our estimates versus actualsDescription 3QFY11 2QFY12 3QFY12 YoY (%) QoQ (%) 3QFY12E Devi. (%)Revenue 17,118 18,541 18,063 5.5 (2.6) 19,492 (7.3)EBITDA 3,033 2,117 1,752 (42.3) (17.3) 2,110 (17.0)EBITDA (%) 17.7 11.4 9.7 (802)bps (172) 10.8 (113)bpsPAT 1,856 760 712 (61.7) (6.4) 699 1.8Source: Company, Nirmal Bang Institutional Equities Research179JBF Industries

Aug-02Feb-03Aug-03Feb-04Aug-04Feb-05Aug-05Feb-06Aug-06Feb-07Aug-07Feb-08Aug-08Feb-09Aug-09Feb-10Aug-10Feb-11Aug-11Feb-12Jan-10Feb-10Mar-10Apr-10May-10Jun-10Jul-10Aug-10Sep-10Oct-10Nov-10Dec-10Jan-11Feb-11Mar-11Apr-11May-11Jun-11Jul-11Aug-11Sep-11Oct-11Nov-11Dec-11Jan-12Feb-12Institutional EquitiesExhibit 6: Delta (sales price less cost of raw materials) margin stabilising at lower level(Rs/kg)35302520151050($bbl)140120100806040200(Rs/kg)211917151311975($bbl)1451351251151059585756555Delta Chips Delta POY Oil ($/Bbl) (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchDelta Chips Delta POY Oil ($/Bbl) (RHS)We are hosting conference call with JBF Industries’ management on 13 Februrary 2012 at 2PM. Dial innumbers are +91 22 66290262/30650062. We will update our estimates/target price post conferencecall, if required.Rating trackDate Rating Market price Target price (Rs)24 August 2011 Buy 125 20911 November 2011 Buy 123 19015 November 2011 Buy 115 1809 February 2012 Buy 111 180Source: Nirmal Bang Institutional Equities Research180JBF Industries

Institutional EquitiesJBF Industries24 August 2011Initiating CoverageReuters: JBFI.BO; Bloomberg: JBF IN(Ұ)Entering the good timesWe expect JBF Industries’ profitability to bounce back in FY13 despite forexlosses and lower PET film prices. Likely fall in forex losses by 51.9% to Rs630mnin FY13, 13% volume growth seen over FY11-13 and a better product mix shouldlead to a 47.7% rise in FY13 net profit to Rs4,478mn. The stock is attractive at3.0x/2.0x FY12/13E PE versus its historical band of 3x-6x and 8-year mean of3.7x. Our sensitivity analysis shows limited downside. On the back of strong freecash flow of Rs9.2bn over FY12-14E, likely lower forex losses in FY13, higherdividend yield of 6.4% and RoCE improvement by 346bps to 16.1% over FY10-13E, we expect a re-rating of the stock and assign a Buy rating to it with a TP ofRs209 based on 4x FY12-13 average EPS of Rs52.32.Likely fall in forex losses by 51.9% to improve profitability in FY13: The mark-tomarket(MTM) forex losses on a derivatives contract ballooned from Rs634mn in FY10to Rs1,446mn in FY11, at 82.4 yen/$, after booking a loss of Rs841mn last year. Onthe back of higher principal, the forex losses amount to Rs1,309mn, being 64% ofMTM losses of Rs2,044mn that would be booked during FY12, at yen/$ rate of 80.Booked losses would reduce by 51.9% to Rs630mn in FY13 and to Rs105mn in FY14on lower outstanding principal sum, resulting in profitability rising by 14.9% in FY13.The company also received a line of credit to fund derivatives losses at a lower interestrate, thereby reducing the impact on cash flow for the next five to seven years.Volume growth to support falling PET film realisation: The company has increasedPOY capacity by 39,000tpa to 240,200tpa in September 2010 at a cost of Rs2,000mn.It expanded chip capacity by 70,000tpa each at its domestic unit to 620,800tpa and atRAK unit, Oman, to 430,000tpa in June 2011. The company is increasing capacity ofPET film by 36,000tpa at a cost of $45mn by December 2011 at its RAK unit. Volumegrowth of 13% over FY11-13E aided by a better product mix would partially cushion a37% fall in PET film realisation from its peak level, and as a result the profitabilitywould bounce back in FY13.Strong operating cash flow to support petrochemicals venture: The company issetting up a 1.1mtpa PTA plant in Mangalore at a cost of $700mn by FY15. It is alsoplanning to set up a 390,000tpa PET chip facility in Belgium at a cost of $230mn. Weexpect the company to generate free cash flow of Rs9.2bn over FY12-14E, therebynegating the need for substantial equity dilution to finance such a huge capex.Tax-free dividend yield of 6.4%: JBF Industries has declared a dividend of Rs8/sharefor FY11. We expect the company to maintain same dividend in FY12/13 too, thusgiving a tax-free dividend yield of 6.4%.BUYSector: PetrochemicalsCMP: Rs125Target Price: Rs209Upside: 67%Jignesh Kamanijignesh.kamani@nirmalbang.com+91-22-3926 8239Saiprasad Prabhusaiprasad.prabhu@nirmalbang.com+91-22-3926 8172Key DataCurrent Shares O/S (mn) 71.7Mkt Cap (Rsbn/US$mn) 9.0/197.452 Wk H / L (Rs) 229/118Daily Vol. (3M NSE Avg.) 116,610Share holding (%)3QFY11 4QFY11 1QFY12Promoter 41.3 41.2 41.9FII 16.1 11.2 11.4DII 18.5 17.9 18.8Corporate 8.1 8.8 7.4General Public 16.0 20.9 20.4One Year Indexed Stock PerformanceY/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 43,098 49,409 64,656 76,649 81.668EBITDA 5,185 4,712 9,529 7,460 8,296Forex loss on derivatives contract 0 0 841 1,309 630Net profit 1,963 1,917 5,461 3,032 4,478EPS (Rs) 31.5 30.8 76.2 42.2 62.4EPS growth (%) 48.3 (2.4) 147.5 (44.6) 47.8EBITDA margin (%) 12.0 9.5 14.7 9.7 10.2PER (x) 4.0 4.1 1.6 3.0 2.0P/BV (x) 1.1 0.9 0.6 0.5 0.4EV/EBITDA (x) 3.7 4.1 2.4 3.1 2.3Dividend yield (%) 4.0 4.8 6.4 6.4 6.4RoCE (%) 15.8 12.6 23.1 13.3 16.1RoE (%) 29.6 23.9 46.9 19.3 23.8Source: Company, Nirmal Bang Institutional Equities ResearchPrice Performance (%)1 M 6 M 1 YrJBF Ind. (19.9) (27.5) (17.9)Nifty Index (12.2) (9.0) (10.7)Source: Bloomberg

Aug-03Aug-03Aug-03Feb-04Feb-04Feb-04Aug-04Aug-04Aug-04Feb-05Feb-05Feb-05Aug-05Aug-05Aug-05Feb-06Feb-06Feb-06Aug-06Aug-06Aug-06Feb-07Feb-07Feb-07Aug-07Aug-07Aug-07Feb-08Feb-08Feb-08Aug-08Aug-08Aug-08Feb-09Feb-09Feb-09Aug-09Aug-09Aug-09Feb-10Feb-10Feb-10Aug-10Aug-10Aug-10Feb-11Feb-11Feb-11Aug-11Aug-11Aug-11Aug-03Aug-03Aug-03Feb-04Feb-04Feb-04Aug-04Aug-04Aug-04Feb-05Feb-05Feb-05Aug-05Aug-05Aug-05Institutional EquitiesFeb-06Feb-06Feb-06Aug-06Aug-06Aug-06Feb-07Feb-07Feb-07Aug-07Aug-07Aug-07Feb-08Feb-08Feb-08Aug-08Aug-08Aug-08Feb-09Feb-09Feb-09Aug-09Aug-09Aug-09Feb-10Feb-10Feb-10Aug-10Aug-10Aug-10Feb-11Feb-11Feb-11Aug-11Aug-11Aug-11Exhibit 1: One-year forward EV/EBITDA(Rs)50,00045,00040,00035,00030,00025,00020,00015,00010,0005,0000ValuationOn account of the appreciating yen, which increased MTM losses, and falling BOPET (Biaxially-orientedpolyethylene terephthalate) film prices, the stock was de-rated by the market in the past six months. Webelieve all negatives have been factored in now, but it has not taken into consideration positives like lowerforex losses in FY13, revival of profitability and strong cash flow. After accounting for forex losses, at currentprices, the stock is trading attractively at 3.0x and 2.0x FY12E EPS of Rs42.23 and FY13E EPS of Rs62.41.The stock is trading at the lower end of its PE band of 3x-6x and below its eight-year mean of 3.7x. Itappears attractive on other valuation parameters too, at 2.3x FY13E EV/EBIDTA, and 0.4x FY13E bookvalue of Rs289 against its historic band of 3x-5x EV/EBIDTA and 0.6x-2x P/B. We expect theshareholders to get a dividend of Rs8/share in FY12, providing a tax-free dividend yield of 6.4%. Thecompany is expected to generate free cash flow of Rs9.2bn over FY12-14E. On account of strong operatingcash flow, we don’t foresee substantial equity dilution to finance the huge capex required for thepetrochemicals venture. Our sensitivity analysis indicates limited downside, even considering a worst casescenario. On the back of strong free cash flow of Rs9.2bn over FY12-14E, pruning of forex losses by 51.9% inFY13, higher dividend yield of 6.4% and RoCE improvement by 346bps to 16.1% over FY10-13E, we expecta re-rating of the stock and assign a Buy rating to it with a target price of Rs209 based on 4x FY12-13Eaverage EPS of Rs52.30.5x4x3x2x1x(x)76543210Lower valuation onaccount of uncertaintyover derivative loss8-year mean 3.4Exhibit 2: One-year forward P/E(Rs)4504003503002502001501005006x5x4x3x2x1x(x)98765432108-year mean 3.7Exhibit 3: One-year forward P/B(Rs)3503002502001501005001.0x0.8x0.6x0.4x0.2x(x)2.01.81.61.41.21.00.80.60.40.20.08-year mean 0.8Source: Bloomberg, Nirmal Bang Institutional Equities Research182JBF Industries

Aug'10Sep'11Oct'10Nov'10Dec'10Jan'11Feb'11Mar'11Apr'11May'11June'11July'11Aug'11Aug'10Sep'11Oct'10Institutional EquitiesNov'10Dec'10Jan'11Feb'11Mar'11Apr'11May'11June'11July'11Aug'11Exhibit 5: Estimated forex liability(Rsmn)2,5002,0001,5001,0005000Investment ArgumentsLikely lower forex losses by 51.9% to improve profitability in FY13JBF Industries raised $40mn (yen-denominated) through the ECB route to part-finance its expansion at RAKunit in FY07. In order to reduce interest costs, the company entered into structured product pacts with twobanks, having contract value of $20mn each. The company raised funds via the ECB route at an exchangerate of 123 yen/$ and as per the contracts’ structure, it was hedged against dollar-yen movement till the 92.5level. However, the yen appreciated 37.7% since June 2007 till date, breaching the crucial level of 92.5, andthereby the structured products turned into open-ended contracts, resulting in heavy losses. JBF closed one$20mn contract in 2008, thereby incurring a loss of Rs10mn, while the second contract remains open.This second contract of $20mn will mature over a period of three years, August 2010-July 2013. Hence, thecompany has to book losses on it as per the yen-dollar movement. The MTM losses on the contract haveballooned from Rs634mn in FY10 to Rs1,446mn in FY11, at 82.4 yen/$, after booking a loss of Rs841mn lastyear. The market is expecting the yen to appreciate further and is worried that the losses could rise. Thecompany booked a loss of Rs841 mn in FY11, which is 44% of FY10 net profit.Prices of BOPET film produced at the RAK facility increased 103.2% YoY to Rs182.10 per kg in 3QFY11,which resulted in a bumper profit for FY11 and minimised the impact of forex losses on profits and networth.However, in FY12 the market is expecting forex losses to increase due to yen appreciation and profitability totake a severe hit on account of lower realisation from PET film business.Structure of MTM losses: As per the agreement with Bank of India, the company has to pay for actual losseson derivatives contract on a monthly basis for the period, August 2010-July 2013. Yen-dollar rate on the thirdday of every month is considered to calculate actual monthly losses and outstanding MTM losses.Appreciation of the yen by every single point increases MTM losses of the company on $20mn loan byRs10.5mn per month. Principal for first year i.e. August 2010-July 2011 is fixed at $20mn, $16mn for thesecond year and $4mn for the third year. Regarding principal repayment, 20% of it was due in July 2011, 60%in July 2012 and the remaining 20% in July 2013. We have considered outstanding forex losses ofRs2,044mn at yen/$ rate of 80 at the beginning of FY12. On the back of higher principal, the forex lossamounts to Rs1,309mn, being 64% of MTM loss of Rs2,044mn, which would be booked at yen/$ rate of80 during FY12. Booked loss would reduce by 51.9% to Rs630mn in FY13 and to Rs105mn in FY14 onaccount of lower outstanding principal sum, leading to a rise in the profitability by 14.9% in FY13.Exhibit 4: Assumption of MTM forex lossesYear Months Loan $ mn Date Avg JPY Forex Loss (Rsmn) Total (Rsmn)FY11 8 20 Aug'10- Mar'11 82.8 841 841FY12E4 20 Apr'11- Jul'11 80 4698 16 Aug'11- Mar'12 80 8401,309FY13E4 16 Apr'12- Jul'12 80 4208 4 Aug'11- Mar'13 80 210630FY14E 4 4 Apr'13- Jul'13 80 105 105Total (FY12-14E) 2,044Source: Company, Nirmal Bang Institutional Equities Research(Yen/$)8685848382818079787776(Rsmn)140120100806040200(Yen/$)8685848382818079787776M2MYen/DollarSource: Company, Nirmal Bang Institutional Equities ResearchLoss BookedYen/Dollar183JBF Industries

Institutional EquitiesIn order to reduce the impact on cash flow, the company entered into an agreement with its banker i.e. Bank ofIndia, to finance MTM losses via low-cost debt. As per the terms with Bank of India, the bank would provide10% down payment, 35% term loan (repayment in five years, rate of interest 3.5%), 35% infusion of funds viapreference shares (maturity period of seven years, rate of interest 2.5%) and 20% via convertible debt(warrants to be converted into equity shares by July 2016, as per the Securities and Exchange Board ofIndia’s formula). The company has an option not to issue equity shares equivalent to 20% of MTM losses andpay interest at the rate of 12% per year at the time of maturity. The line of credit from its banker at a lower rateof interest would reduce the impact on cash flow for the next five to seven years.Sensitivity analysisWe found the yen-dollar and PET (Polyethylene terephthalate) film price movements are major factorsaffecting the profitability of the company in FY12. PET film prices increased by 80.7% to Rs182/kg between1Q-3QFY11 on supply-demand mismatch. Prices softened by 22.1% to around Rs142/kg in 1QFY12 and weexpect them to further soften by 12.7% to Rs124/kg on commissioning of new capacities globally. Recentexpansion of high value 36,000tpa PET film (thick film) plant is expected to fetch better realisation and as aresult, the overall impact of declining film prices should be relatively lower for the RAK unit. In spite of theincrease in raw material prices by around 22.5% in FY12E over FY11, we expect PET film prices to decline17.4% to Rs124/kg in FY12 from Rs150.10/kg in FY11 and by 7% to Rs115/kg in FY13 for the company’sRAK unit and this should reduce gross delta from Rs92.70/kg in FY11 to Rs53.60/kg and to Rs44.90/kg eachin FY12E and FY13E. We found that every Rs5/kg fall in film prices should reduce consolidated FY12 profit by11.3%. The yen, from June 2007 till date, has appreciated 37.7% and is now hovering at 76.6/$. For ourcalculation, we have taken yen-$ rate of 80 until maturity of the derivatives contract i.e, July 2013. If the yenappreciates by two points (for the entire life span of the contract), then it can increase outstanding MTM lossesby 11.8% to Rs2,317mn, which, in turn, should reduce consolidated profit by 3.4% in FY12. However, onaccount of lower outstanding principal sum, net profit would decline by just 1.5% even if the yenappreciates by two points in FY13.Exhibit 6: Sensitivity analysis for FY12E PAT, EPS against yen and PET film price movements(PAT Rsmn)Film Price (Rs/kg)Yen/$74 76 78 80 82 84 86109 1,648 1,751 1,855 1,959 2,062 2,166 2,270114 2,005 2,109 2,213 2,316 2,420 2,524 2,627119 2,363 2,467 2,571 2,674 2,778 2,882 2,985124 2,721 2,825 2,928 3,032 3,136 3,239 3,343129 3,079 3,182 3,286 3,390 3,493 3,597 3,701134 3,436 3,540 3,644 3,747 3,851 3,955 4,058139 3,794 3,898 4,002 4,105 4,209 4,312 4,416Source: Nirmal Bang Institutional Equities Research(EPS Rs)Film Price (Rs/kg)Yen/$74 76 78 80 82 84 86109 22.9 24.4 25.8 27.2 28.7 30.1 31.6114 27.9 29.3 30.8 32.2 33.7 35.1 36.6119 32.9 34.3 35.8 37.2 38.7 40.1 41.6124 37.9 39.3 40.8 42.2 43.7 45.1 46.6129 42.9 44.3 45.8 47.2 48.7 50.1 51.6134 47.9 49.3 50.8 52.2 53.7 55.1 56.6139 52.9 54.3 55.8 57.2 58.7 60.1 61.5We believe the market is very pessimistic on the yen-dollar movement and PET film prices. By assigning a PEof 4.5x (average of PE band of 3x-6x), at the current market cap of Rs8,966mn, the market is expecting thecompany to register a net profit of Rs1,992mn in FY12, which factors in yen/$ rate of 74 and PET film price ofRs114/kg. We believe the probability of the yen appreciating to that level and film prices correcting by37.4% (from a peak of Rs182/kg) is very low and hence, such pessimism is unwarranted.Re-rating of stock on strong operating cash flowJBF Industries has aggressively expanded its polymerisation capacity from 334,800tpa in FY07 to 910,800tpain FY10 by investing Rs8.6bn over the same period. Almost 50% of this capex was allocated to set up theRAK facility in FY07 at a cost of $225mn. The pace of investment slowed from FY10 onwards and in additionall investments made during FY07-09 started yielding good results. As a result, we expect the company to turnfree cash flow positive from FY12 onwards and generate free cash flow of Rs9.2bn over FY12-14E. We expectthe company to consolidate its operations in the near future. Resources generated from the operations wouldbe utilised to fund the backward integration plan, as and when finalised. Due to positive healthy cash flow,we expect a re-rating of the stock.184JBF Industries

FY04FY05FY06FY07FY08FY09Institutional EquitiesFY10FY11FY12EFY13EExhibit 7: Cash flow trend(Rsmn)8,0006,0004,0002,0000(2,000)(4,000)(6,000)(8,000)FY08 FY09 FY10 FY11E FY12E FY13E FY14EFree Cash FlowNOPLATSource: Company, Nirmal Bang Institutional Equities Research(Rsmn)5,0003,0001,000(1,000)(3,000)(5,000)(7,000)(9,000)FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14ECFO CFI CFFNote: CFO: Cash flow from operations; CFI: Cash flow from investments;CFF: Cash flow from finance, NOPLAT: Net operating profit less adjusted taxesTax-free dividend yield of 6.4% (DPS: Rs8)JBF Industries is very consistent in dividend payment since FY04. It has increased dividend payment fromRs2/share in FY04 to Rs8/share in FY11. We expect the company to maintain dividend of Rs8/share inFY12/13 too. At the current market price, the stock is providing annual tax-free dividend yield of 6.4%.Exhibit 8: Dividend history (DPS)(Rs)876543210Source: Company, Nirmal Bang Institutional Equities ResearchVolume growth to cushion falling film realisationThe company is expanding its capacity across segments through de-bottlenecking of existing capacity. It hasincreased chip capacity in India by 70,000tpa to 620,800tpa at a cost of Rs300mn in June 2011. It hasincreased POY (Partially oriented yarn) capacity by 39,000tpa to 240,200tpa in September 2010 at cost ofRs2,000mn, which has stabilised by now and is running at an optimum level. This should result in POY volumegrowth of 4.7% to 220,984tpa in FY12E. The company has expanded chip capacity by 70,000tpa to430,000tpa at its RAK facility at a cost of $25mn in June 2011 and this should result in volume growth of21.5% in FY12. The company made super normal profits in 2HFY11 in PET film, as realisation increased by80.7% to Rs182.10/kg between 1Q-3QFY11. To capitalise on the opportunity, the company is increasing itscapacity of PET film by 36,000tpa at a cost of $45mn by December 2011. New capacity would aid theproduction of value added thick film catering to solar panel, LCD (Liquid crystal display) and other segmentswhere the realisation is relatively higher. We expect the prices of commodity PET film to decrease in FY12.However, on account of higher share of value added products (34% in FY13E vs 20% in FY11), the fall wouldbe cushioned. Even after raw material price increase by around 22.5% in FY12E over FY11, we expect theRAK unit’s PET film prices to decline 17.4% to Rs124/kg in FY12 and by 7% to Rs115/kg in FY13.185JBF Industries

2QFY093QFY094QFY091QFY102QFY103QFY104QFY101QFY11Institutional Equities2QFY113QFY11FY084QFY111QFY12FY09FY12EFY10FY13EFY11FY12EFY13EExhibit 9: Sales trend – Volume Exhibit 10: Sales trend – Value Exhibit 11: EBIDTA (Rs/kg of sales)(Tonne)1,000,000900,000(Rsmn)90,00080,000800,00070,000700,00060,000600,00050,000500,000400,00040,000300,00030,000200,00020,000100,00010,00000FY08 FY09 FY10 FY11 FY12E FY13EChips India POY PET Chips PET filmSource: Company, Nirmal Bang Institutional Equities ResearchFY08 FY09 FY10 FY11 FY12E FY13EChips India POY PET Chips PET film(Rs/Kg)121086420EBIDTA(Rs/Kg)Volume growth of 13% over FY11-13E supported by a better product mix would partially cushion a 37% fall infilm realisation from its peak levels, and as a result the profitability would bounce back in FY13. The companyregistered gross delta of Rs92.70/kg from PET film as against PET chip delta of Rs8.40/kg in FY11. As aresult, the PET film division, which accounted for 38.5% of RAK unit’s sales and 17.6% to consolidated sales,contributed 75.2% to gross margin of RAK unit and 41.3% to consolidated gross margin (sales less rawmaterials) in FY11. As PET film capacity would be operational from December 2011, we don’t foresee volumegrowth in FY12 but it should result in a growth of 35.9% in FY13. As a result, contribution of PET film shoulddecline to 11.6% (17.6% FY11) in consolidated sales and 24.9% (38.5%) in RAK unit’s sales in FY12 and27.8% (42.4%) in consolidated gross margin and 56.4% (75.2%) in RAK unit’s gross margin in FY12,respectively.Exhibit 12: Sales break-up (volume) Exhibit 13: Sales break-up (value terms) Exhibit 14: Gross margin break-up100%100%100%80%80%80%60%40%20%60%40%20%60%40%20%0%FY08 FY09 FY10 FY11 FY12E FY13EChips India POY PET Chips PET filmSource: Company, Nirmal Bang Institutional Equities Research0%FY08 FY09 FY10 FY11 FY12E FY13EChips India POY PET Chips PET filmExhibit 15: BOPET film realisation, raw material and delta(Rs/Kg)18015012090603000%FY08 FY09 FY10 FY11 FY12E FY13EChips India POY PET Chips PET filmSource: Company, Nirmal Bang Institutional Equities ResearchEfficient working capital managementDelta Film price Raw MaterialJBF Industries is one of the most efficient players in the industry in managing working capital, operating withlow working capital of 7-8% of net sales. Its Indian operation procures the main raw material, PTA (PurifiedTerephthalic Acid), from Reliance Industries, Indian Oil Corporation, and Mitsubishi - located within a 150-kmradius - which reduces the holding period of PTA. The RAK unit has PTA delivery timeframe of 3-4 weeks. Onaccount of low conversion time, the work in progress is negligible. Also, most of the customers sourcingsupplies from the company’s Indian manufacturing units are located within a 25-km radius of its plants.186JBF Industries

Institutional EquitiesThe company enjoys 90% market share in the UAE and the finished products’ holding period is also lower atthe RAK unit. On account of lower holding period of raw materials and finished goods, the company operatesat average inventory level of 35-40 days only.Exhibit 16: Ex-cash net working capital as a percentage of sales(days) (%)601450403020100121086420FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13EInventory days Receivable days Payable days Net WC ex CashSource: Company, Nirmal Bang Institutional Equities ResearchLocational advantageJBF Industries’ manufacturing unit in India is strategically located, as most customers of polyester chip andPOY are located within a 25-km radius of its plants. This gives logistics advantage of Rs2/kg on chip andPOY compared to its nearest competitor Indo Rama Synthetics, located at Nagpur, 600 km away. Inaddition, key raw material suppliers i.e, Reliance Industries, Mitsubishi, Indian Oil Corporation etc are alllocated within a 150-km radius of the company’s plants. The power costs of the company’s plant located atSilvassa is Rs3.15/unit as compared to Rs5/unit charged by the state electricity board. The RAK plantenjoys the benefit of low-cost raw materials along with no income-tax and customs duties. Indian producers ofchips, polyester yarn are facing constraints in PTA sourcing, but the company’s RAK unit has long‐termcontracts with Mitsui, Thailand and BP, Europe for PTA supply and apart from that also sources it from around3-4 Korean and 2-3 Taiwanese firms. On account of diversified sourcing of PTA, the capacity utilisation levelof the RAK plant is not impacted, unlike its domestic facilities. The RAK unit has started catering to markets inthe UAE, US and Europe. On account of anti-dumping duty, exports to European countries from India attractcustoms duty but JBF Industries can export to these countries without any duty with the help of its RAK plant.Diversified revenue across products/geographiesJBF Industries was predominantly a textile chip producer in India until FY07, accounting for 62% of FY07revenue. It enjoyed polyester chip market share of 55% in India in FY07. To reduce dependence on textilechip and domestic market, the company set up a facility at RAK in August 2007 at cost of $225mn to producePET chip and BOPET film. The RAK unit enjoys the benefit of low-cost raw materials along with no income-taxand customs duty. This unit has started catering to markets in the UAE, US and Europe. On account of antidumping duty, exports to European countries from India attract customs duty, but JBF Industries can export tothese countries without any duty from its RAK plant. Visualising the backward integration plan of its keycustomers (accounting for 20-25% of chip demand), JBF Industries’ forward integration by acquiringMicrosynth Fabrics, a manufacturer of specialty yarn in FY08 and increasing POY capacity in India by77,000tpa at a cost of Rs2,000mn over January-September 2010, reduces merchant supply of polyester chipin Indian market. Today, the company has a diversified product mix comprising textile chip, polyester yarn,PET chip and BOPET film which are sold in the US, India, Europe, Middle East etc. For the plant in India,currently the company procures main raw material PTA from IOC, Reliance Industries, and Mitsubishi etc.However, Mitsubishi is not able to run its expanded capacity at an optimum level, resulting in erratic supply toJBF’s India plant. As JBF has a presence in RAK, which sources PTA from Thailand, Korea, Taiwan andEurope region, the company is able to procure some quantity of PTA for its Indian unit and as a resultproduction at its Indian plant is not impacted significantly. Its major clients in India are textile players such asWelspun India, Jiwarajka Industries etc. Its global clients are Coca-Cola Co, Nestle Waters, Danone,Schweppes, Al Ain, Masafi, AFIA etc.187JBF Industries

Aug-02Feb-03Aug-03Feb-04Aug-04Feb-05Aug-05Feb-06Aug-06Feb-07Aug-07Feb-08Aug-08Feb-09Aug-09Feb-10Aug-10Feb-11Aug-11Aug-08Oct-08Dec-08Feb-09Apr-09Jun-09Institutional EquitiesAug-09Oct-09Dec-09Feb-10Apr-10Jun-10Aug-10Oct-10Dec-10Feb-11Apr-11Jun-11Aug-11Exhibit 17: Sales break-up product-wise, geography-wise - FY07 vs FY11FY07 FY11 FY07 FY11POY38%BOPETFilm18%Chips28%India 100%USA3%Europe17%CIS2%Chips62%PetChipsRAK28%POY26%ME/Africa24%India54%Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 18: Raw material pricesProfitability isolated during rising crude oil pricesPTA and MEG (Mono Ethylene Glycol) are main raw materials for manufacture of chip and POY. For every 1kg of chip, 0.86 kg of PTA and 0.34 kg of MEG are required. PTA and MEG are derivatives of crude oil and asa result their prices are dependent on oil prices in addition to supply-demand dynamics. However, theircoefficient of correlation with crude oil prices is weak, and hence their price movement is mainly on demandsupplyscenario.(Rs/kg)757065605550454035302520($bbl)140120100806040200(Rs/kg)7570656055504540353025($bbl)140120100806040200MEG (Rs/kg) PTA (Rs/kg) Oil ($/Bbl) (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchMEG (Rs/kg) PTA (Rs/kg) Oil ($/Bbl) (RHS)The company is a pure converter and as seen from Exhibit 17, delta margin (selling price less cost of rawmaterials) for chip in the past nine years has remained in the band of Rs5-9/kg, irrespective of fluctuation incrude oil prices. PTA prices have increased by 53.1% in April 2011 from April 2010 as compared to a 38%jump in crude oil prices on account of strong demand and limited supply. MEG prices have increased by31.9% over the same period. On account of higher PTA, MEG costs, raw material prices have increased by47.3% over the same period but the company’s margin was intact as it has increased the prices of chip by49.2% and of POY by 38.7% over the same period. On account of supply side constraints, prices of PTA andMEG rose by 20.4% and 18%, respectively, in February 2011, while in the same month chip prices wereincreased by 17.3%. On account of buoyant demand, gross delta margin in chip rose gradually over a periodof nine years to Rs9/kg from Rs5/kg. Gross delta margin in POY declined from a high of Rs25-30/kg during2003 to Rs16-20 in 2006 and stabilised in this band.188JBF Industries

Aug-02Feb-03Aug-03Feb-04Aug-04Feb-05Aug-05Feb-06Aug-06Feb-07Aug-07Feb-08Aug-08Feb-09Aug-09Feb-10Aug-10Feb-11Aug-11Aug-08Oct-08Dec-08Feb-09Apr-09Institutional EquitiesJun-09Aug-09Oct-09Dec-09Feb-10Apr-10Jun-10Aug-10Oct-10Dec-10Feb-11Apr-11Jun-11Aug-11Exhibit 19: Historical delta (sales price less cost of raw materials)(Rs/kg)35302520151050($bbl)140120100806040200(Rs/kg)2523211917151311975($bbl)1451351251151059585756555Delta Chips Delta POY Oil ($/Bbl) (RHS)Source: Company, Nirmal Bang Institutional Equities ResearchDelta Chips Delta POY Oil ($/Bbl) (RHS)As depicted in Exhibit 17, historical delta for chip and POY is weakly related to crude oil prices. Delta margin inchip and POY is more dependent on demand-supply dynamics. We have assumed delta of Rs9/kg for chipand Rs20/kg for POY. Net profit would impacted by 11.9% for every one-rupee change in delta margin of chipand by 3.4% for every one-rupee change in delta margin of POY in FY13.Exhibit 20: Sensitivity analysis for FY13E PAT, EPS vs chip, POY deltaPOY price/ delta (Rs/kg)(PAT)(Rsmn)Chip price / delta (Rs/kg)77 78 79 80 81 82 836 7 8 9 10 11 1288 17 2,412 2,947 3,482 4,017 4,552 5,087 5,62289 18 2,566 3,101 3,636 4,171 4,706 5,240 5,77590 19 2,720 3,254 3,789 4,324 4,859 5,394 5,92991 20 2,873 3,408 3,943 4,478 5,013 5,548 6,08392 21 3,027 3,562 4,097 4,632 5,167 5,702 6,23793 22 3,181 3,716 4,251 4,786 5,321 5,856 6,39194 23 3,335 3,870 4,405 4,939 5,474 6,009 6,544Source: Nirmal Bang Institutional Equities ResearchA transforming petrochemicals companyPOY price/ delta (Rs/kg)(EPS)(Rs)Chip price / delta (Rs/kg)77 78 79 80 81 82 836 7 8 9 10 11 1288 33.6 41.0 48.5 56.0 63.4 70.9 78.489 35.7 43.2 50.7 58.1 65.6 73.1 80.590 37.9 45.3 52.8 60.3 67.7 75.2 82.791 40.0 47.5 54.9 62.4 69.9 77.3 84.892 42.2 49.6 57.1 64.6 72.0 79.5 87.093 44.3 51.8 59.2 66.7 74.2 81.6 89.194 46.5 53.9 61.4 68.8 76.3 83.8 91.2JBF Industries is in the process of transforming itself from a commodity producer of textile chip to apetrochemicals complex. We expect the company to produce 905,096tpa of chip in FY13, which would require777,150tpa of PTA. The company is not able to operate its plant at full capacity on account of lower supply ofPTA from current suppliers. In order to ensure consistent supply, the company is planning to set up 1.12mtpaPTA plant at a SEZ in Mangalore at a cost of $700mn. As per the management, the project would be financedvia debt-equity ratio of 70:30, and generate project IRR of 18.3%, equity IRR of 24.9%, and NPV of $378mn.The plant would be located close to the proposed paraxylene facility (key raw material for PTA) of ONGC inMangalore. At full capacity utilisation the plant requires 740,000tpa of paraxylene. ONGC, along with its jointventures, is setting up 200,000tpa paraxylene facility by 4QFY12 and 440,000tpa paraxylene facility by3QFY13 at Mangalore. As the company’s plant would be close to ONGC’s paraxylene facility, paraxylene canbe easily transported by road to its unit in minimum lead time at a lower cost. The PTA plant should alsorequire less working capital, as the Indian facility keeps PTA inventory for 3-4 weeks currently, which shouldreduce to just one day. RAK operations would also able to reduce its inventory on account of assured supplyof PTA from India. Backward integration is a very positive step for JBF Industries as it would have theadvantage of consistent supply of low-cost PTA, which would increase utilisation level, enhance margin andimprove competitive position in the industry. The company has acquired necessary land for the project and isawaiting environmental clearance. As per the management, financial closure for the project should take placeby 2HFY12 and it should be operational by 1HFY15. We haven’t considered any benefits/capex of this venturein our model as the financial closure is awaited.189JBF Industries

Institutional EquitiesComparative analysisCompared with competitors like Indo Rama Synthetics, Garden Silks, Century Enka etc, JBF Industries is theonly player to report strong performance across all parameters for the past five years. The company wasable to register 53% CAGR in sales against 28.7% of Garden Silks, 6.3% of Indo Rama and 5.8% ofCentury Enka over the period FY06-11. JBF Industries has increased its gross block 5.4x by investingRs19.9bn over FY05-10 and even after such huge capacity expansion, the company has been able to improveits asset turnover to 1.81x in FY10 from 0.88x in FY06. Indo Rama, Garden Silks and Century Enka reportedasset turnover of 1.16x, 1.28x and 1.26x, respectively, in FY10. Over the years, JBF Industries has enjoyedhighest margin compared to peers and we expect it to continue doing so on the back of cost efficiency.Exhibit 21: Net salesExhibit 22: EBITDA margin(Rsmn)70,00060,00050,00040,00030,00020,00010,0000FY06 FY07 FY08 FY09 FY10 FY11JBF Indorama Garden Silk Century EnkaSource: Company, Nirmal Bang Institutional Equities Research(%)181614121086420FY06 FY07 FY08 FY09 FY10 FY11JBF Indorama Garden Silk Century EnkaExhibit 23: RoCEExhibit 24: Asset turnover(%)181614121086420(2)(4)FY06 FY07 FY08 FY09 FY10JBF Industries Indorama Garden Silk Century EnkaSource: Company, Capital Line, Nirmal Bang Institutional Equities Research(x)2.01.81.61.41.21.00.80.6FY06 FY07 FY08 FY09 FY10JBF Industries Indorama Garden Silk Century Enka190JBF Industries

FY06FY07FY08FY09FY10FY11FY12EFY13EFY06FY07FY08FY09FY10FY11FY12EFY13EInstitutional EquitiesFY06FY07FY08FY09FY10FY11FY12EFY13EFinancialsStandalone operationsJBF Industries has expanded chip capacity by 70,000tpa, operational since June 2011. In addition, thecompany expanded POY capacity by 77,000tpa in 1HFY11, which would be fully operational in FY12. Onaccount of sharp fall in cotton prices in 1QFY12, polyester product prices were under pressure. Tradersliquidated inventory and refrained from re-stocking due to falling prices. In order to hedge against decliningprices and minimise inventory losses, JBF Industries reduced its production in 1QFY12. The companyoperated its PET chip facility in India at 67.6% in 1QFY12 against 89.2% in 1QFY11 and its facility at RAK at78.6% in 1QFY12 against 89.1% in 1QFY11. With stabilisation of cotton prices and reduction of raw materialcosts in the wake of lower crude oil prices, the product margins were restored to the normal level (delta marginof POY increased to Rs20.10/kg in July 2012 against Rs16.90 in June 2012). The company increased theutilisation level and all its plants are running at optimum level currently. We do not expect any productiondecline on a full-year basis in FY12. In line with higher raw material prices of PTA and MEG, we expect chipand POY prices to increase by 19.9% to Rs80/kg and by 12.6% to Rs91.20/kg, respectively, in FY12. Being aconvertor, we expect JBF to pass on higher input prices to customers and this should lead to revenue growthof 15.3% to Rs41,029mn in FY12.The company should report volume growth of 3.4% in FY13 on account of 3.6% and 3.3% volume growth inchip and POY production, respectively. As the company is a pure convertor, we expect chip delta to remain inline with FY11 level of Rs9/kg in FY12 as well as in FY13. The company is producing value added yarns likemicro yarn, cationic yarn, FDY etc where it is enjoying better margins, which would help it from any marginpressure. On account of higher contribution from yarns at 49.6% in FY12E from 40.5% in FY10, averageEBIDTA per kg of polyester sold should improve to Rs7.40 in FY12E from Rs6.20 in FY10. Of the outstandingMTM losses payable for the period August 2010-July 2013, we expect the company to account for forex lossesof Rs1,309mn in FY12 and Rs630mn in FY13 at yen/$ rate of 80. Forex losses would peak in FY12 and dropby 51.9% in FY13, which would be a key trigger for a re-rating of the stock. On account of higher forex losses,net profit should decline by 67.8% to Rs423mn in FY12, but should increase by 127.7% to Rs963mn in FY13.Exhibit 25: Per kg analysis (Rs/kg)JBF Indian operations FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13ERealisation – Chip 65.5 64.5 61.7 59.5 58.0 66.7 80.0 80.0Realisation - POY 75.3 74.9 72.5 72.4 74.3 81.0 91.2 91.2PTA 37.0 41.3 37.3 40.4 43.6 51.5 62.8 62.8MEG 38.3 39.4 47.9 33.1 32.9 38.9 48.2 48.2R/m costs per kg of chip 48.9 50.1 49.8 48.0 49.6 58.2 71.0 71.1Delta – chip 16.6 14.4 11.9 11.5 8.4 8.5 9.0 8.9Revenue/kg 62.7 62.5 61.9 61.3 62.9 73.6 85.6 85.5EBIDTA/kg 7.7 7.3 7.2 7.2 6.2 8.5 7.4 7.1PAT/kg 3.7 3.4 4.0 2.1 3.0 2.7 0.9 1.9* Note: Lower profitability in FY12 on account of higher forex loss; profitability would bounce back in FY13Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 26: Production trend Exhibit 27: Sales trend Exhibit 28: Margin trend('000 tonne)6005004003002001000(% Growth)12010080604020-(20)(Rsmn)45,00040,00035,00030,00025,00020,00015,00010,0005,000-(%)12010080604020-(Rsmn)4,5004,0003,5003,0002,5002,0001,5001,000500-(%)20181614121086420Chips POY Chips POYSource: Company, Nirmal Bang Institutional Equities ResearchNet Sales (Rs mn) Growth (%)EBIDTA PAT EBIDTA (%) PAT (%)191JBF Industries

FY08FY09FY10FY11FY12EFY13EFY08FY09FY10FY11FY12EFY13EFY08FY09FY10FY11FY12EFY13EInstitutional EquitiesUAE operationsThe company set up its operations in the UAE in July 2007 and was able to operate its PET chip plant at96.4% level in FY09. The company set up PET film unit having capacity of 66,240tpa in 2QFY09, but onaccount of global meltdown it took one year to reach the optimum utilisation level. The company operated itsPET chip plant at 94.2% capacity and BOPET film unit at 113.9% capacity in FY11, leaving no scope forfurther improvement. The company expanded PET chip capacity by 70,000tpa at a cost of $25mn in June2011 and is expanding PET film capacity by 36,000tpa at a cost of $45mn by December 2011.The company made super normal profits in PET film in 2HFY11 as realisation increased in six months by80.7% to Rs182.10/kg in Q3FY11. To capitalise on the opportunity, the company is increasing PET filmcapacity by 36,000tpa at a cost of $45mn by December 2011. New capacity would help in production of valueadded thick films, catering to solar panel, LCD and other segments, where realisation is relatively higher. For1QFY12, the company reported net sales and EBITDA of Rs6,763mn and Rs728 mn, up by 19% and 8.5%,respectively. Operating margin declined to 10.8% in 1QFY12 against 11.9% in 1QFY11 following inventorylosses due to falling PTA prices to the tune of Rs450mn and lower utilisation of PET chip facility at 78.6%versus 89.1%. We do not expect the company to report any further inventory losses and the utilisation levelhas also improved currently. We expect commodity PET film prices to decrease in FY12, but on account ofhigher share of value added products at 34% in FY13E versus 20% in FY11, the fall would be cushioned.Even after the increase in raw material costs by around 22.5% in FY12E over FY11, we expect PET film pricesto decline 17.4% to Rs124/kg in FY12 and by 7% to Rs115/kg in FY13 for the RAK unit this should reducegross delta from Rs92.70/kg in FY11 to Rs53.60/kg and Rs44.90/kg in FY12E and FY13E.On account of super normal profits, FY11 should not be used for comparison of normal business performance.We expect EBIDTA per kg of sales to increase to Rs9.60/kg in FY12 and to Rs10.60/kg in FY13, fromRs7.10/5.30 in FY09/10. As against profit of Rs1,147mn/Rs614mn in FY09/10, RAK operations should reportnet profit of Rs2,609mn and Rs3,515mn in FY12E and FY13E, respectively. JBF Industries has bought backCVC’s entire holding of 32.62% in its RAK unit at a cost of US$104.4bn over 2Q-3QFY11 and as a result,contribution of highly profitable RAK operations should increase in the consolidated numbers. The companyhas long-term contracts with Mitsui, Thailand and BP, Europe for PTA supply. Apart from that it also sourcesPTA from around 3-4 Korean and 2-3 Taiwanese suppliers. On account of diversified sourcing of PTA, theutilisation level at its RAK plant is not severely impacted unlike in India. Just like its Indian facility, the companyhas followed great discipline in managing working capital. On account of strong profitability and relative lowerworking capital requirement, we expect the RAK unit to generate cash flow from operations to the tune ofRs13bn over FY12-14E, which would be used to set up the PTA plant in near future.Exhibit 29: Production trend Exhibit 30: Sales trend Exhibit 31: Margin trend('000 tonne)450400350300250200150100500(Rsmn)45,00040,00035,00030,00025,00020,00015,00010,0005,000-(%)250200150100500(Rsmn)6,0005,0004,0003,0002,0001,000-(%)3530252015105(1,000)0PET ChipsPOYNet Sales (Rs mn) Growth (%)EBIDTA PAT EBIDTA (%) PAT (%)Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 32: Per kg analysis (Rs/kg)JBF RAK operations FY08 FY09 FY10 FY11E FY12E FY13EPET chip realisation 56.2 57.0 54.2 65.8 79.1 79.1PET film realisation 85.1 89.7 150.1 124.0 115.3R/m cost per kg of PET chip 49.2 44.4 47.9 57.5 70.4 70.4Delta – PET chip 7.0 12.6 6.3 8.4 8.7 8.7Delta – PET film 40.7 41.9 92.7 53.6 44.9Delta PET film – PET chip 28.1 35.5 84.3 44.9 36.2Revenue/kg 56.4 57.2 58.6 82.0 87.1 86.9EBIDTA/kg 1.6 7.1 5.3 15.2 9.6 10.6PAT/Kg (0.4) 3.4 1.6 11.7 6.4 7.8Source: Company, Nirmal Bang Institutional Equities Research192JBF Industries

FY06FY07FY08FY09FY10FY11FY12EFY13EFY06FY07FY08FY09FY10FY11FY12EFY13EInstitutional EquitiesFY08FY06FY07FY09FY08FY10FY09FY10FY11FY11FY12EFY12EFY13EFY13EConsolidated financialsConsolidated net sales have shown a 55% CAGR at Rs64,656mn over FY06-11 on successful implementationof RAK project and volume growth in Indian operations. Domestic operations reported a 37.6% CAGR in salesat Rs35,580mn over FY06-11 on account of a 32.8% CAGR in volume and a 3.6% CAGR in realisation overthe same period. The RAK unit commenced operations in FY08 and revenue from it has shown 65.5% CAGRat Rs29,076mn over FY08-11, supported by 46.1% volume growth and 13.3% realisation growth. Thecompany increased its gross block by 5.4x to Rs24,455mn in FY10 by investing Rs19,891mn over FY06-10,which resulted in additional revenue of Rs57,434mn in FY11 over FY06.JBF Industries is in the process of transforming itself from a commodity producer of textile chip to apetrochemicals complex. In order to ensure consistent supply of main raw materials, the company is planningto set up 1.2mtpa PTA plant at a cost of $700mn. In addition the company has entered into a pact with BPAromatics to build 390,000tpa PET chip facility in Belgium at a cost of $230mn by 2HFY15. We expect volumegrowth of 6.1% to 889,055 tonne in FY12 and 6.6% to 947,461 tonne in FY13, and input cost driven realisationgrowth of 10.8% in FY12 which should increase consolidated sales by 18.5% to Rs76,649mn in FY12 and6.5% to Rs81,668mn in FY13.On account of super normal profit of the PET film division of RAK unit, profitability was higher in FY11 andhence it cannot be used for comparison purpose. We expect operating margin to improve to 9.7%/10.2% inFY12/13 from 9.5% in FY10 on account of higher share of high margin products like PET film, POY etc. Wehaven’t considered major repayment of loan in FY13 due to which cash appears higher in our FY12-13estimate. It would be utilised once the company finalises its PTA plan. However, the company has MTMlosses of Rs1,446 mn as on end March 2011 based on 82.4 yen per dollar. Based on 80 yen per dollar, wehave consider MTM losses of Rs2,044mn and expect the company to book forex losses of Rs1,309mn inFY12. As a result, net profit should decline by 44.5% to Rs3,032mn in FY12E. However, we expect theimpact of forex losses would be lower by 51.9% to Rs630mn in FY13E compared to Rs1,309mn in FY12E. Netprofit should increase by 47.7% to Rs4,478mn in FY13E. We expect the company to report EPS of Rs42.20 inFY12E and Rs62.40 in FY13E.Exhibit 33: Production trend Exhibit 34: Sales trend Exhibit 35: Margin trend('000 tonne)500450400350300250200150100500(Rsmn)(%)90,00012080,00010070,00060,0008050,0006040,00030,0004020,0002010,000--(Rsmn)10,0009,0008,0007,0006,0005,0004,0003,0002,0001,000-(%)2520151050Chips POY PET Chips PET FilmsSource: Company, Nirmal Bang Institutional Equities ResearchNet Sales (Rs mn) Growth (%)EBIDTA PAT EBIDTA (%) PAT (%)Exhibit 36: Sales trend in volume Exhibit 37: Sales trend in value terms Exhibit 38: EBIDTA/kg of sales('000 tonne)1,0009008007006005004003002001000FY08 FY09 FY10 FY11 FY12E FY13EChips India POY PET Chips PET film(Rsmn)90,00080,00070,00060,00050,00040,00030,00020,00010,0000FY08 FY09 FY10 FY11 FY12E FY13EChips India POY PET Chips PET film(Rs/Kg)121086420EBIDTA(Rs/Kg)Source: Company, Nirmal Bang Institutional Equities Research193JBF Industries

Institutional EquitiesKey concernsSharp drop of 24.6% in cotton prices during April-May 2011 exerted pressure on polyester prices.Following declining raw material and finished product prices, traders kept away from the market andclients deferred their requirement during the period which put pressure on margins in 1QFY12. Anydeferment in demand may exert pressure on margins in the near term. With stabilisation of cotton prices,and lower crude oil prices, the situation has improved currently and we expect the margins to bounceback to normal levels from 2QFY12.Volume growth is attributed to capacity expansion, and therefore any delay in the scheduled expansionwill negatively impact our top line and bottom line estimates.BOPET prices, after increasing 80.7% to Rs182.10/kg in 3QFY11 over a period of six months, havedeclined by 22% in three months to Rs142/kg in 1QFY12. We have considered a drop of 31.2% from thepeak level of Rs124/kg in FY12. Any sharp drop in prices may impact the profitability of the company.Appreciation in the yen would increase the cost of $20mn ECB.Yen appreciation would increase MTM losses. For every one-point appreciation in the yen, MTMincreases by Rs10.5mn per month. If the yen appreciates by two points (during the entire life span of thecontract), it would reduce consolidated profit by 3.4% in FY12. However, on account of lower outstandingprincipal sum, net profit would decline by just 1.5% if the yen appreciate by two points in FY13.Company overviewJBF industries, promoted by Bagirath Arya, was established in 1982 and is engaged in the production ofproducts such as polyester chip, PET chip, polyester yarn, PET film and other value added yarns like FDY,cationic yarn etc. The company is one of the top 10 global manufacturers of PET chip with its operationsspread across India and the Middle East. Currently, the company has chip capacity of 620,800tpa, POYcapacity of 240,200tpa and processed yarn 13,420tpa at its Indian facility, and 430,000tpa of PET chip and66,240tpa of PET film at RAK unit.The company is run by an experienced team. Bhagirath Arya has over 30 years of experience in the polyesterbusiness, particularly synthetic yarn, and was instrumental in setting up the UAE subsidiary. Rakesh Gothi,managing director and chief executive officer since1997, is a technocrat with over 30 years of experience inthis industry. P. N. Thakore is associated with the company since 1990 and is currently director (finance),responsible for managing finance, treasury and banking functions.Exhibit 39: Business modelPTAPolyesterChipPartiallyOrientedYarnTextile BusinessPolyesterFilament YarnFabricGarmentsPackaging BusinessMEGPETResinPETChipBeverage companies, bottlemanufacturers, etcRetailingJBF area of operationsPETFilmFlexi packaging, magneticmedia, liquid crystal display, etcSource: Company, Nirmal Bang Institutional Equities Research194JBF Industries

Institutional EquitiesExhibit 40: Capacity TrendCapacity 1.37 mtpa - FY1231%5%45%('000 tonne)6005004003002001%18%Polyester chips POY Speciality yarnPET chips PET filmSource: Company, Nirmal Bang Institutional Equities ResearchInternational operationsExhibit 41: Change of ownership RAK Unit1000FY06 FY07 FY08 FY09 FY10 FY11 FY12EChip - India POY PET chip - RAK PET filmJBF Industries commenced international operations in 2007 by foraying into PET chip and BOPET filmbusiness through setting up of a plant at RAK in the UAE. The 60:40 JV with the Prince of RAK had a projectcost of $225mn. In 2007-08, CVC acquired stake in the RAK project through its subsidiary JBF Global PTE,Singapore, and the ownership of the JV transferred to it. CVC took 32.62% stake in JBF Global PTE. During2008-09, JBF Global PTE raised its stake in JBF RAK LLC to 100%, taking full ownership of the companyJBF Industries JBF Industries JBF IndustriesJBF IndustriesJBF Industries, 60%,RAK Inv Authority 40%JBF Industries, 67.38%,Citigroup VC, 32.62%JBF Industries, 67.38%,Citigroup VC, 32.62%JBF industries, 100%RAK, UAEJBF Global PteLtd., SingaporeJBF Global PteLtd., SingaporeJBF Global PteLtd., SingaporeJBF Global, 80%,RAK Inv Authority 20%JBF Global, 100% JBF Global, 100%RAK, UAERAK, UAERAK, UAESource: Company, Nirmal Bang Institutional Equities ResearchExhibit 42: Key milestonesIncorporated in 1982,established itself as one ofIndia’s leading polyestertexturisersBackward integration into chipproduction with 36,000tpa in March2001 Expanded to 72,000tpa inNovember 2001Commissioned Ras-Al KhaimahUAE plant; Capacity: 216,000tpagrade chip and PET filmcapacity of 48,000tpaBackward integration bysetting up a 1.2mtpa PTAplantEntered yarnmanufacturing in 1996,capacity 18,000tpa.Expanded to 36,000tpa in1999Expansion:Chip – 108,000tpa;Yarn – 144,000tpa;Sets up Sarigam Facility-216,000tpa textile grade chipAcquired MicrosynthFabrics, Saily andincreased RAK bottlegrade chip capacity to360,000tpa; PET filmcapacity to 66,000tpaTexturisingYarnmanufacturingTextile chipmanufacturingScale-upGeographicaldiversificationInorganic growthBackwardIntegrationSource: Company, Nirmal Bang Institutional Equities Research195JBF Industries

Institutional EquitiesSector OverviewGlobal polyester industryGlobal polyester capacity is estimated at 71.2mtpa, while overall production is projected at 51.6mtpa at theend of 2011. Leaving aside the 2008 economic downturn, the industry has witnessed consistent demandgrowth, showing a CAGR of 4.4% over CY05-10. Following the downturn in 2008, the utiilsation level reducedto 71% in 2009 from 76% in 2005, but it improved to 73% in 2010 on buoyant demand. As per CMAI data,global polyester industry is expected to show a 6% CAGR against capacity growth of 5.4%, resulting in higherutilisation level over CY10-15. PET resin and textile filament segments are main consumers of polyester meltwith a share of 30.6% and 31.1%, respectively; staple consumed 18.2% of polyester melt, PET film 4.5%, chip10.6%, industrial film 2.3% and the rest 2.7% in CY11E.The company’s overseas operations are focused on bottle grade PET chip and polyester film. Globally, wewitnessed PET resin showing a 9% CAGR over CY05-10 and a 5.5% CAGR likely over CY10-15E. The PETfilm business globally witnessed a 3.7% CAGR over CY05-10 and as per CMAI, the PET film business isexpected to show a 7.9% CAGR over CY10-15E. The company’s Indian operations are focused on chip andPOY as main products. Globally, we saw POY demand growing 10.9% over CY05-10 and expected toshow10.7% CAGR over CY10-15. On account of backward integration plans of POY producers, chip businesshas consolidated at a 4.6% CAGR over CY05-10 and is expected to consolidate further by 2.8% CAGR overCY10-15. Foreseeing consolidation of chip business, JBF Industries has already forward integrated to producepolyester yarn and hence, reduced its dependence on chip business.Exhibit 43: Polyester melt global supply-demand balanceCAGR (%)CY05 CY06 CY07 CY08 CY09 CY10E CY11E CY12E CY13E CY14E CY15E CY05-10 CY10-15ECapacity (‘000tpa) 51,679 55,800 59,363 61,873 63,786 66,922 71,238 75,455 79,374 83,849 87,064 5.3 5.4Growth (%) 8.0 6.4 4.2 3.1 4.9 6.4 5.9 5.2 5.6 3.8Operating rate (%) 76.0 75.0 77.0 71.0 71.0 73.0 72.0 73.0 73.0 74.0 75.0Demand 39,167 42,002 45,802 43,918 45,505 48,658 51,632 54,865 58,216 61,753 65,186 4.4 6.0Growth (%) 7.2 9.0 (4.1) 3.6 6.9 6.1 6.3 6.1 6.1 5.6Sub-segments(’000tpa)PET resin 11,861 12,921 14,033 13,877 14,343 15,080 15,823 16,721 17,696 18,706 19,679 4.9 5.5Staple 8,064 8,509 9,133 8,641 8,761 9,125 9,393 9,709 9,957 10,211 10,405 2.5 2.7Textile filament 8,649 10,878 12,336 12,010 12,976 14,533 16,077 17,822 19,594 21,582 24,121 10.9 10.7Industrial filament 781 868 920 1,015 978 1,091 1,169 1,249 1,337 1,424 1,517 6.9 6.8PET film 1,748 1,947 2,047 2,056 2,006 2,094 2,298 2,494 2,678 2,880 3,057 3.7 7.9Chip 6,834 5,595 5,933 4,956 5,185 5,413 5,453 5,381 5,393 5,305 4,687 (4.6) (2.8)Others 1,230 1,284 1,400 1,363 1,256 1,322 1,419 1,489 1,561 1,645 1,720 1.5 5.4Total 39,167 42,002 45,802 43,918 45,505 48,658 51,632 54,865 58,216 61,753 65,186 4.4 6.0Source: CMAI, Company, Nirmal Bang Institutional Equities ResearchDomestic polyester industryDomestic polyester capacity is estimated at 5.6mtpa, while overall production is seen at 4.6mtpa in 2011.Taking into consideration the 2008 downturn, domestic polyester industry has witnessed consistent demandgrowth and has shown a CAGR of 13.2% over CY05-10 with consistent utilisation level at 77-79%. As perCMAI data, domestic polyester industry is expected to show a 8.9% CAGR against capacity growth of 9.9%over CY10-15E and it should exert pressure on the utilisation level post CY13, but JBF Industries would beleast affected on account of lower production costs and a diversified product range. Textile filament companiesare main consumers of polyester melt with a share of 37%, staple 20%, chip 18%, PET resin 15%, film 8%,and the rest 1% in CY11E. The company’s domestic operations are focused on PET chip, polyester chip andpolyester yarn. Industry witnessed PET resin showing a 7.1% CAGR over CY05-10 and a 9.4% CAGR isexpected over CY10-15. The filament yarn business has grown at a CAGR of 14.8% over CY05-10, and asper CMAI data the textile filament business is expected to show a 16.3% CAGR over CY10-15. After abuoyant 26% CAGR over CY05-10, polyester chip business is expected to consolidate, showing negativegrowth of 6.3% CAGR over CY10-15 on account of backward integration plans of POY producers. Foreseeingconsolidation of polyester chip business, JBF Industries has already forward integrated to produce polyesteryarn and hence, reduced its dependence on polyester chip business.196JBF Industries

CY05CY06CY07CY08CY09CY10ECY11ECY12ECY13ECY14ECY15ECY05CY06CY07Institutional EquitiesCY08CY09CY10ECY11ECY12ECY13ECY14ECY15EExhibit 44: Polyester melt supply/demand balance - IndiaCAGR (%)CY05 CY06 CY07 CY08 CY09 CY10E CY11E CY12E CY13E CY14E CY15E CY05-10 CY10-15ECapacity (‘000tpa) 2,954 3,643 4,230 4,422 5,010 5,503 5,652 6,221 7,161 8,151 8821 13.2 9.9Growth (%) 23.3 16.1 4.5 13.3 9.8 2.7 10.1 15.1 13.8 8.2Operating rate (%) 79 77 79 77 77 77 81 79 74 73 73 (0.5) -0.9Demand 2,336 27,95 3,346 3,409 3,875 4,240 4,592 4,914 5,315 5,934 6,480 12.7 8.9Growth (%) 19.6 19.7 1.9 13.7 9.4 8.3 7.0 8.2 11.6 9.2Sub-segments (‘000tpa)PET resin 447 485 508 592 683 630 687 712 753 869 988 7.1 9.4Staple 635 782 925 871 922 960 939 954 945 1,014 1,045 8.6 1.7Textile filament 767 906 1,126 1,171 1,322 1,531 1,716 1,930 2,262 2,777 3,258 14.8 16.3Industrial filament 9 9 9 9 11 16 17 19 21 23 25 12.2 9.3PET film 235 265 265 265 265 332 383 422 449 509 564 7.2 11.2Chip 237 339 503 489 657 753 827 848 848 696 544 26 (6.3)Others 6 9 10 12 15 18 23 29 37 46 56 24.6 25.5Total 2,336 2,795 3,346 3,409 3,875 4,240 4,592 4,914 5,315 5,934 6,480 12.7 8.9Source: CMAI, Company, Nirmal Bang Institutional Equities ResearchPolyester filament yarn demand-supply balanceCurrently, supply of PFY closely matches with demand in India. PFY demand has shown a 12.9% CAGR overCY05-10 at 2.18mtpa compared with 9.8% CAGR in capacity addition at 2.76mtpa, resulting in higherutilisation level of 81% in CY10 and firm POY prices. On account of higher profitability witnessed in the pastfew years, many players are expanding their capacity and as a result, we expect overcapacity by CY13, whichwould put pressure on utilisation level and margins. In order to mitigate margin pressure, JBF Industries hasalready started exporting a small quantity of POY with plans to increase exports during overcapacity apartfrom increasing the proportion of valued added yarn. Global demand for PFY has shown a 6.5% CAGR overCY05-10 to 20.2mtpa against capacity addition growth of 4.5% to 30.3mtpa. Utilisation level has improved to67% in CY10 from 61% in CY05. We expect demand growth at 7.9% CAGR to outpace capacity additiongrowth of 5.5% CAGR over CY10-15E and expect the utilisation level to remain firm.Exhibit 45: Polyester filament yarn demand-supply balance – India and Global (‘000 tonne)('000 ton) (%)5,000904,5004,000853,5003,000802,5002,000751,5001,00070500065(''000 ton) (%)40,0007635,0007430,0007225,0007020,0006815,0006610,000645,00062060Production Demand Capacity Operating Rate (RHS)Source: CMAI, Company, Capital Line, Nirmal Bang Institutional Equities ResearchDemand Capacity Operating Rate (RHS)Middle East PET resin demand-supply balancePET capacity has shown a 7.2% CAGR at 19.9mtpa over CY05-10 as against demand growth of 5.4%. Afterwitnessing a modest decline in 2008, global PET packaging resin demand returned to a more conventionallevel of 5-6% in 2010. Almost all of the growth is concentrated in Asia (where JBF Industries has a presence)and South America, while consumption in North America and Europe remained relatively stagnant. Strongeconomic growth in emerging markets led to good demand for beverage bottles, thereby resulting in risingdemand for PET resin. Global PET capacity has been gradually shifting away from the US to Asia, with the USthat was accounting for 40% of PET bottle capacity in the late 1990s, slipping to only 25% currently. Onaccount of shutdown of capacity in the US and lower pace of capacity addition, we expect the utilisation levelto improve to 81% by CY15 from 78% in CY10. JBF Industries, one of the top 10 manufacturers of PET chip,would benefit the most from this structural shift.197JBF Industries

CY05CY06CY07CY08CY09CY10ECY11ECY12ECY13ECY14ECY15EInstitutional EquitiesCapacity in the Middle East that had remained below 250,000tpa until the middle of the past decade, virtuallyexploded to over 1.4mtpa by 2009. New plants in the UAE, Iran, Saudi Arabia, and more recently Oman,supplied to not only a rapidly expanding regional market - mainly for production of beverage bottles - but alsomanaged to become a significant exporter, primarily to West European markets from being net importersearlier. Although the pace of regional capacity addition is expected to slow over the next five years, showing a10.2% CAGR over CY10-15E from 40.8% CAGR over CY05-10, it is likely to remain in double digits. OctalHoldings in Oman and Ibn Rushd in Saudi Arabia are already constructing new plants with a combinedcapacity of close to 1mtpa. As against capacity of 1.5mtpa, domestic demand in the Middle East was 0.94mtin 2010 while exports accounted for about one-third of total consumption. The share of exports is expected togo up to 40% by 2015, following an estimated 10.2% CAGR expansion over 2010-15 as against domesticdemand growth of 6.4%. As against domestic production of 1.89mt, domestic demand was at 2.54mt in 2010in Western Europe. In order to match the deficit, it imported 0.88mt in 2010. Eastern Europe consumed0.558mt against production of 0.11mt in 2010, resulting in import of 0.513mt. With meagre capacity addition,we expect the European region to remain net importer to the tune of 1.39mt. Regional demand will continue tobe driven by the beverages segment, which is projected to consume about 80% of PET production in 2015.Another fastest growing segment will be sheet extrusion, albeit on a much smaller base.Exhibit 46: PET resin demand-supply balance('000ton)2,5002,0001,5001,0005000Production Demand ImportExport Capacity Operating Rate (RHS)(%)8075706560555045Exhibit 47: Major PET resin suppliers in Middle EastKorteks2%Artenius9%OctalHoldings24%Capacity 1.5 mtpa - CY10ShahidTondguyan20%JBF RAK23%Ibn Rushd22%Source: CMAI, Company, Capital Line, Nirmal Bang Institutional Equities ResearchRaw material scenarioPurified Terephthalic Acid (PTA)Global PTA capacity has shown a 7.4% CAGR as against demand growth of 5.5% CAGR over 2005-10. Asiahas accounted for over 80% of the world’s growth in PTA capacity. This was mainly due to China’s efforts tobackward integrate in order to achieve self sufficiency in PTA production. Producers in the Americas andEurope undertook only modest expansion, while some capacity was closed as a result of 2008-09 globalrecession. Asia now represents close to 80% of global PTA capacity, while the Americas’ contribution hasfallen to around 12%. Over the past five years, India and Thailand also added significant amount of newcapacity, making them the fourth and sixth largest producing countries after China, South Korea, Taiwan, withthe US being the fifth. Future PTA capacity addition will continue to be concentrated in China, althoughcountries like Brazil, Poland, Portugal, Russia and Saudi Arabia have announced plans to build PTA facilitiesduring the aforesaid period in order to support their local polyester production.Although the rate of capacity growth is projected to be only marginally greater than demand growth, averagecapacity addition in CY12-14 would exceed 5.7mtpa, before slowing by the middle of the decade. Based oncurrent announcements, between CY10 and CY15, global nameplate PTA capacity is expected to show a6.8% CAGR, touching 67.6mtpa versus expected demand growth of 6.3% over the same period. As large,world scale units are commissioned in locations such as China and the Middle East, CMAI expectsrationalisation of older assets in South Korea, Taiwan, Japan and Europe. JBF Industries’ RAK unit wouldbenefit from higher availability of PTA from Middle East in future, which would improve its utilisation level andthere by the margins.In the past five years, PTA capacity has shown a 17% CAGR at 3.86mtpa over CY05-10 in India. Only threeplayers - Reliance Industries, Indian Oil and Mitsubishi - produce PTA in India. Reliance Industries is themarket leader with a 52.6% share, followed by Mitsubishi with 33.2% and Indian Oil with 14.2%.198JBF Industries

CY05CY06CY07CY08CY09CY10ECY11ECY12ECY13ECY14ECY15ECY05CY06Institutional EquitiesCY07CY08CY09CY10ECY11ECY12ECY13ECY14ECY15EThe most recent capacity addition is by MCPI (Mitsubishi) of 0.8mtpa at its Haldia plant, which hasexperienced repeated start-up delays from the initial target date of early 2009. Although the plant has beenoperating since late 2009, there have been repeated failures. Demand growth at 14.7% CAGR over CY05-10has outpaced production growth of 12.9% over the same period. In order to match demand, the countryimports 0.38mtpa of PTA from countries like Thailand, China, Korea, Taiwan etc. Textile players like JBF, IndoRama etc are facing problems in procuring required quantity of PTA. At present, MCPI’s Haldia plant has beenoperating smoothly, but at a reduced rate, and is expected to reach the designed rate in late 2011. RelianceIndustries has announced that it will be building two global scale plants in the near future. We expect PTAcapacity addition CAGR at 10.2% over CY10-15E to outpace demand growth of 8.9% CAGR over the sameperiod and thus ease availability. This would be beneficial to JBF Industries as its current plants in India areoperating at lower utilisation level due to reduced availability of PTA.Exhibit 48: PTA demand/supply – India (‘000 tonne)('000ton) (%)1006,000985,000964,00094923,000902,00088861,00084082Exhibit 49: PTA demand/supply – Global (‘000 tonne)('000ton) (%)70,0009360,0009150,0008940,000878530,0008320,0008110,00079077Production Demand Capacity Operating Rate (RHS)Production Demand Capacity Operating Rate (RHS)Source: CMAI, Company, Capital Line, Nirmal Bang Institutional Equities ResearchMono Ethylene Glycol (MEG)Exhibit 50: MEG demand/supply – GlobalGlobal demand for MEG is estimated at 18.5mtpa as against capacity of 25mtpa in CY10. SABIC, SinopecGroup, Formosa Petrochemical, Shell and ME Global etc are global suppliers of MEG, while in India it isproduced by Reliance Industries, Indian Oil, and India Glycols. Pace of capacity growth at 6.8% CAGR overCY07-10 outpaced demand growth of 1.4% over the same period, resulting in lower utilisation rate of 74% inCY10. On account of higher demand at 5.9% CAGR over CY10-12E as against capacity growth of 3% CAGR,the utilisation level is expected to improve. There are only three MEG producers in India- Reliance Industries,Indian Oil and India Glycols - with total capacity of 1.2mtpa against demand of 1.45mtpa, resulting in import of0.35mtpa.Exhibit 51: MEG demand/supply –India('000ton) (%)30,0008725,0008520,000838115,0007910,000775,00075073CY07 CY08 CY09 CY10E CY11E CY12EDemand Capacity Operating Rate (RHS)Source: CMAI, Company, Capital Line, Nirmal Bang Institutional Equities Research('000ton) (%)1,800991,600981,400971,20096951,0009480093600924009120090089CY07 CY08 CY09 CY10E CY11E CY12EProduction Demand Capacity Operating Rate (RHS)199JBF Industries

Institutional EquitiesFinancials (Consolidated)Exhibit 52: Income statementY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13ENet sales 43,098 49,409 64,656 76,649 81,668% growth 54.3 14.6 30.9 18.5 6.5Raw material costs 33,392 38,667 46,841 60,388 63,816Staff costs 381 606 846 902 988Any other costs 3,606 4,761 - 6,902 7,489Others 534 664 7,440 997 1,079Total expenditure 37,913 44,698 55,127 69,189 73,372EBITDA 5,185 4,712 9,529 7,460 8,296% growth 94.3 (9.1) 102.3 (21.7) 11.2EBITDA margin (%) 12.0 9.5 14.7 9.7 10.2Other income 160 255 214 241 252Interest costs 975 1,275 1,421 1,495 1,411Forex losses 690 (149) 945 1,509 680Gross profit 3,680 3,841 7,377 4,696 6,457% growth 67.8 4.4 92.1 (36.3) 37.5Depreciation 779 1,173 1,314 1,453 1,498Profit before tax 2,900 2,668 6,063 3,243 4,959% growth 81.6 (8.0) 127.2 (46.5) 52.9Tax 459 540 602 211 481Effective tax rate (%) 15.8 20.2 9.9 6.5 9.7Net profit 2,442 2,128 5,461 3,032 4,478% growth 87.5 (12.8) 156.6 (44.5) 47.7Minority interest 553 224 - - -PAT after minority interest 1,889 1,904 5,461 3,032 4,478Extraordinary items (75) (13) - - -Reported net profit 1,963 1,917 5,461 3,032 4,478% growth 48.3 (2.4) 184.9 (44.5) 47.7Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 54: Balance SheetY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEquity 622 622 716 716 716Preference shares 266 266 266Reserves 6,709 8,117 13,555 15,910 19,710Networth 7,331 8,740 14,538 16,892 20,693Minority interest 3,997 3,633 - - -Short-term loans 3,244 3,312 7,127 6,827 6,627Long-term loans 9,170 10,332 10,709 10,709 9,709Total loans 12,414 13,644 17,836 17,536 16,336Deferred tax liability 1,226 1,337 1,430 1,470 1,561Liabilities 24,969 27,353 33,804 35,899 38,590Gross block 20,975 24,455 29,394 32,291 33,281Depreciation 3,288 4,372 5,686 7,139 8,637Net block 17,688 20,084 23,708 25,152 24,644Capital work-in-progress 3,149 1,081 997 590 609Long-term Investments 32 27 27 27 27Inventories 3,966 5,132 7,344 9,155 9,646Debtors 3,735 4,674 6,957 8,100 8,707Cash 899 999 2,350 1,920 5,102Liquid Investments 329 1,282 1,252 1,252 1,252Other current assets 2,094 3,023 3,658 4,418 4,401Total current assets 11,022 15,110 21,562 24,844 29,109Creditors 4,732 1,915 3,237 4,052 4,293Other current liabilities 2,353 7,070 9,282 10,691 11,535Total current liabilities 7,085 8,985 12,519 14,743 15,828Net current assets 3,938 6,125 9,043 10,101 13,281Total assets 24,969 27,353 33,804 35,899 38,590Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 53:Cash flowY/E March (Rsmn) FY09 FY10 FY11 FY12E FY13EEBIT 4,406 3,539 8,215 6,007 6,798(Inc.)/Dec in working capital (1,322) (2,088) (1,565) (1,489) 2Cash flow from operations 3,084 1,451 6,649 4,518 6,801Other income 160 255 214 241 252Depreciation 779 1,173 1,314 1,453 1,498Deferred liabilities 244 111 93 40 91Forex loss(-) (690) 149 (945) (1,509) (680)Interest paid (-) (975) (1,275) (1,421) (1,495) (1,411)Tax paid (-) (459) (540) (602) (211) (481)Dividend paid (-) (364) (437) (671) (677) (677)Minority interest ( P&L) (553) (224) - - -Extraordinary items 75 13 - - -Net cash from operations 1,301 675 4,633 2,359 5,392Capital expenditure (-) (8,255) (1,500) (4,855) (2,490) (1,009)Net cash after capex (6,954) (825) (222) (130) 4,382Inc./(Dec.) in short-term borrowing 2,046 68 3,815 (300) (200)Inc./(dec.) in long-term borrowing 2,003 1,161 377 - (1,000)Inc./(Dec.) in preference capital - - 266 - -Inc./(dec.) in borrowings 4,049 1,229 4,459 (300) (1,200)(Inc.)/Dec. in investments (22) 4 - - -Minority interest 837 (365) (3,633) - -Equity issue/(buyback) - - 1,285 - -Cash from financial activities 4,864 869 2,111 (300) (1,200)Others (364) 56 (537) 0 0Opening cash 3,353 899 999 2,350 1,920Closing cash 899 999 2,350 1,920 5,102Change in cash (2,454) 100 1,352 (430) 3,182Source: Company, Nirmal Bang Institutional Equities ResearchExhibit 55: Key ratiosY/E March FY09 FY10 FY11 FY12E FY13EPer share (Rs)EPS 31.5 30.8 76.2 42.2 62.4Book value 117.8 140.4 203 236 289Valuation (x)P/E 4.0 4.1 1.6 3.0 2.0P/BV 1.1 0.9 0.6 0.5 0.4EV/EBITDA 3.7 4.1 2.4 3.1 2.3EV/sales 0.4 0.4 0.4 0.3 0.2Return ratio (%)RoCE 15.8 12.6 23.1 13.3 16.1RoE 29.6 23.9 46.9 19.3 23.8Margin ratio (%)EBITDA margin 12.0 9.5 14.7 9.7 10.2PBIT margin 10.2 7.2 12.7 7.8 8.3PBT margin 6.7 5.4 9.4 4.2 6.1PAT margin 4.6 3.9 8.4 4.0 5.5Turnover ratioAsset turnover ratio (x) 2.0 1.9 2.1 2.2 2.2Avg collection period (days) 30 33 37 37 37Avg payment period (days) 45 15 21 21 21Solvency ratios (x)Debt-equity 1.7 1.6 1.2 1.0 0.8Interest coverage 4.5 2.8 5.8 4.0 4.8Source: Company, Nirmal Bang Institutional Equities Research200JBF Industries

Institutional Equities

202Institutional Equities

Institutional EquitiesTop Buy’s ReturnsCompanies% ReturnsCMP(Rs)MCap(US$ bn)YTD(%) 20-Dec-12% FromDec LowOur Target(Rs)% PotentialUpsideRELIANCE INFRAST 593 3.2 74 343 73 724 22IVRCL LTD 59 0.3 110 28 112 55 (7)IRB INFRASTRUCTU 173 1.2 33 142 22 235 36GMR INFRASTRUCTU 31 2.4 47 19 67 39 26BHARAT HEAVY ELE 262 13.0 10 223 17 327 25SUN PHARMA INDU 543 11.3 9 498 9 592 9TORRENT PHARMA 565 1.0 5 520 9 715 27INFOSYS LTD 2,810 32.6 2 2,651 6 3,125 11HCL TECH LTD 463 6.5 19 387 20 504 9BATA INDIA LTD 698 0.9 32 492 42 838 20JBF INDUSTRIES 111 0.2 21 92 21 180 62203

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