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Investment Concerns
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A further global economic slowdown may jeopardize company's
growth: The global economic conditions pose a significant economic
risk to the company's operations. Any slowdown in the economy may impact
the volumes in the MTO segment. Also, if Indian economy gets impacted, the
prospects of CFS and PES business will also be harmed.
Slow execution of infrastructure projects: A
weak growth in the Indian economy or adverse policy regime can lead to a
slowdown in the infrastructure projects. Such an environment is likely to
lead to a delay in capacity expansions or worse, result in, the
cancellation of existing orders in PES segment. Since the company has done
significant capital expenditure in this segment, such a scenario will lead
to idle capacity and poor return ratios.
Regulatory risk: For operating in MTO
business and CFS/ICD business, the company will have to function as per the
regulations set for the sector. Any delay in approvals, delay in reforms
like GST, unfavorable tax laws etc are likely to hurt the prospects of the
company.
Increase in the fuel prices: With crude oil
trading towards the high end and known for being volatile, the fuel prices
are also likely to go up. This will adversely impact the prospects of
CFS/ICD and coastal shipping business which is a new venture for the
company.
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Background
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Allcargo Logistics Ltd is a leading multinational company
that offers integrated logistics solutions across Multimodal Transport
Operations, Container Freight Station Operations and Project &
Engineering Solutions. It is the second-largest global player in LCL
(less than container load) consolidation business and has a presence in
over 60 countries and covers more than 5,000 port pairs. In MTO, the
company operates as non vessel operating common carrier (NVOCC) and
offers consolidated service packages like LCL, FCL (full container load)
, stuffing and sailing etc that support cargo consolidation. Its operations
include providing end-to-end freight services to exporters and importers
of cargo through more than one form of transportation modes. The share of
MTO segment in the revenues stands at around 73%. MTO is a low margin
business for Allcargo Logistics. Within MTO, the company specializes in
LCL (consolidation of various types of cargoes in a single container) and
thus serves small importers/exporters who may not have sufficient cargo
to book entire container. The company carries operations in this segment
through ECU line, its wholly owned subsidiary.
The other key business segments of the company are Container
Freight Station operations (7.8% share in revenues). These include import
/ export cargo stuffing, de-stuffing, customs clearance and other related
ancillary services to both importers and exporters. The segment enjoys
better margins as compared to MTO. In this segment, the company has a
presence at JNPT port, Chennai port and Mundra port that receive most of
the country's container traffic. It is the among the country's top two
CFS operators at JNPT and Chennai port and amongst the top three at
Mundra.
Another key segment of the company is Projects and
Engineering Solutions segment (around 11% of the revenues) through which
the company offers end-to-end project engineering and logistic services
across various sectors such as power, oil and gas, railways etc. These
include erection, installation, lifting services through a diverse fleet
of owned or rented special equipment like cranes, forklifts to carry ODC
(Over Dimensional Cargo) / OWC (Over Weight Cargo).
Besides project engineering solutions, the company is
involved in Inland Container Depot (ICD) services, 3PL (Third Party
Logistics) & warehousing, airfreight cargo logistics and shipping
services.
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Industry Prospects
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With the increasing movement of goods across geographies,
containerized trade is gaining focus in the global logistics industry. The
development of containerized traffic is likely to boost MTO operations.
However, mainly relying on export import volumes, the fate of the industry
depends on global macro economic growth and trade. Within MTO, the LCL
segment (less than container load), in which the company is the second
largest operator, is however less vulnerable to the slowdown in the global
trade. As far as the prospects of global trade are concerned, even though
Western economies don't offer much hope, the trade volumes within Asia are
likely to provide relief.
The Indian Logistics industry is valued at over US$ 125 bn and
is expected to grow at around 15%-20% per annum. The Container logistics
industry comprising Inland Container Depot (ICD) services and Container
Freight Stations (CFS) is among the fastest growing segments in the Indian
logistics sector. The major demand drivers for this segment are growth in
international trade coupled with the rise in containerization levels. The
market is expected to grow strongly due to the demand generated by
importers and exporters for specialized services. With the development of
dedicated freight corridors, this segment is likely to attract a lot of
investment. However, it will also need a favorable regulatory scenario (for
e.g easy land acquisitions, favorable tax rules) and faster project
execution for growth to materialize. Going forward, FDI in multibrand
retail and introduction of GST is likely to lead to a further rise in
outsourced logistics. As more and more regulations come into the sector,
the larger players in the sector are likely to gain over smaller
unorganized players.
As far as PES segment is concerned, the investment in the
infrastructure development will be a key driver for the business. While the
Government has estimated an expenditure of around 1 trillion dollar on the
same, the pace of execution and regulations and policies in different
sectors such as oil and gas, railways, transport etc will be crucial for
the plan to be executed.
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Key Management
Personnel
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Mr. Shashi Kiran Shetty is the Chairman and
Managing Director of Allcargo Logistics Ltd. Mr. Shetty started his
career in the Logistics industry in 1978 with Intermodal Transport and
Trading Systems Private Limited, Mumbai. After that, he moved to Forbes
Gokak, a TATA Group Company where he gained experience in port operations.
In 1993 he founded Allcargo Logistics as freight forwarding privately held
company. He has served on the Board of Mumbai Port Trust and was the
Co-Chairman of the Transport and Logistics Committee of The Indian Merchant
Chambers. He has also served as the Vice President of Association of
Multimodal Transport Operators of India.
Mr. S.Suryanarayanan serves as the Director,
Finance of the company. He was appointed as Group Finance officer of
Allcargo Logistics Ltd. and its subsidiaries in May 2008. He has a degree
in Chartered Accountancy. As the group financial officer, he is responsible
for the group financial plans, strategic planning, and merger and
acquisitions of the group .He has over 25 years of vast experience in the
logistics, chemical & engineering sectors. With rich experience in fund
raising he has also been extensively involved in domestic and international
mergers and acquisitions.
Mr. Adarsh Hegde,, serves as the Executive
Director of Allcargo Logistics Ltd. He has been serving in this role
since September 2006. He is a Director on the Board of the company and
spearheads CFS, ICD, and Project Logistics and Warehousing businesses in
the company. He is also the Corporate Marketing Chief for the group. He
holds a degree in mechanical engineering. He started his career as
Assistant Maintenance Engineer with Eastern Ceramics Pvt. Ltd. and joined
Allcargo Logistics Ltd. in 1987-88. He currently holds the position of the
President of CFS Association of India.
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Risk Analysis
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Sector: The Company operates mainly in three
segments all of which are broadly related to global and domestic economic
growth rate, trade volumes and capex cycle. Within MTO, LCL segment is
less vulnerable to the slowdown in the global economy. However, the other
segments like PES and CFS have a high systematic risk. Nonetheless, there
is a huge potential of containerization and growth of CFS services. Also,
the thrust on infrastructure investment in 12th Five year plan is likely
to be favorable for the sector. In view of all this, we assign 'medium'
risk rating to the stock on this parameter.
Company standing: Allcargo Logistics Ltd is
one of the leading players in NVOCC segment (second largest LCL operator
in the world) and is a dominant player in the CFS segment (among top two
operators at high container traffic ports) and PES segment. Despite a
global slowdown, the company's sales and profits have grown at decent
rate without any risk on the balance sheet. Hence, we assign a 'strong'
rating to the company on this parameter.
Revenue growth: Allcargo Logistics Ltd
generated average revenues to the tune of Rs 24.5 bn in the last five
years. We expect its sales to grow at a CAGR of nearly 11.4% between FY12
and FY15. Please note that this is on the basis of conservative
estimates. We thus assign a high risk rating of 3 to the stock.
Operating margins: This ratio is a
measurement of what proportion of a company's revenue is left over after
paying for variable costs of production such as raw materials, wages, and
sales and marketing costs. A healthy operating margin is required for a
company to be able to pay for its fixed costs, such as interest on debt.
The higher the margin, the better it is for the company as it indicates
its operating efficiency. Allcargo Logistics Ltd's average operating
margins for the past five years have been 10.3%. In FY12, the operating
margins stood at 12.2% and we expect the same to improve to around 12.7%
by the end of FY15 on account of higher contribution from high margin
business segments. Hence, we assign a medium risk rating of 6 to the
stock on this parameter.
Long-term EPS growth: We expect Allcargo
Logistics Ltd's net profits to grow by around 10.4% CAGR during the
period FY12-FY15. The growth is lower than the growth of 28.3% CAGR
witnessed between CY08 and FY12. As such, the rating assigned to the
stock on this factor is 3.
Return on equity: Return on equity denotes
the returns that the company is generating for its shareholders. Allcargo
Logistics Ltd has had an average ROE of 18.8% over the past 5 years. Its
RoE in FY12 stood at 17.8% and is expected to stand slightly over 15% at
the end of FY15. Thus the rating assigned is 6.
Dividend payout: A stable dividend history
inspires confidence in the management's intentions of rewarding
shareholders. Allcargo Logistics Ltd's average payout ratio has been
around 12% in the last five years. Going forward, the same is expected to
be 7%. Thus, we have assigned a high risk rating of 3 to the stock on
this parameter.
Promoter holding: A larger share of promoter
holding indicates the confidence of the people who run it. We believe
that greater than 40% promoter holding indicates safety for retail
investors. At the end of September 2012, the promoter holding in Allcargo
Logistics stood at 71.5%. We have assigned a rating of 10 to the stock.
Liquidity: The past 52 weeks average
daily volume of the stock is in the range of 33,110 shares, which is
below average. The rating assigned is 3.
Current ratio: This ratio is an
indication of a company's ability to meet short-term debt obligations.
The higher the ratio, the more liquid the company is. Current ratio is
equal to current assets divided by current liabilities. Allcargo
Logistics Ltd has had an average current ratio of 1.7 times over the last
five years. It is expected to have a ratio of more than 1 over the next
three years. The rating assigned is on this parameter is, thus, 6.
P/E Ratio: The P/E ratio
(price-to-earnings ratio) of a stock is a measure of the price paid for a
share relative to the per share income or profit earned by the company.
This is one of the important metrics to judge the attractiveness of a
stock, and thus gets the highest weightage in our risk matrix. The
company's P/E on its trailing twelve months earnings stands at around 7.2
times. As such, we have assigned a low risk rating of 9 to the stock on
this parameter.
Debt to equity: Allcargo Logistics Ltd has
had very comfortable debt to equity ratio in its balance sheet in the
past and in light of the slowdown in company's capex plans, it is likely
to improve further. Thus the rating assigned is 7.
Interest coverage ratio: Allcargo Logistics
Ltd has had very healthy interest coverage ratio and the same is expected
to remain unchanged in future. Thus the rating assigned is 7.
Considering the above analysis, the total ranking assigned
to the company is 63 that, on a weighted basis, stands at 5.5. This makes
the stock a medium-risk investment from a long-term perspective.
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Risk Matrix
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Rating accorded
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Rating
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Weightage* (A)
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Rating# (B)
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Weighted (A*B)
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Sector risk
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-
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Medium
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NA
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Company's standing
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-
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Strong
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NA
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Performance parameters
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Sales growth (%)
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10.0%
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3
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0.3
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Operating margins (%)
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5.0%
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6
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0.3
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Long term EPS growth (%)
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10.0%
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3
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0.3
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Return on equity (%)
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10.0%
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6
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0.6
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Technical parameters
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Dividend payout (%)
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10.0%
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3
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0.3
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Promoter holding (%)
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5.0%
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10
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0.5
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Liquidity (Nos. '000)
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10.0%
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3
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0.3
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Safety parameters
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Current ratio (x)
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10.0%
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6
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0.6
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P/E
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10.0%
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9
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0.9
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Debt to equity ratio (x)
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10.0%
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7
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0.7
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Interest coverage ratio (x)
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10.0%
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7
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0.7
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Final Rating#
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63
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5.5
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# Rating has been assigned on the basis of the company's performance
over the past five years and expected performance over the next 3 to 5
years. Rating is on a scale of 1 to 10, with 1 indicating highest risk and
10 indicating lowest risk. * 'Weightage' indicates the relative importance
in percentage terms of the parameter. For instance, for an investor, given
all the performance metrics, return ratios (say ROE) should be the foremost
criteria for buying/not buying stocks. ** The final rating has been arrived
at by multiplying the rating/points given on each parameter with the
respective weightage
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Valuations
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At current price, the company is trading close to an around
all time low TTM PE of 7.2x. The current TTM PE is at around 38% discount
to its average TTM PE of 11.7x in last three years. Despite a tough
global macroeconomic environment, the company's net profits in the last
three years have grown at a CAGR of 28.3%. As per our estimates, going
forward the company's bottomline should grow at a 10.4% CAGR (FY12-FY15e).
The gearing levels for the company are likely to come down due to a
slowdown in the capex plans and its return on equity is expected to be
slightly above 15% (at the end of FY15). We believe that the existing
valuations over penalize the company for an expected weak performance in
FY13e. Our target price of Rs 195 implies a target PE multiple of 8.0x
with respect to earnings in FY15. This is at a significant discount to
three year average TTM PE of 11.7x considering the slowdown in earnings
growth in the next three years and offers sufficient margin of safety.
Our target price of Rs 195 implies a point to point return of 54% and
CAGR returns of around 21% from the current stock price. Hence, we
recommend a 'Buy' from a long term perspective.
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(Rs m)
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FY12*
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FY13E
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FY14E
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FY15E
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Net sales (Rs m)
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34,169
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38,810
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43,116
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47,337
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Net profit (Rs m)
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2,276
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2,223
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2,537
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3,066
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Diluted EPS (Rs)**
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18.0
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17.6
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20.1
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24.2
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Price to earnings (x)
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7.0
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7.2
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6.3
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5.2
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Price to sales (x)
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0.5
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0.4
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0.4
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0.3
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Price to book value (x)
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1.1
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0.9
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0.8
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0.7
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Source : Company data, Equitymaster
estimates
Notes : E-Estimates
*adjusted for 12 months
** per share numbers on the basis of existing outstanding shares
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(Rs m)
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FY12*
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FY13E
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FY14E
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FY15E
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Sales
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34,169
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38,810
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43,116
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47,337
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Sales growth (%)
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19.3%
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13.6%
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11.1%
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9.8%
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Operating profit
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4,161
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4,903
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5,265
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6,008
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Operating profit margin (%)
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12.2%
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12.6%
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12.2%
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12.7%
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Net profit
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2,276
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2,223
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2,537
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3,066
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Net profit margin (%)
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6.6%
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5.7%
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5.8%
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6.4%
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Balance Sheet
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Fixed assets
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13,829
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13,505
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13,483
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13,263
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Current assets
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7,228
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9,258
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10,055
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12,659
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Other long term assets
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7,104
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7,207
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7,507
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7,707
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Investments
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235
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590
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1,000
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2,000
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Total assets
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28,396
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30,561
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32,045
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35,629
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Current liabilities
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6,639
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7,541
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8,377
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9,198
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Net worth
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15,210
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17,359
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19,806
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22,770
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Debt
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5,632
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4,500
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2,500
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2,000
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Other long term liabilities
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162
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162
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162
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162
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Deferred tax liability
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753
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1,000
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1,200
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1,500
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Total liabilities
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28,396
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30,561
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32,045
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35,629
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Source : Company data, estimates
Note : FY12 numbers adjusted for 12 months
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