| Summary of Contents STOCK UPDATE Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Under review
Current market price: Rs546
Q2FY2009 results: First-cut analysis Result highlights - Tata Consultancy Services’ (TCS) results in Q2FY2009 were ahead of our estimates at revenue and operating profit levels. However, the net earnings growth was way below our and street expectations on the back of provisions for bad debts (from some of the financial services clients affected by the financial crisis in the USA) and much higher-than-expected foreign exchange (forex) fluctuations losses.
- The consolidated revenues grew by 8.5% quarter on quarter (qoq) to Rs6,953 crore in Q2FY2009. The sequential growth in the revenues was driven by a 6% growth in volumes, higher realisations and the steep depreciation in the rupee. In the dollar terms, the revenues grew by 3.2% qoq to US$1,574 million in Q2FY2009.
- The earnings before interest and tax (EBIT) margin improved by 217 basis points to 24.2% in Q2FY2009 on account of positive impact of rupee depreciation (147 basis points), favourable effort mix (55 basis points), higher realisations and productivity gains (165 basis points). This was partially offset by provisions for bad debts (55 basis points) and higher overhead expenses (94 basis points). Consequently, the company’s operating profit grew by 19.1% sequentially to Rs1,684.8 crore.
- However, the net income grew by 1.4% sequentially to Rs1,261.5 crore, largely on account of a sharp dip in the other income to a negative Rs178.4 crore in Q2FY2009 as compared with a positive Rs33.2 crore in Q1FY2009. The company has accounted for a forex fluctuation loss of $59 million (Rs261 crore) in the other income component during the quarter.
- TCS is suffering due to its aggressive hedging policy. In addition to the forex losses already taken in the profit & loss account, the company has derivatives loss of Rs659.3 crore and foreign currency translation gain of Rs355.8 crore sitting on its balance sheet as on September 2009. This amount would have to be amortised in the coming quarters if the rupee continues to remain weak against the US dollar.
- In Q2FY2009, the employee addition remained healthy with a net addition of 5,328 employees. The company is on track on its hiring target of 30,000-35,000 employees and has made 24,789 campus offers for FY2010. In addition to healthy campus offers, the addition of 51 clients during the quarter is also encouraging.
- In terms of deals, the company has won four large deals (one each in BFSI, retail, public and pharma vertical) during the quarter. Moreover the company currently has 20 deals in pipeline.
- At the current market price, the stock is trading at attractive valuations of 9.3x FY2009 earnings estimate and 8.1x FY2010 earnings estimate. However, the estimates are under review as we have to account for the change in the exchange rate assumption, the muted demand environment and the recent acquisitions. We maintain our Buy recommendation on the stock and will follow up with revised estimates and target price in a detailed note.
Wipro
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs418
Q2FY2009 results: First-cut analysis Result highlights - Wipro’s Q2FY2009 results under US GAAP were largely in line with our estimates. However, a muted growth guidance in Q3FY2009 for its IT services business and uncertainty related to business from some of the key industry verticals like semiconductors and telecom equipment manufacturers are the key negative takeaways from the quarterly results.
- Wipro’s consolidated revenues under US GAAP grew by 7.5% sequentially to Rs6,409.4 crore, ahead of our expectation of Rs6,296.3 crore.
- The operating profit margin (OPM) declined by 49 basis points to 15.9% on account of decline in the margins of IT products business (220 basis points down to 2.2%) and consumer care & lighting business (down 200 basis points to 10.7%) and foreign exchange loss on external commercial borrowing loan. On the other hand, the margin in the IT services business improved by 20 basis points to 20.3% sequentially.
- The consolidated net earnings grew sequentially by 1% to Rs822.4 crore, in line with our expectation of Rs828.9 crore, largely due to a lower-than-expected other income. The company reported a negative other income of Rs78.9 crore in Q2FY2009 v/s a negative other income of Rs27.2 crore in Q1FY2009.
- In terms of performance of IT services business, the revenues grew by 4% sequentially to US$1,110 million, which was 1.9% above its guidance of US$1,089 million. The revenue growth was driven by a 1.2% volume growth and a 2.7% price realisation during the quarter. The margin improved by 20 basis points to 20.3% on the back of positive impact of the rupee depreciation (38 basis points) and a higher realisation and utilisation rate (70.3% in Q2FY2009 v/s 67.9% in Q1FY2009).
- In terms of outlook, the IT services are guided to grow by 1% sequentially to US$1,121 million in Q3FY2009. This is largely to factor in the lower number of working days in Q3FY2009 due to festive season and on account of uncertain global scenario. More concerning is the fact that some of the key user industry domain such as semiconductors and telecom equipment manufacturing are witnessing a slowdown in the business ramp-up.
- In the IT product business, the company reported a healthy growth of 31.4% sequentially to Rs914 crore in Q2FY2009 on the back of a seasonally weak base in Q1FY2009.
- In terms of operating metrics, the net employee addition stood at 1,877 employees in Q2FY2009. The total number of active customers declined to 906 in Q2FY2009, down from 928 in Q1FY2009.
- The hedge position stood at US$2.17 billion at the end of FY2009. The unrecognised foreign exchange (forex) losses on the hedge position in the balance sheet under the head “other comprehensive income” expanded further to Rs1,382.3 crore at the end of Q2FY2009 compared with Rs934.4 crore at the end of the previous quarter.
- At the current market price, the stock is trading at 11.7x FY2009 earnings estimate and 9.6x FY210 earnings estimate. Though the valuations are compelling, the uncertain growth outlook and an overhang of an aggressive forex hedges would keep the sentiments weak at the counter. We had downgraded the stock to Hold recommendation after Q1FY2009 results. We will review the stock and the earnings estimates in a detailed note.
Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs365
Current market price: Rs270
Q2FY2009 results: First-cut analysis Result highlights - Bank of India (BoI) has reported a net profit of Rs762.9 crore for Q2FY2009, indicating an impressive growth of 79.9% year on year (yoy). The Q2FY2009 net profit came in well above our estimate of Rs568 crore.
- The bank’s net interest income (NII) grew by 38.3% yoy to Rs1,363.1 crore on the back of a robust growth in the advances coupled with a healthy expansion in the margins.
- The reported net interest margin (NIM; global) for the quarter stood at 3.2%, indicating an expansion of sixteen basis points yoy. The expansion in the NIM was largely driven by a 14-basis-point increase in the yield on funds as the bank has hiked its lending rates. Further, the cost of funds remained largely stable yoy.
- The non-interest income rose by 23% yoy to Rs649.5 crore from Rs528 crore a year ago. The strong growth was achieved on the back of a significant jump (up 47.5% yoy) in the recoveries, followed by a 36% year-on-year (y-o-y) growth each in the foreign exchange (forex) income and ‘commissions, exchanges and brokerage’ (CEB).
- The operating expenses increased by 18.3% yoy to Rs797.9 crore during the quarter. During the quarter the bank provided Rs70.4 crore towards AS-15 and Rs72 crore towards wage revision, which led to a 26.7% y-o-y growth in the staff expenses. Meanwhile, the growth in the operating expenses was contained at 7.4%. Consequently, the cost/income ratio improved significantly to 39.6% in Q2FY2009 from 44.6% a year ago.
- The provisions and contingencies declined by 4.2% yoy, mainly due to write-back of provisions under the implementation of the debt waiver scheme and lower non-performing assets provisions. However, this was partially offset by higher investment provisions as the bank has fully provided for its exposure of Rs108.6 crore towards Lehman Brothers.
- The gross NPAs remained largely flat with a 0.3% decline yoy to Rs1,978.1 crore, after considering the reduction of Rs182 crore on account of debt waiver implementation. Meanwhile, the net NPAs declined by 14.8% yoy to Rs608 crore. While asset quality remains healthy, a 27.5% y-o-y increase in slippages is a concern.
- The gross advances witnessed a robust growth of 35% yoy and stood at Rs129,314 crore at the end of Q2FY2009. This growth was achieved on the back of a 64.1% growth in the corporate segment, a 26.2% rise in the agricultural segment and a 25.9% increase in the small and medium enterprises segment.
- The global deposits grew by a healthy 26.7% yoy to Rs164,246 crore. Importantly, the current account and savings account ratio declined to 32% in Q2FY2009 from 37% a year ago.
- At the current market price of Rs270, BoI trades at 5.5x 2009E earnings per share, 3.3x 2009E pre-provisioning profit per share and 1.3x 2009E book value per share. We maintain our Buy recommendation on the stock and shall follow up this note with a detailed analysis soon.
Jindal Saw
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs910
Current market price: Rs352
Q3CY2008 results: First-cut analysis Result highlights - Jindal Saw Ltd’s Q3CY2008 numbers were ahead of our expectations on the back of an exceptionally strong top line. The top line was driven by higher sales of submerged arc welded (SAW) pipes due to a higher inventory at the end of the previous quarter. Further, lower exports in the previous quarter on account of the imposed duty led to increased shipments in the present quarter. Post the hive-off of the US division, the results are not strictly comparable with those of the corresponding quarter of the last year.
- The revenues from Indian operations marked a brilliant growth of 48.7% year on year to Rs1,485.5 crore and by 46% on a sequential basis, particularly on the back of a strong growth in SAW pipes. The sales volumes of other divisions, ie ductile iron (DI) and seamless pipe sales also remained firm during the quarter.
- The operating margins declined on sequential comparison on account of change in the product mix with higher sales of SAW pipes. The margins in SAW pipes are lower than that in the DI and the seamless pipes segments. Consequently, the operating profit margin (OPM) stood at 13.4% during the quarter as against 16.6% in Q2CY2008 as the operating profit grew by 17.9% on quarter on quarter basis to Rs198.7 crore.
- Both the interest and the depreciation cost has risen on account of high capital expenditure programme of the company. Its planned facility for LSAW and Mundra is likely to commence operations by December 2008, while the HSAW facility at Bellary has already commenced operations. Consequently, the company reported a 42.6% sequential growth in its reported profits to Rs100.1 crore.
- The company further improved its order book during the quarter, with an order book of about $1.14 billion at the end of the quarter executable by June/July 2009. Of this, $825 million orders were for SAW pipes, while the remaining orders were for DI and seamless pipes.
- We would be coming out with our full update on the company after a conference call with the management of the company. At the current levels, the stock is trading at 3.9x its CY2009E earnings and is available at an enterprise value/earnings before interest, depreciation, tax and amortisation of 1.9x. We maintain our Buy recommendation on the stock with a price target of Rs910.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs107
Current market price: Rs57
Price target revised to Rs107 Result highlights - Indian Hotels Company Ltd (IHCL) has posted a subdued operating performance for Q2FY2009, which is below our expectation. The revenues grew moderately by 8% year on year (yoy) to Rs367.8 crore on account of lower occupancy rate.
- The operating profit margin (OPM) declined by 459 basis points yoy to 24.4% on account of higher-than-expected employee expenses and other expenditure. Thus the operating profit declined by 9.1% to Rs89.9 crore in Q2FY2009.
- However higher other income, lower interest outgo and lower incidence of tax led to a 17.7% year-on-year (y-o-y) growth in the adjusted net profit to Rs58.1crore.
- The reported net profit declined by 4.8% yoy to Rs50.7 crore on account of an exchange loss of Rs9.4 crore (post-tax Rs7.4 crore) during the quarter.
- We are revising downwards our earnings estimate for FY2009 by 7.9% and for FY2010 by 10.7% to factor lower occupancies, lower average room rate (ARR), possible delays in the commencement of new properties in India and delay in breakeven of international properties under IHMS Inc.
- We expect IHCL’s properties in India and overseas to see pressure on their occupancies and ARRs in the coming year. Hence, the revenue and the earnings growth would be driven more by the increase in the room count. Thus even in these difficult times we expect IHCL to deliver revenue and net profit at a compounded annual growth rate (CAGR) of 12% and 19.7% respectively, which is commendable. The company is adequately funded by the proceeds from rights issue to execute its capital expenditure (capex) plans.
- At 8.0x FY2010E earnings the stock is trading much below its historical average one-year forward PE of 17.4x. We believe IHCL, being the largest and a growing hotelier in the country with global presence, should create value in medium to long term. While we maintain our Buy recommendation on the stock we are cutting our price target on the stock to Rs107 post pruning of the estimates. Our price target discounts the FY2010E earnings per share (EPS) by 15x.
Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs271
Current market price: Rs165
Price target revised to Rs271 Result highlights - During Q2FY2009 Crompton Greaves Ltd’s (CGL) consolidated income from operations grew by 32.5% to Rs2,098.4 crore led by a strong 51.5% top line growth of the subsidiaries. The operating profit margin (OPM) improved by 90 basis points while the net profit (post minority interest) grew by 32.1% to Rs120.1 crore.
- Looking at segmentals, the consolidated power systems division’s sales have reported a strong 35% growth in the revenues while the earnings before interest and tax (EBIT) margin of the division improved by 120 basis points. The revenues of the consumer products (up 24.1% yoy) and the industrial systems (up 26.7% yoy) divisions too reported a decent growth. However the profit before interest and tax (PBIT) margin of the industrial systems division contracted mainly due to execution of lower margin orders.
- The order book of the company grew by 31% on a consolidated basis and stood at around Rs6,750 crore, up from Rs6,004 crore at the end of Q1FY2009. The current order book provides revenue visibility for the next 12 months.
- In the conference call, the management highlighted that the power systems division has not seen any drop in the order booking and inquires while the industrial systems division is witnessing a slowdown in the new order intake. On international front, the US and the Ireland markets are witnessing a slow down in the demand for distribution transformers due to collapse of housing markets.
- The capital expenditure (capex) of Rs200 crore (Rs100 crore for domestic business and Rs100 crore for international business) has been put on hold currently and any affect on the revenues from the cut in the capex would be visible only in FY2011.
- H1FY2009 results of CGL have been in line with our estimate, hence we maintain our full year estimate. CGL, which is one of the leading players in the power transmission and distribution (T&D) space in the country, would remain the prime beneficiary of the spending in the sector.
- We remain bullish on the stock and reiterate our Buy recommendation with a revised price target of Rs271. At the current market price the stock is attractively priced at 11.6x and 9.2x FY2009E and FY2010E earnings per share respectively.
Marico
Cluster: Apple Green
Recommendation: Buy
Price target: Rs77
Current market price: Rs53
Results ahead of expectations Result highlights - The Q2FY2009 results of Marico are ahead of our expectation. The company’s net sales grew by a robust 30.1% year on year (yoy) to Rs603.9 crore during the quarter against our expectation of Rs574.5 crore. The hefty growth in the top line was achieved on account of a 11% volume growth, a 3% inorganic growth and a price-led growth of 16% yoy.
- Despite the inflationary pressure, the company has achieved a decent volume growth of 11% yoy, backed by strong performance by some of its focus brands. Parachute, Marico’s flagship brand, achieved a healthy volume growth of 12% yoy, while Saffola’s volume growth moderated to 9% during the quarter. The hair oil portfolio continued its strong performance with the overall volume growth of 14% yoy in Q2FY2009.
- The cost of some of the key inputs such as copra, sunflower oil, safflower, corn oil and rice bran oil rose by 30.0%, 20.0%, 50.0%, 10.0% and 25.0% yoy respectively during the period. Consequently the raw material cost as a percentage of sales increased by 267 basis points to 54.3% in Q2FY2009.
- The staff cost increased by 51.1% yoy (on account of consolidation of the South African business, which was not there in the previous year and due to an increase in the staff count for eight new Kaya clinics). However the advertising and selling expenditure as a percentage declined by 402 basis points to 9.0% on account of lack of any new product launch during the quarter. This led to a just 60-basis-point year-on-year (y-o-y) decline in the operating profit margin (OPM) to 13.4% during the quarter.
- The price increases affected across the brands during the last 12 months also prevented a steeper decline in the OPM. This coupled with outstanding top line growth led to a healthy 25.0% growth in the operating profit to Rs80.9 crore in Q2FY2009. Consequently the adjusted net profit increased by 25.3% to Rs52.9 crore, ahead of our expectation of Rs47.5 crore for the quarter.
- During Q2FY2009 the company witnessed a marked-to-market (MTM) loss of Rs7 crore (post-tax Rs5.8 crore) on account of a steep depreciation in the rupee. This has resulted into a 11.6% y-o-y growth in the reported net profit to Rs47.1 crore.
- We expect the prices of key raw materials used by Marico to soften in the coming quarters, which would help the company to post better margins. Marico has maintained strong volume growth across product categories even in the current inflationary scenario, which has exceeded our expectation. However the company guides for a cautious outlook as far as its rate of growth is concerned considering the inflationary pressures.
- We expect Marico’s revenue and profit to grow at a compounded annual growth rate (CAGR) of 20.3% and 20.8% respectively over FY2008-10. At the current market price, the stock trades at 17.2x and 13.8x its FY2009E earnings of Rs3.0 and FY2010E earnings of Rs3.8 respectively. We maintain our Buy recommendation on the stock with a price target of Rs77.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs694
Current market price: Rs361
Price target revised to Rs694 Result highlights - Ratnamani Metals & Tubes Ltd (RMTL) has reported a 21.4% growth in the sales to Rs253.9 crore in Q2FY2009 led by a strong 62.2% growth in the revenues of the carbon steel pipes business.
- RMTL has restated its accounts for Q2FY2008 and has also made a marked-to-market provision of Rs3.5 crore on its current foreign transactions. Adjusting for the same the operating profit of the company grew by 11.8% to Rs50.1 crore. The operating profit margin (OPM) declined by 180 basis points year on year (yoy) to 19.7%. The decline in the margin was primarily due to change in the product mix and higher raw material cost. The raw material cost as a percentage of sales increased by 155 basis points yoy to 67.2%.
- On segmental basis, the stainless steel (SS) pipe division reported an increase of 9.5% in the revenues led by a 19.1% growth in the volumes. The carbon steel (CS) pipe division’s sales were up by 62.2% to Rs114.9 crore while the volumes grew by 56.4%.
- The interest cost declined by 17.7% to Rs4.5 crore while the depreciation charge rose by 9.4%. During the quarter the effective tax rate was high at 36.4%.
- Consequently, after adjusting for the foreign exchange (forex) loss the net profit of the company reported an increase of 12.8% to Rs25.8 crore. The net profit was below our estimates mainly due to a lower-than-expected operating performance and a higher tax rate. The reported profit after tax (PAT) declined by 12.5% to Rs23.4 crore.
- The order book of the company stands at Rs539 crore. Apart from these orders the company also has a Rs200-crore-worth contract for manufacturing 40,0000 metric tonne (MT) of helical submerged arc welded (HSAW) pipes. That said, we see any slowdown in the refinery space as a key risk to the order inflow going forward.
- We have revised our earnings estimates for the company to factor in the softening of the key metal inputs (steel, nickel etc), which in turn will lower the realisations. Consequently we have revised our estimates downwards by 7.7% for FY2009 and 10.8% for FY2010. Our revised fully diluted earnings per share (EPS) for FY2009E now stands at Rs116.5 per share and that for FY2010 stands at Rs135.8.
- At the current market price the stock is trading at attractive valuations of 3.1x and 2.7x FY2009 and FY2010 fully diluted EPS respectively. We continue to recommend Buy on the stock with a price target of Rs694 valuing the stock at 5.5x one-year forward earnings.
VIEWPOINT Infrastructure Development Finance Company Results above expectations Result highlights - The Q2FY2009 results of Infrastructure Development Finance Company (IDFC) were above street expectations. The net interest income for the quarter came in at Rs417.8 crore indicating a strong 28% year-on-year growth, while the net profit stood at Rs232.3 crore, 20% higher compared with Rs194.5 crore during the year-ago period.
- Despite a strong growth in the net interest income, higher operating expenses marred the bottom-line growth. The operating expenses increased by 80% year on year (yoy) due to the consolidation of the asset management business of Standard Chartered, on account of which the cost to income ratio spiked up to 21% (vs 15% during the year-ago period).
- The non-interest income increased by a robust 72% yoy to Rs220 crore in Q2FY2009 as compared with Rs128 crore in Q2FY2008. This primarily stemmed from a significant increase in the asset management fees, as the company managed to close two private equity funds during the quarter.
- The company reduced its leverage to 4.9x in Q2FY2009 as compared with 5.2x in Q1FY2009.
- The gross approvals declined by 12% yoy to Rs7,420 crore, while the gross disbursements decreased by 7% yoy to Rs4,663 crore during the quarter.
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