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Executive Summary

EXECUTIVE SUMMARY

EXECUTIVE SUMMARY
Indian Manufacturing sector signals growth
After a slowdown in the last five years, the Indian manufacturing sector is showing clear signs of turning around. The manufacturing sector grew at a 4% CAGR during FY97-FY02. But in FY03 the sector registered a 6% growth.This growth has been predominantly led by exports which grew 19% in FY03 compared with a 5.4% CAGR between FY97-02. Going forward, we believe exports will continue to drive growth in select sectors.

Mindset focused on global markets


Lower growth in domestic markets and liberalisation have stimulated companies to focus on international markets for growth. In unprecedented moves, companies are setting up capacities and changing production lines keeping global markets in mind. They are also investing in international marketing networks and in infrastructure.We believe this change in mindset of Indian managements is the most significant factor.

Competitive edge in skill intensive industries


Although overall opportunity and potential for India are immense, we believe that all industries will not benefit equally. Industry dynamics and the China factor will have a major role in determining the beneficiaries of this opportunity. We believe Indian companies engaged in skill intensive industries like Agro-chemicals, Auto components, Engineering, Pharmaceuticals and Specialty chemicals have sustainable competitive advantages in international markets. This is also vindicated by the performance of industries like Pharma and Auto ancillaries which have reported 15% and 24% growth in export revenues from FY99 to FY02.

Companies with direct sales model to benefit more


We have classified the export sales models followed by companies into five categories to evaluate long term sustainability of export revenues and profit margins. We believe companies selling directly to end customers will have higher sustainabilityof revenues and margins in the long term. This sales strategy calls for significant investments in international marketing and distribution networks. These factors give the direct sales model an edge over the contract manufacturing and outsourcing models in the long term.

Our Picks
Our key sector picks are Agro-chemicals, Auto components, Engineering, Pharmaceuticals and Specialty chemicals. We have identified two sets of companies in these sectors. The first set of companies includes those that are at an advanced stage of export initiative. These companies have in place the necessary ingredients needed for success in export markets. In this category, our picks include ABB, Aurobindo, Bharat Forge, Crompton Greaves, Cummins, IPCA, Jubilant, Shasun, Thermax and United Phosphorus. Companies in this basket are expected to witness maximum impact of exports on their financials and market capitalisation. The companies identified in the second set are either at an early stage of export initiative or are small market cap companies. Our picks in this set are Camlin, Elgi Equipment, Hindustan Inks, Igarashi Motors, Lupin, Motherson Sumi and Sundaram Brakelinings.
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MANUFACTURED EXPORTS

CONTENTS
Executive Summary ....................................................................................................................................................1 At a Glance .................................................................................................................................................................4 Indian Manufacturing Sector - Waiting In the Wings .................................................................................................6 Indian Manufacturing - Shifting Focus to Exports. .................................................................................................... 8 Growing Manufacturing Exports .............................................................................................................................. 10 Advantage India ....................................................................................................................................................... 11 The Time Is Now ..................................................................................................................................................... 15 Evaluation of Export Sales Model ............................................................................................................................ 20 Concerns and Risks ................................................................................................................................................. 23 Annexure 1 .............................................................................................................................................................. 24 Annexure 11 ............................................................................................................................................................. 26 Annexure 111 ........................................................................................................................................................... 27 Annexure 1V ........................................................................................................................................................... 29 INDUSTRIES AND COMPANIES Agro-Chemicals Industry ................................................................................................................................... 33 United Phosphorus ............................................................................................................................................... 35 Auto Components Industry ................................................................................................................................ 42 Bharat Forge ........................................................................................................................................................ 45 Engineering Industry .......................................................................................................................................... 51 ABB ..................................................................................................................................................................... 53 Crompton Greaves ............................................................................................................................................... 58 Cummins .............................................................................................................................................................. 63 Thermax ............................................................................................................................................................... 68 Pharmaceutical Industry ..................................................................................................................................... 74 Aurobindo Pharma ............................................................................................................................................... 77 IPCA ................................................................................................................................................................... 82 Shasun Chemicals ................................................................................................................................................ 87 Specialty Chemicals ............................................................................................................................................. 92 Jubilant Organosys ............................................................................................................................................... 95 Emerging Export Stories .................................................................................................................................. 100 Camlin ................................................................................................................................................................ 101 Elgi Equipment ................................................................................................................................................... 102 Hindustan Inks ................................................................................................................................................... 103 Igarashi Motors .................................................................................................................................................. 104 Lupin .................................................................................................................................................................. 105 Motherson Sumi ................................................................................................................................................. 106 Sundaram Brakelinings ...................................................................................................................................... 107

Edelweiss

MANUFACTURED EXPORTS

CHARTS

CHARTS

Chart 1: Percentage change in manufacturing industry output .................................................................................. 8 Chart 2: Percentage of manufacturing in Indias GDP .............................................................................................. 9 Chart 3: Composition of Indias merchandise exports ............................................................................................. 10 Chart 4: Indias manufactured exports ..................................................................................................................... 14 Chart 5: Category-wise CAGR during FY96-FY02 ................................................................................................ 14 Chart 6: Days taken for clearing at ports ................................................................................................................ 15 Chart 7: Contribution of SEZs to total exports in select countries ........................................................................... 16 Chart 8: QS Certified plants in India ........................................................................................................................ 19 Chart 9: Risks v/s Margins of different export sales models ................................................................................... 21 Chart 10: Long term impact of different export sales models ................................................................................. 21 Chart 11: Top twenty internationally traded products by factor intensity - 1980-2000 ............................................. 25 Chart 12: Growth of world exports by product categories ....................................................................................... 28 Chart 13: United Phosphorus Revenue break up in FY03 ....................................................................................... 36 Chart 14: Bharat Forge Revenue break up in FY03 ................................................................................................ 46 Chart 15: ABB Revenue break up in CY02 ............................................................................................................ 54 Chart 16: Crompton Revenue break up in FY02 ..................................................................................................... 59 Chart 17: Cummins Revenue break up in FY02 ...................................................................................................... 64 Chart 18: Thermax Revenue break up in FY02 ....................................................................................................... 69 Chart 19: Aurobindo Revenue break up in FY02 ..................................................................................................... 78 Chart 20: IPCA Revenue break up in FY02 ............................................................................................................ 83 Chart 21: Shasun Revenue break up in FY02 .......................................................................................................... 88 Chart 22: Jubilant Organosys Revenue break up in FY03 ....................................................................................... 96 TABLES Table 1: Compensation for manufacturing workers ................................................................................................. 11 Table 2: Availability of skilled labour ........................................................................................................................ 12 Table 3: Availability of qualified engineers ............................................................................................................... 12 Table 4: Major MNCs having sourcing offices in India ........................................................................................... 17 Table 5: The role of foreign affiliates in the exports of six select economies .......................................................... 17 Table 6: Export sales model Plotting companies according to the business model followed .................................... 22 Table 7: International trade in motor vehicle parts and accessories ........................................................................ 44 Table 8: Major Auto MNCs having sourcing offices in India .................................................................................. 44 Table 9: International trade in non-electrical machinery parts and accessories ....................................................... 52 FIGURES Figure 1: Critical success factors in each category ................................................................................................. 13 Figure 2: Select MNCs outsourcing plans for India ................................................................................................ 18

Edelweiss

At a glance
MANUFACTURED EXPORTS

AT A GLANCE
All nos for FY04E (INR mn) Companies Sector Revenues Exports Exp/Rev (%) 13.6 52.8 47.5 18.8 18.8 56.7 30.6 73.2 30.2 54.5 EBIDTA (%) 10.7 17.7 31.7 10.5 13.9 22.0 17.8 19.7 11.6 24.3 PAT EPS (INR) 25.9 58.9 32.3 12.4 6.3 67.0 45.5 29.4 20.9 45.7 EV/EBIDTA (x) 6.9 4.6 5.4 3.6 6.7 2.8 3.9 3.1 2.0 2.7 EV/Sales (x) 0.7 0.8 2.0 0.4 0.9 0.6 0.7 0.6 0.2 0.7

ABB Aurobindo Bharat Forge Crompton Cummins IPCA Jubilant Shasun Thermax UPL
* CY03

Engineering Pharma Auto Components Engineering Engineering Pharma Specialty Chemicals Pharma Engineering Agro Chemicals

14,080 14,170 7,953 17,915 11,738 5,902 8,333 2,952 7,848 10,926

1,917 7,486 3,780 3,366 2,210 3,349 2,552 2,161 2,370 5,958

1,098 1,425 1,217 647 1,231 838 637 241 515 1,165

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AT A GLANCE

RoE (%) 19.4 22.0 47.6 13.8 16.7 29.0 30.2 25.5 12.6 22.5

CAGR 02-05E(%) Revenues Exports PAT 17.6 15.7 32.8 10.0 9.8 19.2 18.6 18.0 12.0 13.9 51.3 19.7 76.1 29.7 1.4 27.0 35.6 25.0 25.5 25.5 30.7 33.9 108.5 33.8 14.4 42.8 49.2 37.9 33.3 82.0

Sales Model

Price(INR)

Market Cap

P/E(x)

Reco

Sales to Parent Direct Sales/Contract Mfr Sales to OEMs Direct Sales Sales to Parent Direct Sales Direct Sales/Contract Mfr Contract Manufacturer Direct Sales Direct Sales

340 273 299 62 70 243 178 135 178 163

14,391 6,361 11,263 3,255 13,840 3,038 2,492 1,110 4,235 4,153

13.1 4.6 9.3 5.0 11.2 3.6 3.9 4.6 8.5 3.6

VALUE BUY VALUE BUY VALUE BUY VALUE BUY VALUE BUY VALUE BUY VALUE BUY VALUE BUY VALUE BUY VALUE BUY

Edelweiss

INDIAN MANUFACTURING SECTOR


MANUFACTURED EXPORTS

INDIAN MANUFACTURING SECTOR WAITING IN THE WINGS


Export growth of Indian manufacturing sector picks up
Manufacturing industries have grown at 6% in FY03 as against a 4% CAGR from FY97-FY02

The Indian manufacturing sector is showing clear signs of turning around, re-emerging from a five-year phase of a slowdown. The sector registered a 6% growth in FY03 alone as against 4% annually from FY97-FY02. We believe exports will play a significant role in driving the growth of the manufacturing sector. In FY03 alone, Indias merchandised exports surged 18% to USD 51.7 bn. The composition of Indian exports too has changed. For instance, in the past, primary products i.e natural resources that were raw materials for manufacturing products, dominated exports. The contribution of manufactured products to exports has increased from 46% in FY82 to 76% in FY02. Skill-intensive sectors will grow fast We believe that select skill-intensive manufacturing sectors like Pharmaceuticals, Engineering, Agro-Chemicals, Auto ancillary and Specialty chemicals will play a key role in driving this export-led growth. During the last three years, Pharmaceutical and Engineering industries reported a 15% and 14% CAGR in export revenues respectively, where as overall export revenues have grown at a 9% CAGR.

However, merchandised exports rose 18% to USD 51.7 bn in FY03

Skill-intensive industries like Pharma and Engineering reported 15% and 14% CAGR in export revenues respectively in the last three years

India enjoys a distinct advantage of having abundant skilled manpower. The Indian IT sector has already displayed the benefits of leveraging this advantage. India has the second largest pool of scientific talent in the world. The country adds around 0.14 mn engineers every year apart from 1 mn polytechnic diploma holders. According to The World Competitiveness Yearbook published by the International Institute for Management Development (IMD), India ranks first in the availability of qualified engineers and second in the availability of skilled manpower. Since the Pharmaceutical, Auto ancillary, Engineering and Specialty chemicals sectors predominantly employ skilled and technically competent manpower, we believe that this advantage will be one of the triggers in an environment conducive to export-led growth. Changing business environment Liberalisation has had a positive impact on the Indian manufacturing sector. Companies that operated for decades together in regulated markets could now operate in a free environment with the government acting as an enabler. The earlier mindset of seeking protection from imports was replaced by a new confidence to take on global competition. The slowdown at home acted as a catalyst in bringing about an attitudinal change of focussing on global markets. In a reversal of roles, companies across sectors that were hither to more inward looking in a protected regime have emerged major exporters after the slowdown in late nineties. The change in mindset of Indian managements is reflected in the fact that over the last five years, Indian companies rationalised work force, modernised and upgraded shopfloors, consciously imparted a focus on quality and invested in international markets for business development. All this, complemented by improved infrastructure and simplified procedures, has made exports a more attractive option for Indian companies. We believe Indian companies will leverage the overriding advantages offered by India to establish themselves as global players.

Perceived change seen in managements attitude towards exports

Edelweiss

INDIAN MANUFACTURING SECTOR WAITING IN THE WINGS

Ford India exports 30,000 cars from its Indian manufacturing facility

The new business environment has brought about vibrant changes. For instance Telco has indigenously designed the Indica car at one-fourth the cost of developed countries and recently signed an agreement with Rover of the U.K to export over 100,000 cars for the next five years. From its manufacturing base in India, Ford India manufactured 50,000 cars in CY02, of which 28,915 cars were exported, clearly indicating India as a chosen outsourcing destination. A number of large and mid-sized players emerging The phenomenal success of the Indian pharmaceutical and engineering companies in the global arena is now well recognised. For instance, the success of Ranbaxy and Dr Reddys in the global markets is quite well known and documented and their current market capitalisation also reflects this.

Numerous emerging midsized players will see maximum impact of exports on revenues and market cap

We believe that there are numerous other large-cap and mid-cap Pharma, Engineering and Auto ancillary companies that are pursuing the export-led path to growth. We have selected companies which will see maximum impact of exports on their revenues and market capitalisation going forward. Bharat Forge, a company in our universe for instance, has captured 25% of world market share of front axle beams for heavy commercial vehicles. United Phosphorus has emerged the fourth largest global player in the agro-chemical generic category. Jubilant Organosys, yet another company in our universe, is a world leader in the manufacture of a range of Specialty chemicals. Our attempt has been to pick up companies across sectors that display the capability to translate potential into performance in the global marketplaces. Evaluating export business models

Direct sales to customers as a model has long term advantages over contract manufacturing and oursourcing

We have identified and analysed different export business models of companies and their impact on long-term sustainability of revenues and profit margins. For instance, Cummins and Thermax, two companies in our universe, are expected to report 30% and 25% CAGR in export revenues respectively over FY03-FY05. Thermax has invested in marketing infrastructure and is out to win direct sales opportunities. Cummins, however, benefits from outsourcing by its parent. While both these translate into export-led growth, we believe that the Thermax model is more dynamic, offering possibilities of exponential growth and in turn is rated higher than the Cummins model. While evaluating export business models of companies, we have also taken into consideration whether the company is at an advanced stage of the export business model or whether it has just made an export foray. There are risks and rewards associated with each of these. We have considered further the export business models followed by these companies. The two sets of companies we have selected also factor in above criteria.

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INDIAN MANUFACTURING - SHIFTI Chart 1: Percentage change in


MANUFACTURED EXPORTS

INDIAN MANUFACTURING - SHIFTING FOCUS TO EXPORTS


Impact of liberalisation
A CAGR of 10% in manufacturing output, 8% in IIP and 6.7% in GDP seen during FY93-97 immediately after liberalisation

The Indian business scenario underwent a seachange following liberalisation in 1991. In the period prior to this, the Indian economy was primarily supply driven with shortage for everything from steel to scooters. From FY93 to FY97, the impact of liberalisation resulted in a buoyant 10% CAGR in manufacturing output (see Chart 1), 8% CAGR in Index of Industrial Production and 6.7% CAGR in GDP. This period was characterised by strong domestic demand. De-licensing of industries, additional investments and FDI inflows led the rapid growth of industrial production in the early nineties up to FY97.
Chart 1: Percentage change in manufacturing industry output
16 14 12 10
(%)

14.9 11.95 9.66 8.49 6.66 4.24 4.14 1.51 2.72 2.83
1998-99 1999-00 2000-01 2001-02

8 6 4 2 0
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98

Source: CMIE

A marked slowdown in the domestic market


But, a slowdown in growth from FY98 and increased capacities impacted companies....

However, from FY98 onwards, a slowdown in demand for industrial products and increased capacities led to lower revenues and pressure on realisations and margins (See Annexure II). As shown in Chart 2, the share of manufacturing in Indian GDP declined from 17.7% in FY98 to 16.8% in FY02. As per Centre for Monitoring Indian Economy (CMIE) data, Indian manufacturing industry sales grew at a 17.6% CAGR from FY90FY95 and a 13.8% CAGR from FY96-FY01. This growth too was driven primarily by the petroleum industry. Net profits of the Indian manufacturing industry grew at a 34.5% CAGR from FY90-FY95. But, this declined to 14.3% annually during FY96-FY01. Similarly, net profit margin, which improved from 1.8% in 1992 to 4.2% in 1996, slipped to 0.8% in FY00. Some sectors like Auto and Industrial machinery reported a decline in sales in FY98-FY99 and flat revenues in FY00. Slowdown engenders shift in focus

Compelling them to look at international markets for growth

Slack demand and oversupply at home motivated companies to focus on international markets. This called for structural changes requiring companies to focus on costs, enhance quality and initiate global marketing efforts. This entailed redesigning plants, rationalising workforce, automating processes, streamlining vendors network and eliminating wastages.

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Chart 2: Percentage of manufac

INDIAN MANUFACTURING - SHIFTING FOCUS TO EXPORTS

Chart 2: Percentage of manufacturing in Indias GDP


18.5 18.0 17.5 17.0
(%)

17.9

18.3 17.7 17.1 17.2 16.8

16.8 16.1 15.7 16.8

16.5 16.0 15.5 15.0 14.5 14.0


1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

Source: CSO

Manufactured product exports accelerate


Indian exports grew faster than the GDP, at an 11% CAGR during FY72-FY02

Indian exports have grown faster than the GDP in the last three decades, registering an 11% CAGR during FY72-FY02 to USD 43.7 bn. From FY93-FY02, Indian exports recorded a 9.3% growth annually compared with world export growth of 5.5%. However, Indias share in world trade is still a negligible 0.7%. Traditionally, primary products and handicrafts dominated Indian exports. But a gradual yet definite shift towards export of manufactured products is discernible since the eighties as India progressed towards industrialisation.

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2001-02

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GROWING MANUFACTURED EXPORTS Chart 3: Composition of India


MANUFACTURED EXPORTS

GROWING MANUFACTURED EXPORTS


During FY99-FY02 manufactured products grew at a 9% CAGR compared with a 1% CAGR in primary products

In FY02 manufactured products accounted for 76% of total merchandised exports. Twenty years ago this share was 46%. In the last ten years, manufactured exports have grown at a 10% CAGR as against a 6% CAGR in primary products. From FY99-FY02, the trend is strikingly in favour of manufactured products with a 9% CAGR compared with a 1% CAGR in primary products. In spite of the increasing share of manufactured products as a percentage of the export pie, the top ten products are primarily from labour-intensive categories. Going forward, we see this composition changing significantly.
Chart 3: Composition of Indias merchandise exports

45 40 35 30 25 20 15 10 5 0
1970-71 1973-74 1976-77 1979-80 1982-83 1985-86 1988-89 1991-92 1994-95 1997-98 2000-02

(USD bn)

Primary Products
Source: DGCIS

Manufactured Products

Others

Gaining prominence of skill intensive manufactured exports We firmly believe that India enjoys a strong advantage in skill-intensive products. In the last decade (FY92-FY02), Drugs and Pharmaceuticals (13% CAGR) Engineering goods (12% CAGR) and Chemicals (11%CAGR) led the growth of manufactured exports. The last three years (FY99-FY02) data of Director General of Commerce and Intelligence (DGCIS) of the government of India clearly shows acceleration of exports from these sectors. Engineering goods reported a 15% CAGR in exports and Pharmaceutical and Chemicals exports registered a 14% CAGR during this period. As per the preliminary numbers released for FY03 by the DGCIS, the engineering sector reported a 24.7% growth and basic chemicals reported an 18.2% growth in exports.

Engineering sector reported a 25% export growth in FY03

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ADVANTAGE INDIA Table 1: Compensation for manu


ADVANTAGE INDIA

ADVANTAGE INDIA
Leveraging traditional advantages
Availability of a large labour force at low cost, skilled manpower and rich natural resources have historically been positives for India

India offers a host of advantages that could directly and indirectly drive export growth of manufacturing companies. These include availability of inexpensive labour, availability of skilled manpower, low labour costs, a rich natural resources base and availability of metal-based raw materials at lower prices. India has historically had these advantages. However, in the absence of favourable business policies, these advantages remained dormant and unexploited. Following liberalisation, in the new changed business scenario, these advantages emerged as factors that could catalyse Indias export growth. In this section, we review the advantages offered by India. We attempt to position India vis--vis other emerging markets including China and identify niches in which India emerges strong (See Annexure IV - India vis--vis China). These niches, we believe will trigger export-led growth of manufacturing companies going forward. a) Availability of labour and low labour costs This advantage, an attractive feature of developing countries, is typically characterised by huge populations with a majority of them still engaged in agriculture work.

These dormant and unexploited factors are now acting as catalysts for future growth

Employee cost as a percentage of revenues is 6% in India

In India, 62% of the workforce continues to be employed in the agricultural sector. For such agricultural labourers, shifting to factory jobs would be an improvement in standard of living, a steady income job replacing a low income seasonal employment, which too is subject to the vagaries of nature. Given high unemployment and underemployment rates and low standards of living, wages in India are much lower than in developed countries. Low labour cost also works in favour of Indian manufacturers. The average hourly wages for a graduate/skilled worker in India are USD 7 as against USD 3050 in most developed countries and USD 15-40 in developing countries. Table 1 below gives a perhour comparison of wages across countries. India is closer to China and is well poised to exploit this advantage. Though India ranks low on labour productivity, wages, as a percentage of sales, are around 5-9% vis--vis 25-35% in Europe and U.S. for similar industries. Low labours costs will continue to remain a major advantage for the Indian manufacturing industry.
Table 1: Compensation for manufacturing workers (in 1999)
Country Germany USA Brazil Mexico India China Source: IMD USD per hour 22.7 19.2 6.7 2.1 0.6 0.5

Average hourly wages for Indian graduate/skilled worker are USD 7 vis-a-vis USD 30-50 in developed countries and USD 15-40 in developing countries

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Table 2: Availability of skill Table 3 : Availability of qual


MANUFACTURED EXPORTS

b) Availability of skilled manpower India has the second largest pool of scientific talent in the world. The country adds around 0.14 mn engineers every year, apart from 1 mn polytechnic diploma holders.
India ranks first in availability of engineers and second in availability of skilled labour

According to The World Competitiveness Yearbook published by the International Institute for Management Development (IMD), in availability of skilled manpower rating, Indian ranks second with 7.4 points, the first being Germany as shown in Table 2 below. However on availability of qualified engineers (see Table 3), India ranks first with 8.5 points followed by Brazil. India has 0.8 mn engineering graduates who are in the working age category. Importantly, the working age group will continue to be favourable to India vis--vis other countries.
Table 2: Availability of skilled labour (in 2000)
Country Germany India USA Brazil Mexico China
Source: IMD

Survey results 1=low, 10=high


Score 7.5 7.4 7.2 6.4 6.3 4.8

Table 3 : Availability of qualified engineers (in 2000)


Country India Brazil USA Mexico Germany China
Source: IMD

Survey results 1=low, 10=high


Score 8.5 7.5 7.4 6.6 6.6 4.2

Lower cost of skilled labour reduces employee expense as a percentage of revenues, making Indian companies cost competitive globally

The advantage of availability of skilled labour at lower costs has a multiple impact on a firms cost structure which comprise capital, product design and production costs. Also a significant aspect is that expenditure on design, including product design and related activities would be lower. Manufacturing today involves a significant amount of designing work that uses the latest software programs. These programs require skilled design engineers. Companies like Bharat Forge, Telco, BHEL and L&T have in-house design centres with capabilities on par with global companies. The result is that employee expenses as a percentage of revenues would be lower compared with other countries. This gives Indian corporates a strong edge when pitching in global markets.

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Figure 1: Critical success fac


ADVANTAGE INDIA

c) Availability of metal-based raw materials at lower prices


Using Indias rich iron ore and aluminium resources Tisco and Hindalco have emerged globally competitive

India is endowed with rich natural resources, a major plus for a number of metal-based industries. Leveraging this advantage, Tisco and Hindalco have emerged the lowest cost producers of steel and aluminium respectively in the new business scenario. UNCTAD classification To identify Indias competitive advantages in various categories of manufactured products, we have used the UNCTAD classification of products as a basis. (See Annexure I and Annexure III). UNCTAD has classified products according to industrial upgrading based on factor intensity relating to resources, skill and technology. Thus all products have been classified under five categories. 1) Non-fuel primary products (Vegetables and Fruits, Minerals and Tobacco)

Our analysis uses the UNCTAD classification of products as a base

2) Labour and resource-intensive products (Textiles, Leather, Toys and Clothing) 3) Low skill technology-intensive products (Iron and Steel, Metal products) 4) Medium skill and technology-intensive products (Motor vehicles, Electrical and non Electrical Machinery and Plastic products) 5) High-skill and technology-intensive products (Computers, Communication equipment, Chemicals Pharmaceutical and Scientific instruments) Factors that determine success in these categories We have analysed critical factors required for being successful in each of these categories in the Figure 1. We have considered categories 2,3, 4 and 5 from the above since they are relevant to our study.
Figure 1: Critical success factors in each category Labour intensive Availability of labour (uneducated, labour with no technical training) Productivity of Labour Favourable Labour laws Low tech-intensive Availability of medium skill labour (Diploma holders) Economies of scale Long product life cycles

Medium- tech intensive Availability of skilled labour (Engineers, Chemists etc.) Customised production Production in batch quantities

High-tech intensive Availability of highly skilled work force (Scientists) Environment for innovation (patent laws, risk capital, rewards for innovation) High R&D investment Large domestic market (ability to identify trends)

Source: Edelweiss

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Chart 4: Indias manufactured Chart 5: Category-wise CAGR du


MANUFACTURED EXPORTS

India emerges strong in the skill intensive category Considering the above factors and India-specific advantages, we believe that India has an edge in medium and high skill-intensive products. Our discussions with Indian managements and industry experts also corroborate our view that India has a competitive advantage in manufactured products which require:
India has a competitive advantage in medium and high skill- intensive products

- Engineering and design capabilities - Low volume not involving mass production - Skilled manpower We have identified the following sectors which fit into the above categories, considering their competitive global advantages. We believe these industries will report faster export growth rates in the coming years and our effort has been directed towards identifying companies in these sectors with maximum growth potential. The industries identified are: 1. Agro-chemicals 2. Auto components 3. Engineering 4. Pharmaceuticals 5. Specialty chemicals Recent performance validates this We have mapped Indian manufactured exports as per UNCTAD product classification using the DGCIS data on commodity-wise exports from India. DGCIS categorises total exports into 100 products. Of these 70 products are under the manufactured exports category. We have mapped data for these products from FY96-FY02.

High skill-intensive product exports grew at a 13% CAGR during FY96-FY02

As can be seen from Chart 4 below, in India labour and resource-intensive industries accounted for 60% of total manufactured exports of USD 34.5 bn in FY02. The growth rates clearly indicate the shape of things to come. High skill and technology-intensive products have grown at a 13% CAGR during the last six years primarily led by pharmaceuticals and medical equipment industries. Compared with this, labour-intensive products have grown at a 5% CAGR during the same period. Pharmaceuticals and medical instruments are part of high skill-intensive products while electrical and non-electrical machinery like diesel engines and auto components form part of medium skill-intensive products.
Chart 4: Indias manufactured exports
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

Chart 5: Category-wise CAGR during FY96-02


14 12 10

USD Mn

(%)

8 6 4 2 0
Laborintensive and resource intesive Low skilltechnologycapital intensive Medium skill-technology, capital intensive High skilltechnology

Labor-intensive and resource intensive Medium skill-technology, capital intensive

Low skill-technology-capital intensive High skill-technology

Source: DGCIS & Edelweiss

Source: DGCIS & Edelweiss

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The Time is Now Chart 6: Days taken for clear


THE TIME IS NOW

THE TIME IS NOW


New business enablers are acting as triggers of growth

In the earlier sections, we have listed the various India-specific advantages and factors that engendered a conducive business climate. We had also stated that the single most important factor that we believe will drive export-led growth of Indian manufacturing companies is the change in the mindset of the Indian management. We wish to argue that a new business environment has emerged in which the government is more a facilitator than an impediment to business. There have been other business enablers as well. We believe this has had a tremendous positive impact on Indian companies. We have categorised these business enablers into Industry/economy level enablers and company level enablers. Going forward, these enablers will catalyse export-led growth for manufacturing companies. I) Economy/Industry level enablers a) Improving regulatory issues and policies: Today, the governments role in export promotion is more of a facilitator than a regulator. The governments efforts to boost exports are directed at i) Simplifying procedures to eliminate administrative and legal hassles ii) Announcing policies and incentives aimed at increasing exports. i) Simplification of procedures: Over the last five years, the government has simplified procedures for exports tremendously. Our interactions with industry indicate that today, enterprises spend around two days clearing their consignments with customs officials compared with around fourteen days in CY96 and seven days in CY99 as shown in Chart 6 below. In some cases goods are cleared in less than 24 hours from the time they arrive at the ports. All 32 offices of the Director General of Foreign Trade (DGFT ), the nodal agency for foreign trade, have been computerised and exporters can transact with DGFT online. In the new EXIM policy for FY03-FY04, the government has announced 50% lower transaction fees for applications filed online. Customs officials are available at ports at any time of the day as against past practice of working to a clock. ii) Encouraging policies: The Government has been improvising its export policies in the post-liberalisation era. Some measures include setting up of new Special Economic Zones (SEZs), launching special export promotion programmes, conducting market studies and identifying special products for export promotion. Up to 100% foreign equity is permitted without requirement of an approval in construction and maintenance of ports and harbours and in projects providing support services to water transport, such as operation and maintenance of ports and loading and discharging of vehicles. These initiatives are helping in reducing infrastructure bottlenecks.
Chart 6: Days taken for clearing exports at ports
16 14
No. of days

Governments role as an enabler is increasing

Goods are cleared at ports within 24 hours against 14 days earlier

Companies can transact online with the DGFT

SEZs along the lines of China are emerging

12 10 8 6 4 2 0 1996 1999 Days for clearance 2002

Source: Edelweiss

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Chart 7: Contribution of SEZs


MANUFACTURED EXPORTS

Significant improvements seen in Road and Telecom infrastructure

b) Improved infrastructure: During the last five years, India has made significant progress in improving infrastructure. This is noticeable in port capacities and in telecom and road infrastructure. Average ship turnaround time at major ports has reduced from 7.5 days in CY97 to 3.4 days in CY02. In the telecom sector, a near-monopoly scenario characterised by years of waiting to secure a telephone connection, old technology and very low penetration levels are things of the past. The changes have been dramatic. In the last seven years, the country has moved from this (penetration levels of two per hundred) to a scenario of multiple operators competing vigorously, (80% drop in domestic long distance tariffs in the last three years), state-of-the-art technologies in telecom, fibre optic network connecting all major towns and penetration levels reaching 4.3 per hundred. The road infrastructure has also seen improvement with the commissioning of expressways (Mumbai-Pune, Bangalore-Hosur). Implementation of the Golden Quadrilateral project and national highway projects are well underway. c) Emergence of SEZs and EOUs: The effectiveness of SEZs in generating export production is already well established by the performance of such Zones worldwide (see Chart 7). Exports in the year 2000 from these Zones were USD 850 bn, representing 15% of the total world exports. These Zones are also increasingly being perceived as a major source of attracting FDI. At present there are 2700 SEZ/EOU units in India. In FY02 they contributed INR 270 bn in exports revenues, a growth of 15% YoY. The units also provide employment to 700,000 people. The EOUs/SEZ units cover major industrial sectors like textiles, garments and yarn, food and agro products, electronics and software, chemicals, engineering, minerals, and granites. The Export Promotion Council (EPC), with the support of EOUs/SEZs, has an ambitious road map to achieve and contribute 25% of the national exports through manufacturing exports by FY08. In the next two years this segment is looking at achieving USD10 bn worth of exports.
Chart 7: Contribution of SEZs to total exports in select countries

EPC targets a 25% contribution to national exports through SEZs and EOUs

90 80 70 60 50 40 30 20 10 0 1992 1993 1994 China 1995 1996 1997 1998 Indian Philippines Dominican Republic

Source: KPMG

Interest rates have reduced considerably in recent times, helping Indian companies

d) Lower interest rates: The steady decline of interest rates has led to lower cost of capital and companies becoming more competitive in global markets. Over the last four years, India has seen a decline in real and nominal interest rates. Corporates can now borrow at 8-9% compared with 14-15% four years ago. This is mitigating the disadvantages the Indian corporates faced while competing internationally.

18

(%)

Edelweiss

Table 5 The role of foreign Table 4::Major MNCs having sou Table 5 : The role of foreign
THE TIME IS NOW

e) Increased outsourcing by MNCs: Multinational corporations (MNCs) have played a major role in globalisation and exports of developing countries. The barriers to international transactions are falling, spurred by liberalisation, technological innovations and speedier transportation. This is intensifying competition urging MNCs to internationalise production systems. Thus, different activities can be performed in locations that offer the best conditions in terms of costs, resources, logistics and market access. The MNCs mentioned in Table 4 below have established sourcing offices in India with an aim to increase sourcing and develop the vendor market.
Table 4: Major MNCs having sourcing offices in India
Volvo General Motors GE Hyundai Daimler Chrysler
Source: Edelweiss

Ford Delphi Cummins Toyota

Favourable policies and improving infrastruture luring MNCs to set base in India for catering to global requirements

Multinationals have played a major role in contributing to the export growth of various countries in which they have established a presence (see Table 5). In China, the share of foreign affiliates in exports rose from 17% in CY91 to 50% in CY01. The affiliates of five multinational auto manufacturers contributed USD 27 bn to total exports of Mexico. In India, until late nineties, the role of MNCs was very limited. Favourable policies and improving infrastructure have attracted many MNCs to set up and expand operations in India to cater to global requirements. In CY00, MNCs accounted for 5% of Indias total exports.
Table 5 : The role of foreign affiliates in the exports of six select economies
Economy (Year) Total exports CY00 (USD bn) 279.6 Share of foreign affiliates in total exports (%) 50.0 Top three MNC exporters in CY00 IBM Samsung Electronics Nokia Intel Dole Food Del Monte Volkswagen IBM Philips Electronics Intel (CY98) Dell Computer (CY98) Microsoft (CY98) IBM Daimler Chrysler General Motors Amkor Technology Nokia Chip Pak Exports CY00 (USD bn) 1.5 1.5 1.1 1.7 0.2 0.1 3.2 2.2 2 4.8 4.3 2.4 9.6 6.9 6.7 4.7 2.4 2.4

China (CY01) Costa Rica (CY00) Hungary (CY99) Ireland (CY98) Mexico (CY00) Republic of Korea (CY99) Source: UNCTAD

6.7

50.0

25.5

80.0

52.5

90.0

180.4

31.0

150.4

15.0

Edelweiss

19

Figure 2: Select MNCs outsour


MANUFACTURED EXPORTS

GE takes the lead in outsourcing to India....

GE is among the foremost to declare intentions to use India as a manufacturing base for medical equipment and motors. In CY02 General Electric (GE) exported INR 10 bn worth medical equipment and is expected to scale this up to INR 25 bn by CY05. In the Fig.2 below, we present examples of MNCs who have displayed strong intentions of outsourcing from India. Over the last five years numerous MNCs have opened dedicated offices called international purchase office (IPO) or global procurement divisions (GPD) in India to identify and expand their sourcing operations. Figure 2: Select MNCs outsourcing plans for India


While numerous others are following suit

Unilever sources around INR 8 bn worth FMCG products from HLL, which is expected to touch INR 50 bn over the next three-four years. Ford India exports to Brazil, Mexico and South Africa. In CY02, it exported 28,915 passenger cars, while it sells only half of that in India. Whirlpool plans to increase contribution of exports in total revenues from present 12% to 25% in the next three years. Clariant India is amongst the three global sourcing bases of the parent company. Toyota is sourcing propeller shaft and rear and front axles. Soon it will be sourcing transmissions for seven SUV plants located worldwide Techumseh of U.S. has invested USD 100 mn in India since CY97 and is expanding capacities to increase its export business from current 30% to 50-70% in the coming years. Sourcing from Indian suppliers by Daimler Chrysler has increased from Euro 6 mn in CY98 to Euro 63 mn in CY02.

Source: Industry

II) Company level enablers


Thrust on exports entails focus on quality and structural changes

a) Focus on exports: Competing in the global marketplace is a totally different ballgame. Indian managements that hitherto thrived in a protected regime had to take on the challenges of international competition. Focus on export markets called for companies making structural changes. Companies needed to improve their cost structure, enhance quality and establish a dynamic marketing infrastructure. It also called for redesigning plants, rationalising workforce, automating processes and streamlining vendors network. To supplement the above efforts, companies also upgraded systems and sought accreditions like QS9000 and QS 14000. Chart 8 captures this scenario, showing how the number of accredited plants increased from virtually zero in CY91 to 8000 in CY99 in the postliberalisation phase. During the same period, companies made vigorous efforts to explore and improve their visibility in international markets. This is evident from the foreign travel expenses of BSE 500 companies for the manufacturing sector. This expense reported an 11% CAGR during FY99-FY02.
Edelweiss

Companies spending more on increasing visibility and developing and nurturing international markets

20

Chart 8: QS certified plants i


THE TIME IS NOW

Chart 8: QS certified plants in India


2,000 8,000 6,000 4,000 2,000 0

Incremental plants

1,500 1,000 500 0

2001E

Incremental

Total in India

Source: ISO and Edelweiss estimates

Indian companies are establishing international marketing facilities

b) Strategic initiatives: Until a few decades ago, India was perceived as the land of snakes and elephants. Though this perception has undergone a dramatic change since the advent of liberalisation, we believe that foreign players still harbour reservations about dealing with India. We have said elsewhere in the Report that the Indian software industry has established a comfort level of dealing with a number of Fortune 500 companies. This is a major plus. But the process of establishing global presence is time-consuming. We believe that the entrepreneurship displayed and strategies deployed by Indian corporates will play a major role in acceleration of exports. Some of these strategies are outlined below. i) Acquiring front-end companies: Indian companies face a major challenge of selling themselves, especially in high skill-intensive products. The lead times for initiating discussions and ramping up are high. To counter this many firms like Ranbaxy, Dr Reddys and Bharat Forge have acquired local marketing and distribution companies in their key markets of U.S. and Europe. Some companies like Sun Pharma have acquired firms with manufacturing facilities, where final packaging is being done. ii) Investing in a marketing and distribution network: This involves sustained investment in sales and marketing and distribution network in the initial years though benefits will accrue over a period of time. Companies like Crompton Greaves have invested heavily for establishing their presence globally. iii) Leveraging existing clientele: A well-reputed client base can be leveraged for increasing customers. For instance, Bharat Forge, with clients like Daimler Chrysler, Volvo and Cummins, will find it much easier to attract new clients in international markets. Indian software companies offer a very good example of leveraging existing clientele to attract new clients. A fine example would be that of Satyam leveraging its relationship with GE and Dun & Bradstreet to become a leading software services player.

This entails acquiring front-end companies.....

investing heavily in a sales and distribution network

Edelweiss

2002E

1992

1993

1994

1995

1996

1997

1998

1999

2000

Total No. of plants

21

Evaluation of Export Sales Mod


MANUFACTURED EXPORTS

EVALUATION OF EXPORT SALES MODELS


In this Report, our attempt has been to identify companies with potential for export-led growth. We believe companies in Pharmaceuticals, Engineering, Auto Ancillaries and Specialty Chemicals are likely to show robust overall growth in export revenues going forward. But we believe profit margins over the long term would also depend on the export sales model of the company.
Sales strategy followed by companies will be crucial in determining revenue sustainability

We define an export sales model as a strategy used by a company to reach its clients. We have identified different export sales models followed by companies to achieve export growth and have analysed their impact on long-term sustainability of revenues and profit margins. i) Direct Sales Model: This comprises: 1) 2) Sales to retail and wholesale customers Original Equipment Manufacturers (OEMs) This model entails establishment of a global distribution network to reach end customers. ii) Outsourcing Model: Outsourcing is defined as the contracting of one or more of a companys businesses/products to an external firm. This is sub-divided into three categories: 1) Supplying to the parent 2) Outsourcing for a third party 3) Contract manufacturing

High initial marketing expenses in case of a direct sales model

We attempt to show how the export sales model of the company will drive margins and long-term sustainability of revenues. For instance, we believe that companies following the Direct Sales Model will see high sustainability of revenues and profit margins in the long run. The risk here is in investing in companies which are at the early stage of adopting the direct sales model. During the initial phase of two to three years, overheads will be high, impacting profits. On the other hand, Outsourcing by the parent will show fast growth in the short term, with least effort (no S G & A expenses). However, in the long term, the margins could be under pressure considering the parents interest in maintaining its profit margins. We believe contract manufacturing is a good model for a company as an entry strategy and as a means of achieving faster growth in the initial period. It also offers high revenue sustainability. It is a good foot-in-the-door strategy offering sustained revenues since a contract usually stretches over five years. The underlying danger is that, as in case of sales to parent mode the buyers here too would be well aware of the cost structure and would constantly work towards cutting prices. Chart: 9 shows how each business model is positioned in terms of risks and margins across different categories and sub categories. Chart 10 shows the long term impact of these sales models on sustainability of revenues and profits of companies.

22

Edelweiss

Chart 9: Risk vs Margins of di Chart 10: Long term impact of


EVALUATION OF EXPORT SALES MODELS

Chart 9: Risk vs Margins of different export sales models


High DS

Risks higher, but margins higher too in case of a direct sales model

OEM

Risk

TP

Parent Low Low


Source: Edelweiss

Cont

Margins

High

Chart 10: Long term impact of different export sales models

Sustainability of Revenues

Sales to parent model offers high revenue sustainability but low margins

High

Parent DS TP

Cont OEM

Returns low in contract manufacturing but a good foot-in-the-door policy

Low Low Sustainability of Earnings High

Source: Edelweiss Explanation for terms used in the charts above Parent Cont DS TP OEM : : : : : Exports to parent Contract manufacturing Direct Sales Third party manufacturing Original Equipment Manufacturers

Edelweiss

23

Table 6: Export sales model fo


MANUFACTURED EXPORTS

Companies covered Our objective is to identify companies that are likely to benefit from export growth and see maximum market cap expansion. Our focus has been on the following industries: a) Agro-chemicals b) Auto components c) Engineering d) Pharma e) Specialty chemicals We have identified companies from the above industries considering factors such as export potential, the export phase in which company is at present, the degree to which current market price reflects potential from export business and share of export revenues to total revenues and size. Based on these we have categorised companies likely to benefit from exports into three categories. 1. Large market cap companies, where current market cap factors in the companys international presence. This category includes companies who will report faster export growth but this will not have a significant impact on their revenues. 2. Companies that will see a major impact on market capitalisation due to increased exports. In most cases, these companies have just entered a high growth phase. This is our primary focus area of this report. 3. Companies that are at an early stage of initiative in exports and small cap companies having good potential going forward. We have presented these companies in a separate section under the category Emerging Exports Stories. Thus, we have not considered in this Report large corporations like L&T, BHEL or HLL who are aiming at aggressive export growth since we believe that overall contribution of exports to their revenues will be insignificant. We have also not covered companies like Ranbaxy and Dr Reddys whose export forays are largely factored in to current market price.
Table 6: Export sales model followed by companies
Direct Sales Direct Agro. Chem Auto Comp. Engineering UPL Sund. Brake CG Elgi Thermax IPCA, Lupin, Aurobindo Jubilant Camlin, Hind. Inks Bharat Forge Igarashi Cummins ABB Motherson Bharat Forge OEM Parent Outsourcing Contract Third Party Manufacturing Outsourcing

ABB

Pharma

Shasun

Spl. Chem

24

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Concerns and Risks


CONCERNS AND RISKS

CONCERNS AND RISKS


Delays in closing existing businesses
Initiating outsourcing measures or relocating manufacturing bases are time-consuming processes

The business Indian firms will be getting in the coming years will be increasingly from replacing existing manufacturers than from additional or new demand. The present requirements of these firms are being met by a) in-house manufacturing facilities and b) outsourcing from other firms in the same region. While a slowdown in demand and need to cut costs are pushing companies to look for low cost suppliers, it entails closing down in-house manufacturing facilities or reducing offtake from existing suppliers. Both the decisions are sensitive and involve issues of laying off employee and relationships with suppliers. As a result, though there is a compelling need for sourcing their requirements from countries like India, implementing the measures to outsource or relocate manufacturing bases could take time. Anti-dumping duties and non tariff barriers

Indian companies could encounter anti-dumping duties and non-tariff barriers

In the nineties most developed countries saw growth and economic expansion. But in the last two years, growth rates have slowed considerably resulting in recessionary trends. In this scenario a foreign entity taking away business from local supplier is a sensitive issue. Apart from anti-dumping cases, there will be many non-tariff barriers that Indian companies will encounter. For instance, to sell their products in the U.S., auto manufacturers will have to get registered with local authorities in the respective cities, which is a time-consuming process. Rigid labour laws and low labour productivity

Rigid Indian labour laws a dampener

Archaic labour laws and low productivity levels are concerns. We believe countries like China have advantage over India in labour intensive products. Foreign companies who believe in paring payrolls to remain cost competitive view the rigid Indian labour laws as a major impediment. Power, infrastructure and regulatory problems

Infrastructure needs vigorous changes for companies to be in the reckoning

Apart from high tariffs, Indian industry is dogged by power shortages and poor quality of power. India continues to have 14% peak power deficit. Though road and port infrastructure improved considerably in the recent past, we believe we have a long way to go to match standards of developing countries, especially our East Asian neighbours. China

China has clear advantages in labour-intensive categories

China has clear advantage in products, which are either labour intensive or scale intensive. Judged from todays point of view, China does look as though it could out-compete other economies in the manufacturing of almost anything labour-intensive. This is substantiated by the fact that 70% of Chinas exports today are of garments, toys, shoes and furniture. In Annexure IV, we have attempted to present a head-on of India vis-a-vis China. As reiterated in this Report in earlier sections, our analysis clearly points out that India has a distinct advantage in skill-intensive areas.

Edelweiss

25

ANNEXURE I
MANUFACTURED EXPORTS

ANNEXURE I
What is manufacturing?
Manufacturing is defined as a process that combines machinery, tools and manual labour to bring material closer to a final state. It consists of a set of processes, materials, and systems (including people) that transforms a limited range of materials into products of increased value. Manufactured products can be classified in numerous ways. For the purpose of our study in this Report, we have used UNCTADs Standard International Trade Classification (SITC). The SITC groups all products in three categories. a) Primary products consisting of agricultural products, mining products, fuels and non-ferrous metals. b) Manufactured products - This segment has seven sub segments: 1) 2) 3) 4) 5) 6) 7) Iron and Steel Chemicals Other Semi-Manufactures Machinery and Transport equipment Textiles Clothing Other Consumer Goods

c) Other products - consists of commodities and transactions not classified elsewhere.

UNCTADS CLASSIFICATION OF PRODUCTS


UNCTAD has classified products according to industrial upgrading based on factor intensity relating to resources, skill and technology. Thus all products have been classified under five categories. 1) 2) 3) 4) Non-fuel primary products Low skill and technology-intensive products Medium skill and technology-intensive products High-skill and technology intensive products

Relevance of UNCTAD classification to our study Since our study is focused on manufactured products, we have considered the last four categories of UNCTADs classification in this Report. In Chart 11 we attempt to show the top products in each category, their market share in international trade and their growth rates in the last twenty years.

26

Edelweiss

Chart 11 Top twenty intern


ANNEXURE I

Chart 11 Top twenty internationally traded products by factor intensity - 19802000


Share in world non-fuel exports, 2000 Average annual export value growth, 1980 2000 Computers & office equip. Comm. equip. & semicond. Chemical and Pharm. products Aircraft Scientific instruments El. machinery excl. semicond. Rubber and plastic products Road motor vehicles Non electrical machinery Clothing Wood and paper products Toy and sporting goods Leather Non metallic mineral products Textiles Footwear Sanitary and Plumbing equipment Simple transport equipment Fabricated mental products Iron & Steel Ships and Boats Misc. edible products Beverages Fish Tobacco Crude animal & vegetable mat. Processed animal and veg oil, etc Vegetables and fruits Non-ferrous metals Meat Fixed vegetable oils and fats Cork and wood Dairy products Feeding stuff for animals Pulp and waste paper Metalliferous ores Live animals Sugar Tropical beverages & spices Oil-seeds Cereals Crude fertilizers and minerals Textile fibres Hides and skins Crude rubber Animal oils and fats 15 10 (%) 5 0 5 10 (%) 15 20

Non-fuel primary commodities

High technology-intensive manufactures

Medium technology-intensive manufactures

Labour- and resource-intensive manufactures

Low technology-intensive manufactures

Source: UNCTAD

Edelweiss

27

ANNEXURE II
MANUFACTURED EXPORTS

ANNEXURE II
The Indian manufacturing sector - A perspective
The share of manufacturing in Indian GDP in FY02 was 16.8%. This share has reduced from 17.7% in FY98 primarily due to faster growth of the services sector. Significant signs of a turnaround however seem to be emerging, with the manufacturing sector posting 6% growth in FY03. According to the Annual Survey of Industries, conducted by the government of India, at the end of FY00, Indian manufacturing sector comprised of 131,558 factories, invested INR 5,666 bn and reported INR 8,979 bn in revenues. According to the Economic Census, which is the most comprehensive study on enterprises, including the unorganised sector, there were 65 mn people employed in enterprises at end of FY98. The manufacturing sector plays a significant role in productive use of labour and transition of agricultural workforce to manufacturing workforce. The sector employs only 14% of the total workforce in India. Agricultural sector accounts for 62% and services sector for 24%. According to CMIE, which maintains financials of over 5,000 corporates, Indian manufacturing industry sales grew at a 17.6% CAGR in the first half of the nineties and 13.8% CAGR in the second half. This growth too was primarily driven by petroleum industry. Aggregate revenues of these companies were INR 8,882 bn in FY01.

28

Edelweiss

Annexure III
ANNEXURE III

ANNEXURE III
Trends in global trade
In the last twenty years, the value of world merchandise exports has grown at an 8% CAGR compared with less than 6% CAGR in global output. In FY02, international trade in merchandised goods was at USD 6.1 trillion. Of these manufactured goods accounted for 75% at USD 4.6 trillion.In the changing international trade scenario, some products have registered much higher growth than others for a number of reasons. It is easy to achieve export growth and gain market shares through focus on these products. Growing share of developing countries The share of developed countries to total world exports was 64.1% in CY01, a decline from 71.5% in CY90. The steady growth in world trade has been attributed to a) Increasing integration of national economies b) Deepening of international division of labour c) International production networks. Since the early eighties, most developing countries have rapidly liberalised trade and are working towards increasing Foreign Direct Investment (FDI). This implies openness to international market forces, thus altering the pace and pattern of international trade of developing countries. These countries currently account for one third of world merchandise trade. Manufactured products account for 70% of developing countries exports. The increased mobility of capital has led to international production networks where production chains can be split up and located in different countries For example, U.S. based pharmaceutical majors source incipient and other basic chemicals from China, which are then transported to India. The end product i.e. the bulk drug is then sourced from India. The final formulation is manufactured in the U.S. This spread of production sharing networks is also facilitated by reduced transport and communications costs and falling trade and regulatory barriers. Products that have participated maximum in international production sharing arrangements during last two decades are categorised in three distinct groups: a) Components and parts for electrical and electronic goods b) Labour intensive products like clothing c) Goods with high R&D content . Shifting manufacturing bases to low cost countries In the U.S, the number of jobs in manufacturing at present is same as it was CY91. During the same period, the U.S. economy grew at a 4% CAGR. The average U.S. manufacturing worker is paid USD14.35 per hour. Comparative wages for workers in India and China are USD 0.6. In developed countries, standards of living are much higher compared with developing countries. This along with limited populations and low unemployment rates is putting pressure on availability of unskilled or factory labour. In the U.S., employment growth

Edelweiss

29

Chart 12: Growth of world expo


MANUFACTURED EXPORTS

has been primarily led by the services sector. In the first nine months of 2002 alone, the manufacturing industry in U.S. lost 332,000 jobs while the services sector added 506,000 jobs. Non-availability of workforce, high wages and higher overheads are forcing companies to shift manufacturing bases to developing countries like China and India.
Chart 12: Growth of world exports by product category (Index numbers, 1980 = 100)
650 550 450 350 250 150 50

All products Labor- and resource-intensive manufactures Medium technology-intensive manufactures

Source: UNCTAD

Fast growing trade in skill-intensive products As can be seen from Chart 12 above, the difference in growth rates of world exports in these five product categories during FY80-FY98 is dramatic. The high skill and technologyintensive products category reported the strongest growth with a five-fold increase in exports during this period. Significantly, developing countries reported stronger growth in high skill and technology-intensive products with a 14 times increase in exports during this period. This category now accounts for the highest share in world non-fuel exports category.

30

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Non-fuel primary commodities Low technology-intensive manufactures High technology-intensive manufactures

Edelweiss

ANNEXURE IV
ANNEXURE IV

ANNEXURE IV
China vis--vis India
We have argued in this Report that Indian companies in select industrial sectors will leverage the India advantage and report exponential growth. We have also enumerated how export growth will come from direct sales, outsourcing and contract manufacturing. Given a number of similarities, it is inevitable that parallels are drawn between India and China. In this Annexure, we list factors that give China its pre-eminent status. We go on to compare India with China and show that Indias core competence is in skill intensive sectors. China gains pre-eminence in exports China is amongst the top five players for eight out of the 20 dynamic products in world trade. China has emerged as an outsourcing destination and manufacturing base for the world in several products and has captured a large share of world trade. Manufactured exports from China have registered a 16% CAGR in the last ten years to USD 280 bn in FY01. Today China accounts for 29% of world trade in bicycles, 28% in toys, 25% in footwear, 20% in readymade garments and 14% in electric power machinery. In contrast Indias total manufactured exports were USD 34 bn, of which USD 7.4 bn are from gems and jewellery business. The only other product categories where India has a noticeable share are readymade garments (3.8% market share), bicycles (2.15% market share) and pharmaceuticals (2% market share). A new trend is emerging We believe that China will continue to enjoy leadership in labour-intensive and mass production categories. In these categories, Indian companies will not be able to compete with China. Instead, as seen in case of our basket of companies, Indian companies will increasingly use China as an outsourcing or contract manufacturing base, perform the value addition in India and export to a third country. As current trends indicate, at one level, the Indian manufacturing sector is identifying opportunities to win a slice of the burgeoning Chinese market. At another, it is leveraging China as a source for components and finished goods to cut costs for its own products and stay competitive at home and internationally. Some of the companies like Aurobindo have already begun the process. In a new emerging trend, companies like Bharat Forge and Tisco have started exporting to China. Bajaj Electricals stopped manufacturing table, pedestal and wall fans and started importing these from China. Thus, we believe, in the new scenario, with a changed mindset, crossborder trade between India and China is showing a positive trend. Factors that give China its overriding advantage China has a clear advantage in products, which are either labour-intensive or scale- intensive. About 70% of Chinas exports today are of garments, toys, shoes, furniture and other such labour intensive products. We believe, it would be difficult for India to match Chinese labour productivity in the medium term.

Edelweiss

31

MANUFACTURED EXPORTS

The Chinese success has mainly been due to the following factors: a) FDI China received USD 336 bn FDI inflows in the last ten years. Exports of multinationals now account for 49% of total Chinese exports of USD 280 bn. This was only 4% in CY91. Comparitively, India has attracted a cumulative FDI of USD 38 bn during the same period. b) SEZs: Over the last twenty years, China has created over 500 special economic zones in the country. All these zones provide several benefits like quick approvals, ready office and plant infrastructure, flexible labour policies, attractive financial incentives and ready to access domestic market. These SEZs have been instrumental in the growth of Chinese manufacturing industry. In FY01, these SEZs accounted for 75% of total FDI inflows into the country. The Indian government is working on setting up SEZs along these lines. c) Manufacturing employment: The employment by agriculture in China reduced from 68% in CY81 to 54% in CY99. This has played a major role in improving purchasing power of people, apart from increasing availability of labour for manufacturing industry. In India however, agricultural employment has fallen from 69% to 62% only during this period. China has achieved a 12% annual labour productivity growth during the last ten years, whereas during the same period productivity growth in Indian manufacturing was 2.2%. d) Lower duties and taxes: Average import duty in China is 17% compared with 24% in India. In indirect taxes, China has a flat 17% value added tax, whereas in India these taxes account for 25-30% of retail prices. This leads to higher raw material prices and products being expensive overall.

32

Edelweiss

industries

INDUSTRIES AND COMPANIES

AGRO CHEMICAL INDUSTRY

AGRO CHEMICALS

AGRO CHEMICAL INDUSTRY


Global generics a massive opportunity
An INR 45 bn industry Agro chemicals is an INR 45 bn industry in India. Insecticides account for 75% of the market, Fungicides 14% and Herbicides 9%. In terms of chemical compounds, Synthetic Pyretheroids account for 50%, Organophosphates 16%, Organochlorines 19% and Carbonates 35%. Exports from India are around INR 10 bn. The Indian market is the thirteenth largest in the world with a 2.5% share. In the domestic market, the industrys fortunes depend on the monsoons with most consumption happening during the Kharif (September-March) period. The composition of the industry indicates that it is still largely unorganised. There are 80 organised players as against 500 unorganised players in the segment. Major Indian players are United Phosphorus (INR 10 bn), Rallis (INR 10 bn) and Excel industries (INR 4 bn). Multinational companies having a major presence in India are Bayer (INR 6 bn), Syngenta (INR 4 bn) and Monsanto (INR 3 bn). A USD 30 bn global market The global agro chemicals market is USD 32 bn in size. It has grown at a 2-3% CAGR in the last five years. Of this, the generic opportunity is approximately USD 24 bn. Globally, share of Herbicides is the highest (48%), followed by Insecticides (29%), Fungicides (17%) and others. Key markets for agro-chemicals are North America (30% share), Western Europe (22%), Asia Pacific (25%) and Latin America (16%). In the last three to four years sales growth of these markets have been depressed due to the entry of generic products and slow pace of new introductions. The global market is highly consolidated with the top ten companies commanding a 70% marketshare. In North America and Europe, the markets are highly regulated. Players here have to comply with stringent environmental safety tests. It takes approximately 12-18 months for generic companies to get approvals for their products due to rigorous regulatory requirements. Leading global players are Bayer Crop Science (USD 6 bn), Syngenta (USD 5 bn), BASF (USD 3 bn) and Monsanto (USD 3 bn). Key growth drivers Key growth drivers for the industry are a) Increased domestic consumption b) Global opportunity.

Edelweiss

35

MANUFACTURED EXPORTS

I. Increased domestic consumption. In India, pesticides are used for 36% of the area under cultivation. Further, this is confined to a few crops and a few states. The farming industry in India is getting corporatised gradually. Growth of the food processing industry and entry of corporates into commercial agriculture are expected to provide the necessary fillip to the sector. II. Attractive export opportunity Of the USD 30 bn, global industry, generics accounts for 80%. For competitive Indian companies, this is a vast opportunity. Companies like United Phosphorus and Rallis have just begun to enter the export markets. Indian companies enjoy cost advantages due to high level of integration in operations and low labour costs. An added attraction is the absence of intense competition in the generic category where costs of registrations are prohibitive and act as an entry barrier. Indias share in the global pie is less than 1%. We expect companies that have already ventured into exports to show over 30% CAGR in the next three to four years. Key success factors Key success factors for agro chemical companies intending to tap export opportunities are: Integrated manufacturing facilities Active product pipeline for export markets Plants and facilities that meet global environmental norms Availability of skilled R&D people with experience in global companies

Outlook Indian agro-chemical manufacturers have invested in building integrated facilities, lowering cost structures and enhancing R&D in the last five to six years. These companies have also built an active product pipeline for registrations in the global markets. Companies have now begun to make significant investments towards branding of products and building a strong distribution network across markets. We believe that the USD 24 bn generic market place provides a good opportunity to Indian companies who have marketing infrastructure and globally compliant manufacturing facilities in place. Exports currently do not form a significant portion of industry revenues and the share of Indian companies is less than 1% of global trade. Going forward, we expect growth to be driven by exports and composition of revenues to shift in favour of exports. We believe Indian companies are well equipped to tap the global generic opportunity in the agro-chemicals market. We are positive on the outlook for the leading companies in this sector.

36

Edelweiss

United Phosphorus
Rooshnil Securities
(An Edelweiss Capital Company)

UNITED PHOSPHORUS
Blazing new trails

AGRO CHEMICALS

Initiating Coverage INR 163

Company Report

Recommendation
Va l u e

United Phosphorus Limited (UPL) is a leading agro-chemical player that has adopted the direct sales business model for exports. UPL forayed into the export markets in the early nineties ahead of a slow down in the domestic market. UPL adopted a strategy of aggressive registrations, branding of its products and building a network of distributors across markets. For this, the company incurred an upfront investments of over INR 1 bn. While growing organically, UPL also made strategic acquisitions of products and companies. In a short span of eight years, UPL has emerged as the fourth largest generic agro-chemical company in the world. With an increasing global presence, we expect UPL to show sustainable growth in revenues and profits. We recommend a VALUE BUY.

Key Investment Highlights


Sell Reduce Accum Buy

Trading Sell Buy No Reco

Presence spanning major geographies UPLs operations extend over 30 countries. Its presence in two of the largest agro-chemicals markets U.S. (USD 9 bn) and Europe (USD 6 bn) is increasing significantly. UPL is simultaneously expanding operations through 100% subsidiaries in China, Zambia, Australia and Russia. An increasing global presence is expected to drive export revenues from 36% of sales in FY02 to 54% in FY05. Pipeline of registrations - key competitive strength To capture the attractive generic market (USD 24 bn) UPL undertook aggressive registrations of products across U.S., Europe and other key markets. It has spent over INR 1.25 bn in the last six years for registration of products and has about 10-12 products in the pipeline. These registrations are important entry barriers due to their prohibitive costs (approximately USD 4-5 mn per registration in the U.S.). Due to this promising pipeline, we expect a 23% export CAGR from FY03-FY05 driven by a CAGR of 34% in the U.S. and 19% in Europe. Turnaround in Searchchem (SCL) SCL, the 53% subsidiary of UPL has shown a turn around in operations in FY03, driven by an up trend in caustic soda prices and higher plant utilisation due to continuous power supply. SCL managed to bring down its losses from INR 390 mn in FY02 to INR 130 mn in FY03. This turnaround in SCL will boost UPLs earnings prospects significantly. We expect UPLs fundamentals to improve on the back of a diversified exports base and a turnaround in SCL. EPS per share is expected to grow at an 49.4% CAGR from FY03-FY05, from INR 28.7 per share in FY03 to INR 64.2 per share in FY05. The stock is trading at a PE of 3.6x FY04E and 2.5x FY05E earnings and at an EV/EBIDTA of 2.7x FY04E. We recommend a VALUE BUY.
Financials Price Chart
200 6000 5000

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 34.1 23.9 7.9 34.1

Reuters Code Bloomberg Code

: UNPS.BO : UP IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 189/73 25.5 4.2/88

MCap (INR bn/USD mn) :

Year to March
Revenues (INR mn) Growth (%) Net profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA (x) ROE (%)

FY03

FY04E

FY05E

180 160 140

9,682 13 732 29 175 5.7 3.7 16.9

10,926 13 1,165 46 59 3.6 2.7 22.5

12,691 16
Price (INR)

Preethi Shukla 91-22-2286 4307 preethi@edelcap.com

1,635 64 40 2.5 1.9 25.3

120 100 80 60 40 20 0 May-02 Aug-02 Nov-02 Feb-03 0 May-03 2000 1000 3000

Volume (000)

4000

Management and Company Backgro Business Analysis Chart 13: Revenue break up in
MANUFACTURED EXPORTS

Management and Company Background


UPL, a leading agro-chemical player based in Mumbai, was incorporated in 1969 by Mr. R.D. Shroff. UPL was initially set up to manufacture red phosphorus. Currently, UPLs main product lines include pesticides, chemical intermediates, industrial chemicals and specialty chemicals. UPL was listed on the BSE in FY87. In FY94, the company made a GDR issue and raised USD 16.4 mn to fund its export foray and acquisitions. Besides the Indian company, other key entities in the group are Search Chem (a 53% subsidiary, set up in FY96 to manufacture caustic soda and phosphorus compounds), a U.K subsidiary and a U.S. subsidiary. In FY03, UPLs consolidated revenues were INR 9.7 bn. Of this, domestic market contributed 53% and exports exports 47%. The UPL group has eight manufacturing sites, six in India, one in the U.K and one in the U.S. UPL has operations in 30 countries. In the last eight years, besides the U.K and the U.S., it has also set up subsidiaries in China, Australia, Zambia, Mexico and Brazil. It has representative offices in Sri Lanka and Vietnam. UPLs focus in the coming years would be on developing the export markets. The management is conscious of the huge resources that would have to be forked out for developing the export markets and is willing to do this. In the short term, UPL desires to diversify its revenue base across key regions. These include China, U.S., the UK, Mexico and Australia. In the medium term, UPL is keen to nurture an active pipeline of products that would generate sustainable revenues. UPLs ambitious long term plans are to become the number one agro-chemical generic player in the world. We believe the management is focused and expect UPL to emerge a leading global player in agro-chemicals.

Business Analysis
In FY03, UPLs consolidated revenues were INR 9.7 bn. Of this, domestic market contributed 53% and exports 47%. UPL has a 9% market share in a highly competitive domestic market. Approximately 80% of domestic revenues come from agro-chemicals. UPL deals in both technical (active ingredients) and formulations and its product range includes fumigants, fungicides, insecticides, rodenticides and herbicides. The industrial
Chart 13: Revenue break up in FY03
ROW 13% Domestic Revenues 53%

Europe 23%

USA 11%

Source: Company

38

Edelweiss

Risks and Concerns


UNITED PHOSPHORUS

chemicals division accounts for the remaining 20% of domestic revenues. The company is soft-pedalling this business, which has been slowing down considerably in recent times. Europe and U.S., key export destinations, contributed to 23% and 11% of export revenues in FY03 respectively. Focus in the European market is on the sugar beet herbicide range of products. In the U.S., its main products are Acephate, Aluminium Phosphide and Permethrine. UPLs margins in export markets are significantly higher at about 45-50% compared with 20-25% in the domestic market. We expect a 25.5% revenue CAGR from the export market between FY02-05. Reverse merger with Search Chem SCL was promoted in 1996 to manufacture phosphorus intermediates, caustic soda and chlorine. UPL holds a 53.1% stake in SCL. Exports account for approximately 20% of SCLs revenues. In FY02, SCLs revenues were INR 1.78 bn with losses of INR 345.9 mn. As on March 31 2003, SCL made accumulated losses of about INR 1.9 bn. From FY97-FY02, SCL suffered due to acute power shortage, downtrend in caustic soda prices and other external factors. In this period, both SCL and UPL had to borrow heavily to sustain operations. UPL had funded SCL to the extent of INR 3 bn, besides guaranteeing loans worth INR 1.05 bn. A bleak picture on the revenues front, irregular availability of key inputs and mounting interest costs saw SCL in the red until FY02, with net worth eroding seriously. Towards late FY01, the UPL management did a serious re-thinking on SCLs future and took key decisions on power problems. A captive power unit was set up with maintenance of equipment assigned to GE-U.S. The power problem was thus solved by H2FY03. A simultaneous uptrend in caustic soda prices provided a timely breather. These events had a positive impact on SCLs financials. In FY03, SCL managed to bring down losses by 66% to INR 130 mn compared with INR 390 mn in FY02. In March 2003, the UPL management decided to reverse-merge the manufacturing division of UPL into SCL primarily to offset SCLs losses against UPLs tax liabilities. The reverse merger would involve a 91.6% reduction in the capital of SCL against accumulated losses. Subsequently, shares would be swapped between UPL and SCL in the ratio of 1:1. Also, preference shares in SCLs books held by UPL would be cancelled. Following this, UPLs outstanding number of shares will be 292.7 mn.

Risks and Concerns


Ability to handle legal and regulatory issues Players in the generic agro-chemical market are exposed to complex regulatory issues and legal disputes with other generic players. We believe UPL is still in the initial stages of the learning curve with regards to these. Failure to troubleshoot imminent legal and regulatory problems could lead to significant delays in product approvals.

Edelweiss

39

Outlook
MANUFACTURED EXPORTS

Caustic soda/chlorine price volatility After a prolonged downtrend, caustic soda prices started looking up only recently. Though we expect the uptrend to continue, a reversal could again change the fortunes of SCL. This could have a bearing on the time and resources that the management is rightly devoting on nurturing the export markets. We would monitor caustic soda price trends closely since this development could have a significant impact on the UPLs prospects.

Outlook
An increasingly diversified market presence and an impressive pipeline of product registrations across markets are expected to have a positive impact on UPLs earnings. With improvement in cash flows, we expect accelerated debt repayment and subsequent reduction in interest costs. The reverse merger with SCL is expected to benefit UPL by reducing its tax liability significantly. Overall, we believe UPLs prospects are impressive going forward. We expect a CAGR of 21.9% for exports, 14.5% for revenues and 49.4% for profits respectively for FY03-FY05. We estimate an EPS of INR 45.7 for FY04E and INR 64.2 for FY05E. The stock is trading at a PE of 3.6x and 2.5x FY04E and FY05E earnings and at an EV/EBIDTA of 2.7xFY04E. We recommend a VALUE BUY.

40

Edelweiss

Financial Statements
UNITED PHOSPHORUS

Financial Statements
Income Statement
Year to March Income from operations International Revenues Domestic Revenues Total Operating expenses EBIDTA Interest Expenditure Depreciation Other Income Profit Before Tax Provision for Tax Profit After Tax EPS (INR) Shares Outstanding (mn) Dividend per share (INR) Dividend payout (%)
* Stand alone UPL financials

(INR mn) FY01* 5,169 2,676 2,870 4,378 790 457 221 130 241 16 225 8.6 25.5 2.0 22.6 FY02 8,562 3,755 4,807 6,905 1,657 1,162 662 189 22 (244) 266 10.4 25.5 1.0 9.9 FY03 9,682 5,023 4,658 7,439 2,243 1,069 798 281 658 (74) 732 28.7 25.5# 2.0 7.0 FY04E 10,926 5,958 4,967 8,276 2,650 730 861 200 1,259 94 1,165 45.7 25.5 10.0 21.9 FY05E 12,691 7,475 5,216 9,528 3,162 608 988 201 1,767 133 1,635 64.2 25.5 10.0 15.6

# Post reverse merger, outstanding no. of shares to be 292.7 mn

Common Size Metrics - as % of Revenues


Year to March Operating Expenses Depreciation EBIDTA Margins Interest Expenditure Net Profit Margins FY01 84.7 3.3 15.3 8.8 4.3 FY02 80.6 2.0 19.4 6.6 3.1 FY03 76.8 1.8 23.2 6.3 7.4 FY04E 75.7 1.6 24.3 5.6 10.7 FY05E 75.1 1.6 24.9 4.8 12.9

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 (0.6) 19.0 8.0 (43.9) (36.2) (36.2) FY02* NA NA NA NA NA NA FY03 13.1 33.8 23.2 2.7 174.9 174.9 FY04E 12.9 18.6 24.3 191.4 30.3 30.3 FY05E 16.2 25.4 24.9 40.3 40.3 40.3

* FY02 is the first year of consolidated numbers, no comparable numbers available for FY01

Edelweiss

41

Balance Sheet
MANUFACTURED EXPORTS

Balance Sheet
Year to March Equity Capital Pref. Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Others Sources of Funds Gross Block Depreciation Net Block Capital Work In Progress Investments Inventories S.Debtors Cash and Bank Balances Loans and advances Other Current Assets Total Current Assets S. Creditors Provisions Total Current Liabilities and Provisions Net Current Assets Others Uses of Funds Book Value Per Share (INR) FY01 255 200 4,092 4,547 3,063 857 3,920 46 8,513 3,369 1,105 2,264 123 1,986 889 2,080 164 1,489 897 5,518 1,749 56 1,805 3,713 8,513 178 FY02 255 180 3,181 3,616 4,376 692 5,068 494 9,411 7,505 2,525 4,980 59 57 1,961 2,057 262 1,477 229 5,986 3,084 28 3,112 2,874 1,440 9,411 142 FY03 255 180 3,894 4,329 4,068 591 4,659 494 9,715 7,705 2,942 4,763 59 57 2,286 2,740 350 1,477 242 7,095 3,362 (15) 3,347 3,748 1,087 9,715 170 FY04E 255 143 4,772 5,170 3,568 486 4,054 494 9,951 8,205 3,453 4,752 59 357 2,801 3,154 564 1,477 280 8,277 3,890 341 4,231 4,046 737 9,951 203

(INR mn) FY05E 255 77 6,120 6,451 3,380 0 3,380 494 10,559 8,705 4,041 4,664 59 557 3,407 3,481 842 1,477 323 9,530 4,483 421 4,905 4,626 652 10,559 253

Ratios
Year to March ROE (%) ROCE (%) Inventory Days Debtors Days Fixed Assets T/o (x) Debt/Equity FY01 4.8 8.2 60.2 140.9 2.3 0.9 FY02 7.3 13.6 79.4 83.3 1.8 1.4 FY03 16.9 19.2 85.0 95.0 2.0 1.1 FY04E 22.5 21.6 90.0 100.0 2.4 0.8 FY05E 25.3 24.2 95.0 100.0 2.8 0.5

Valuation Parameters
Year to March EPS (INR) YoY growth (%) CEPS (INR) PE (x) Price/BV(x) EV/Sales (x) EV/EBIDTA (x) FY01 8.6 (36.2) 17 18.8 1.1 1.1 7.5 FY02 10.4 NA 36 15.7 1.1 1.0 5.4 FY03 28.7 174.9 60 5.7 1.0 0.9 3.7 FY04E 45.7 59.1 80 3.6 0.8 0.7 2.7 FY05E 64.2 40.3 103 2.5 0.6 0.5 1.9

42

Edelweiss

AUTO COMPONENTS

AUTO COMPONENTS

AUTO COMPONENT INDUSTRY


Revving Up
INR 250 bn industry The Indian Auto component industry comprises of five major categories - Engine parts (32.7% market share), Transmission and steering equipment (20.2%), Suspension and braking equipment (16.8%), Electrical parts (6.7%) and miscellaneous products (22.8%). The industry consists of over 400 players. The size of this industry was INR 250 bn in FY03. The industry caters to about 24 Indian automobile units. India is the worlds second largest manufacturer of two-wheelers and tractors and ranks fifth globally in commercial vehicles (CVs). A large domestic automobile industry has provided a strong base for this industry for growing globally as well. Auto component industry has registered a CAGR of 17% during the last five years (FY9803). Exports during the same period have registered a CAGR of 25% to INR 38 bn in FY03 from INR 13 bn in FY98. Demand for Auto components comes from the OEM market (25%), replacement market (65%) and exports (10%). Evolution of the Indian Auto component industry The Auto component Industry in India was fragmented until the seventies, catering to a few domestic manufacturers. The entry of Nissan and a number of Japanese auto majors in the seventies and the arrival of Maruti Udyog in early eighties brought about major changes in this Industry. Efforts to meet quality standards of these companies raised the Industry on par with global levels, making it relatively easy to compete globally a decade later. In mid-nineties, the entry of global auto companies like General Motors, Ford, Toyota and Hyundai prompted Domestic Auto component manufacturers to increase capacities and modernise plant and machinery in anticipation of a growth in demand. However demand for cars and commercial vehicles was lower than anticipated. This hit the auto component industry severely in the late nineties compelling companies to focus on international markets for growth. Leading auto component manufacturers in India are MICO (INR 14.0 bn), Bharat Forge (INR 6.5 bn), Sundaram Fasteners (INR 4.6 bn) and Motherson Sumi (INR 3.6 bn). Mico India, with exports of INR 2.3 bn, is the largest exporter of auto components from India. Other important players are: Ucal Fuel, GKN Driveshafts, Rane Group, PRICOL Subros, Munjal Showa, Lakshmi Auto and Omax Auto. USD 545 bn industry Globally, the auto component industry is USD 545 bn in size In FY00, international trade in auto components was at USD 131 bn. Most of this (86%) trade was within developed countries (see Table 7).

44

Edelweiss

AUTO COMPONENT INDUSTRY

The automotive industry in developed countries reached a plateau with a lower than 3% growth rate during FY95-FY01. Increased competition and lower growth rates forced auto makers to lower prices. In turn, some of these companies exerted pressure on their component suppliers to reduce prices while others started looking at outsourcing alternatives, major destinations being Mexico, Brazil and India. Combined revenue of listed auto component companies in U.S. is around USD 98 bn while in Europe, it is around USD 94 bn. Some of the largest global players are Delphi, Visteon, Denso Meritor, Bosch and Dana. Key drivers of Indian Auto component exports Proven proficiency, high quality levels (295 companies have ISO-9000 certification) and cost advantages enhance the global prospects of the Indian auto component industry. Globally, outsourcing has become an important feature of the Auto industry. This will benfit Indian players. We believe exports in Auto components will be driven by: a) MNCs and their JVs exporting to parent b) Indian companies catering to tier-1 vendors and global auto majors. These categories are expected to undergo vibrant changes. During the last five years many MNCs have formed JVs with domestic players and set up manufacturing facilities for catering to the domestic market. The same facilities are being expanded to cater to the global requirements. Some of the JVs working on exports are: Kirloskar Toyota Motor, Sona Koyo Steering Systems and Rane TRW. Many global auto companies have opened full-fledged purchasing offices in India (See Table 8). Their objective is to identify and develop Indian auto component vendors for sourcing components. For example Daimler Chryslers international purchase office (IPO) in India has increased sourcing components from Euro 6 mn in CY98 to Euro 63 mn in CY02. According to industry sources the top 15 auto majors have a target of sourcing USD 1.5 bn worth of auto components from India in FY04 alone. Key customers for Indian companies are GM, Ford, Daimler Chrystler, BMW, AUDI, Mercedes Benz, Volvo, Isuzu, Nissan, Piaggio and New Holland. Of total exports, Europe accounts for 35%, U.S. 25%, Asia 17% and Africa 13%. Major components exported from India are engines, transmission and steering parts, suspension and brakes.

Outlook
Considering competitive advantages enjoyed by Indian auto component manufacturers and the presence of global auto majors in India and their sourcing plans, we believe the industry will see strong export-led growth going forward. The Indian Automotive Component Manufacturers Association (ICMA) is targeting export revenues of USD 8 bn by CY10.

Edelweiss

45

Table 7: International Trade i


MANUFACTURED EXPORTS

Table 7: International trade in motor vehicle parts and accessories


Total exports in 2000 (in USD mn) World Developed countries Developing countries Mexico Korea, Republic of China, Taiwan Province of Brazil China Argentina Philippines Singapore Thailand Turkey
Source: UNCTAD

% of countrys total exports 2.4 3.1 0.91 3.61 1.11 1.2 2.92 0.43 2.05 1.38 0.35 0.67 1.57

% of total world exports 100 86.04 11.17 3.98 1.28 1.18 1.1 0.7 0.37 0.37 0.32 0.31 0.31

137,171 118,028 15,317 5,460 1,750 1,613 1,509 956 508 505 444 425 423

Table 8: Major Auto MNCs having sourcing offices in India


Volvo Daimler Chrysler Delphi Toyota Ford General Motors Hyundai
Source: Edelweiss

46

Edelweiss

Bharat Forge
Rooshnil Securities
(An Edelweiss Capital Company)

BHARAT FORGE
Die is cast

AUTO COMPONENTS

Update INR 300

Company Report

Recommendation
Va l u e

Bharat Forge is a leading manufacturer of forging components in India and is one of the three largest forging plants in the world. To counter slowdown in the domestic auto industry, BFL intensified efforts on increasing exports in the last five years. During this period, it increased capacities, upgraded design facilities and made time to market a major competitive strength. BFL follows the direct sales and outsourcing models. BFLs clients are global auto majors like Daimler Chrysler, Toyota and Volvo. In the coming years, each of these clients is expected to scale up to USD 10 mn annually. In FY03, BFL reported a 150% growth in export revenues to INR 2.7 bn. This marked the beginning of a new growth phase. We expect a 50% CAGR in export revenues in FY03-FY05. We recommend a VALUE BUY on the stock.

Key Investment Highlights


Sell Reduce Accum Buy

Quantum leap in exports


Trading Sell Buy No Reco

BFL reported export revenues of INR 2.7 bn in FY03 as against INR 1.1 bn in FY02. The signing up of FAW, Chinas largest CV manufacturer and ramping up by existing clients like Meritor have driven this 146% growth. BFL recently bagged another order from Second Auto Works (SAW) of China. Impressive clientele

Shareholding pattern (%) Promoters FIs, MFs & Banks FIIs Others : : : : 37.2 19.5 5.3 38.0

Over the last seven years, BFL has made vigorous efforts to win new customers. Its clients include Cummins, Daimler Chrysler, Volvo and Toyota. We believe most of these clients are at an early stage of scaling up (sourcing USD 1 - 2 mn p.a). We expect each of them to source USD 10 mn worth forgings annually from BFL over the next three years. Moving up the value chain BFL is simultaneously working on moving up the value chain by providing machined products. These products go straight to the assembly lines of OEMs. A successful foray into Europe and China has reduced dependence on the American market (from 70% of export revenues in FY02 to 50% in FY03). Sustainable competitive advantages

Reuters Code Bloomberg Code

: BFRG.BO : BHFC IN

Market Data 52-week Range (INR) : : 320/117 37.7

India Equity Research

Global scale of operations, design capabilities and faster delivery time have made BFL globally competitive. The current global economic slowdown has prompted closure of forging units in developed countries. We expect BFL to benefit from this and increase its market share. BFL trades at 9.3xFY04E and 6xFY05E earnings and at an EV/EBIDTA of 11xFY04E. We expect it to report a 50% CAGR in exports during FY03-FY05. Given its global scale of operations and proven capabilities, BFL is poised to report strong export growth. We recommend a VALUE BUY.
Financials Price Chart
FY03 FY04E FY05E
350 400

Shares in issue (mn)

MCap (INR bn/USD mn) : 11.3 / 238

Year to March
Revenue (INR mn) Growth (%) Net Profit (INR mn) EPS (INR) EPS Growth (%) P/E (x) EV/EBIDTA (x) ROE (%)

6,375 50.4 782 20.8 277.5 14.4 17.1 42.5

7,953 24.7 1,217 32.3 55.6 9.3 11.1 47.6

9,931 24.9
Price (INR)

300

300
Volume (000)

Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com

1,879 49.9 54.4 6.0 6.8 49.5

250 200 200 100

150

100 May-02 Aug-02 Nov-02 Feb-03

0 May-03

Management and Company Backgro Business Concerns Risks andAnalysis Chart 14: Revenue break up in
MANUFACTURED EXPORTS

Management and Company Background


BFL is the flagship company of the Kalyani Group and was established in FY61. BFL has been the largest forging company in Asia and ranks among the three largest commercial forging shops in the world. The Kalyani group, with annual revenues of INR 20 bn, has a presence in steel, steel-based products, forgings and automotive component businesses. Other major group companies are Kalyani Steels, Kalyani Brakes, Kalyani Carpenter Special Steels, Kalyani Lemmerz, Automotive Axles, Kalyani Sharp, Kalyani Thermal Systems, BFL Utilities, Epicenter and Synise Technologies. BFL has manufacturing facilities at Mundhwa and Chakan near Pune. Its main product lines are front axle beams, crankshafts and steering knuckles. Over the years, BFL has set up facilities for machining these products and it ships finished products directly to the OEMs assembly line.

Business Analysis
Leading manufacturer of forgings BFL has an 80% share in forgings above 50 kgs, a category in which it is a national leader. BFL primarily manufactures front axle beams, crankshafts and steering knuckles. BFLs front axle beams serve 75% of the domestic and 25% of global HCV markets. BFL also caters to other auto sectors, oil and gas and construction industries.
Chart 14: Revenue break up in FY03

Non - Auto Exports 7% Non AutoDomestic 8%

Auto - Domestic 50%

Auto - Exports 35%


Source: Company

We believe, BFLs success comes primarily from outsourcing. Hence, we believe it does not depend on the growth of the automobile industry. Its revenues come from replacing the suppliers existing vendors and not from incremental growth in the sector. BFL is also expanding its product range and segments. Until recently, BFL had focused mainly on the international truck markets. But it has also started focusing on the passenger car market.

Risks and Concerns


Exports dependent on replacing existing suppliers Replacing existing suppliers or OEMs switching over from captive facilities to outsourcing will drive BFLs export growth. Globally, Germany, the U.S. and Mexico have been leading producers of forgings. Slowdown in demand and mounting manufacturing costs are forcing ailing forging plants to close down. This will benefit BFL in the long term. However, shutting down plants and shifting businesses from local markets are sensitive

48

Edelweiss

Outlook
BHARAT FORGE

issues. Besides, it involves honouring bankruptcy commitments such as severance packages, which call for a fresh infusion of funds. The company thus needs to manage the perception issues well. Nearing full capacity and ability to manage growth BFL is expected to reach almost full capacity utilisation by end-FY04, which is almost double the production of FY02. The company needs to invest in fresh capacity or acquire capacities to maintain the upswing. BFLs debt on books is INR 3.3 bn debt and debt/ equity ratio is 1.4x. We believe scaling up from present levels involves considerable challenges both financially and managerially.

Outlook
The successful foray into China demonstrates BFLs capabilities of making inroads into new geographies. We believe BFLs strategy of focusing on machined products to move up the value chain is right. BFL is expected to report a 50% CAGR in exports during FY03-FY05 on the back of a strong global client base. Considering these, we recommend a VALUE BUY.

Edelweiss

49

Financial Statements
MANUFACTURED EXPORTS

Financial Statements
Income Statement
Year to March Income from Operations International Revenues Domestic Revenues Manufacturing Expenses Employee Expenses S G & A Expenses EBIDTA Interest Expenditure Depreciation Other Income Profit Before Tax Provision For Tax Profit After Tax EPS (INR) Shares Outstanding (mn) Dividend per share (INR) Dividend payout (%) FY01 4,720 851 3,869 1,879 464 1,208 1,169 573 397 159 359 32 312 8.3 8.3 3.0 39.9 FY02 4,239 1,104 3,135 1,576 427 1,144 1,091 454 390 106 353 133 207 5.5 5.5 3.5 64.2 FY03 6,375 2,714 3,661 2,220 462 1,798 1,895 408 418 63 1,132 322 782 20.8 20.8 6.0 28.9 FY04E 7,953 4,173 3,780 2,927 522 1,986 2,518 274 460 55 1,839 588 1,217 32.3 32.3 7.0 21.7 (INR mn) FY05E 9,931 6,031 3,900 3,654 585 2,197 3,494 233 484 35 2,812 900 1,879 49.9 49.9 10.0 20.0

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee Expenses S G & A Expenses Depreciation EBIDTA Margins Interest Expenditure Net Profit Margins FY01 39.8 9.8 25.6 8.4 24.8 12.1 6.6 FY02 37.2 10.1 27.0 9.2 25.7 10.7 4.9 FY03 34.8 7.2 28.2 6.6 29.7 6.4 12.3 FY04E 36.8 6.6 25.0 5.8 31.7 3.4 15.3 FY05E 36.8 5.9 22.1 4.9 35.2 2.3 18.9

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 (7.9) (23.2) 4.0 (39.5) (36.7) 1.7 FY02 (10.2) 29.7 (19.0) (1.6) (33.6) (33.6) FY03 50.4 145.8 16.8 221.0 277.5 277.5 FY04E 24.7 53.8 3.2 62.4 55.6 55.6 FY05E 24.9 44.5 3.2 53.0 54.4 54.4

50

Edelweiss

Balance Sheet
BH ARAT FORGE

Balance Sheet
As on 31st March Equity Capital Pref. Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Sources of Funds Gross Block Depreciation Net Block Capital Work In Progress Investments Inventories S.Debtors Cash and Bank Balances Loans and advances Other Current Assets Total Current Assets S. Creditors Other Current Liabilities Provisions Total Current Liabilities and provisions Net Current Assets Others Uses of Funds Book Value Per Share (INR) FY01 377 100 1,012 1,489 2,623 1,506 4,129 5,618 6,359 2,463 3,896 509 12 879 837 29 956 113 2,814 1,279 85 364 1,727 1,087 114 5,618 36.5 FY02 377 200 1,185 1,762 2,203 1,620 3,822 5,584 7,071 2,859 4,212 263 0 860 716 93 1,120 150 2,939 1,471 41 426 1,938 1,001 108 5,584 43.9 FY03 377 300 1,741 2,418 1,652 1,701 3,353 5,771 7,390 3,276 4,114 200 0 1,002 939 158 1,130 150 3,379 1,639 48 322 2,008 1,371 86 5,771 61.9 FY04E 377 300 2,695 3,372 1,008 1,735 2,743 6,114 7,809 3,737 4,073 130 0 1,267 1,309 294 1,288 173 4,331 1,837 63 588 2,489 1,842 69 6,114 87.8

(INR mn) FY05E 377 0 4,198 4,574 605 1,822 2,426 7,000 8,179 4,221 3,958 120 0 1,565 1,696 960 1,435 198 5,854 2,009 78 900 2,987 2,867 55 7,001 120.0

Ratios
Year to March RoE (%) RoCE (%) Inventory Days Debtors Days Fixed Assets T/o (x) Debt/Equity FY01 12.0 13.7 58.2 55.4 0.8 3.0 FY02 14.6 14.7 62.7 52.2 0.7 2.3 FY03 42.5 27.6 63.0 59.0 0.9 1.4 FY04E 47.6 36.0 60.0 62.0 1.1 0.8 FY05E 49.5 46.9 60.0 65.0 1.3 0.5

Valuation Parameters
Year to March EPS (INR) YoY growth (%) PE (x) CEPS (INR) Price/BV (x) EV/Sales (x) EV/EBIDTA (x) FY01 8.3 (36.6) 36.1 18.8 36.6 2.7 13.1 FY02 5.5 (33.6) 54.3 15.9 10.4 2.8 13.7 FY03 20.8 277.5 14.4 31.9 17.5 3.1 7.6 FY04E 32.3 55.6 9.3 44.5 26.8 2.0 5.4 FY05E 49.9 54.4 6.0 62.8 44.0 1.5 3.6

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51

ENGINEERING

ENGINEERING

ENGINEERING INDUSTRY
Joining the export high fliers

Introduction
Under the broad term Engineering Industry we have considered the following segments in this Report: 1) Industrial machinery 2) Electrical equipment 3) Non-electrical equipment The common characteristic of the above segments is that products here are manufactured in batches, they involve an engineering element in designing and production and they are skill intensive. According to the Centre for Monitoring Indian Economy (CMIE) the size of the machinery industry is INR 961 bn with 859 players operating in it. The size of electrical equipment industry is INR 215 bn and that of non-electrical equipment industry is INR 248 bn. Key players Major listed Indian players are BHEL (INR 75 bn), L&T (INR 40 bn), Crompton Greaves (INR 16 bn), Cummins (INR 10 bn), ABB (INR 13 bn), Voltas (INR 12 bn) Kirloskar Oil (INR 7.5 bn) and Thermax (INR 6.6 bn). Background The engineering industry in India took shape in a scenario where the governments accent was mainly on import substitution. Until the nineties, the industry thrived in a regulated market, protected by artificial shortages of equipments. This in turn resulted in companies being able to sell whatever they produced, making them complacent. Restructuring and consolidation However, with the advent of liberalisation in late nineties, Indian companies started feeling the first pinch of global competition. Compounding this, a general economic slowdown, excess capacities and policies favouring import of capital goods led to declining growth rates for the sector. This brought about consolidation in the sector. Over the last five years, many weak players exited. Those who survived the rigours of these tough times rapidly redesigned and upgraded their manufacturing processes and technologies. Focus on international markets and niche businesses As companies restructured operations to improve quality and cost structure, they realized the limitations of the domestic market and the immense opportunities in international markets. Having put the required inputs in place, these companies also realized the competitive advantages they enjoyed. Thus, they started focusing on international markets for growth.

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53

Table 9: International Trade i


MANUFACTURED EXPORTS

Companies like Elgi, Crompton and Thermax explored international markets and realized how lower design and development costs and labour costs gave them an edge. Another interesting aspect is size. Indian firms are small compared with global engineering companies. This was hitherto considered a weakness. These companies made this their strength by focusing on small volume and niche businesses in the international markets. For example, Thermax is focusing on waste heat recovery units for smaller power plants and expects around USD 10 mn revenues in two years time. Big firms find it very difficult to introduce profitable products for such small markets and remain profitable. Growth drivers The industrial slowdown in U.S. and Europe will accelerate the process of shifting high cost manufacturing to low cost manufacturing countries like India and China. We believe India has an edge in skill intensive products and will gain significant share in this relocation. Exports of engineering products is mainly driven by outsourcing. Indian companies are following supply to OEM route as a means to achieve higher revenues in a short span and also leverage existing client base for adding more customers. Outlook The sub-segments in the industry in which we believe export will see aggressive growth in the coming years are: transformers, engines, power generation and distribution equipment. The manufacture of high-end transformers is highly skill intensive as these are customized products. Companies like Crompton have explored and established their presence in select countries in these segments. ABB is looking at sourcing transformers from its Indian subsidiary. In engines, Cummins is the largest diesel engine manufacturer of 701400 hp engines in the world. Cummins India is already an exclusive supplier of select models to its parent and we expect a significant ramp-up in the coming years. We believe that our picks in the Engineering Industry will benefit immensely from the emerging opportunities in the international market. In Table 9 below, we have given the present market share of major players from developing countries.
Table 9: International trade in non-electrical machinery parts and accesories
Total exports in 2000 (in USD mn) World Developed countries Developing countries China Mexico China, Taiwan Province of Singapore Korea, Republic of Brazil Thailand Malaysia India Slovenia
Source:UNCTAD

% of countrys total exports 1.1 1.4 0.6 0.8 1.2 1.1 1.0 0.6 0.8 0.6 0.3 0.4 1.4

% of total world exports 100.0 82..0 14.9 2.8 2.8 2.4 2.1 1.6 0.6 0.6 0.4 0.3 0.2

63,272 51,929 9,437 1,791 1,772 1,502 1,316 1,033 395 387 249 162 119

54

Edelweiss

ABB
Rooshnil Securities
(An Edelweiss Capital Company)

ABB
Powered by exports

ENGINEERING

Update INR 339

Company Report

Recommendation
Va l u e

ABB India is a leading player in the transmission and distribution equipment market. Over the last three years ABB India has restructured operations and upgraded manufacturing facilities to be on par with the ABB groups centre of excellence factories. It has thus emerged an exclusive supplier of a number of products for ABBs requirements worldwide. ABB India also caters to some international customers directly. In the last 15 months, the company has bagged project orders worth INR 2.7 bn from the international markets. We believe, given its current focus and proven capabilities, ABB India will report a 78% CAGR in export revenues in CY02-CY04. We recommend aVALUE BUY.

Key Investment Highlights


Reduce Accum Buy

Sell

Three-pronged strategy for international markets ABB Indias export revenues will be driven by Products (35% of CY02 exports), Projects (55% of CY02 revenues) and Services (10% of CY02 revenues). The Products business ABB India manufactures products for the groups global requirements. It works either as an exclusive supplier or as a sourcing base. ABB India has now emerged an exclusive supplier of 72.5 KV highvoltage breakers and 32 KV magnetic actuators to ABB, with the groups last Swedish plant manufacturing these closing down. ABB India supplies 36 KV outdoor breakers to the group along with ABB USA. These products are expected to contribute INR 500 mn in revenues p.a. going forward.
52.1 25.7 4.7 17.5

Trading Sell Buy No Reco

Shareholding pattern (%) Promoters FIs, MFs & Banks FIIs Others : : : :

Projects
As a part of the groups global optimisation project, ABB India has been assigned the task of developing ABBs business in SAARC, West Asian and a few African countries. ABB India will invest in building marketing network in these countries. In the last 15 months, the company has bagged two orders worth INR 2.7 bn from a Syrian utility company for setting up of a substation network. Given strong projection execution capabilities, we expect ABB to bag more such orders going forward.

Reuters Code Bloomberg Code

: ABB.BO : ABB IN

Market Data 52-week Range (INR) : 351/213 42 14.4/303

Services ABB India provides engineering, design and commissioning services to ABB affiliates worldwide. It is also the groups regional centre of excellence for metal and steel industries in Asia. The company is currently working on projects in Taiwan and Singapore.
ABB is trading at 13.1xCY03E and 9.9xCY04E earnings and at an EV/EBDITA of 6.9xCY03E. We believe, ABB will report steady growth going forward on the back of a lean cost structure, established credibility and international orders. Investments in the T&D sector will provide a further fillip. We recommend a V ALUE BUY.
Financials Price Chart
350 600 500
Price (INR)

India Equity Research

Shares in issue (mn): MCap (INR bn/USD mn):

Year to Dec.
Revenue (INR mn)

CY02

CY03E

CY04E

11,758 12.9 844 19.9 29.3 17.1 9.8 17.1

14,080 19.7 1,098 25.9 30.2 13.1 6.9 19.4

16,943 20.3 1,458 34.4 32.7 9.9 4.4 22.2


200 May-02 Aug-02 Nov-02 Feb-03 300

Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com

Growth (%) Net Profit (INR mn) EPS (INR) EPS Growth (%) P/E (x) EV/EBIDTA (x) ROE (%)

400 300

250

200 100 0 May-03

Volume (000)

Management and Company Backgro Chart 15: Revenue break up in Business Analysis
MANUFACTURED EXPORTS

Management and Company Background


ABB was incorporated in 1949 as Hindustan Construction Company. Four group companies ABB Instrumentation, Introl (I), ABB Lenzohm Service and ABB Analytical were amalgamated with ABB India from April 1, 2001. ABB India has attained global leadership and a dominant market share in power technology products such as high voltage switchgears (20%), medium voltage switchgears (14%), distribution transformers (14%) and power transformers (20%).

Business Analysis
ABB Indias main businesses comprise of Transmission and Distribution (T&D) and Industrial Automation (IA).
Chart 15: Revenue break up in CY02
IND. Automotion Exports 2% T&D Exports 55%

Ind-Domestic Exports 38%

T&D - Exports 5% Source: Company

Transmission and distribution ABB is a leading player in the T&D segment. This business contributed 55% of ABBs CY02 revenues of INR 10.4 bn. The central government has formulated the Accelerated Power Development and Reform Programme (APDRP) as a part of a spate of power sector reforms. In the first phase, the government intends to spend INR 140 bn on T&D. We believe ABB India will benefit from the emerging opportunities in T&D since it has an excellent track record and requisite technical expertise. Industrial automation ABB is a leader in Industrial Automation solutions. The industrial automation division accounts for 35% of ABBs CY02 revenues. The service offerings of this division include equipment and software applications for control and plant performance optimisation of process industries. ABB India also sells drives, electric motors, distribution relays and power network protection equipment. The industrial automation sector caters primarily to process industries in the country. We expect this segment to grow at a 7% CAGR over CY02-CY04.

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Risks and Concerns Outlook


ABB

Risks and Concerns


Export business totally depends on parent ABB Indias export growth depends on increased supplies to the parent. Its fortunes are dictated by the parents decisions on which products or components to outsource, quantities to outsource and pricing. Though, pricing would be based on bids submitted by various group entities, given the precarious financial condition of the parent, ABB Indias margins could be under pressure. Dependence on investments in T& D In the domestic market, ABBs prospects depend on investments in the T&D segment. In this sector, the principal clients, the State Electricity Boards (SEBs), are almost bankrupt. Investment in T&D is currently by way of borrowings from multilateral funding agencies including the World Bank and funds allocated to the central governments APDRP scheme. Delays in sanctioning and disbursing of funds are a major concern.

Outlook
We expect ABB India to report a 31.4% CAGR in earnings in CY02-CY04 since its key businesses are poised to grow rapidly. In the domestic market, the APDRP scheme is helping the sector to invest in T&D network. ABB being a market leader stands to benefit from this. In the international markets, increased sourcing by parent and addressing more markets for projects will see robust growth. We recommend a VALUE BUY.

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57

Financial Statements
MANUFACTURED EXPORTS

Financial Statements
Income Statement
Year to Dec Income from Operations International Revenues Domestic Revenues Manufacturing expenses Employee expenses S G & A expenses EBIDTA Interest Expenditure Depreciation Other income Profit Before Tax Provision for Tax Profit After Tax EPS (INR) Shares outstanding (mn) Dividend per share (INR) Dividend payout ratio (%) CY00 7,933 494 7,439 5,091 1,019 1,047 776 39 168 136 705 165 540 13.0 41.4 5.0 47.0 CY01 10,416 829 9,586 6,987 1,130 1,334 963 73 182 142 850 198 652 15.4 42.4 5.0 35.0 CY02 11,758 913 10,845 7,960 1,208 1,389 1,201 6 183 248 1,260 416 844 19.9 42.4 6.0 30.1 CY03E 14,080 1,917 12,163 9,642 1,329 1,600 1,510 0 206 336 1,639 541 1,098 25.9 42.4 7.5 28.9 (INR mn) CY04E 16,943 2,875 14,068 11,318 1,462 2,062 2,102 0 229 303 2,176 718 1,458 34.4 42.4 10.0 29.1

Common Size Metrics - as % of Revenues


Year to Dec Manufacturing expenses Employee expenses S G & A expenses Depreciation EBIDTA margins Interest Expenditure Net Profit margins CY00 64.2 12.9 13.2 2.1 9.8 0.5 6.8 CY01 67.1 10.9 12.8 1.8 9.3 0.7 6.3 CY02 67.7 10.3 11.8 1.6 10.2 0.1 7.2 CY03E 68.5 9.4 11.4 1.5 10.7 0.0 7.8 CY04E 66.8 8.6 12.2 1.4 12.4 0.0 8.6

Growth Metrics (%)


Year to Dec Revenues Internationla Revenues EBIDTA PBT Net Profit EPS CY00 2.3 NA NA NA NA NA CY01 31.3 67.9 24.2 20.6 20.9 18.1 CY02 12.9 10.1 24.7 48.2 29.3 29.3 CY03E 19.7 110.0 25.7 30.1 30.2 30.2 CY04E 20.3 50.0 39.2 32.7 32.7 32.7

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Edelweiss

Balance Sheet
ABB

Balance Sheet
As on 31st Dec. Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Sources of Funds Gross Block Depreciation Net Fixed Assets Capital Work In Progress Investments S. Debtors Cash & Bank Balance Inventories Loans & Advances Total Current Assets S. Creditors Other Liabilities Provisions Total Current Liabilities and provisions Net Current Assets Others Net Deferred tax liability Uses of Funds Book Value Per Share (INR) CY00 414 3,555 3,970 115 51 166 4,135 2,554 1,138 1,416 12 105 4,190 294 1,129 761 6,373 3,506 6 259 3,771 2,602 0 4,135 95.8 CY01 424 4,054 4,477 33 76 109 4,586 2,963 1,400 1,562 12 128 4,208 1,425 1,204 908 7,745 4,488 6 228 4,722 3,024 (139) 4,586 108.9 CY02 424 4,698 5,122 45 79 124 5,245 2,866 1,428 1,438 41 276 4,696 2,807 1,118 928 9,548 5,604 0 304 5,908 3,640 (150) 5,245 124.4 CY03E 424 5,478 5,902 0 0 0 5,902 3,207 1,612 1,595 50 500 5,401 3,468 1,312 1,157 11,338 6,558 0 859 7,417 3,921 (164) 5,902 143.1

(INR mn) CY04E 424 6,512 6,936 0 0 0 6,936 3,568 1,830 1,738 50 600 6,267 4,538 1,532 1,393 13,729 7,891 0 1,142 9,033 4,696 (147) 6,936 167.1

Ratios
Year to Dec. ROE (%) ROCE (%) Debtors Days Inventory Days Fixed Assests T/o (x) Debt/Equity CY00 14.1 18.1 195 67 3.1 0.0 CY01 15.2 20.8 167 62 3.5 0.0 CY02 17.1 25.0 155 47 4.1 0.0 CY03E 19.4 28.6 153 48 4.4 0.0 CY04E 22.2 33.1 147 47 4.7 0.0

Valuation Parameters
Year to Dec. EPS (INR) YoY growth (%) PE (x) Price/BV (x) EV/Sales (x) EV/EBIDTA (x) CY00 13.0 45.1 26.0 3.5 1.8 18.0 CY01 15.4 18.1 22.1 3.1 1.2 13.5 CY02 19.9 29.3 17.1 2.7 1.0 9.8 CY03E 25.9 30.2 13.1 2.4 0.7 6.9 CY04E 34.4 32.7 9.9 2.0 0.5 4.4

Edelweiss

59

Crompton Greaves
Rooshnil Securities
(An Edelweiss Capital Company)

CROMPTON GREAVES
Transform(er)ed

ENGINEERING

Initiating Coverage INR 62

Company Report

Recommendation
Va l u e

Crompton Greaves (CG) is a conglomerate manufacturing industrial and consumer products. It is the largest manufacturer of transformers in the country. After reporting losses due to a slowdown in the domestic markets in late nineties (INR 1.5 bn loss in FY00), CG started rigorous restructuring in early FY02. This was aimed at exiting non-core businesses and improving operational efficiencies. Over the last five years CG invested in developing markets abroad for products in the Transmission and Distribution (T&D) segment. Consequently, exports increased from INR 1 bn in FY01 to INR 2.2 bn in FY02. The Power systems group (38% of revenues in FY02) is a key business for CG and is expected to be a major growth driver. We believe CGs sales model of catering directly to customers will drive a 30% CAGR in export revenues during FY02-05. We recommend a VALUE BUY.

Key Investment Highlights


Sell Reduce Accum Buy

Exports and APDRP lead power systems growth


Trading Sell Buy No Reco

CG manufactures a range of electrical equipments like power transformers, circuit breakers and switchgear. The marketing efforts of this division in Latin American and East Asian countries have begun yielding results. Exports of the Power systems division increased from INR 680 mn in FY01 to INR 1.8 bn in FY02, accounting for 53% of this divisions revenues. Realising the importance of improving T&D network for making electricity in India commercially viable, the Central government formulated the Accelerated Power Development and Reform Programme (APDRP). In the first phase (FY03-FY05), the government intends to spend INR 140 bn on T&D. All the T&D equipment manufacturers including Crompton have started to benefit from this. Commendable restructuring under new management CG was growing steadily until it was hit by a slowdown in Indian industry in the late nineties. Revenues declined during FY99-FY02. Remedial measures not initiated during the early phase of slowdown to re-align operations led to losses of INR 1.5 bn in FY00 and INR 1.8 bn mn FY01. However, in FY02 the new management initiated across-the-board restructuring. The management re-located manufacturing facilities and exited seven businesses. The company is focussed on improving efficiencies and achieving profit growth. We believe this a good strategy in the current market environment. CG is trading at 8xFY03E and 5xFY04E earnings and at an EV/EBIDTA of 4.7xFY03E. We expect CG to report a 10% CAGR in revenues in FY02-FY05. As the various cost cutting initiatives start yielding results, we expect profits to grow at a 34% CAGR during FY02-05. We recommend a VALUE BUY.
Financials Price Chart
FY03E FY04E FY05E
70 1200 1000 60 800 50 600 400 40 200 30 May-02 Aug-02 Nov-02 Feb-03 0 May-03

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 52.4 23.6 24.0

Reuters Code Bloomberg Code

:CROM.BO : CRG IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 65/35 52.38

MCap (INR bn/USD mn) : 3.2 / 68.1

Year to March
Revenue (INR mn)

16,284 8.9 409 7.8 26.1 8.0 4.7 9.4

17,915 10.0 647 12.4 58.2 5.0 3.6 13.8

19,872 777 14.8 20.0 4.2 3.0 15.4


Price (INR)

Net Profit (INR mn) EPS (INR) EPS Growth (%) P/E (x) EV/EBIDTA (x) ROE (%)

Volume (000)

Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com

Growth (%)

10.9

Management and Company Backgro Business Analysis 16: Revenue Break-up in Chart
CROMPTON GREAVES

Management and Company Background


Crompton Greaves is part of the Brij Mohan Thapar group. It is one of the largest players in India in the electrical equipment and engineering industry. CG makes a wide range of transformers, switchgears, motors, lighting products, fans and railway-signalling equipment. It also undertakes turnkey engineering projects. Earlier, CGs business operations were organised under four strategic business units: After exiting many unrelated businesses, CG currently has three subsidiaries and five JVs. CGs 27 divisions are accredited with ISO 9001 certification. Comprehensive restructuring of operations CG has initiated across-the-board restructuring of operations in FY01. The company has exited seven businesses by either selling the division or divesting stake in JVs.
Particulars 1) No. of businesses 2) No. of employees 3) Borrowings 4) Factories in Mumbai 5) Cost of borrowings March 2000 18 10,600 INR 8.1 bn 7 16% Present 10 6,500 INR 5.1 bn 3 10%

It has exited telecom services, capacitors, low-tension switchgear and other unrelated businesses in the first phase of restructuring. To cut costs, CG shifted manufacturing facilities from high cost locations like Mumbai to Goa. In the second phase, which is currently on, we expect CG to exit the telecom and network equipment business, consolidate its motors business and show significant growth in its core business of power systems.

Business Analysis
Currently, CG has four main business groups: power systems (38% of FY02 revenues), consumer products (31%), industrial systems (22%) and digital systems (10%). Some of the major product categories are transformers, switchgear, motors, pumps, fans, luminaries, EPABX systems, telecom switching and transmission products.
Chart 16: Revenue Break-up in FY02

Digital Industrial Systems 10% Exports 2% Industrial Systems Domestic 19%

Power Systems Domestic 28%

Power Systems Exports 10% Consumer Products 31%


Source: Edelweiss

As can be seen from these products, CG caters to diverse applications. In consumers products, it is the market leader in fans with a very strong brand name and distribution network. With intensifying competition, both consumer products and industrial division are facing pressure on realisations and margins.

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61

Risks and Concerns Outlook


MANUFACTURED EXPORTS

Power systems to be the growth driver CG manufactures a range of electrical equipment like power transformers, circuit breakers and switchgears. In the domestic market, we expect growth to come on the back of increased investments in T&D network funded by the APDRP Scheme. In exports, power transformers and switchgear are expected to lead the growth. The marketing efforts of this division in the Latin American, African and East Asian markets over the last five years have begun yielding results. Exports of this division have increased to INR 1.8 bn in FY02 from INR 680 mn in FY01, accounting for 53% of revenues. At present European companies like ABB, Siemens, Alstom and Schinder are leading players in global markets. Power transformers are a highly skill intensive products which requires manual winding of wires and customisation. This in turn means no large plants with automated assembly lines. This gives CG an edge over competitors including Chinese players. Globally, power transformers is a USD 13 bn market. Of this, about 30% is CGs addressable market. Average life of T&D products is approximately 20-25 years. Demand from developed countries is primarily from the replacement market. CG has made efforts over the last five years to enter select countries. Benefits of these have just started flowing in. For instance, CG spent three years in Spain to get approvals from a local utility and has recently bagged its first order. In most non-European countries and in the U.S., CG supplies directly to utilities. In developed countries, CG supplies to turnkey players, who in turn sell its products. We believe that once the company is able to establish its presence with utility companies in the European market, subsequent sales will be easier. We believe CG has made significant progress in tapping international markets and expect a 30% CAGR in exports over the next three years. We expect CG to report export revenues of INR 3.3 bn in FY04 and INR 4.6 bn in FY05.

Risks and Concerns


Delays associated with the strategy of direct sales model CG has adopted the direct sales model for expanding its exports business. The strategy calls for setting up offices in target countries and appointing dealers to sell products. Besides being time consuming, huge investments would be needed to build this model and attain a minimum size. Also products like transformers need approvals of various agencies and undergo rigorous tests. This also delays aggressive scale up. Diversified product range CG is an INR 16 bn company with four distinct businesses groups and ten product groups. The slowdown in demand, intensified competition in these products categories has forced CG to restructure its operations. However, given the current low margins, (2% PBT margins) further deterioration of a few product businesses will impact overall profitability.

Outlook
CG will benefit from restructuring done in the last two years. The Power systems group will lead the marginal improvement in revenues. Contribution of exports to total revenues will increase from 13% in FY02 to 17% in FY04 and 22% in FY05. Though this share is not significant as a percentage of total revenues, considering the long-term sustainability of CGs export model, we recommend a VALUE BUY.
62 Edelweiss

Financial Statements
CROMPTON GREAVES

Financial Statements
Income Statement
Year to March Income from Operations International Revenues Domestic Revenues Manufacturing Expenses Employee Expenses S G & A Expenses EBIDTA Interest Expenditure Depreciation Other Income Profit Before Tax Provision For Tax Minority interest Recurring Profit After Tax Net Extra-ordinary Items Reported Profit After Tax EPS (INR) Shares Outstanding (mn) Dividend per share (INR) Dividend payout (%) FY01 12,527 930 10,342 9,175 1,765 2,102 (515) 871 473 49 (1,810) 3 (1,808) 1,081 (727) (34.6) 52.4 0.0 0.0 FY02 14,948 2,120 11,464 9,941 1,578 2,020 1,409 757 452 161 361 34 2.8 325 (277) 48 6.2 52.4 0.0 0.0 FY03E 16,284 2,494 12,480 10,878 1,625 2,211 1,570 688 474 110 518 104 5 409 0 409 7.8 52.4 1.0 12.8 FY04E 17,915 3,366 13,167 11,824 1,723 2,479 1,889 520 498 110 981 324 10 647 (250) 397 12.4 52.4 2.0 16.2 (INR mn) FY05E 19,872 4,625 13,799 13,215 1,878 2,661 2,118 530 523 110 1,175 388 10 777 (250) 527 14.8 52.4 2.5 16.8

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee Expenses Other Expenses Depreciation EBIDTA Margins Interest Expenditure Net Profit Margins FY01 73.2 14.1 16.8 3.8 (4.1) 7.0 (14.4) FY02 66.5 10.6 13.5 3.0 9.4 5.1 2.2 FY03E 66.8 10.0 13.6 2.9 9.6 4.2 2.5 FY04E 66.0 9.6 13.8 2.8 10.5 2.9 3.6 FY05E 66.5 9.4 13.4 2.6 10.7 2.7 3.9

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 (17.9) 22.8 NA NA NA NA FY02 19.3 127.9 NA NA NA NA FY03E 8.9 17.6 11.4 43.4 26.1 26.1 FY04E 10.0 35.0 20.3 89.5 58.2 58.2 FY05E 10.9 37.4 12.1 19.7 20.0 20.0

Edelweiss

63

Balance Sheet
MANUFACTURED EXPORTS

Balance Sheet
As on 31st March Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Others Minority interest Sources Of Funds Gross Block Depreciation Net Block Capital Work In Progress Investments Inventories S.Debtors Cash and Bank Balances Loans and Advances Total Current Assets S. Creditors Other Current Liablities Provisions Total Current Liabilities and Provisions Others Deferred Tax Asset Uses of Funds Book Value Per Share (INR) FY01 524 4,103 4,627 4,809 1,103 5,912 0 10,539 7,101 3,182 3,919 588 1,196 1,846 4,704 7 1,625 8,182 4,948 102 172 5,222 498 0 9,160 88 FY02 524 3,650 4,174 4,082 1,097 5,179 22 9,374 7,840 3,669 4,172 91 562 1,836 4,820 28 1,792 8,476 5,361 78 199 5,638 834 878 9,374 80 FY03E 524 4,007 4,531 3,633 1,042 4,675 25 9,231 8,232 4,143 4,089 90 510 1,976 5,399 60 1,928 9,363 5,784 106 194 6,084 584 678 9,231 87 FY04E 524 4,300 4,823 3,270 990 4,260 25 9,108 8,644 4,641 4,003 90 510 2,009 5,974 210 2,115 10,308 6,291 88 414 6,793 334 657 9,108 92

(INR mn) FY05E 524 4,696 5,220 2,943 940 3,883 25 9,128 9,076 5,164 3,912 90 510 2,103 6,717 240 2,336 11,397 6,893 85 478 7,455 84 591 9,128 100

Ratios
Year to March ROE (%) ROCE (%) Inventory Days Debtors Days Fixed Assets T/o (x) Debt/Equity (x) FY01 (39.2) (8.9) 49 125 1.94 1.43 FY02 7.4 11.2 41 108 2.08 1.54 FY03E 9.4 13.0 41 112 0.90 1.18 FY04E 13.8 16.4 38 113 1.04 0.94 FY05E 15.4 18.7 36 115 1.23 0.75

Valuation Parameters
Year to March EPS (INR) YoY growth (%) CEPS (INR) PE (x) Price/BV(x) EV/Sales (x) EV/EBIDTA (x) FY01 (34.6) (25.6) (1.7) (25.6) 0.6 (15.4) FY02 6.2 14.8 10.0 14.8 0.5 5.6 FY03E 7.8 26.1 16.9 8.0 16.9 0.4 4.7 FY04E 12.4 58.2 21.9 5.0 21.9 0.4 3.6 FY05E 14.8 20.0 24.8 4.2 24.8 0.3 3.0

64

Edelweiss

Cummins India
Rooshnil Securities
(An Edelweiss Capital Company)

CUMMINS INDIA
Driven by new Engines

ENGINEERING

Update INR 70

Company Report

Recommendation
Va l u e

Cummins India Ltd (CIL) is Indias leading diesel engine manufacturer. It primarily caters to the power generation and industrial markets. The company has undergone extensive restructuring in the last three years under the new management. It has extended product range and upgraded product quality. CIL has been exporting select engine models to its parent for over a decade. The global slowdown in the power generation business during the last two years has hit CILs exports (40% decline in export revenues in FY03E to INR 1.7 bn). To counter this CIL started working on exporting components to the parent and has just started shipping these. CIL is one of the lowest cost producers in the Cummins group and has an established track record. Considering all these, we expect CIL to report an export revenue CAGR of 30% during FY03-FY05E.

Sell

Reduce Accum Buy

Key Investment Highlights


Established engine export business For FY02, export revenues accounted for 27% of CILs total revenues. In FY00 export revenues rose from INR 1.47 bn in FY98 to INR 2.8 bn. CIL has been traditionally exporting engines to Cummins Inc. It has been an exclusive supplier of V-28 series engines. Global slowdown a growth opportunity CILs role in the Cummins group is becoming important. For instance, CIL and Cummins UK jointly developed the latest Q series engines and are currently working on developing N series gas engines. CIL would be exclusive supplier of this engine. Globally, the power generation equipment business is going through a lean period. Most companies are looking at low cost manufacturing options like India. Focus on components exports a positive Traditionally, CIL manufactured most components required for an engine in-house. The company wants to capitalise on its experience of manufacturing critical components and scale up this business. It has started working on a component export strategy from January 2001. We view this very positively since, besides boosting growth, this will reduce dependence on the power generation market. CIL started exporting camshafts and connecting rods, each having a potential to scale up to USD 50 mn annually. We expect component export revenues of INR 200 mn in FY04 and INR 700 mn by FY05. CIL is trading at 14xFY03E and 11xFY04E earnings and at an EV/EBIDTA of 8.9xFY03E. We believe CIL will benefit from successful scaling-up of its new businesses in the domestic market, component export initiatives and aggressive cost cutting measures from FY04 onwards. This will increase CILs share in Cummins group steadily. We recommend a VALUE BUY.
Financials Price Chart
75 600 500

Trading Sell Buy No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 51.0 15.1 12.7 21.2

Reuters Code Bloomberg Code

:CUMM.BO : KKC IN

Market Data 52-week Range (INR) : : 70/45 198 14/291

India Equity Research

Shares in issue (mn)

MCap (INR bn/USD mn) :

Year to March
Revenue (INR mn) Growth % Net Profit (INR mn) EPS (INR) EPS Growth (%) P/E (x) EV/EBIDTA (x) ROE (%)

FY03E

FY04E

FY05E

10,337 1.4 967 4.9 (5.6) 14.3 8.9 13.8

11,738 13.6 1,231 6.3 28.4 11.2 6.7 16.7

13,482 14.9
Price (INR)

70 65 60

1,510 7.7 23.4 9.0 5.2 18.4

300 55 50 45 40 May-02 200 100 0 May-03

Aug-02

Nov-02

Feb-03

Volume (000)

Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com

400

Management and Company Backgro Business Analysis Chart 17: Revenue break up in
MANUFACTURED EXPORTS

Management and Company Background


Cummins Engines Co. USA (CE) and Kirloskar Oil Engines Limited (KOEL) promoted CIL in 1962 with a 50% and 25% stake respectively. The objective was to manufacture diesel engines to CEs specifications. In late eighties, Cummins took over the management of the company from the Kirloskars. In FY98, KOEL and Cummins decided to part ways and KOEL sold 1% of CILs equity to Cummins Inc. The Cummins group has 8 companies in India catering to power generation and, industrial and automotive markets. While CIL is the flagship company, other group companies are Tata Cummins Ltd, a JV with Tata group, Tata Holset Ltd, Valvoline Cummins Ltd and Fleetguard Filters India Ltd. Combined revenues for FY02 for the are INR 21 bn. The company has two production facilities - at Pune in Maharashtra and at Daman near Gujarat. The engine manufacturing facility, situated on 379,400 square meters area at Pune, is the main facility. CIL manufactures all major engine components including cylinder blocks, crankshafts, gears and fuel system components in-house and also has an excellent R&D centre at Pune.

Business Analysis
CIL has expanded its product range to cater to the entire power generation market: from 15 Kva to 3000 Kva. Most of these engines operate on diesel, gas and duel fuel mode. CILs engines find applications in power generation, construction and mining, compressors, locomotives and, marine segments. Chart 17 below gives an industry-wise break-up of over 86,000 Cummins live engines in the domestic market. CIL has been a leading player in the diesel engine market, with over a 65% market share in 125 kva to 1250 kva genset business. It also has 30% market share in the 15 kva and 125 kva genset businesses. CILs main competitors are Hindustan Powerplus, (which manufactures and markets Caterpillar engines in India) and Kirloskar Oil Engines.
Chart 17: Revenue break up in FY02
CPSL, PSIL and CASL 10% Powergen Domestic 22%

CDSS 32%

Powergen Exports 27% Industry 9%


Source: Edelweiss

CIL has one of the best after sales networks in the country in engineering products. CIL is increasing focus on offering complete solutions and enhancing spares and service revenues. New businesses added in the last three years like power rentals and after sales support of trucks have shown good progress. We believe that CILs domestic revenues will grow 7% each in FY04 and FY05, driven by these businesses.

66

Edelweiss

Risks and Concerns Outlook


CUMMINS INDIA

Risks and Concerns


Ability to scale up component exports and dependence on U.S. market for engines sales CIL has just started catering to Cummins U.S. plant requirements. The scaling up of this business would depend on closure of relationships with existing local vendors and ability to bag new component parts. The process of replacing existing vendors can get delayed considering long term relationships and sensitivity of the issue. Power generation markets in U.S. and other countries will determine CILs fortunes in the engine exports business. Rising diesel prices and sluggish domestic market Fuel accounts for 80% of the total cost of generating a unit of power. A host of measures to de-regulate the oil sector and abolish APM saw diesel prices shooting up 60% in the last 24 months. Thus, cost of generating power using DG sets has become costlier than the tariffs charged by State Electricity Boards (SEBs) to industries. In power generation and industrial applications, CIL depends on the domestic industry. Major buyers of DG sets are textiles, chemicals, cement and other manufacturing firms.

Outlook
CIL is seeing early signs of benefiting from new initiatives made during the last three years like extending the product range, offering additional value added services and commencing component exports. We believe these initiatives will lead to steady growth in revenues going forward. To improve cost structure, the company is implementing turbo kaizen a cost-cutting initiative aimed at drastic improvement in processes and elimination of wastages. The company is generating close to INR 1 bn in free cash flows. The recent decision to pay dividend of INR 800 mn clearly indicates the companys intentions on utilisation of free cash flows. We recommend a VALUE BUY.

Edelweiss

67

Financial Statements
MANUFACTURED EXPORTS

Financial Statements
Income Statement
Year to March Income from Operations International Revenues Domestic Revenues Manufacturing expenses Employee expenses S G & A expenses EBIDTA Interest Expenditure Depreciation Other Income Profit Before Tax Provision For Tax Profit After Tax EPS (INR) Outstanding Shares (mn) Dividend Per Share (INR) Dividend Payout (%) FY01 10,715 2,888 7,827 7,172 923 888 1,733 37 289 281 1,688 456 1,232 6.2 198.0 1.3 23.0 FY02 10,195 2,756 7,439 6,734 1,044 1,090 1,327 35 288 441 1,444 350 1,094 5.2 198.0 1.5 29.0 FY03E 10,337 1,700 8,637 6,811 1,125 1,179 1,223 30 320 467 1,339 372 967 4.9 198.0 4.0 82.0 FY04E 11,738 2,210 9,528 7,598 1,178 1,329 1,633 30 349 467 1,722 490 1,231 6.3 198.0 2.0 31.9 (INR mn) FY05E 13,482 2,873 10,609 8,632 1,261 1,546 2,042 30 378 468 2,102 592 1,510 7.7 198.0 2.4 31.0

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee expenses S G & A expenses Depreciation EBIDTA margins Interest Expenditure Net Profit margins FY01 66.9 8.6 8.3 2.7 16.2 0.3 11.5 FY02 66.1 10.2 10.7 2.8 13.0 0.3 10.7 FY03E 65.9 10.9 11.4 3.1 11.8 0.3 9.4 FY04E 64.7 10.0 11.3 3.0 13.9 0.3 10.5 FY05E 64.0 9.4 11.5 2.8 15.1 0.2 11.2

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 38.1 4.1 201.0 217.4 231.2 (85.0) FY02 (4.9) (4.6) (23.5) (14.5) (11.2) (16.9) FY03E 1.4 (38.3) (7.8) (7.3) (11.6) (5.6) FY04E 13.6 30.0 33.6 28.6 27.4 28.4 FY05E 14.9 30.0 25.0 22.1 22.7 23.4

68

Edelweiss

Balance Sheet
CUMMINS INDIA

Balance Sheet
As on 31st March Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Minority Interest Lease rental payable Deferred Tax Liability Sources of Funds Gross Block Depreciation Net Fixed Assets Capital Work in Progress Lease Rental receivable Deferred Tax Asset Investments Inventories S. Debtors Cash & Bank Balances Loans & Advances Total Current Assets S. Creditors Other liabilites and Provisions Provisions Total Current Liabilities and Provisions Net Current Assets Uses of Funds Book Value Per Share (INR) FY01 396 5,386 5,782 0 120 120 0 0 0 5,902 4,055 2,340 1,716 0 0 0 1,318 1,353 2,348 111 477 4,289 938 0 482 1,421 2,868 5,902 29.2 FY02 396 6,568 6,964 32 192 223 32 6 169 7,393 4,750 2,715 2,036 111 43 7 2,308 1,784 2,650 334 462 5,229 1,693 11 636 2,340 2,889 7,393 35.2 FY03E 396 6,643 7,039 0 100 100 32 0 150 7,321 5,155 3,035 2,120 98 32 5 2,608 1,813 2,634 475 467 5,389 1,756 11 1,164 2,931 2,458 7,321 35.6 FY04E 396 7,438 7,834 0 100 100 32 0 150 8,116 5,640 3,384 2,257 80 24 5 2,608 1,994 2,959 519 566 6,038 1,994 15 886 2,895 3,142 8,116 39.6

(INR mn) FY05E 396 8,435 8,831 0 100 100 32 0 100 9,063 6,125 3,762 2,364 70 18 5 2,608 2,216 3,324 1,142 688 7,371 2,290 15 1,067 3,372 3,998 9,063 44.6

Ratios
Year to March ROE (%) ROCE (%) Debtors Days Inventory Days Fixed Assets T/o (x) Debt/Equity FY01 22.9 28.5 80.0 46.1 2.1 0.0 FY02 16.1 15.9 94.9 63.9 2.1 0.0 FY03E 13.8 13.5 93.0 64.0 2.0 0.0 FY04E 16.7 16.5 92.0 62.0 2.1 0.0 FY05E 18.4 18.2 90.0 60.0 2.2 0.0

Valuation Parameters
Year to March EPS (INR) PE (x) CEPS (INR) Price/BV(x) EV/Sales (x) EV/EBIDTA (x) FY01 6.2 11.2 7.7 1.8 1.1 6.7 FY02 5.2 13.5 7.0 1.5 1.1 8.6 FY03E 4.9 14.3 6.8 1.4 1.1 8.9 FY04E 6.3 11.2 8.3 1.3 0.9 6.7 FY05E 7.7 9.0 9.9 1.2 0.8 5.2

YoY
Edelweiss 69

Thermax
Rooshnil Securities
(An Edelweiss Capital Company)

THERMAX
Maximising profits

ENGINEERING

Update INR 178

Company Report

Recommendation
Va l u e

Thermax is a leading Indian engineering company. Its key products are boilers and chillers. To capitalise on its engineering capabilities and to counter the slowdown in domestic markets, the company started focusing on international markets for growth in the late nineties. The companys export strategy involved investment in sales and marketing network to sell directly to customers. As a part fo this, Thermax opened offices in eight countries in the last four years and appointed resident representatives in ten other countries. We view this strategy as a major positive. In FY01, Thermax acquired ME Engineering of the UK. Thermaxs international revenues have increased from INR 1.1 bn in FY01 to INR 1.9 bn in FY03 We expect Thermax to report a 25.5% CAGR in international revenues during FY02-FY05.

Sell

Reduce Accum Buy

Key Investment Highlights


Focus on international markets Thermax is one of the first few engineering companies to identify and focus on international markets for growth. Over the last five years, it has opened subsidiaries in three countries and has established offices in sixteen countries. The company has always believed in investing in sales and marketing network to sell directly to customers, instead of being a supplier to an OEM or a contract manufacturer. Acquires ME Engineering UK Thermax acquired ME Engineering, UK, in May FY01. ME is a turnkey engineering company with a presence in designing, manufacture and construction of boiler related work for oil, gas, petrochemical and industrial markets. Thermax retained the key management team and aligned MEs operations with itself and started offering energy and environment solutions to the industrial customers in UK. The companys revenues increased from UKP 2 mn in FY00 to UKP 8 mn in FY03. We believe going forward, ME will provide increased business opportunities for Thermax. Product range - Boilers, Chillers and Water Treatment Chemicals Boilers (50% export revenues in FY03E) will lead Thermaxs exports followed by Chillers (25% of export revenues in FY03E) and water treatment chemicals (25% of export revenues in FY03E). Thermax has a presence in over 27 countries and has created a niche for each of its products globally. Key international markets for Thermax are: East Asian countries (36% of revenues), U.S. (30% revenues) and Europe (20%). Thermax is trading at 9.9xFY03E and 8.5xFY04E earnings and at an EV/EBDITA of 2.6xFY03E. We believe, Thermax will report steady growth in the domestic market, with the main growth driver being captive power plant business. Growth in the international markets will be robust as initiatives taken over the last two years start to pay off. We recommend a VALUE BUY.
Financials Price Chart
FY03E FY04E FY05E
190 180 400 350 300 250 200 140 130 120 110 100 May-02 Aug-02 Nov-02 Feb-03 150 100 50 0 May-03

Trading Sell Buy No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 62.0 14.2 1.8 22.0

Reuters Code Bloomberg Code

:THMX.BO : TMX IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 178/108 23.8 4.2/89

MCap (INR bn/USD mn) :

Year to March
Revenue (INR mn) Growth (%)

7,296 19.4 443 18.0 55.6 9.9 2.6 11.2

7,848 7.6 515 20.9 16.1 8.5 2.0 12.6

8,595 674 27.5 31.3 6.5 1.3 15.3


Price (INR)

170 160 150

Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com

Net Profit (INR mn) EPS (INR) EPS Growth (%) P/E (x) EV/EBIDTA (x) ROE (%)

Volume (000)

9.5

Management and Company Backgro Business Analysis Chart 18: Revenue break up in
THERMAX

Management and Company Background


Thermax was incorporated in 1966 as Wanson India Pvt Ltd in technical collaboration with Wanson, a Belgian company manufacturing coil type boilers. Today, Thermax offers integrated solutions in energy and environment management to industrial and commercial entities. The company has four manufacturing facilities near Pune and a network of 150 distributors in the country. It has subsidiaries in three countries and branch offices in eight countries. In India Thermax has three subsidiaries. The companys diversification into too many businesses and slowdown in industrial sector led to Thermax reporting flat revenues of around INR 5 bn in FY97-FY02. In the last three to four years, Thermax has undergone extensive restructuring. This entailed exiting five businesses, winding up three JVs, re-designing shop floors and cutting manpower by 26%.

Business Analysis
The companys main business is manufacturing boilers in which it has a 40% market share in its addressable market. It caters to small and medium industrial undertakings. Over the years, Thermax has refined its business projecting itself as a conserving energy and preserving environment company with a expertise in offering comprehensive solutions.
Chart 18: Revenue break up in FY02

Others Environment - 3% Exports 10% Environment Domestic 19%

Energy Domestic 54%

Energy Exports 14%


Source: Edelweiss

The companys main business groups are Energy and Environment. The Energy group comprises of boilers and heaters and co-generation businesses. The Environment group comprises of absorption chillers, chemicals and water and waste water solutions businesses. All these find applications in industries. The slowdown in Indian industrial production during the last five years has affected Thermaxs sales in these businesses.

Edelweiss

71

Risks and Concerns


MANUFACTURED EXPORTS

Outlook

Risks and Concerns


Delays associated with the strategy of Direct Sales Model Thermax has adopted the Direct Sales Model for expanding its international business. The strategy calls for setting up offices in target countries and appointing dealers and country representatives to sell its products. Besides being time-taking, huge investments would be needed to build this network and attain a critical mass. However, we are of the opinion that this model offers better returns in the long term. A marginal player with diverse product range In the international business, Thermax has a presence in boilers, chillers and water chemicals. Each of these businesses contributes less than USD 15 mn to export revenues and less than USD 50 mn to total revenues. Given the small size of operations and diversified product range, the company faces a significant risk of getting marginalised.

Outlook
Thermax has rightly decided to focus on international markets for growth. Efforts made in the last five years have just started paying off. The completion of restructuring at home has given the management more time to focus on international markets. Considering growing international revenues and distribution network, scaling up of ME Engineering and tie-ups entered into recently, we believe Thermax will report steady growth going forward. We thus recommend a VALUE BUY.

72

Edelweiss

Financial Statements
THERMAX

Financial Statements
Income Statement
Year to March Income from Operations International Revenues Domestic Revenues Manufacturing Expenses Employee Exenses S G & A Expenses EBIDTA Interest Expenditure Depreciation Amortisation Other Income Profit Before Tax Provision For Tax Less Minority interest Profit After Tax EPS (INR) Shares outstanding (mn) Dividend per share (INR) Dividend payout (%) FY01 4,578 1,105 3,473 2,708 648 1,087 136 37 117 144 125 28 98 9.9 23.3 1.0 11.2 FY02 6,111 1,425 4,686 3,435 808 1,382 486 40 184 76 170 357 82 (1) 276 11.6 23.8 5.0 43.1 FY03E 7,296 1,900 5,742 4,464 772 1,297 763 20 193 70 171 651 221 (13) 443 18.0 23.8 6.0 33.3 FY04E 7,848 2,270 5,942 4,752 811 1,375 910 0 209 70 125 756 257 (16) 515 20.9 23.8 18.0 86.0 (INR mn) FY05E 8,595 2,816 6,174 5,196 840 1,494 1,065 0 228 0 155 992 337 (20) 674 29.4 23.8 15.0 54.6

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee Expenses S G & A Expenses Depreciation EBIDTA Margins Interest Expenditure Net Profit Margins FY01 59.1 14.1 23.7 2.6 3.0 0.8 6.2 FY02 56.2 13.2 22.6 3.0 8.0 0.7 4.5 FY03E 61.2 10.6 17.8 2.6 10.5 0.3 6.1 FY04E 60.6 10.3 17.5 2.7 11.6 0.0 6.6 FY05E 60.5 9.8 17.4 2.7 13.2 0.0 7.8

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 17.0 NA NA NA NA NA FY02 33.5 29.0 257.9 184.3 181.9 2.5 FY03E 19.4 33.3 57.0 82.5 60.2 0.0 FY04E 7.6 24.7 19.2 16.1 16.4 0.0 FY05E 9.5 18.8 17.1 31.3 31.0 0.0

Edelweiss

73

Balance Sheet
MANUFACTURED EXPORTS

Balance Sheet
As on 31st March Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Net Deferred Tax Liabities Sources of Funds Gross Block Depreciation Net Fixed Assets Capital Work in Progress Investments Inventories S. Debtors Cash & Bank Balances Loans & Advances Other Current Assets Total Current Assets S. Creditors Other Liabilites Provisions Total Current Liabilities and Provisions Net Current Assets Others Miscellaneous Expenditure P&L Account Uses of Funds Book Value Per Share (INR) FY01 233 3,314 3,547 323 103 425 3,972 1,681 712 969 20 1,582 522 1,114 192 619 96 2,542 435 702 46 1,183 1,359 42 3,972 151 FY02 238 3,663 3,901 147 10 157 143 4,201 2,160 1,058 1,102 1 1,704 564 1,534 363 612 58 3,131 1,221 633 195 2,049 1,082 152 161 4,201 157 FY03E 238 3,686 3,924 0 0 0 146 4,070 2,330 1,251 1,079 0 1,804 733 1,675 429 775 115 3,726 1,570 837 221 2,629 1,097 91 4,070 161 FY04E 238 3,756 3,994 0 0 0 131 4,125 2,541 1,460 1,082 0 1,312 742 1,755 1,114 787 74 4,472 1,620 900 257 2,777 1,695 36 4,125 166

(INR mn) FY05E 238 4,053 4,291 0 0 0 98 4,390 2,799 1,688 1,112 0 1,627 813 1,847 1,113 862 50 4,764 1,749 985 337 3,071 1,693 25 4,390 179.0

Ratios
Year to March ROE (%) ROCE (%) Debtors Days Inventory Days Fixed Assets Turnover (x) Debt/Equity FY01 6.5 3.2 90 42 2.9 0.1 FY02 7.4 8.9 100 37 3.0 0.0 FY03E 11.2 16.2 80 35 3.3 FY04E 12.6 18.7 78 33 3.2 FY05E 15.3 23.5 75 33 3.2 -

Valuation Parameters
Year to March EPS (INR) YoY growth (%) CEPS (INR) PE (x) Price/ BV (x) EV/ Sales (x) EV/EBIDTA (x) FY01 9.9 NA 14.9 18.0 1.2 0.7 22.2 FY02 11.6 17.4 22.5 15.3 1.1 0.5 4.8 FY03E 18.0 55.6 29.1 9.9 1.1 0.3 2.6 FY04E 20.9 16.1 32.6 8.5 1.1 0.2 2.0 FY05E 27.5 31.3 37.0 6.5 1.0 0.2 1.3

74

Edelweiss

PHARMACEUTICAL

PHARMACEUTICAL

PHARMACEUTICAL INDUSTRY

PHARMACEUTICAL INDUSTRY
The prognosis is good
A vibrant sector The Indian pharmaceutical industry is a dynamic sector with significant growth potential in the global marketplace. The Indian market is currently valued at USD 4 bn and comprises of formulations (58%) and bulk drugs (25%). Exports from India are to the tune of USD 1.7 bn. India primarily exports bulk drugs, which account for 70% of export revenues. The Indian industry is fragmented with over 23,000 players. Of these, only 250 players belong to the organised market. Indian companies have over the years emerged agile, cost competitive and market savvy. They now dominate the Indian market with over an 80% share, up from 60% a decade ago. MNCs share has been dwindling due to their hesitancy in launching new products in the absence of intellectual property rights in India. In the last five years, the CAGR in the domestic market was approximately 12% and that of exports was over 40%. Demand from the life style segments of respiratory, cardiovascular, CNS and diabetes has been the key driver in the domestic market. On the export front, growth has been driven by both bulk and formulations, primarily to unregulated markets. Key domestic players Key players constitute a mix of Indian and multinational companies. Major Indian players are Ranbaxy (INR 46 bn), Dr Reddys Laboratories (INR 18 bn), Cipla (INR 17 bn), Aurobindo Pharma (INR 11 bn), Nicholas Piramal (INR 10 bn), Lupin (INR 10 bn), Sun Pharmaceuticals (INR 9 bn), and Wockhardt (INR 8 bn). Major multinational players are Glaxo SmithKline Pharmaceuticals (INR 10 bn), Pfizer (INR 7 bn), Novartis (INR 4 bn) and Aventis Pharma (INR 7 bn). USD 380 bn global marketplace The global pharmaceutical market is valued at USD 380 bn and has been growing at a 10% CAGR in the last decade. The United States is the largest and most lucrative pharmaceutical market (52% of global sales). The other key markets globally are Europe comprising of the U.K, Spain, Germany, France and Italy (30%), Japan (15%) and Latin American countries (4%). These markets are well regulated entailing rigorous procedures for approval of products and characterised by high quality standards in manufacturing. The top ten companies account for approximately 50% of global revenues. The leading companies are Pfizer (USD 52 bn), GlaxoSmithKline (USD 28 bn), Merck (USD 22 bn), Astra Zeneca (USD 17 bn), Aventis (USD 17 bn), Johnson and Johnson (USD 16 bn), Novartis (USD 14 bn), Bristol Myers Squib (USD 14 bn), Eli Lilly (USD 10 bn), and Roche (USD 8 bn).

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PHARMACEUTICAL INDUSTRY

Key growth drivers Export offers a major growth opportunity for Indian companies. On the domestic front, increasing demand for life style drugs is the key driver. a) Export an immense opportunity The global pharmaceutical industry was valued at USD 380 bn as per IMS December 2002 Data. The generics market is approximately 20% of global revenues. There are attractive opportunities available for Indian companies in this space in the medium and long term. We believe the opportunities will come from the following two areas: i) Generics space in Europe and US Drugs worth approximately USD 60 bn are expected to go off patent by 2010 in the U.S. and Europe. Cost efficient Indian companies possessing strong process research skills, and having upgraded plants and facilities to meet the regulatory markets requirements are well placed to tap this opportunity. Leading Indian companies like Ranbaxy, Dr Reddys and Cipla have already begun to participate in this wave. We believe numerous Indian companies are well prepared to exploit this growth opportunity. The Indian companies have just a 1% share in the global market. This is only the tip of the iceberg. The time is ripe for Indian companies to leverage numerous advantages and make a marked presence on the global scene. ii) Export opportunities in other regulated and semi-regulated countries Indian players have almost a negligible presence in other key markets like Brazil (USD 4 bn), Mexico (USD 5 bn), Australia (USD 4 bn), China (USD 6 bn) and Japan (USD 50 bn). The attractive prices of generics combined with spiralling healthcare costs has forced governments in these countries to be more receptive to generics. Of late, we see several trends that indicate an opening up of these markets. Several Indian companies like Cipla, IPCA and Ranbaxy have already entered these markets, though in a small way. We see a big opportunity for low cost generics from India in these markets. iii) Contract R&D The global outsourcing market for R&D is valued at approximately USD 10 bn. This encompasses basic research, NDDS, clinical trials, CRAMS and discovery services. Companies like Shasun, Suven, Divis, and Dr Reddys have already tapped this market. Going forward, an increasing share of revenues of Indian companies is expected to come from contract R&D. b) Life style segments to drive domestic sales Cardiovascular, CNS, diabetes and respiratory areas of the lifestyle segment, though a small percentage of the domestic formulations market presently, are poised to grow. The Indian scenario is witnessing a shift towards the lifestyle segment. Increasing demand is seen for lifestyle segment drugs. We believe there is considerable scope for Indian companies to scale up revenues in these segments. Key success factors To achieve global success, Indian companies need to possess the following: Strong Process Research skills Integrated manufacturing facilities Facilities that meet regulatory markets requirements

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MANUFACTURED EXPORTS

Capacities to cater to global market requirements Active pipeline of product registrations across markets Availability of skilled R&D talent with experience in global companies

Outlook We believe strengths built by Indian companies in the last decade in manufacturing and research make them competitive. This has been exemplified by the success stories of some leading Indian companies like Ranbaxy (in the US generics market), Dr. Reddys (in the R&D space), Divis, Suven (in the CRAMS space) and Aurobindo (in manufacturing). These achievements are small compared to the immense opportunities. Exports from India account for just 1% of global pharma trade. We believe opportunities have just begun to unfold for the industry and reiterate our positive stance on this sector. We expect the Indian pharmaceutical industry to be a key wealth creator in the long term.

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Edelweiss

Aurobindo Pharma
Rooshnil Securities
(An Edelweiss Capital Company)

AUROBINDO PHARMA
A new beginning

PHARMA

Initiating Coverage INR 273

Company Report

Recommendation
Va l u e

Aurobindo Pharma (AP) is a leading Indian bulk drug manufacturer with a strong thrust on exports. Its main product lines are bulk semi-synthetic penicillins (SSPs) and bulk cephalosporins. In the last three years, AP has worked robustly to enter the regulated markets, build capabilities to manufacture formulations and attain global leadership in main product lines. To achieve this, it invested over INR 4 bn on capacity expansion, backward integration and plant upgradations. AP simultaneously expanded its R&D team, improved its product basket, established operations in various markets and registered products aggressively. This vigorous restructuring has made AP cost competitive and given it a strong base to leverage its core competence. In FY04, AP is set to make a fresh beginning and positively transform its fundamentals. We expect the stock to be re-rated and recommend a VALUE BUY.

Sell

Reduce Accum Buy

Key Investment Highlights


Establishing global scale capacities Aurobindo has invested over INR 3.25 bn on expansion of capacities for its key product lines. This expansion would place Aurobindo among the top ten global manufacturers of SSPs and cephalosporins and enhance its competitiveness in global markets. Backward integration to enhance cost competitiveness Aurobindo has set up Aurobindo (Datong) Bio Pharma, a 100% subsidiary in China to manufacture key intermediates and raw materials. The plant is fully operational and would cater to 60% of Aurobindos raw material requirements. We expect this plant to bring in saving of over INR 300 mn in raw materials and ensure a steady supply of raw materials. Increasing share of formulations and high value bulk drugs Aurobindo now possesses capabilities to manufacture a range of formulations. Revenues from export formulations and high value bulk drugs are expected to drive a 30% CAGR from FY02 to FY05. Their share of total revenues is expected to increase from 9% in FY02 to 17% by FY05. Increasing contribution from these segments would drive higher margins. Entry into regulated markets Aurobindo is expected to enter the regulated markets of U.S. and Europe by FY05. Approvals for its plants from the US FDA and UK MCA are expected by Q3FY04. We expect an upward re-rating of the stock upon its eventual entry into these markets. We expect Aurobindo to emerge cost competitive on the back of robust restructuring and leverage its core competence. We estimate an EPS of INR 35.7 and INR 58.9 in FY03E and FY04E respectively. The stock is trading at a PE of 7.7xFY03E and 4.6x FY04E earnings at an EV/EBIDTA of 4.6xFY04E. We recommend a VALUE BUY.
Financials Price Chart
280 80 70

Trading Sell Buy No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 61.6 10.8 10.0 17.7

Reuters Code Bloomberg Code

: ARBN.BO : ARBP IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 276/180 23.25

MCap (INR bn/USD mn) : 6.3 / 113.4

Year to March
Revenues (INR mn) Growth (%)

FY03E

FY04E

FY05E

11,809 8.0 831 35.7 (2.4) 7.7 6.5 16.5

14,170 18.8 1,425 58.9 65.1 4.6 4.6 22.0

17,129
Price (INR)

260

60 50 40

22.1 1,768 73.1 24.1 3.7 3.5 22.0

Preethi Shukla 91-22-2286 4307 preethi@edelcap.com

Net profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBITDA (x) ROE (%)

240

220

30 20 10

200

180 May-02 Aug-02 Nov-02 Feb-03

0 May-03

Volume (000)

Management and Company Backgro Business Analysis Chart 19: Revenue break up in
MANUFACTURED EXPORTS

Management and Company Background


Aurobindo is a leading pharmaceutical company, headquartered at Hyderabad, India. It was promoted in 1986 by Mr Rama Prasad Reddy (Chairman) and Mr Nityanand Reddy (Managing Director) to manufacture a range of bulk drugs. Their stake in the company is 62%. Currently over 90% of its revenues are from bulk drugs. Exports and domestic sales contribute equally to this. Until mid-nineties, Aurobindos focus was primarily on semisynthetic penicillins. Over the years, it has diversified its product profile to establish a presence in cephalosporins, formulations and high value bulk drugs. In the last three years, Aurobindo expanded its operations across different parts of the world. It has set up Aurobindo (Datong) Bio Pharma, a 100% subsidiary based in China for manufacturing key intermediates and raw materials required by Aurobindo. The plant is fully operational and would cater to 30% of Aurobindos raw material requirements. Other key destinations where Aurobindo has subsidiaries include U.S., U.K, Brazil, Mexico, Hong Kong and Thailand. Extended global presence, especially in regulated markets would help Aurobindo in improving its profitability. Aurobindo has eight manufacturing units four at Visakhapatnam, two at Hyderabad and two at China. Of these, four plants would be equipped to meet regulatory markets. In the short term, we expect Aurobindo to improve profitability through backward integration by setting up the lower cost manufacturing facility at China. In the medium term we expect Aurobindo to enter the regulated markets, gain leadership and strengthen its stronghold in segments where it already has a presence. Over the long term, we believe Aurobindo would become an important player with a strong presence in regulated markets having a well established distribution network and a vibrant product pipeline.

Business Analysis
Over 90% of Aurobindos FY02 revenues come from bulk drugs. Within the bulk drug categories, Aurobindo has a leading presence in semi-synthetic penicillin and cephalosporin bulk, both oral and sterile. These two product segments contribute to over 60% of Aurobindos revenues. The formulations business addresses the anti-infective, antihistamines, anti-viral, anti-TB, anti-ulcer, anti-depressant, anti-fungal, gastro-intestinal, osteoporosis and cardiovascular therapeutic segments.
Chart 19: Revenue break up in FY02
Others-Exports 14% Others-Domestic 15% SSP Exports 23% Ceph. Exports 11% Ceph. Domestic 21%
Source: Company

SSP Domestic 16%

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Risks and Concerns Outlook


AUROBINDO PHARMA

Domestic and export markets contribute equally to Aurobindos revenues. The company exports to over 70 countries, primarily in unregulated and semi-regulated markets. Post restructuring, Aurobindo is expected to establish a presence in regulated markets as well. Restructuring of operations Aurobindo embarked on a major restructuring exercise of manufacturing facilities. This involved identification of viable units, elimination of wastages and upgradation of existing and new units to meet regulatory standards. It made the following changes. Discontinued its Pondicherry plant and Unit 4 at Visakhapatnam Revamped the Sri Chakra bulk drug facility and added cephalosporin and noncephalosporin units to these facilities Upgraded Unit 1, 5 and 6 to meet regulatory market requirements Set up a plant in China for manufacturing key intermediates

Major benefits accruing to Aurobindo from this restructuring are establishment of economies of scale and attaining the requisite capabilities to manufacture formulations.

Risks and Concerns


Unproven capabilities in formulations Aurobindo has attained leadership in bulk drugs. But it remains to be seen whether Aurobindo can repeat this feat in formulations since this segment calls for totally different business strategies. The demands of the regulated formulations market are complex and rigorous. Inability to deliver the right basket of products at competitive prices and at the right time could severly impact Aurobindos long term plans of succeeding in the formulations market. Increased working capital outlay could delay debt repayment With a significant expansion in overseas markets, we expect an increase in Aurobindos working capital. It is also expected to increase its outlay towards market development and product registrations. We believe surplus funds generated over the next two to three years would be utilised for the above purposes. As a result, debt repayment could be impacted or delayed. Aurobindo is significantly leveraged compared to its peers. We believe it is unlikely to see a significant reduction in this ratio due to the above factors.

Outlook
We expect significant transformation in Aurobindos operations in the coming years. Following vigorous restructuring, the company has emerged agile, more receptive to market trends and aggressive in its focus towards export markets. With a leaner cost base and widened product pipeline, we expect the company to show buoyant earnings growth over the next two years. While we estimate a 20% export CAGR between FY02-FY05, we expect revenue and EPS to grow at a 15.7% and 33.8% CAGR respectively during the same period. The stock is trading at a PE of 7.7x FY03E and 4.6x FY04E earnings and at an EV/EBIDTA of 4.6x FY04E. We recommend a VALUE BUY.

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Financial Statements
MANUFACTURED EXPORTS

Financial Statements
Income Statement
Year to March Income from Operations International Revenues Domestic Revenues Manufacturing expenses Employee Expenses S G & A expenses EBIDTA Interest Expenditure Depreciation Other Income Profit Before Tax Provision For Tax Minority Interest Profit After Tax EPS (INR) Shares Outstanding ( mn) Dividend Per Share (INR) Dividend Payout (%) FY01 9,492 4,777 4,715 7,532 216 449 1,295 417 148 104 834 151 683 34.2 20.0 3.0 8.9 FY02 11,008 5,295 5,713 8,981 267 496 1,264 454 159 182 933 203 731 36.5 20.0 3.1 8.4 FY03E 11,809 6,286 5,524 9,218 306 550 1,736 550 269 122 1,038 208 831 35.7 23.3 4.0 11.2 FY04E 14,170 7,486 6,684 10,587 396 683 2,504 438 344 128 1,850 426 1,425 58.9 24.2 8.0 13.6 (INR mn) FY05E 17,129 9,128 8,001 12,641 493 827 3,168 407 505 134 2,390 621 1,768 73.1 24.2 8.0 10.9

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee Expenses S G & A Expenses Depreciation EBIDTA Margins Interest Expenditure Net Profit Margins FY01 79.4 2.3 4.7 1.6 13.6 4.4 7.1 FY02 81.6 2.4 4.5 1.4 12.5 4.1 6.5 FY03E 78.1 2.6 4.7 2.3 14.7 4.7 7.0 FY04E 74.7 2.8 4.8 2.4 17.7 3.1 10.0 FY05E 73.8 2.9 4.8 2.9 18.5 2.4 10.2

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 33.6 48.0 10.5 2.0 (8.4) (8.4) FY02 NA NA NA NA NA NA FY03E 8.0 18.7 37.3 11.2 13.7 13.7 FY04E 18.8 19.1 44.3 78.2 71.5 71.5 FY05E 22.1 21.9 26.5 29.2 24.1 24.1

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Balance Sheet
AUROBINDO PHARMA

Balance Sheet
As on 31st March Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Others Sources of Funds Gross Block Depreciation Net Block Capital Work In Progress Investments Inventories S.Debtors Cash and Bank Balances Loans & Advances Other Current Assets Total Current Assets S. Creditors Other Current Liablities Provisions Total Current Liabilities and Provisions Net Current Assets Others Uses of Funds Book Value Per Share (INR) FY01 200 2,564 2,764 1,375 885 2,259 2 5,025 1,982 376 1,606 109 238 1,730 2,013 46 638 0 4,426 1,279 120.6 1,400 3,026 5,025 138 FY02 207 3,353 3,560 2,591 1,563 4,154 20 7,733 2,214 494 1,720 926 165 1,519 4,209 203 817 0 6,748 1,510 121 1,631 5,117 7,733 178 FY03E 233 4,790 5,023 5,138 365 5,503 20 10,546 3,664 763 2,901 1,701 165 2,443 4,792 349 817 0 8,401 2,094 332 2,426 5,974 10,546 216 FY04E 242 6,225 6,467 4,788 365 5,153 20 11,640 4,650 1,107 3,543 1,395 165 2,902 6,061 36 912 0 9,870 2,529 651 3,138 6,732 11,640 267

(INR mn) FY05E 242 7,799 8,041 4,420 365 4,785 20 12,847 6,555 1,612 4,943 0 165 3,543 7,466 48 912 0 11,918 3,189 846 3,984 7,934 12,847 332

Ratios
Year to March RoE (%) RoCE (%) Inventory Days Debtors Days Fixed Assets T/o (x) Debt/Equity FY01 18.9 22.1 62.5 72.8 6.2 0.8 FY02 20.5 18.0 47.0 130.2 6.8 1.1 FY03E 16.5 15.1 70.0 140.0 4.3 0.8 FY04E 22.0 19.7 70.0 150.0 4.2 0.6 FY05E 22.0 21.8 70.0 150.0 3.7 0.6

Valuation Parameters
Year to March EPS (INR) YoY growth (%) CEPS (INR) PE (x) Price/BV (x) EV/Sales (x) EV/EBIDTA (x) FY01 34.2 (8.4) 42 8.0 2.0 0.7 5.7 FY02 36.5 7.0 45 7.5 1.1 0.8 7.3 FY03E 35.7 (2.4) 47 7.7 1.0 0.9 6.5 FY04E 58.9 65.1 73 4.6 0.8 0.8 4.6 FY05E 73.1 24.1 94 3.7 0.8 0.6 3.5

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IPCA Laboratories
Rooshnil Securities
(An Edelweiss Capital Company)

IPCA LABORATORIES
Formula for growth
Update

PHARMA

INR 243

Company Report

Recommendation
Va l u e

IPCA is a leading pharmaceutical player with a strong focus on exports. Over the last two years, IPCA has restructured operations and fundamentals to improve profitability. Investments were made over the last five years towards product registrations in regulated and semi-regulated markets, enlarging distributor network across markets, setting up subsidiaries in key markets and employing specialists dedicated to export operations. Simultaneously, IPCA upgraded its plants and enhanced its R&D spend to establish a vibrant product pipeline. These efforts are reflected in a) Higher share of revenues from the profitable regulated export markets, b) increasing share of revenues from formulations and c) Significant improvement in profitability of operations. We believe the fundamentals of IPCA, driven by strong export CAGR of 27% between FY02-FY05 are set to improve further. We recommend a V ALUE BUY.

Sell

Reduce Accum Buy

Key Investment Highlights


Market presence spanning across geographies IPCA derives 51% of its revenues from exports. Significantly, regulated markets of U.S., Europe and Australia account for over 60% of export revenues. Over the years, IPCA also established a presence in Africa, Asia, Middle East, CIS and Brazil. An early entry compared with domestic peers has given IPCA a head start and better understanding of certain key markets like Europe. Underpinned by these factors, IPCAs exports are expected to grow at a 27% CAGR between FY02-FY05.
52.7 3.4 0.1 43.8

Trading Sell Buy No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : :

Positive changes in the composition of exports driving profitability IPCAs composition of export revenues has changed positively in the last two years. The mix now comprises of a) an increasing share of revenues from regulated markets where margins are relatively higher b) decreasing contribution of tender exports, where margins are low c) shift from generics to branded formulation exports in semi-regulated markets of Asia, Africa and CIS countries and d) Increasing share of formulations in the total exports pie. These factors have already started contributing to improved profitability. For the first nine months of FY03, OPM has improved from 14.5 % to 19.9 % YoY. We believe the current valuations do not reflect IPCAs improving fundamentals. Strong exports growth is expected to drive revenues and profits significantly over the next three years. We expect an EPS of INR 50.6 and INR 67 in FY03E and FY04E earnings. The stock is trading at a PE of 4.8xFY03E and 3.6x FY04E and at an EV/EBIDTA of 2.8xFY04E. We recommend a VALUE BUY.

Reuters Code Bloomberg Code

: IPCA.BO : IPCA IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 245/95 12.5 3/64

MCap (INR bn/USD mn) :

Financials

Price Chart
300 100

Year to March
Revenues (INR mn) Growth (%) Net profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA (x) ROE (%)

FY03E

FY04E

FY05E

4,910 15.6 633 50.6 80.6 4.8 3.7 29.7

5,902 19.3 838 67.0 32.3 3.6 2.8 29.0

7,100 19.5
Price (INR)

250 200

80

Preethi Shukla 91-22-2286 4307 preethi@edelcap.com

1,033 82.6 23.3 2.9 1.9 26.8

60 150 40 100 50 0 May-02 Aug-02 Nov-02 Feb-03 20

0 May-03

Volume (000)

Management and Company Backgro Chart 20: Revenue break-up in Business Analysis
IPCA LABORATORIES

Management and Company Background


IPCA Laboratories, a leading Indian pharmaceutical company, headquartered at Mumbai was set up in 1975 to manufacture a range of anti-malarial drugs. Mr. Premchand Godha (Managing Director), Mr Chandurkar (Managing Director) and Mr. Ajithab Bachchan were the promoters of the company. Mr Ajithab Bachchan sold his stake to the other two partners in 1995. Since then, Mr Godha and Mr Chandurkar have been jointly managing the operations. IPCA derives over 50% of its revenues from export markets and has a presence in cardiovascular, central nervous systems, gastrointestinal and therapeutic segments. IPCAs plants are located at Ratlam, Kandla, Athal, Indore and Silvassa. The regulatory authorities US FDA, UK MCA, Australian TGA, and MCC have approved most of its plants. In the short term, we expect IPCA to accelerate its export revenues and generate resources and deploy them to increase presence in developed markets of the U.S. and Japan. In the medium term, we expect the company to establish a presence in Europe, U.S., Japan, Australia and Brazil. Over the long term, we expect IPCA to emerge a preferred alliance partner for global pharmaceutical companies both in bulk drugs and formulations. We believe the management is committed and will be successful in steering the organisation in this direction.

Business Analysis
Domestic Business In FY02, IPCA derived 49% of its revenues from the domestic market and 51% from exports. Formulations form the main component of domestic revenues accounting for 80%. Focus in the domestic formulations market is on anti-malarials (27%), cardiovascular (25%), anti-bacterial (17%), Gastro-intestinal (14%), cough preparations (7%), NSAIDs (6%), and anthelmintics (2%). Leading brands of IPCA include Lariago, Perinorm, Atenolol and Nemocid. IPCA is also recognised for global leadership in chloroquine phosphate, atorvastatin, and pyrantel pamoate.
Chart 20: Revenue break-up in FY02
Others 12% Other Exp. Bulk 5%
Other Exp. Form 13%

Dom. Form 39%

Regulated market Dom. Bulk Exp. Bulk 4% Regulated market 14% Exp. Form 13%

Source: Company

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85

Risks and Concerns

Outlook

MANUFACTURED EXPORTS

Exports Key export destinations include Europe (47%), Asia (15%), Africa (13%), America (12%) and CIS (11%). Over 50% of exports comprise formulations, the balance being accounted by bulk drugs and sale of intermediates. IPCA exports to over 90 countries and has set up subsidiaries in Russia, Nigeria, Brazil and South Africa. It is shortly setting up a subsidiary in the U.S. The total workforce dedicated to exports is approximately 270.

Risks and Concerns


Delays in product registrations and approvals IPCA has over 800 registrations in pipeline in key markets of Europe, Brazil and CIS. Approvals for these registrations are key to export growth of IPCA going forward. Any delay in securing these approvals due to failure on IPCAs part to meet regulatory requirements would impact our estimates. Significant time period before comfort in cash flows Though IPCA would see an improvement in cash flows, the incremental cash is expected to be deployed towards product registrations, capital expenditure, market development and working capital. Thus it would be some time before IPCA manages a comfortable cash position.

Outlook
We believe IPCA is focussed on accelerating its export revenues. It has in place an impressive pipeline of registrations across markets. Its investments in subsidiaries and building up a vibrant distributor network will start reaping benefits in the coming years. We however believe IPCA has only seen part of the benefits of investments made over the last five years. Its pipeline of registrations, strong relationships with distributors and enhanced global presence would ensure buoyant earnings in the coming years too. We are optimistic on the prospects of IPCA. We estimate an EPS of INR 50.7 and INR 67FY03E and FY04E earnings. The stock is trading at a PE of 4.8FY03E and 3.6xFY04E earnings and at an EV/EBIDTA of 2.8xFY04E. We recommend a VALUE BUY.

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Edelweiss

Financial Statements
IPCA LABORATORIES

Financial Statements
Income Statement
Year to March Income from operations International Revenues Domestic Revenues Manufacturing Expenses Employee Expenses S G & A Expenses EBIDTA Interest Expenditure Depreciation Other Income Profit Before Tax Provision for Tax Profit After Tax EPS (INR) Shares Outstanding (mn) Dividend Per Share (INR) Dividend payout (%) FY01 3,586 1,747 1,840 1,799 400 904 480 161 102 3 221 16 205 16.4 12.5 5.0 30.5 FY02 4,169 2,074 2,095 3,047 428 1,039 683 154 109 11 430 79 351 28.0 12.5 5.5 19.6 FY03E 4,910 2,587 2,322 2,087 509 1,202 1,112 95 181 12 849 216 633 50.7 12.5 6.0 11.8 FY04E 5,902 3,349 2,553 2,420 600 1,502 1,380 58 206 16 1,132 294 838 67.0 12.5 6.0 9.0 (INR mn) FY05E 7,100 4,278 2,822 2,840 708 1,892 1,660 15 231 20 1,434 402 1,033 82.6 12.5 6.0 7.3

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee Expenses S G & A Expenses Depreciation EBIDTA Margins Interest Expenditure Net Profit Margins FY01 50.2 11.2 25.2 2.6 12.1 4.1 5.2 FY02 73.1 10.3 24.9 2.4 15.0 3.4 7.7 FY03E 42.5 10.4 24.5 3.4 21.1 1.8 12.0 FY04E 41.0 10.2 25.4 3.3 22.0 0.9 13.3 FY05E 40.0 10.0 26.6 3.1 22.1 0.2 13.8

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 6.4 (3.5) (5.0) (17.9) (23.0) (23.0) FY02 15.1 18.7 42.1 94.4 71.2 71.2 FY03E 15.6 24.8 62.9 97.6 80.6 80.6 FY04E 19.3 29.4 24.1 33.4 32.3 32.3 FY05E 19.5 27.7 20.3 26.7 23.3 23.3

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Balance Sheet

MANUFACTURED EXPORTS

Balance Sheet
As on 31st March Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Total Borrowings Others Sources Of Funds Gross Block Depreciation Net Block Capital Work In Progress Investments Inventories S.Debtors Cash and Bank Balances Loans & Advances Other Current Assets Total Current Assets S. Creditors Other Current Liablities and Provisions Provisions Total Current Liabilities Net Current Assets Others Uses of Funds Book Value Per Share (INR) FY01 125 1,672 1,797 1,442 147 1,589 0 3,386 2,000 529 1,471 77 21 902 783 50 504 2,239 436 26 462 1,777 3,346 144 FY02 125 1,445 1,570 1,430 16 1,446 237 3,253 1,970 555 1,415 17 21 963 990 35 499 2,486 561 125 687 1,800 3,253 126 FY03E 125 2,004 2,129 1,180 16 1,196 221 3,614 2,172 735 1,437 17 21 1,112 1,446 54 499 3,110 688 284 971 2,139 3,614 170 FY04E 125 2,766 2,891 810 16 826 221 3,891 2,472 941 1,531 17 21 1,327 1,733 10 499 3,569 873 374 1,247 2,322 3,891 231

(INR mn) FY05E 125 3,724 3,849 184 16 200 221 4,269 2,772 1,172 1,600 17 21 1,586 2,078 13 499 4,154 1,064 481 1,525 2,630 4,269 308

Ratios
Year to March RoE (%) RoCE (%) Inventory Days Debtors Days Fixed Assets T/o (x) Debt/Equity FY01 11.4 11.3 82.0 71.1 2.4 0.9 FY02 22.3 19.4 76.1 78.2 2.9 0.9 FY03E 29.7 28.4 76.0 100.0 3.4 0.6 FY04E 29.0 32.0 76.0 100.0 3.9 0.3 FY05E 26.8 35.8 76.0 100.0 4.4 0.1

Valuation Parameters
Year to March EPS (INR) YoY growth (%) CEPS (INR) PE (x) Price/BV(x) EV/Sales (x) EV/EBIDTA (x) FY01 16.4 (23.0) 25 14.8 1.7 1.3 9.5 FY02 28.0 71.2 37 8.7 1.9 1.1 6.5 FY03E 50.7 80.6 65 4.8 1.4 0.8 3.7 FY04E 67.0 32.3 83 3.6 1.1 0.6 2.8 FY05E 82.6 23.3 101 2.9 0.8 0.5 1.9

88

Edelweiss

Shasun Chemicals & Drugs


Rooshnil Securities
(An Edelweiss Capital Company)

SHASUN CHEMICALS & DRUGS


Leveraging Core Competence

PHARMA

Initiating Coverage INR 135

Company Report

Recommendation
Va l u e

Shasun is a leading bulk drug contract manufacturer, headquartered in Chennai, India. In FY02, Shasun derived over 50% of its revenues from exports. Its key products are - ibuprofen, ranitidine and nizatidine. Shasun also derives revenues for Contract R&D work done for Austin Chemicals of U.S. The company has invested in increasing capacities for ibuprofen and nizatidine. It has leveraged its relationship with Austin to market itself to large buyers in U.S. and Europe from whom orders are expected. Investments have also been made for developing new product lines in contract manufacturing and expanding its R&D team and facilities to meet increased work flow from Austin. We expect Shasun to leverage its key strengths of cost competitive manufacturing, strong process research skills and strong relationships with global players to gain greater visibility in regulated markets. We are positive on the prospects for the company and recommend a VALUE BUY.

Sell

Reduce Accum Buy

Key Investment Highlights


Trading Sell Buy No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 45.5 5.2 49.3

U.S. market to significantly drive growth for ibuprofen bulk Shasun is the most cost competitive producer of ibuprofen in India. Globally too, it is amongst the worlds largest producers and has gained recognition for its competitiveness. It currently commands 8% of the ibuprofen bulk market in the U.S. Shasun is expected to increase this share to over 20% over the next 3-4 years underpinned by a good track record, a strong alliance with Austin and marketing efforts made in the last few years. Nizatidine bulk supply to Eli Lilly to more than double Shasun has extended its success in contract manufacturing of ibuprofen and ranitidine to the bulk nizatidine in FY03. It has entered into long-term arrangements with Eli Lilly and Reliant Pharma for supply of this drug in the U.S. We expect an impressive 96% revenue CAGR from this drug. We believe success in this product would enhance Shasuns credibility in the pharmaceutical outsourcing market. Increasing revenues from the alliance with Austin Shasuns tie up with Austin Chemicals has given it visibility in the U.S. and helped gain custom synthesis business orders from global companies. This business accounted for 12% of revenues (INR 162 mn) in FY02. We expect this to grow to INR 330 mn by FY05, implying a 26% CAGR between FY02-FY05.
Increasing revenue share from regulated markets is expected to drive OPM from 16.7% in FY02 to 19.7% and 21.1% in FY04E and FY05E respectively. Shasuns focussed approach combined with skills in process research and alliance with Austin to help it gain greater visibility in the pharma outsourcing space. We estimate an EPS of INR 21.1 and INR 29.4 for FY03E and FY04E respectively. The stock is trading at a PE of 6.4xFY03E and 4.6x FY04E earnings and at an EV/EBIDTA of 3.1xFY04E. We recommend a VALUE BUY.
Financials Price Chart
FY03E FY04E FY05E
150 140 130 120 200 180 160

Reuters Code Bloomberg Code

: SHAS.BO : SSCD IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 119/65 8.22

MCap (INR bn/USD mn): 1.1 / 22.7

Year to March Revenues (INR mn) Growth (%) Net profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA (x) ROE (%)

Preethi Shukla 91-22-2286 4307 preethi@edelcap.com

2,422 15.5 174 21.1 44.3 6.4 4.1 23.4

2,952 21.8 241 29.4 39.0 4.6 3.1 25.5

3,462 17.3 319 38.8 32.0 3.5 2.1 26.0

110 100 90 80 70 60 50 May-02 Aug-02 Nov-02 Feb-03

120 100 80 60 40 20 0 May-03

Volume (000)

140

Price (INR)

Management and Company Backgro Business break up


MANUFACTURED EXPORTS

Chart 21: Revenue break up in

Management and Company Background


Shasun Drugs and Chemicals was incorporated in 1976 by Mr Shankar Lal Jain to manufacture bulk analgin (anti-pyretic). The company was listed in 1992. Over the years, Shasun diversified into production of ibuprofen bulk and ranitidine bulk and is currently a world leader in the manufacture of these drugs. Promoters hold a 46% stake in the company. Shasun has set up a 50:50 JV in the U.S., in an alliance with Austin Chemicals LLc of the U.S., a leading contract manufacturer and R&D player in the custom synthesis business. Shasun has also entered into alliances with Nagase & Co of Japan (for chiral ibuprofen) and with Eastman Chemicals (for Hydroxypropyl Methyl cellulose Phthalate). Shasun has set up a representative office in Europe as well. Shasun has manufacturing facilities at Pondicherry and Cuddalore. The Cuddalore plant manufactures ranitidine and nizatidine and Pondicherry plant manufactures the entire ibuprofen range. The regulatory authorities of the U.S., UK and Australia have approved both these facilities. In the short term, we expect Shasun to move up the value chain and emerge a contract manufacturer of formulations. Over the next three to five years, we believe Shasun would emerge as a key supplier of ibuprofen and nizatidine to companies in regulated markets. Significant investments have already been made for this. Shasun has also drawn out ambitious plans for its contract R&D business and expects to diversify from plain custom synthesis. Over the longer term, we expect Shasun to emerge as a leading contract manufacturer and contract R&D player.

Business break up
The company has a focused product profile. Its main products are ranitidine and ibuprofen. These products accounted for 78% of revenues in FY02. Over 60% revenues came from export markets in FY02. More importantly, 58% of this was from the regulated markets of U.S., Canada and Europe. Ibuprofen and ranitidine dominate the product groups in both domestic and export markets.
Chart 21: Revenue break up in FY02
SE Asia 20% US 19%

Europe 16% Others 7%


Source: Company

Domestic Revenues 38%

90

Edelweiss

Risks and Concerns Outlook


SHASUN CHEMICALS

Risks and Concerns


Concentrated product profile Shasuns focus have revolved on three to four main product lines. In the past, the product selections were prudently made on therapeutic strengths and their success in global markets. This model was adopted when the dynamics were different. However, the scenario has changed significantly. We see faster introduction of newer generation drugs addressing the same therapeutic segment within the same compound class. Such an eventuality would make Shasuns investments in select products redundant. We believe a wider product basket would diversify the revenue base and reduce the risk profile. Delay in acquiring approvals for ibuprofen Ibuprofen is expected to be the key revenue and profit driver going forward. Growth from this product is contingent to Shasuns end client in U.S. receiving US FDA approval for the final product. Though there have not been any significant problems in receipt of approvals at various stages till date, demands by US FDA for additional data could impact Shasuns supplies to U.S. clientele.However, we do not expect the approvals to be delayed beyond Q4FY04.

Outlook
Shasun has over the years established its credibility as a leader in the manufacture of ibuprofen, ranitidine and nizatidine bulk drugs. Its focused approach, skills in process research and cost competitive prices have given global players significant confidence in its ability to deliver. We expect Shasun to leverage on these strengths and increase its presence in current product lines in the regulated markets. The alliance with Austin Chemicals is expected to give a boost to Shasuns initiatives. We expect revenue and profit CAGR of 18% and 38% respectively between FY02FY05. We estimate an EPS of INR 21.1 and INR 29.4 for FY03E and FY04E. The stock is trading at a PE of 6.4x and 4.6x FY03E and FY04E earnings at an EV/EBIDTA of 3.1xFY04E. We recommend a VALUE BUY.

Edelweiss

91

Financial Statements
MANUFACTURED EXPORTS

Financial Statements
Income Statement
Year to March Income from Operations International Revenues Domestic Revenues Manufacturing expenses Employee Expenses SG&A EBIDTA Interest Expenditure Depreciation Other Income Profit Before Tax Provision for Tax Profit After Tax EPS (INR) Shares Outstanding (mn) Dividend per share (INR) Dividend payout ratio (%) FY01 1,719 1075 726 1,163 110 161 285 75 103 8 115 13 103 12.5 8.2 3.0 24.0 FY02 2,097 1357 840 1,422 128 197 351 81 124 8 154 34 120 14.6 8.2 4.0 27.3 FY03E 2,422 1634 938 1,610 152 226 434 70 144 8 228 55 174 21.1 8.2 4.1 19.4 FY04E 2,952 2161 941 1,915 179 278 580 82 171 8 335 94 241 29.4 8.2 4.1 13.9 (INR mn) FY05E 3,462 2669 943 2,197 215 320 730 82 187 8 469 150 319 38.8 8.2 4.1 10.5

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee Expenses S G & A Expenses Depreciation EBIDTA Margins Interest Expenditure Net Profit Margins FY01 67.7 6.4 9.3 6.0 16.6 4.3 5.9 FY02 67.8 6.1 9.4 5.9 16.7 3.8 5.7 FY03E 66.5 6.3 9.3 5.9 17.9 2.9 7.1 FY04E 64.9 6.1 9.4 5.8 19.7 2.8 8.2 FY05E 63.5 6.2 9.2 5.4 21.1 2.4 9.2

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 (2.9) (10.3) (25.5) (47.4) (49.8) (49.8) FY02 22.0 26.3 23.0 33.8 17.3 17.3 FY03E 15.5 20.4 23.7 48.0 44.3 44.3 FY04E 21.8 32.3 33.7 46.8 39.0 39.0 FY05E 17.3 23.5 25.8 39.8 32.0 32.0

92

Edelweiss

Balance Sheet
SHASUN CHEMICALS

Balance Sheet
As on 31st March Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Others Sources of Funds Gross Block Depreciation Net Block CWIP Investments Inventories S.Debtors Cash and Bank Balances Loans & Advances Total Current Assets S. Creditors Other Current Liablities Provisions Total Current Liabilities and Provisions Net Current Assets Others Uses Of Funds Book Value Per Share (INR) FY01 82 521 603 632 0 632 0 1,235 1,244 344 901 60 1 214 280 41 60 595 294 27 321 274 1,235 75 FY02 82 520 602 586 50 636 109 1,347 1,436 464 971 30 2 315 360 11 51 736 356 36 392 345 1,347 75 FY03E 82 660 742 686 50 736 109 1,587 1,761 608 1,154 30 2 393 397 64 51 906 414 88 503 403 1,587 93 FY04E 82 864 946 686 50 736 109 1,791 2,071 779 1,292 30 2 474 499 70 51 1,095 500 127 627 467 1,791 118

(INR mn) FY05E 82 1,145 1,227 686 50 736 109 2,072 2,261 966 1,295 30 2 552 604 303 51 1,511 582 184 766 745 2,072 153

Ratios
Year to March RoE (%) RoCE (%) Debtors Days Inventory Days Fixed Assets T/o Interest Coverage (x) Debt/Equity FY01 17.0 15.4 49.6 42.9 1.9 4.2 1.0 FY02 20.0 19.0 56.9 51.5 2.2 2.5 1.1 FY03E 23.4 20.2 58.0 55.0 2.1 2.9 1.0 FY04E 25.5 24.8 60.0 55.0 2.3 4.3 0.8 FY05E 26.0 28.0 62.0 55.0 2.7 5.1 0.6

Valuation Parameters
Year to March EPS (INR) YoYgrowth (%) CEPS (INR) PE (x) Price/BV (x) EV/Sales (x) EV/EBIDTA (x) FY01 12.5 (49.8) 25.0 10.8 1.8 1.0 6.0 FY02 14.6 17.3 29.7 9.2 1.8 0.8 4.9 FY03E 21.1 44.3 38.6 6.4 1.5 0.7 4.1 FY04E 29.4 39.0 50.2 4.6 1.2 0.6 3.1 FY05E 38.8 32.0 61.6 3.5 0.9 0.4 2.1

Edelweiss

93

SPECIALTY CHEMICALS

SPECIALTY CHEMICALS

SPECIALTY CHEMICALS INDUSTRY


Benefiting from the export rub-off

Introduction and Classification


The Indian Specialty chemicals industry is valued at USD 7 bn. This industry is characterised by low batch quantities, significant differentiation in products delivered to customers and pricing based on value addition to end products. Revenues from this industry account for 25% of total Indian chemical industry revenues. This industry is primarily classifed on the basis of the targeted end-users who are pharmaceuticals, agrochemicals and textile chemical sectors. Other sectors from where significant demand gets generated include woodworkings, paints and adhesives segments. To differentiate themselves from run-of-the-mill chemical manufacturers, specialty chemicals companies regularly introduce a wide range of products. They make significant investments in R&D to develop a wide product basket. Typically, selling and product development costs of Specialty chemicals companies are very high. The flexible nature of manufacturing capacities makes recurring capital investments needs minimal. The Indian Specialty chemicals industry has grown at a 10% CAGR in the last decade compared with 5-6% growth of the chemicals industry. The higher growth of this industry vis--vis other segments of the chemical industry is due to the increasing demand for value added products. Key players In India, the Specialty chemicals industry is largely unorganized, dominated by scores of small-scale sector players. In the organized market, key players are Jubilant Organosys (INR 7 bn), NOCIL (INR 6 bn), ICI (INR 6 bn), Ciba Specialty (INR 5 bn),Clariant (INR 3bn) and India Glycols (INR 1.5 bn). Global Specialty chemicals industry Globally, the Specialty chemicals industry is valued at USD 375 bn (source: KPMG report on Indian Chemicals sector). A major output (45%) goes to the pharmaceutical sector, followed by agro chemicals (21%) and food processing industries (17%). Europe is the largest market, accounting for over 40% of the output. U.S. and Japan are other key markets, accounting for over a 20% share each. Key players in the global market are Clariant (USD 10.4 bn), ICI (USD 8 bn) ,Ciba Specialty (USD 8 bn), Royal DSM (USD 7 bn), Rhodia (USD 7 bn) , Lonza (USD 2.5 bn), Givaudan (USD 2 bn) and Degussa (USD 847 mn). Growth drivers for the industry Increasing demand for low cost Specialty chemicals from global pharmaceutical and agro-chemical industries would be the key demand driver. Consolidation of players, pressure on research costs and increasing customer base spread across different markets are forcing players to look at cheaper manufacturing locations.

Edelweiss

95

MANUFACTURED EXPORTS

Key success factors Key Success factors for Specialty companies are - Strong R&D skills - Vibrant product pipeline - Strong relationships with end-customers Outlook Indian companies are well placed to tap the growing Specialty chemicals market due to cost advantages and availability of technically skilled manpower. The Indian companies have begun to explore the export markets and investments are being made on capital expansions and product development. We believe that with an enhanced product pipeline, Indian companies are well equipped to tap global demand.

96

Edelweiss

Jubliant Organosys
Rooshnil Securities
(An Edelweiss Capital Company)

JUBLIANT ORGANOSYS
A special chemistry

SPECIALTY CHEMICALS

Initiating Coverage INR 177

Company Report

Recommendation
Va l u e

Jubilant Organosys (JO) is a leading Specialty chemicals player based in Noida, India. JO has a presence in pharmaceuticals, advance intermediates, performance chemicals, organic intermediates and agro-chemicals. In the last two years, JOs fundamentals have changed positively. Its business composition has shifted in favour of more profitable specialty chemicals and exports. Investments have been made in marketing, R&D, broadening the product pie and creating capacities to meet global requirements. JOs operations are well integrated backward and forward, rendering the company cost competitive. Depending on the product, JO alternates between a contract manufacturing and direct sales model. Strengthening relationships with clients and an increasing presence in regulated markets are expected to drive CAGR of 32% in exports between FY03-FY05. We believe JO is well poised to tap opportunities in the global specialty chemicals industry. We recommend a VALUE BUY.

Sell

Reduce Accum Buy

Key Investment Highlights


Specialty chemicals to drive revenues and profits The specialty chemicals business has driven an impressive 14% revenue CAGR between FY00FY03. This business comprises of pharmaceuticals, CRAMS, advance intermediates and performance chemicals. The margins in this business are higher vis--vis basic chemicals where scope for value addition is less. We expect a 38% CAGR in this business between FY02-FY05. Diversifying export presence Jubilants exports have grown at a 72% CAGR in the last three years. The company has a well spread presence across Europe (35%), Asia and Australia (38%), the U.S. (6%) and the rest of the world. In future, we expect JO to consolidate its presence in these regions. Integration in operations rendering Jubilant cost competitive Jubilant manufactures most of the products in the value chain. Also, almost 24% of its raw material costs are agro based (molasses) unlike other players whose source raw material is ethylene. These two factors make Jubilant more cost competitive. Creation of global capacities Jubilant ranks amongst the worlds largest producers of pyridine and its derivatives, solid PVA, VP Latex and acetaldehyde. These products have significant growth potential and give the company significant economies of scale. Jubilant is expected to reap benefits of investments made in manufacturing and building export markets. We expect better revenue sustainability with improved distributor network. We expect an EPS of INR 45.5 and INR 56.8 for FY04E and FY05E. The stock is trading at a PE of 3.9x and 3.1x FY04E and FY05E earnings and at an EV/EBIDTA of 3.9xFY04E. We recommend a VALUE BUY.
Financials Price Chart
FY03 FY04E FY05E
190 170 150 30 25

Trading Sell Buy No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 62.3 5.2 1.8 30.7

Reuters Code Bloomberg Code

: VAMO.BO : VAM IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 191/80 14 2.5/53

MCap (INR bn/USD mn) :

Year to March
Revenues (INR mn) Growth (%) Net profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA (x) ROE (%)

7,105 19 499 36 111 5.0 4.8 31.2

8,333 17 637 46 28 3.9 3.9 30.2

9,968 20 795 57 25 3.1 2.9 28.6


Price (INR)

Preethi Shukla 91-22-2286 4307 preethi@edelcap.com

130 15 110 90 70 50 May-02 10 5

Aug-02

Nov-02

Feb-03

0 May-03

Volume (000)

20

Management and Company Backgro Business Analysis


MANUFACTURED EXPORTS

Chart 22: Revenue break-up in

Management and Company Background


Jubilant was promoted in 1982 by Mr. M L Bhartia in collaboration with Bofors of Sweden and Hindustan Wires. The current Chairman and Managing Director Mr. Shyam Bhartia and Co-Chairman and Managing Director Mr. Hari Bhartia took charge in 1999. The company was initially set up to manufacture acetaldehyde and acetic acid. Over the years, Jubilant has developed products across the entire value chain - organic intermediates, fine chemicals, specialty chemicals and pharmaceuticals. Approximately 25% of its revenues are from the export markets. Jubilant has its manufacturing facilities at Gajraula (UP), Samlaya (Gujarat), Nira (Maharashtra) and Nanjangud (Karnataka). Jubilants facilities are extremely flexible. In the last few years, it has achieved significant expansion in capacities for certain product lines by de-bottlenecking. Jubilant aims at increasing the share of specialty chemicals revenues to over 80% by FY05. It is simultaneously working towards building strong relationships with global players to create sustainable revenue streams. We believe Jubilant will be in a position to achieve these objectives on the back of a strong product pipeline and diversifying customer base.

Business Analysis
Jubilant derives approximately 72% revenues from the domestic market and balance from exports. Its business is split into four main divisions a) Pharmaceuticals and Life science chemicals b) Performance Chemicals c) Organic Intermediates and d) AgroChemicals. Organic intermediates and pharmaceuticals business are key components, accounting for over 70% of the companys revenues. Jubilants export presence now extends to over 50 countries. Its key markets are Asia and Australia (38%), Europe (35%), Americas (6%), China (16%) and Rest of Asia (5%). Jubilant has a fully owned subsidiary in Connecticut, USA and a representative office in China. Major products exported include cyano-pyridines (33% of exports in FY03), active pharmaceutical ingredients (15%) and ethyl acetate (20%).
Chart 22: Revenue break-up in FY03
Agro-Chemicals 4% Organic Intermediates 37%
Other exports 9% Acetate exports 6% Pharma exports 4% AI exports 9%

Pharma, CRAMS and Ingredients 40%

Dom. Sales 72%

Performance Chemicals 19%

Source: Company

98

Edelweiss

Risks and Concerns Outlook


JUBILANT ORGANOSYS

The Pharmaceutical business was acquired from Max India in FY02 for INR 699 mn. We view this forward integration positively and believe Jubilant has the capabilities to emerge among the most cost competitive bulk active players. A key product in the pharmaceutical business is Carbamazepine, an anti-depressant bulk drug. Products under the performance chemicals business cater to woodworking, textiles, constructions, industrial adhesives, paints, tyres and confectionary segments. Organic intermediates primarily comprise of acetyl and its derivatives. Single super phosphate is the key product in the agro-chemical business.

Risks and Concerns


Necessity to significantly scale up R&D Going forward, Jubilant would feel the necessity of scaling up its R&D expenditure to differentiate from other players. The pace of introduction of newer products needs to be rapid to sustain higher margins. Delays here could impact long term sustainability and affect margins. Requirement of additional funds imperative to accelerate growth Jubilant would require additional funds to accelerate growth. Funds would be required for capital expenditure, scaling up R&D and development of global markets. If Jubilant adopts the debt route, it may have a negative impact on financials. We believe the company is already highly leveraged. Jubilant would have to finely manage its resource allocation.

Outlook
Jubilant is gradually being recognised as a leading specialty chemicals player from India. This is due to investments made in building relationships and developing the export markets. Going forward, we expect Jubilant to have a vibrant product base catering to the needs of fast growing pharmaceuticals and agro chemicals sectors. Jubilant is focusing on export markets for its specialty business. Given cost competitiveness and impressive product pipeline, we believe Jubilant is well placed to secure an increasing market share in the global space for certain product lines. We are positive on the prospects of the company. We expect a revenue and EPS CAGR of 18.5% and 26% between FY03 - FY05. The EPS is estimated to be INR 45.5 and INR 56.8 for FY04E and FY05E respectively. The stock is trading at a PE of 3.9x and 3.1x FY04E and FY05E earnings and at an EV/EBIDTA of 3.9xFY04E. We recommend a VALUE BUY.

Edelweiss

99

Financial Statements
MANUFACTURED EXPORTS

Financial Statements
Income Statement
Year to March Income from operations International Revenues Domestic Revenues Manufacturing Expenses Employee Expenses S G & A Expenses EBIDTA Interest Expoenditure Depreciation Other Income Profit Before Tax Provision For Tax Profit After Tax EPS (INR) Shares Outstanding (mn) Dividend per share (INR) Dividend payout (%) FY01 5,441 800 4,641 3,515 377 841 707 413 206 42 130 (4) 134 9.5 14.0 2.6 27.2 FY02 5,951 1,360 4,591 3,969 388 760 834 407 254 44 216 (20) 236 16.9 14.0 4.2 24.9 FY03 7,105 1,964 5,141 4,578 453 814 1,260 403 237 39 659 160 499 35.6 14.0 9.0 25.3 FY04E 8,333 2,552 5,782 5,296 529 1,020 1,487 359 309 37 856 218 637 45.5 14.0 9.0 19.8 (INR mn) FY05E 9,968 3,421 6,546 6,283 635 1,212 1,837 307 317 42 1,256 462 795 56.8 14.0 9.0 15.9

Common Size Metrics - as % of Revenues


Year to March Manufacturing Expenses Employee Expenses S G & A Expenses Depreciation EBIDTA margins Interest Expenditure Net Profit Margins FY01 64.6 6.9 15.5 3.8 13.0 7.6 2.4 FY02 66.7 6.5 12.8 4.3 14.0 6.8 3.9 FY03 64.4 6.4 11.5 3.3 17.7 5.7 7.0 FY04E 63.6 6.4 12.2 3.7 17.8 4.3 7.6 FY05E 63.0 6.4 12.2 3.2 18.4 3.1 7.9

Growth Metrics (%)


Year to March Revenues International Revenues EBIDTA PBT Net Profit EPS FY01 90.6 122.2 22.9 34.5 29.0 29.0 FY02 9.3 70.0 17.9 66.5 76.8 76.8 FY03 19.2 44.4 51.1 204.9 111.2 111.2 FY04E 17.2 29.9 18.0 29.8 27.7 27.7 FY05E 19.6 34.1 23.6 46.8 24.6 24.6

100

Edelweiss

Balance Sheet
JUBLIANT ORGANOSYS

Balance Sheet
As on 31st March Equity Capital Reserves Shareholders Funds Secured Loans Unsecured Loans Borrowings Others Sources of Funds Gross Block Depreciation Net Block Capital Work In Progress Investments Inventories S.Debtors Cash and Bank Balances Loans & Advances Other Current Assets Total Current Assets S. Creditors Other Current Liablities Provisions Total Current Liabilities and Provisions Net Current Assets Others Uses Of Funds Book Value Per Share (INR) FY01 113 1,415 1,528 2,803 710 3,513 5,041 5,037 1,930 3,107 53 235 986 844 71 376 2,277 616 82 697 1,580 65 5,041 109 FY02 78 1,226 1,303 2,516 831 3,347 308 4,880 5,301 2,307 2,994 165 230 1,021 782 93 578 2,474 883 100 983 1,491 4,880 93 FY03 78 1,599 1,676 3,264 831 4,095 308 6,002 6,346 2,589 3,757 165 230 1,167 928 346 711 3,151 1,085 216 1,302 1,849 6,002 120 FY04E 78 2,110 2,188 3,064 527 3,591 308 6,009 6,741 2,899 3,843 165 230 1,412 1,088 142 833 3,429 1,319 385 1,658 1,771 6,009 151

(INR mn) FY05E 78 2,779 2,856 2,638 427 3,066 308 6,152 7,136 3,215 3,921 165 230 1,724 1,301 102 997 3,986 1,661 628 2,151 1,835 6,152 199

Ratios
Year to March RoE (%) RoCE (%) Inventory Days Debtors Days Fixed Assets T/o (x) Debt/Equity FY01 8.7 10.8 65.2 55.9 1.8 2.8 FY02 19.3 13.6 62.3 47.3 2.0 3.4 FY03 31.2 18.7 60.0 47.0 1.9 3.1 FY04E 30.2 21.3 60.0 47.0 2.2 2.0 FY05E 28.6 26.7 60.0 47.0 2.5 1.3

Valuation Parameters
Year to March EPS (INR) YoY growth (%) CEPS (INR) PE (x) Price/BV (x) EV/Sales (x) EV/EBIDTA (x) FY01 9.5 29.0 24.3 18.7 1.6 1.0 8.1 FY02 16.9 76.8 35.0 10.5 2.0 0.9 6.6 FY03 35.6 111.2 52.6 5.0 1.6 0.8 4.8 FY04E 45.5 27.7 67.6 3.9 1.2 0.7 3.9 FY05E 56.8 24.6 79.4 3.1 0.9 0.5 2.9

Edelweiss

101

EMERGING EXPORT STORIES

EMERGING EXPORT STORIES

Camlin
Rooshnil Securities
(An Edelweiss Capital Company)

CAMLIN
Emerging Exports Play

PHARMA

INR 56

Camlin is a well-known stationery products company with a growing presence in fine chemicals and pharmaceuticals businesses. Camlin enjoys significant brand equity for its stationery products and is gaining increasing visibility for its pharmaceutical and fine chemical products. Over 15% of its revenues come from exports.

Background
Recommendation
Va l u e

Camlin was promoted in 1931 by the Dandekar family to manufacture plain inks. In the sixties, the company forayed into fine chemicals and in eighties into pharmaceuticals. It has built a network of 400 distributors, 22 sales depots and has an impressive coverage of 200,000 retailers including approximately 50,000 chemists. Camlins manufacturing facilities are located at Tarapur, Taloja and Andheri in Mumbai.

Sell Trading Sell

Reduce Accum Buy

Buy

No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 49.6 0.0 0.0 50.4

Present business Camlins main business divisions are stationary products (46%), fine chemicals (40%) and pharmaceuticals (14%). Its key product in the fine chemicals business is a food grade anti-oxidant used as a preservative. Camlin exports fine chemicals to over 30 countries. Camlins thrust in the pharmaceutical business is on the dermatology segment. Camlin also manufactures other bulk drugs like diloxanide fuorate, mebendazole and diazepam as well as a wide range of formulations used in treating asthma, skin diseases and rheumatism. Export business
Exports accounted for 13% of revenues in FY02. Exports primarily comprise of fine chemicals and pharmaceuticals. Camlin undertook its export initiatives in FY99 and recorded a turnover of INR 83.8 mn in that year itself. Major export destinations are East and West Asia, Europe, Australia and Africa. Camlin has in the pipeline several registrations in the overseas markets for its fine chemicals and pharmaceutical products. In stationery, the company is currently working on three orders - a fashion and hobby colours order for Turkey-based Image, a Woodcase pencils order for an American company and a markers order for a Korean company.

Reuters Code Bloomberg Code :

: CAML.BO CAMLN IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 72/41 2.4 0.1 / 2.7

MCap (INR bn/USD mn) :

Outlook The global stationery market is USD 1 bn in size and offers immense opportunities for cost efficient players like Camlin. The company aspires to establish itself as an OEM for international stationery players and also a leading exporter of pharmaceuticals and fine chemicals. Camlin has invested resources over the last two to three years in securing overseas orders and building relationships with key buyers. The company expects its exports to grow at a CAGR of over 25% going forward. We believe Camlin is an emerging exports story.
Financials Price Chart
80 60 50

Year to March
Revenues (INR mn) Growth (%)

FY00

FY01

FY02
75

1,608 10.8 18.9 7.3 23.1 7.1 4.1 10.4

1,728 7.4 20.7 8.3 13.2 6.2 4.1 10.6

1,882 8.9 30.4 12.6 51.1 4.1 3.2 17.4


Price (INR)

70 65 60 55 50 45 40 May-02 Aug-02 Nov-02 Feb-03 10 0 May-03

Preethi Shukla 91-22-2286 4307 preethi@edelcap.com

Net Profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA (x) ROE (%)

30 20

Volume (000)

40

Elgi Equipment
Rooshnil Securities
(An Edelweiss Capital Company)

ELGI EQUIPMENT
Compressors to expand

ENGINEERING

INR 24

Elgi Equipment (Elgi) is a leading manufacturer of compressors in India. Elgis international foray was induced by a slowdown in domestic markets in late nineties. For exports sales in developing countries Elgi has investing in sales and marketing netwotk to sell directly to customers. In FY03 exports contributed only 9% of total revenues. However, the company aims to increase this to 50% over the next five years. Considering that a distribution network is in place and new OEM agreements have been executed, we believe Elgi will report a 75% CAGR in export revenues in the coming three years.

Recommendation
Va l u e

Background
Elgi is a leading manufacturer of reciprocating screw compressors in India. The company has two manufacturing facilities at Coimbatore in Tamilnadu, a nationwide distribution network and offices in eight countries. The company completed technology transfer from Samsung and Hitachi successfully. Strong R&D has been a hallmark of operations. Recently, Elgi launched the worlds smallest compressor.

Sell Trading

Reduce Accum Buy

Present business
Sell Buy No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 33.3 4.9 0.0 61.8

Elgi manufactures a wide range of compressors, starting from 0.5 hp to 800 hp reciprocating compressors and rotary screw compressors. These compressors find applications in construction, mining, agriculture, defence and railways. Elgi is a market leader in most of these categories. In the high-end water rigs business, Elgi has a 70% market share. Other significant players in the compressors market are Atlas Copco and Ingersoll Rand.

Export business
A slowdown at home induced Elgi to focus on exports. The company adopted a two-pronged strategy. For Asian countries it adopted the direct sales model. For countries like U.S., Germany and Japan, it embraced the outsourcing model of sales to an OEM. The company manufactures compressors as per the OEM customers specifications who in turn brands and sells them locally. Elgi recently started working on exporting compressors for locomotive applications through an OEM in the U.S. This is expected to contribute around INR 50 mn in FY04. The company is working on similar tie-ups with OEMs in Japan and Korea.

Reuters Code Bloomberg Code

: ELEQ.BO : ELGE IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 26/15 60.9 1.5 / 31

Outlook
Elgi is focusing on expanding presence in international markets. It is working on Six Sigma and TPM for providing quality products at lower prices. Distribution network and OEM sales will provide the required brand building for rapid scale up in the coming years.
Financials Price Chart
30 450 400

MCap (INR bn/USD mn) :

Year to March
Income from Operations Export Revenues EBIDTA Net Profit EPS (INR) EPS Growth % PE (x) EV/EBIDTA Debt/Equity Ratio ROE%

FY01

FY02

FY03

250 15 200 10 5 50 0 May-02 0 May-03 150 100

34.2 12.7 0.5 10.7

Aug-02

Nov-02

Feb-03

Volume (000)

Price (INR)

Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com

1,595 129 126 43 0.7

1,943 143 262 166 2.7 287 8.8 5.7 0.2 21.0

2,226 215 303 194 3.2 17 7.6 4.3 0.0 23.9

25 350 20 300

Hindustan Inks & Resins


Rooshnil Securities
(An Edelweiss Capital Company)

HINDUSTAN INKS & RESINS


Inking success

SPECIALTY CHEMICALS

INR 254

Hindustan Inks (HI) is a leading manufacturer of printing inks headquartered at Vapi, India. It has one of the largest manufacturing capacities in the world. It commands over a 30% market share in the domestic printing inks market. HI has established its presence in U.S. China, Europe, Australia, Latin America and Asia. We expect HI to emerge as a major global player in printing inks.

Background
Recommendation
Va l u e

Sell Trading

Reduce Accum Buy

HI was promoted in 1991 to manufacture a range of packaging and printing inks. HI currently has five manufacturing plants - two at Vapi and one each at Daman, Silvassa and the U.S. The fully integrated 100% EOU at Vapi has a capacity to manufacture 100,000 MT printing inks and 30,000 MT pigments/flushes and resins. HIs marketing network spreads over 11 branches, 500 distributors and four technical centres. In FY01, HI set up Micro Inks, a U.S. subsidiary to aggressively target U.S., the largest and most profitable market in the world.

Present business
Buy No Reco

Sell

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 74.4 0.3 0.0 25.3

The printing inks segment accounted for 93% of revenues in FY02 (INR 4.97 bn). HIs other product lines are synthetic resins, industrial adhesives and wire enamels. Its main clients are in the packaging and publishing industries. In FY02, the domestic market accounted for 56% of revenues and exports for 44%of revenues. Domestic revenues grew 12% while export revenues shot up 155% in FY02 Yoy. HI has a diversified base of over 5000 customers. Its top 50 customers account for only 38% of revenues in FY02.

Export business
HIs presence in exports spans over 30 countries in Europe, Asia Pacific and Latin America and includes U.S., Australia and China. U.S. accounts for 92% of export revenues. Micro Ink, its U.S. subsidiary has orders worth USD 80 mn in hand. HIs largest U.S. customer is R R Donnelley & Sons. HI is improving its client base and distributor network worldwide and significant investments are earmarked for this. In FY02, it added approximately 50 regular customers.

Reuters Code Bloomberg Code

: HIRS.BO : HINK IN

Outlook

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 399/194 13.6 3.5/ 73

In the last three to four years HI has emerged an extremely competitive player with a wide product range and large capacities to cater to global demand. It has in place dedicated teams for focusing on key markets. HI expects a 30% export CAGR going forward. We believe HIs prospects are promising and expect it to emerge as a key player in the global inks market.

MCap (INR bn/USD mn) :

Financials

Price Chart
440 140 120 100 80 240 60 190 140 90 40 May-02 40 20 0 May-03

Year to March
Revenues (INR mn) Growth (%) Net Profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA (x) ROE (%)

FY00

FY01

FY02
390

2,191 25.1 243 17.9 3.7 14.2 10.5 21.0

3,843 75.4 316 23.3 30.0 10.9 8.1 14.3

5,631
340

Preethi Shukla 91-22-2286 4307 preethi@edelcap.com

483 35.5 52.7 7.2 4.0 16.9

Price (INR)

290

Aug-02

Nov-02

Feb-03

Volume (000)

46.5

Igarashi Motors
Rooshnil Securities
(An Edelweiss Capital Company)

IGARASHI MOTORS
Small motors for global majors

AUTO COMPONENTS

INR 40

Igarashi Motors (IM) is a 100% Export Oriented Unit (EOU) manufacturing Permanent Magnet DC motors for Global Automotive Tier I Suppliers and for its parent. Export revenues increased from INR 58 mn in FY97 to INR 1,031 mn in FY02. Given proven capabilities and support from parent, we believe IM will turn around after a setback in FY03 due to a change in ownership pattern of a dedicated client and delays in launching new projects.

Recommendation
Va l u e

Background IM, a 100% EOU was jointly promoted by Crompton Greaves and Igarashi Electric Works (IEW) of Japan. In FY02 Igarashi increased its stake to 75% by purchasing CGs stake. The company has manufacturing facilities at Chennai export promotion zone. Revenues registered a quantum growth from INR 58 mn in FY97 to INR 1,031 mn in FY02. Present business IM manufactures DC permanent magnet micro motors, which find major applications in Automobiles, Office Equipment, Power tools and Domestic appliances. IM derives more than 90% of its revenues from the automobile industry and caters primarily to the passenger cars segment.
In the Automotive Segment, IMs motors find applications in car windows, seats, engine systems, fuel pump systems and ventilation systems. Electronic motors are increasingly replacing manual operations, creating a growing demand. About five years ago electronic motor count per car was 15. This increased to 20 motors per car today and is expected to rise to 35 motors per car in the next four years. IM will benefit significantly from this growth. IM has three revenue streams -1) Contract manufacturing for clients (most supplies are to Meritor) 2) Joint development with a client and 3) Business from Igarshi.

Sell Trading

Reduce Accum Buy

Sell

Buy

No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 75.0 0.0 0.0 25.0

Outlook
Reuters Code Bloomberg Code : CGIM.BO : CG IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 66/35 11.9 .5 / 10

MCap (INR bn/USD mn) :

IMs exports have grown from INR 58 mn FY97 to 1031 mn in FY02. IM is a tier-II supplier to global auto majors. Its two main customers are Meritor (70% of export revenues) and Igarshi affiliates. Meritor supplies components to auto majors like General Motors, Ford, Daimler Chrysler, Renault, Peugeot and Honda. Igarashi outsources motors from IM for supplying to its customers in U.S. and Europe. At present U.S. accounts for 67% of IMs exports. Going forward, IM expects Europe to be a major revenue contributor. IMs FY03 performance was impacted (25% decline in revenues) by change in ownership pattern of a dedicated client and delays in launching of new projects. Having established its global credibility and reached critical mass, we expect IM to report strong growth in the coming years.
Financials Price Chart
FY01 FY02 FY03
70 60 40 50

Year to March Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com


Income from Operations Export Revenues EBIDTA Net Profit EPS (INR) EPS Growth % PE (x) EV/EBIDTA Debt/Equity Ratio ROE%

40 30 20

30

20

5.7 5.4 1.4 37.1

10 10 0 May-02 Aug-02 Nov-02 Feb-03 0 May-03

Volume (000)

Price (INR)

928 870 145 83 7.0

1,031 972 173 102 8.6 24 4.7 4.3 1.0 39.5

757 680 135 73 6.1 (29) 6.5 4.7 0.8 23.2

50

Lupin
Rooshnil Securities
(An Edelweiss Capital Company)

LUPIN
Generating generics

PHARMA

INR 231

Recommendation
Va l u e

Lupin Limited (Lupin) is the sixth largest pharmaceutical company in India with a strong thrust on exports. It is a world leader in the anti-tuberculosis segment and now commands a significant presence in cephalosporins and cardiovascular segments. Lupin has built a wide product basket and also invested in large capacities equipping to meet regulated market requirements in these segments. Due to cost competitiveness and attractive product basket, Lupin has managed to enter into alliances with important generic players in the U.S. We expect exports, especially from the regulated markts, to account for an increasing share of revenues going forward. We believe Lupin is poised to capitalise on global opportunities and emerge among frontrunning Indian pharma exporters.

Background
Sell Trading Reduce Accum Buy

Lupin was promoted about three decades ago to manufacture anti-TB drugs. Over the years, it has emerged among the worlds largest producers of Rifampicin (anti-TB), ethambutol (anti-TB) and Pyranzinamide (anti-TB). Lupin has manufacturing facilities at Mandideep, Aurangabad, Ankleshwar and Tarapur. Its R&D facilities are located at Mumbai and Pune.

Sell

Buy

No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 61.6 10.8 10.0 17.7

Present business Lupin manufactures bulk actives (55% of revenues) and formulations (45%). Domestic business accounts for approximately 67% of total revenues. Anti-TB, cephalopsorins and cardiovasculars are focus areas for domestic bulk actives. Therapeutic segments in domestic formulations include antiTB, anti-infectives, NSAIDS and cardiovasculars. Lupins coverage reaches over 0.13mn doctors. Dedicated Promotional Representative strength is around 1000. Export business Of the INR 3.1 bn export revenues in FY02, bulk drugs accounted for 95% and formulation exports 5%. Lupin ventured into export markets in early nineties with its anti-TB range. It is now creating a niche market in cephalosporins and cardiovascular segments. Lupins major clients in bulk actives are Merck Generics, Apotex, Dow Chemicals, DSM, and Koei. Key export destinations are Europe, Middle East and Africa. Lupin has entered into alliances with Apotex and APP, leading U.S. players for the supply of bulk cephalosporin and cardiovascular products. Lupin has also built an active pipeline of formulations for its focus markets in U.S. and Europe. We expect Lupin to report a 30% CAGR in exports during FY02-FY05. Outlook Lupin has been laying the foundation for strong growth in exports in cardiovascular and antiinfective segments. Its focussed approach has helped it gain significant visibility with global players. The USD 10 bn U.S. and European generic markets provide an exciting opportunity. Lupin is well placed to tap these opportunities and emerge as a strong export player.
Financials Price Chart
FY00 9 mths* FY01* FY02
200 170 1000 900 800 600 500 110 80 50 May-02 400 300 200 100 Aug-02 Nov-02 Feb-03 0 May-03

Reuters Code Bloomberg Code :

: LUPN.BO LPC IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 276/180 23.25

MCap (INR bn/USD mn) : 5.4 / 113.4

Year to March
Revenues (INR mn) Growth (%) Net Profit (INR mn) EPS (INR) EPS Growth (%) PE (x) EV/EBITDA (x) ROE (%)

Price (INR)

Preethi Shukla 91-22-2286-4307 preethi@edelcap.com

5,437 NA 306.6 7.7 NA 22.6 13.5 10.2

9,029 NA 600.2 15.0 NA 11.5 9.0 18.6

9,569 5.9 721.8 18.0 20.3 9.6 7.1 21.3

140

* Not comparable due to differing time periods

Volume (000)

700

Motherson Sumi Systems


Rooshnil Securities
(An Edelweiss Capital Company)

MOTHERSON SUMI SYSTEMS (MSS)


Harnessing global majors

AUTO ANCILLIARY

INR 134

Recommendation
Va l u e

MSS is a leading manufacturer of wiring harnesses, rubber and plastic components for the automobile industry. It has a 50% market share in the Indian automotive wiring harness market. In late nineties, the company started focusing on exports to counteract a slowdown at home. The rubber component division, a contract manufacturing facility for Woco, France contributed to 66% export revenues in FY02. The company supplies wiring harnesses to OEMs like Piaggio. In FY02, MSS acquired assets of a wiring harness manufacturer in Ireland and shifted them to Sharjah. MSS is already catering to the existing customers of this company. We believe MSS is all set to show robust growth in exports as existing clients ramp up and new clients are added.

Sell Trading

Reduce Accum Buy

Sell

Buy

No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 71.4 2.6 1.2 24.8

Background MSS is the flagship company of Sumi Motherson Group (INR 6.4 bn revenues in FY02). It was promoted in 1986 by Mr. V C Sehgal in collaboration with Sumitomo Wiring Systems (25% stake in MSS). The group has 19 entities or JVs catering to the automotive industry. The group is the largest manufacturer of automotive wiring harnesses, engine cables and automotive wires in India. It is also a leading manufacturer of injection moulding and rubber components. MSS has seven manufacturing facilities at Noida, Chennai, Pune, Bangalore and Hosur. MSS recently purchased assets from the Receiver of Wexford Electronix, an Irish wiring harness company. MSS shifted the assets of this company to a subsidiary in Sharjah and began to cater to the European customers of Wexford. Present business MSS is a leading manufacturer of integrated wiring harnesses in India catering to requirements of Indian car manufacturers. It enjoys a 50% market share in automotive industry. Its other products are battery cables, engine cables, rubber and rubber-metal components and wiring harness components. It main customer is Maruti accounting for 40% of revenues. It is also a preferred supplier to global auto majors in India like Ford and Toyota. . Export business The following factors will lead MSSs export growth: a) Increased sourcing by Woco for OEMs b) Commencement of exports to Sumitomo its co-promoter and increased exports to other technology partners and JVs like Wilhelm Pudenz and c) Supplies to OEMs like Ford. MSS is currently working on a big contract for supplying dashboards to Ford. Overall outlook MSSs efforts over the last four years and recent alliances and acquisitions position it well to take off in exports.
Financials Price Chart
FY01 FY02 FY03E
160 140 50 45 40 30 25 20 15 10 5 Aug-02 Nov-02 Feb-03 0 May-03 35

Reuters Code Bloomberg Code

: MOSS.BO : MSS.IN

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 148/80 31.3 4.2/ 0.88

MCap (INR bn/USD mn) :

Year to March Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com


Income from Operations Export Revenues EBIDTA Net Profit EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA Debt/Equity Ratio ROE (%)

Price (INR)

100 80 60 40 20 0 May-02

25.49 10.48 0.46 36.25

Volume (000)

2,333 324 418 165 5.3

3,058 479 595 170 5.4 3 24.7 8.55 1.02 18.08

3,680 719 731 261 8.3 53 16.12 6.83 0.86 25.06

120

Sundaram Brake Linings


Rooshnil Securities
(An Edelweiss Capital Company)

SUNDARAM BRAKE LININGS (SBL)


No brakes on growth

AUTO COMPONENTS

INR 195

SBL manufactures brake linings for the automobile industry. It primarily exports these to spare parts distributors in 55 countries. SBL started exporting in 1987. In a decade the exports component in the business grew significantly and SBL reported an 18% CAGR in export revenues from FY97-FY02. We believe over the long term, its direct sales business model offers potential for high margin growth and revenue sustainability.

Recommendation
Va l u e

Sell Trading

Reduce Accum Buy

Background SBL is part of the Chennai-based TVS group. It manufactures friction materials like brake linings, disc brake pads for auto and industrial markets. It has manufacturing facilities at Chennai and Madurai. In November 2001, SBL was awarded Deming Application Prize. SBL is the fifth company outside Japan to bag this prize. Present business The company derives 98% revenues from the auto segment. Domestic sales account for 52% revenues and exports account for 48% revenues. In the domestic automotive segment, replacement market is thrice the size of the OEM market. The company has extensive distribution network in the country and it earns 75% of domestic revenues from the replacement market. OEMs account for remaining 25% of domestic revenues. SBLs largest customers are Telco and Ashok Leyland. SBL is also an exclusive supplier to all two wheelers of TVS motors. The company is the first Indian manufacturer to introduce asbestos free products, which now account for 45% of total revenues. Export business SBL started exporting brake linings in 1987. In the last five years, export revenues increased from INR 181 mn in FY98 to INR 413 mn in FY02 growing at an 18% CAGR.
SBL supplies brake linings to 55 countries. Europe accounts for 50% of total exports. It has a unique export model. In all developing countries SBL supplies directly to the spare parts market. It supplies products to local dealers/distributors of automotive parts who in turn cater to the local demand. In most cases the products are sold in the SBL brand name. But co-branding is done in a few cases. We believe that the replacement market gives SBL pricing power.

Sell

Buy

No Reco

Shareholding pattern (%) Promoters FIs & Banks FIIs Others : : : : 49.1 8.8 0.0 42.1

Reuters Code Bloomberg Code

: :

India Emerging Research

Market Data 52-week Range (INR) Shares in issue (mn) : : 205/143 2.7 0.5 / 11

MCap (INR bn/USD mn) :

Overall outlook In the domestic market, the company is focusing more on passenger car and two wheeler market for growth. In international markets, the company intends to enter into tie-ups with more distributors to extend its reach. SBL is also working on expanding its product range. Considering its current presence in international markets, we believe SBL will report steady growth going forward.
Financials Price Chart
FY01 FY02 FY03E
210 200 190 10 15

Year to March
Income from Operations Export Revenues EBIDTA Net Profit EPS (INR) EPS Growth (%) PE (x) EV/EBIDTA Debt/Equity Ratio ROE (%)

Price (INR)

Srinivas Rao R 91-22-2286 4301 srinivas@edelcap.com

180 170 160 150 140 130 May-02 Aug-02 Nov-02 Feb-03

10.1 6.6 0.8 13.4

0 May-03

Volume (000)

814 311 120 51 18.8

854 413 135 60 22.1 18 8.6 5.7 0.9 17.4

1,019 557 177 81 30.1 36 6.3 3.8 0.6 24.4

Edelweiss Capital 1st Floor, Shalaka, 9 Maharshi Karve Marg, Cooperage, Mumbai 400 021 Board: (91-22) 22864400 Email: research@edelcap.com

INDIA EQUITY RESEARCH PUBLIC MARKETS FMCG & Media Harrish Zaveri 22864302 harrish@edelcap.com Information Technology Ajay Mathrani 22864282 ajay@edelcap.com Aashish Agarwal 22864305 aashish@edelcap.com Pharmaceuticals Preethi Shukla 22864307 preethi@edelcap.com Telecom & Engineering Srinivas Rao R 22864301 srinivas@edelcap.com PRIVATE MARKETS Shriram Iyer 22864256 Head Research shriram@edelcap.com

EQUITY SALES Nilesh Shah 22864210 Head - Broking nilesh@edelcap.com Nischal Maheshwari 22864205 nischal@edelcap.com Nikhil Gholani 22864201 nikhil@edelcap.com Rajesh Makharia 22864202 rajesh@edelcap.com Rajesh Gandhi 22864221 rajeshg@edelcap.com Lavneesh Mohan 22864270 lavneesh@edelcap.com Rajrishi Jain 22864270 rajrishi@edelcap.com

Business Process Outsourcing Prasad Baji 22864248 prasad@edelcap.com Nitika Agarwal 22864252 nitika@edelcap.com Technology George Mathew 22864249 george@edelcap.com Satyen Shah 22864268 satyen@edelcap.com

INDIAALTERNATIVE RESEARCH Vikas Khemani 22864206 vikas@edelcap.com Gautam Laungani 22864287 gautam@edelcap.com Jitendra Marchino 22864289 jitendra@edelcap.com Deepak Mittal 22864250 deepak@edelcap.com
Editor

EDITORIAL TEAM
Production

Saudamini Rao-22864291 Sridhar B-22864306 saudamini@edelcap.com sridhar@edelcap.com

RATING INTERPRETATION VALUE


Buy Accumulate Reduce Sell Expected to appreciate more than 20% over a 12-month period Expected to appreciate up to 20% over a 12-month period Expected to depreciate up to 10% over a 12-month period Expected to depreciate more than 10% over a 12-month period Sell Expected to depreciate more than 10% over a 45-day period Buy Expected to appreciate more than 10% over a 45-day period

TRADING

This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with Rooshnil Securities is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Neither Rooshnil Securities, nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We and our affiliates, officers, directors, and employees world wide, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or may perform or seek to perform investment banking services for such Company(ies) or act as advisor or lender / borrower to such company(ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. No part of this material may be duplicated in any form and/or redistributed without Rooshnil Securities prior written consent. No part of this document may be distributed in Canada or used by private customers in the United Kingdom. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.