EPS (old) ( ) EPS (new) ( )

Spain / IT Services

26 November 2012

Indra (IDR.MC)

One for the radar screen

Last (€)

8.88

Valuation Range (€)

11.7-12.3

1,456

0.5

Free Float

57.8%

BUY

YTD

-9.78%

Marta Llano +34 91 566 2455

Sales (€m)

EBITDA (€m)

vs.

Cons

Net Profit (€m)

EPS (old) (€)

EPS (new) (€)

vs.

Cons

P/E (x)

EV/EBITDA (x)

DPS (€)

DIV Yield

2010 2,557 327 n.a. 189 n.a. 1.15 n.a. n.a. n.a. 0.66 n.a.

2011 2,689 313 n.a. 181 n.a. 1.10 n.a. n.a. n.a. 0.68 n.a.

2012E 2,925 294 -0.7% 133 0.96 0.95 4.4% 9.3 7.3 0.24 2.7%

2013E 2,976 305 2.0% 144 1.03 0.95 -4.1% 9.3 9.8 0.26 2.9%

2014E 3,068 340 2.0% 187 1.28 1.14 3.5% 7.8 6.1 0.34 3.8%

Est 3 Yr Sales CAGR: 4.5% Shares Outstanding (m): 164.1

Est 3 Yr EPS CAGR: 1.2% Mkt Cap (€m): 1,456

Share price performance YTD 1 month 3 months 12 months

Absolute -9.78% 1.39% 13.49% -8.87%

Relative to IBEX -2.29% -0.33% 5.22% -10.55%

Relative to MSCI Europe ex - UK Small Cap. Index -19.91% 2.49% 8.49% -24.69%

„

For the first time in a long time, and after tough reality checks, Indra’s latest quarterly reporting exceeded expectations, and showed healthy FCF generation.

„

It is still early to call this a trend. We see it as wake up call that the end of the tunnel may be not that far away.

„

Company guidance for 2013E will not be provided until late January, but we have lowered our numbers by 9-10%

which are now around Consensus. We think that both of us are now more or less up with events.

„

We expect 3% CAGR in sales, c6% in EBIT (post

restructuring) and 14% in earnings to 2015E. We assume a different geographical mix (less Spain, more

international), more modest margin recovery, a small deterioration in working capital, and assume a payout around half that of 2011. This renders a valuation of

€11.7-12.3 per share (down from €13.0-13.5).

„

The shares are 35% up since the start of the short selling ban, but trade at a 20-25% discount to sector peers (not justified on growth grounds), and have de-rated by 30- 40% since the start of the Euro sovereign crisis.

„

Overhang risk (20% Bankia; 5% Liberbank) and absence

of company guidance in the next two months would

suggest short term caution. We do not disagree, but

recommend to start looking at fundamentals. Reported

shorts are c9% of Indra’s capital.

IDR: Summarised P&L Account and key ratios

€m 2009 2010 2011 2012E 2013E 2014E Sales 2,513.2 2,557.0 2,688.5 2,925.1 2,975.8 3,068.1 EBITDA 327.4 327.3 313.4 294.0 304.8 340.1 Depreciation & Amort. -42.0 -75.5 -45.6 -74.9 -66.8 -55.0 EBIT 285.4 251.8 267.8 219.1 238.1 285.1 Net Int.Cost -24.5 -19.1 -37.7 -54.0 -56.3 -49.6

Associates 0.0 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0

PBT 260.7 233.6 233.3 168.0 184.8 239.5

Taxes -62.7 -45.7 -52.2 -37.0 -40.7 -52.7

Minorities -2.4 0.6 -0.1 2.0 0.0 0.0

Discontinued operations 0.0 0.0 0.0 0.0 1.0 2.0 Net Profit 195.6 188.5 181.0 133.1 144.1 186.8 EPS 1.19 1.15 1.10 0.81 0.88 1.14

Sales growth 5.6% 1.7% 5.1% 8.8% 1.7% 3.1%

EBITDA growth 6.2% 0.0% -4.3% -6.2% 3.7% 11.6%

Net Profit growth 7.2% -3.6% -4.0% -26.5% 8.3% 29.6%

EBITDA margin 13.0% 12.8% 11.7% 10.0% 10.2% 11.1%

EBIT margin 11.4% 9.8% 10.0% 7.5% 8.0% 9.3%

Net Pr. Margin 7.8% 7.4% 6.7% 4.5% 4.8% 6.1%

Gross Int. Cover (x) (1) 11.6 14.9 7.1 4.6 4.5 5.7

IDR: Summarised Balance Sheet and key ratios

€m 2009 2010 2011 2012E 2013E 2014E Fixed assets 140.4 148.2 171.9 177.2 178.5 180.7

Goodwill 440.2 456.3 624.6 624.6 624.6 624.6

Inventories 197.5 238.6 330.4 360.6 366.9 378.3

Trade Receivables 1,363.9 1,592.2 1,687.2 1,883.3 1,932.3 1,975.4 Cash + S/T Inv. + other 141.2 220.0 263.1 137.8 140.3 144.0 Total Assets 2,489.5 2,975.9 3,524.8 3,708.5 3,791.9 3,945.9 Sharehold. Equity 931.8 991.0 1,045.8 1,154.7 1,255.6 1,386.4 L-T Financial Debt 101.9 249.2 314.4 251.5 251.5 251.5 S-T Financial Debt 99.6 155.6 281.2 523.3 474.8 443.1 Trade Payables 1,013.3 1,166.1 1,248.0 1,362.4 1,386.0 1,429.0 Provisions + Other 94.3 128.7 313.3 313.3 313.3 313.3 Total Liabilities 2,489.5 2,975.9 3,524.9 3,711.5 3,795.9 3,950.9

Net Debt 135.0 275.8 513.6 687.0 637.0 602.5

WACC 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%

Net Debt/EBITDA 0.41 0.84 1.64 2.34 2.09 1.77

ROCE (2) 21.8% 17.5% 14.8% 11.4% 10.6% 11.5%

ROE 21.0% 19.0% 17.3% 11.5% 11.5% 13.5%

ROCE/WACC (x) 2.3 1.8 1.6 1.2 1.1 1.2

IDR: Simplified Cash Flow Statement and key ratios

€m 2009 2010 2011 2012E 2013E 2014E Net Profit 159.7 141.9 111.3 133.1 144.1 186.8 + Depr. & Amortis. 42.0 42.1 45.6 45.7 51.9 55.0

+/- Other 0.0 0.0 0.0 0.0 0.0 0.0

= Operating CF 201.7 184.0 156.9 178.8 196.0 241.8 - Change in Working K 30.5 116.5 105.0 111.9 31.6 11.5 - CAPEX of which: 100.5 138.3 205.6 126.0 75.0 148.0

Expansionary CPX 20.0 0.0 0.0 51.0 0.0 70.0

- Dividends 98.7 105.8 107.0 110.4 39.4 42.7

= FCF 74.7 -64.9 -132.5 -48.8 94.4 89.3 FCF Yld (M.Cp) n.a. n.a. n.a. -3.4% 6.5% 6.1%

FCF Yld (EV) n.a. n.a. n.a. -2.3% 4.5% 4.3%

FCF (3) 193.4 40.9 -25.5 112.6 133.8 202.0 FCF Yield (Mkt Cap) n.a. n.a. -9.1% 0.2% 6.5% 10.9%

FCF Yield (EV) n.a. n.a. n.a. -2.3% 4.5% 4.3%

IDR: EV Valuations

€m 2012E 2013E 2014E + Mkt Cap 1,456.4 1,456.4 1,456.4 + Net Debt 687.0 637.0 602.5 - Non-core assets

+/- Other

= EV 2,143.4 2,093.4 2,058.9 EV/Sales (x) 0.7 0.7 0.7 EV/EBITDA (x) 7.3 6.9 6.1

EV/EBIT (x) 9.8 8.8 7.2

EV/IC (x) 1.2 1.1 1.0

IDR: Divisional Sales Breakdown

Defence 18%

IT 82%

IDR: Geographical Sales Breakdown

Latam 20%

USA 1%

Rest of the EU 17%

Other 12%

Spain 50%

Debt Structure (€m)

Total Debt in the B.Sheet 595.6

Short Term 281.2

Long Term: maturing in 314.4

24 months n.a.

36 months n.a.

more than 36 months n.a.

Cost Range 3-10%

Rating (Moody's)

Short term n.a.

Long term n.a.

Estimated Off B/S Liabilities n.a.

IDR: Share Information

Outstanding no. shares (m) 164.1

Market Cap (€ m) 1,456

Avge daily volume (m sh, last 3 m) 0.5

Free float % 57.8%

Major shareholders

BFA 20.0%

Alba 11.5%

Casa Grande de C. 5.7%

Liberbank 5.0%

Management shares option scheme n.a

% of Capital n.a

Nearest to vest n.a

FIDENTIIS 1

1. Indra – 9M12 results. A turning point?

„ For the first time in a long time, Indra’s latest quarterly reporting exceeded expectations and showed healthy FCF generation.

„ It is still early to call this a trend, and FCF should suffer in 4Q12 from working capital deterioration. However, 9M12 results suggest that the end of the tunnel may be not that far away.

Indra’s 9M12 results (see Figure 1) was the first earnings beat in a long time (1% ahead in sales, 2% in EBIT pre-restructuring and 4-9% ahead in net profit). We expect this to reassure Consensus' forecasts (we are in line) and persuade the sceptics about limited earnings risk.

Moreover, FCF generation was better than expected, and the net debt stood at €661m, up from

€587m in June after the payment of a €0.68 DPS in July (€109m of cash outflow) and 4 days of additional working capital (to 105).

Figure 1: Indra - 9M12 results (Euro million)

9M12 % Chg Fidentiis E Consensus E

Revenues 2,121 10% 2,100 2,106

Spain 953 -16% 979 n.a.

International 1,168 48% 1120 n.a.

EBIT pre restrucuturing 179 -11% 176 177

EBIT margin pre restrucuturing 8.45% -204bps 8.4% 8.4%

EBIT post restructuring 152 -25%

Net profit 93 -36% 85 89

Source: Company data, Fidentiis and FactSet

On the negative, however, we would highlight yet another q/q acceleration in the fall of the Spanish business (-8% in 1Q; -18% in 2Q; -24% in 3Q), which suggests an 18% contraction in 2012FY, almost twice the 10% initially estimated by Indra. A fourth of this contraction is explained by telecoms & media (-20%) and defence (-8%) which we estimate are due to lower business from key domestic clients such as Telefonica, Prisa and the Ministry of Defence. The remaining 75% is more difficult to track, but we understand that pressure was well spread across sectors in Spain. We take comfort from Indra’s comments that

cancellations/renegotiations of contracts are rare exceptions.

This contrasts with a q/q acceleration in the organic growth of the international business (+14%

in 1Q; +19% in 2Q; +35% in 3Q).

Working capital is expected to deteriorate by 5 days more before year end, but we still expect Indra to be FCF break even ex financial investments in 2012E (and €49m FCF negative including them). 9M12 results suggested that things are moving in the right direction.

2. Indra – Life after reality checks

„ Company guidance for 2013E will not be provided until late January.

However, after tough reality checks over the last two years, and an 8%- 10% reduction in our estimates, both Consensus and ourselves seem to be up with events.

„ Our estimates forecast 3% CAGR in sales, c6% in EBIT (post restructuring) and 14% in earnings.

„ We now factor in a different geographical mix (less Spain, more international), more conservative margins, some modest deterioration in working capital, and a payout around half that of 2011.

In Spain the crisis is proving tougher and longer lasting than expected, and so we reckon that we have been far too early thinking that Indra’s Spanish business was about to trough. The company, Consensus and ourselves have gone through some reality checks in recent times.

Currently, after earnings downgrades of 33-35% over the last two years (see Figure 2), we believe that estimates are for the first time in a long period, more or less up with events.

Figure 2: Indra – Share price performance vs. next 12m EPS estimates, Dec10 to date

Source: Factset

As one can see in Figure 3, we have fine tuned our 2012 numbers, and lowered our 2013-14E numbers by 8-10% to get very much aligned with Consensus.

Figure 3: Indra – Summarised P&L, 2012-14E (Euro million)

2012E 2013E 2014E

Former New Former New Former New

Sales 2,920 2,925 3,024 2,976 3159 3068.1

% change 0.2% -1.6% -2.9%

EBIT Pre - restructuring 248 248.3 269.2 252.9 314.4 285.1

% change 0.3% -6.0% -9.3%

Net profit 134 133.1 157.9 144.1 209.7 186.8

% change -1.0% -8.7% -10.9%

Source: Fidentiis’ estimates 40

50 60 70 80 90 100 110 120 130

Dec-10 Feb-11 A pr-11 Jun-11 A ug-11 Oct-11 Dec-11 Feb-12 A pr-12 Jun-12 A ug-12 Oct-12

P rice Next 12 mo nths EP S 45 days Estimates

FIDENTIIS -3 The main changes that we have introduced are as follows:

A different geographical mix of sales

Spain should account for a third of group sales in 2014-15E (vs. 50% in 2011 pro forma¹). From an 8% fall in 1Q12, sales in Spain fell by 18% in 2Q12 and by 24% in 3Q12 (see Figure 4), and we now estimate a 19% fall in 2012FY /(see Figure 5).

Figure 4:Indra - Sales growth per quarter YTD, 2012

1Q12 2Q12 3Q12

Spain -8% -18% -24%

International 32% 52% 59%

of which organic 14% 24% 34%

Source: Company data

As one may recall, company indications about the domestic market started at -10% and were revised towards -15% at the release of 1H12. It is important to highlight, however, that this miss, rare in the context of Indra’s track record, is not mainly due to cancellations/delays in the order book (65-70% coverage at the end of 1Q12) but to poorer than expected performance in the 30-35% of the business not yet contracted at the end of March. However, this worse than expected performance in Spain has been more than compensated for by greater than expected growth abroad. This is key as it underlines the successful expansion of Indra’s business abroad as well as the good progress in the integration of recent M&A, mainly Politec, 6% of group sales. As an illustration, we estimate that around 50% of Indra’s business in LatAm is already due to local corporations. In fact, in 2012 FY, we have modestly upgraded our sales estimates for the group (see Figure 6) to take them towards the top end of the 8-9% guided by Indra, up from 8.5%.

Figure 5: Indra – Organic sales growth by market, 2011-15E

2011 2012E 2013E 2014E 2015E

Spain -3% -19% -13% -7% -2%

Institutional demand -10% -28% -18% -11% -4%

Private demand 7% -9% -9% -4% 0%

International 14% 21% 10% 8% 6%

Source: Company data and Fidentiis’ estimates

Going forward, as shown in Figure 5, we have downgraded Spain again, which we now expect will continue to contract over 2013E and 14E, before more or less stabilising in 2015E. This implies a sharper and longer lasting fall than previously expected, i.e. 48% peak to trough in Indra’s domestic business to 2015E vs. 40% to 2014E in our former numbers. We may once again fail to assess the severity of the contraction of the Spanish business. However, one should note that this -48% is based on a 70% fall in institutional demand, in line with the 60- 70% fall for Spanish civil works to date, the sector that benefited the most in the booming years. In the absence of much visibility at present, our model assumes that this greater than expected contraction in the domestic business is only partly offset by higher growth abroad.

Overall, we have lowered our sales growth expectations at the group level to c2-3.5% from 3.5- 4.5% (see Figure 6).

1 Including 12 months of Politec and Galileo

Figure 6:Indra’s sales growth - former and current forecasts, 2012-15E

2012E 2013E 2014E 2015E

Former 8.6% 3.5% 4.5% n.a.

Current 8.8% 1.7% 3.1% 3.5%

Source: Fidentiis’ estimates

One could claim that our new numbers are overly conservative. For instance, we estimate that the roll out of the railways contract for Mecca-Medina a year after signing should add around

€100m to group revenues, 50% of the 2013/12 delta that we estimate for Indra’s international business. However, with the Spanish economy still struggling and awaiting the implementation of some of the austerity measures, we prefer to be cautious and see it as a cushion against potential negative surprises in the domestic business.

Lower margins

One could argue that a 12-18 months payback of Indra’s restructuring plan is the mathematical rationale behind company guidance of a 10% EBIT margin in 2014E, up from 8-9% in 2012E (8.5% in our estimates, in line with the margin reported as of September 12). Likewise, one could argue that this target is not realistic due to pressures from (a). the business mix, with an increasing weighting of lower margin services vs. solutions (see Figures 7 and 8)

Figure 7: Indra – Divisional breakdown, 2011-15E

2011 2012E 2013E 2014E 2015E

Solutions 67% 62% 61% 60% 58%

Services 33% 38% 39% 40% 42%

Source: Company data and Fidentiis’ estimates

Figure 8: Indra – Contribution margin by business segment, 2008-11

Source: Company data

and (b). the need to share part of these efficiency gains with clients. We agree with both arguments, but also highlight that efficiency gains at Indra are not only due to restructuring (elimination of middle managers) but to other initiatives/issues such as the following:

14.40%

18.70%

19.40%

20.20%

20.70%

16.90%

15.60%

14.90%

15.40%

2008 2009 2010 2011

So lutio ns

Services Services including M &A

FIDENTIIS -5

• Indra Global Delivery, a project which is not only about near/off shoring but to the horizontal display of resources across verticals at the early stages of the projects. This should help to optimise efficiency.

• Production management technology or a more industrial approach towards some of their world leading solutions (e.g. radars) as the business has gained critical mass.

• Politec’s turnaround, from break even in 2011 towards a 6-7% EBIT margin in 2014E.

All in all, we estimate a theoretical contribution of these initiatives of 300bps at the EBIT margin level. Thus, company guidance of an EBIT margin in 2014E around 10% seem to assume that 50% of the improvement is absorbed by the above mentioned headwinds. This sounds reasonable, but we prefer to be more cautious due to weakness in the domestic market, which we assume is often higher margin than the international operations. Thus, we now assume a flat EBIT margin in 2013E at 8.5% (down from 9%) on the basis that the improvement in Politec is fully absorbed by further pressure at home. In 2014E, we assume a 9.3% EBIT margin (down from 10%), not far from Consensus’ 9% estimate.

Modest deterioration in working capital

Uncertainty around working capital in Spain remains as the Spanish government’s €27bn plan to pay overdue bills from public administrations proved to be no more than a one off, rather than a turning point in payment practices in Spain. Some government sources point at the FLA (€18bn liquidity fund for the regions that should be made available before year end) as the real turning point. We are sceptical. Indra sees working capital days picking up to 110 days in 2012E, and predicts a long term range of 100-110 days. We agree that this assumption is reasonable in the context of an increasing weight of the international business (Brazil has 60 days of receivables) and assuming more or less stability in Spain. However, we prefer to be more cautious, and assume that working capital days peak at 112 next year, and then progressively come down to 108 in 2015E. We insist that visibility is limited, and so we have tried to play on the conservative side.

Figure 9: Indra – Working capital days, 2012-15E

2012E 2013E 2014E 2015E

Inventories (days) 45 45 45 45

Trade receivables (days) 235 237 235 233

Trade payables (days) 170 170 170 170

Working capital (days) 110 112 110 108

Source: Fidentiis’ estimates

A change in the dividend policy

We believe (and expect) that 2011 will be the last year when Indra’s dividend will be debt financed. Even if self imposed, it does not make much sense to exceed the 2x net debt/ebitda limit to pay €109m in dividends (7.5% yield). As the restructuring of the Spanish banking sector progresses, foreseeable changes in the shareholding structure – sale of 20% by Bankia and maybe 5% by Liberbank - should make thing easier. Thus, our model assumes a 30% payout, half that of 2011, which a). renders a decent 2.5-3% yield in 2012/13 and b). can be paid out of FCF and still allow for a reduction in net debt towards 2x Ebitda. (see Figure 10).

Figure 10: Indra – Simplified Cash Flow Statement, 2012-15E (Euro million)

2012E 2013E 2014E 2015E

Sources of funds

Net profit 189.1 201.0 248.8 264.3

Equity cons.results 133.1 144.1 186.8 199.1

Divds.from equity cons. 3.0 3.0 3.0 3.0

Depreciation 45.7 51.9 55.0 57.2

Net provisions 7.4 2.0 4.0 5.0

Uses of funds

Dividends 109.5 39.4 42.7 55.3

Tangible capex 35.0 35.0 38.0 39.0

Intangible capex 40.0 40.0 40.0 41.0

Financial investments 51.0 0.0 70 * 0.0

Change in working capital 111.9 31.6 11.5 15.4

FCF (49) 94 89 168

Net debt/EBITDA 2.3x 2.1x 1.8x 1.4x

Source: Company data and Fidentiis’ estimates (*) Payment of Politec’s earn out

FIDENTIIS -7

3. €11.7-12.3 per share valuation

„ Indra has been play on Spain’s country risk, but this effect should reduce over time as exposure to Spanish institutional demand comes down towards 10% in the next three years.

„ The shares are 35% up since the start of the short selling ban, but trade at a 20-30% discount to sector peers than cannot be justified on growth grounds, and have de-rated by 30-40% since the start of the Euro sovereign crisis.

„ Overhang risk (20% Bankia; 5% Liberbank) and absence of company guidance for 2013E until late January may advise to wait. We do not disagree, but recommend to start looking at fundamentals. Reported shorts are c9% of Indra’s capital.

The stock is, and will remain a play on country risk (see Figure 11).

Figure 11: Indra - Share price performance vs. 10Y Spanish bond yield (100 base), Dec 10 to date

Source: Factset

In the shorter term in 2012E, for the first time ever, the Spanish operations will account for less than 50% of the business (43% in our numbers). Looking at the medium term, if our

projections are about right, Spain will be no more than a third of the business, and exposure to Spain’s institutional demand will be little over 10% (see Figure 12). This, along with realistic earnings estimates for the first time in a long run and a foreseeable return to positive FCF generation (6-6.5% FCF yield), suggests that it is maybe time to look at fundamental valuations again.

40.0 50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0

Dec-10 Feb-11 A pr-11 Jun-11 Jul-11 Sep-11 Oct-11 Dec-11 Feb-12 M ar-12 M ay-12 Jul-12 A ug-12 Oct-12 40.0 60.0 80.0 100.0 120.0 140.0 160.0

Indra (lhs) 10 Year Go vernment B o nd (rhs)

Figure 12: Indra – Spanish exposure, 2007-15E

Source: Company data and Fidentiis’ estimates

DCF Analysis: €11.7-12.7 per share

We value Indra off a 9.5% WACC (1.4x Beta) and assume a perpetual growth rate of 1.5-2%

(versus 2% formerly). We have rolled over our model for next year, which renders a DCF valuation of €11.7-12.7 per share (see Figure 13).

Figure 13: Indra – DCF Model

0% 1% 1.5% 2%

EBITDA 351 355 357 358

Tax on ebit -65 -65 -66 -66

Net OCF 287 289 291 292

Net capex ("normalised") -57 -57 -57 -57

Working capital -15.4 -15.6 -15.8 -16.1

Free cash flow 214 217 218 219

Terminal value 2,249 2,545 2,719 2,915

Discounted terminal value 1,875 2,122 2,267 2,430

DCF MODEL

Disc. terminal value 1,875 2,122 2,267 2,430

Cummulative value of DCF 337 337 337 337

Enterprise Value (EV) 2,212 2,459 2,604 2,767

Net debt 2012 -687 -687 -687 -687

Equity value ( € m) 1,525 1,772 1,917 2,080

Equity value (€/per share) 9.3 10.8 11.7 12.7

Source: Fidentiis’ estimates 41%

13%

27%

18%

32%

69%

2007 2015E

Spanish Institutio nal demand Spanish P rivate demand Internatio nal S pa in 6 8 %

S pa in 3 1%

FIDENTIIS -9

Long term growth rate: €12.3 per share valuation

Another variation of the DCF analysis is to value Indra doing a long-term (10 year over the projected period) earnings growth analysis on the assumption that EPS in IT is a cash flow proxy. In the case of Indra, this assumes “normalisation” of working capital days, a key hypothesis in our analysis.

We use an 11% discount rate (cost of equity), assume 2% long-term (2016-2021) earnings growth and an 10x exit PE, in line with that of Indra’s peers in 2014E. This suggests a valuation of €12.3 per share.

Market multiples and peer comparison

In this section, we look at Indra’s current PE both compared with historical levels and the sector. As one can see in Figure 14, the short selling ban and some moderation in country risk have meant a rebound from the historical lows of this summer. However, the stock is still well below average of the last few years. Reconquering the levels of April 2011, before the start of the Euro sovereign crisis, suggests 30-40% upside.

Figure 14: Indra – 12 and 24 M FW PE, 2007 to date

Source: Factset

Compared to its peers, and excluding SAP (truly global, 100% solutions), Indra trades at a 20- 25% discount to its main comparables. As one can see in Figure 15 on the right hand side, this discount cannot be justified on growth grounds.

Figure 15: Indra – Peer group comparison

P/E 2012-2014

2012E 2013E 2014E CAGR sales CAGR EPS

Cap Gemini SA 11.6 x 10.9 x 9.9 x 3% 8%

Atos Origin SA 13.3 x 11.4 x 10.8 x 2% 11%

TietoEnator Oyj 11.2 x 9.9 x 9.4 x 1% 9%

Software AG 15.6 x 14.1 x 13.1 x 4% 9%

SAP AG 19.3 x 16.8 x 14.6 x 10% 15%

Altran technologies SA 11.5 x 10.1 x 8.9 x 3% 14%

Indra Sistemas SA 9.3 x 9.3 x 7.8 x 2% 18%

Sector average ex SAP 12.7 x 11.3 x 10.4 x Source: FactSet and Fidentiis’ estimates

6 8 10 12 14 16 18 20

No v-07 Jul-08 A pr-09 Dec-09 A ug-10 A pr-11 Jan-12 Sep-12

P E 12 mo nths FW P E 24 mo nths FW

Further upside?

Visibility is limited, and so we do not dare to model much of a recovery in Spain. However, it is reasonable to expect some rebound at some stage. If we were to assume 10% growth in the Spanish operation in 2015E, a 10% EBIT margin (more in line with company guidance of a margin around 10% in 2014) and 100 days of working capital in our terminal year (2015), Indra would render an 18% FCF yield, put the stock on 6.4x PE and suggest a valuation would go up to €16.2-17.5 per share.

FIDENTIIS -11 Fidentiis Equities S.V.S.A.

C/ Velázquez 140 • 28006 Madrid • Tel +34 /91 566 24 00 • Fax +34 /91 566 24 50 info@fidentiis.com • www.fidentiis.com

CIF A-83563767 Milan Branch

Piazzale Cadorna 9 • 20123 Milano • Tel +3902 9280200 Fax +3902 36705239 infoit@fidentiis.com • www.fidentiis.com

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Information in compliance with the RD 1333/2005 and Consob Regulation no.11971/1999 Analyst Certification

Each research analyst(s) as indicated on the first page of each report, primarily responsible for the preparation and content of all or any identified portion of this research report hereby certifies that, with respect to each issuer or security that the research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or

securities.

Each research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report nor to the positive outcome of investment banking transactions.

Neither the research analyst(s) primarily responsible for the preparation and content of all or any identified portion of this research report, nor his/her/their relatives have any financial interest in the securities of the subject company or are officers or directors of the same.

Disclaimer

This publication has been prepared by Fidentiis Equities, Sociedad de Valores S.A., included the Italian Branch, (“Fidentiis Equities”) solely for the information of clients of Fidentiis Equities. This product is not for retail clients. This product is only for Qualified Investors as defined by the RD 1310/2005 and art. 34-ter, Consob Regulation 11971/1999. This product is distributed primarily in electronic form. No part of this document may be reproduced, distributed or published by any person for any purpose without the prior express consent of Fidentiis Equities. Acceptance of this product implies that the relevant recipient is bound by the above mentioned limitations.

This document and its contents do not constitute an offer, invitation or solicitation to purchase, sell or subscribe to any securities or other instruments. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but Fidentiis Equities makes no representation as to its accuracy, integrity or completeness. Neither research analyst(s) primarily responsible for the preparation and content of all or any identified portion of this research report, nor Fidentiis Equities intend to provide an exhaustive analysis of the commercial or financial situation or the growth perspectives of the subject company and the relevant recipient should not rely on this report for such purposes.

The information contained herein is subject to change without notice. The investments and the strategies described in this report may not be suitable for all the recipients; accordingly we invite to consult your personal financial advisor in this respect. Fidentiis Equities and any of its officers or employees may, to the extent permitted by the law, have a position or otherwise be interested in any transactions or investments directly or indirectly in the subject company of this publication.

Neither Fidentiis Equities nor any officer or employee of Fidentiis Equities accepts any liability whatsoever for any direct, indirect or consequential loss arising from any use of this publication or its contents.

Conflict of interests

Neither Fidentiis Equities, nor its affiliates or the respective officers and employees involved in the preparation of this report hold, directly or indirectly, any regular stake in the equity capital or any financial instruments of companies which could be the object of analysis in this publication herein. Neither Fidentiis Equities, nor its affiliates or the respective officers and employees involved in the preparation of this report have a financial interest in or a material conflicting interest with the subject company.

Fidentiis Equities has adopted internal procedures in order to guarantee the independence of the research analysts and has developed and implemented a set of measures to: (i) identify the possibilities of having conflicts of interest, (ii) try to avoid them, and, if necessary, (iii) solve them. It is possible to consult the conflict of interests policy of Fidentiis Equities by clicking on “legal” at www.fidentiis.com. An internal commission is responsible for reviewing and guaranteeing the independence of our opinions. There is a “Restricted list” of equities that we are preparing to publish research on, and the equities included in our daily recommendations. Compliance Department manages the “Restricted list”. It is permanently updated and distributed to the staff.

This publication has been reviewed and approved by the “Committee for the independence of the publications of the Research Department”. It is in compliance with EEC Directive n. 2004/39/ECand the relevant Spanish and Italian laws and regulations.

Guide to fundamental research

Reports on companies under coverage are published at least once a quarter, to comment on results and important news flow.

A draft copy of each report may be sent to the subject company for its information (without target price and/or recommendations), but unless expressly stated in the text of the report, no changes are made before it is published nor Fidentiis Equities has entered into any agreement with the subject company with reference to this report.

In its recommendations, Fidentiis uses an “absolute” rating system, which is not related to market performance. Ratings are as follows:

BUY: 12-month valuation is at least 10% higher than the current market price.

HOLD: 12-month valuation is 0%-10% higher than the current market price.

SELL: 12-month valuation is lower than the current market price.

Current market price is the reference price of the day prior to the publication of the report.

Recommendation history and target price trends – www.fidentiis.com/recommendationhistory_Iberia.asp