| Summary of Content | STOCK UPDATE Infosys
Cluster: Evergreen
Recommendation: Buy
Price target: Rs3,358
Current market price: Rs2,228 Cautious undertone on business environment -
The annual analyst day of Infosys highlighted the management maintaining its cautious stance on the current macro environment owing to the elevated levels of uncertainties in the USA and the euro zone. Nevertheless, the management has not seen any cancellation or budget cuts in the clients' accounts in the recent months and believes that this phase is also temporary as newer technologies will evolve and support investments in IT in the long term. On the other hand, Infosys 3.0 is gaining momentum and creating a strong base to sustain the growth trajectory in future. Going forward, the company targets to generate one-third of its total revenue each from the consulting & system integration (SI); business & IT services; and products, platforms & solutions (PPS) verticals. -
In the last one month, owing to increased uncertainties in the USA and the euro zone (which could lead to another potential slowdown in the IT sector), the BSE IT Index has fallen by around 19% as compared to the broader market indices that have fallen by around 14%. The Infosys stock has also fallen by around 19% in the same period. In the near term, we expect the macro headwinds to continue to make headlines, which could possibly result in further correction in the stock price. Nevertheless, we believe the recent fall has provided a good opportunity to enter the stock with an attractive risk-reward profile for the next 12-18 months. Currently, we maintain our estimates for the stock. At the current market price of Rs2,228 the stock trades at 16.2x and 13.3x our existing earnings estimates for FY2012 and FY2013 respectively. We maintain our Buy rating with a price target of Rs3,358. However, in a bear-case scenario with a sub-optimal earnings growth of 5% assumed in FY2013 (similar to the earnings growth seen in FY2010), we would get a price target of Rs2,347.
SHAREKHAN SPECIAL Q1FY2012 Banking earnings review Key points -
Earnings growth decelerates: Apart from seasonal weakness the earnings growth of banks was affected by a sharp decline in margins and provisions, and a subdued growth in the non-interest income. Our banking universe reported a decline of 3.6% year on year (YoY) in earnings, which, however, grew by 10% on a quarter-on-quarter (Q-o-Q) basis. The public sector banks (PSBs) under our coverage reported a decline of 16.5% YoY in their earnings (a growth of 23% quarter on quarter [QoQ]). The private banks fared better positing a growth of 29.8% YoY in earnings, with HDFC Bank, Axis Bank and ICICI Bank continuing the upward trend in their earnings growth. -
Core income growth in line with estimate but margin pressure continues: During Q1FY2012, the growth in the net interest income (NII) was broadly in line with our estimate for both PSBs and private banks. On an aggregate basis, the banks under our coverage reported an NII growth of 23% YoY. The NII of the PSBs grew at a healthy rate of 25% YoY whereas the private banks reported an NII growth of 18.5% on an annual basis. However, the net interest margin (NIM) remained under pressure due to an increase in the cost of funds and a lag in the re-pricing of assets. The drop in the incremental credit-to-deposit ratio (52% from 74% in Q4FY2011) also contributed to a sequential dip in the margins. -
Asset quality deteriorates for PSBs, remains stable for private banks: PSBs continued to report an increase in non-performing assets (NPAs) on a Q-o-Q basis in Q1FY2012 while the private banks' asset quality remained stable. The higher provision requirements were contributed by revised provisioning norms, increased slippages and marked-to-market (MTM) provisions on the investment book. Moreover, PSBs migrated to a system-based NPA recognition for accounts above Rs0.5 crore which also led to an increase in their NPA provisions. -
Remain cautious with preference for private banks: In view of the weak macro environment, we expect the credit growth to moderate to 17-18% in FY2012 (from 21% in FY2011). At the same time, the pressure on the margins will sustain due to the high interest rates, the inability of banks to fully pass on the burden to their borrowers and a lower credit-deposit ratio. The deterioration in the asset quality is another overhang as certain segments like infrastructure (coal-based power plants), airlines, agriculture, and small and medium enterprises (SME) would remain susceptible and could result in additional slippages. We (and the Street) have trimmed the FY2012 estimate for most banks to factor in the higher than expected moderation in their advances growth and increased asset quality risks. We maintain our cautious view and selectively positive stance on the sector with preference for the private banks. Our top picks are HDFC Bank (a defensive bet) and ICICI Bank (purely on valuations basis; cautious advance growth and expectations of stable NIM); among PSBs we prefer Union Bank (attractive valuation). Q1FY2012 Cement earnings review -
The cement industry in its Q1FY2012 has largely exceeded the Street estimates on account of a better than expected realisation. The companies with larger exposure to south India saw their bottom lines being significantly improved during the quarter as their realisation surged due to a supply discipline maintained by the manufacturers in the region. The impact of a sluggish volume growth and cost pressure during Q1FY2012 was largely offset by a surge in realisation, especially in case of the south based companies. However, the management of the southern companies is very pessimistic about the volume outlook in FY2012 and hence we have lowered down our volume estimates. However, we believe a better than expected realisation will offset the impact of a cut down in volume growth. We have upgraded our earnings estimates for India Cements and Madras Cements. The companies operating in the northern and central regions have posted a mixed performance. Going ahead, with the price correction undertaken in the month of July, we believe that the companies could post a contraction (quarter on quarter [QoQ]) in their profitability and earnings in the coming quarter. Our top pick in the sector is Grasim Industries (Grasim) in the large size space on account of its strong balance sheet, better profitability in VSF and attractive valuation. In the mid size space we prefer Orient Paper & Industries (Orient Paper) due to its diversified business model and an improving market mix in favour of non-southern region, and due to its attractive valuation. -
Cumulative revenue grew by 10.4%: In the quarter under review, the cumulative revenues of the cement companies under Sharekhan's universe grew by 10.4% year on year (YoY) to Rs16,769 crore. The revenue growth has been supported by realisation which grew by 14.2% YoY whereas the volume declined by 0.5% due to a slower than expected execution of infrastructure projects. Grasim continues to shine with a healthy growth in its realisation (both cement and VSF). Among the Sharekhan cement universe, Orient Paper, Grasim and India Cements have posted revenue growth in the range of 16-21%, whereas the revenues of other companies in the universe have grown in the range of 8-9%. Large player like ACC have posted an impressive revenue growth of 18.9% whereas the revenue growth of Ambuja Cement was limited to 6.1%. -
Mixed volume growth of cement universe, Jaiprakash Associates continues to lead: The cement companies under our coverage posted a mixed volume growth during the quarter. Jaiprakash Associates Ltd (JAL) reported a volume growth of 13.3% due to capacity addition and it gaining market share from other players. On the other hand Shree Cement posted a volume growth of 10.9% while south based companies like India Cements, Madras Cements and Orient Paper registered a de-growth in their volume by 11-15%. ACC has delivered a volume growth of 12.5% whereas in case of Ambuja Cement, volume declined by 2.2%. -
Cumulative realisation increased by 14.2%, supported by southern players: The cumulative realisation of the cement makers under our coverage increased by 14.2% YoY in the quarter under review. The cumulative growth in the realisation was supported by a surge in the realisation by 25-30% in case of south based companies like Orient Paper, India Cements and Madras Cements. Whereas other companies saw their realisations increase in the range of 1-10% during the quarter. However, cement prices have come under pressure in July and declined by Rs10-12 per bag. -
Cost pressure offset by surge in realisation, margins expand: The cumulative operating profit margin (OPM) of the cement companies under our coverage expanded by 223 basis points to 25.9% in Q1FY2012. India Cements, Madras Cements and Orient Paper reported healthy improvements in their OPMs whereas margin improvement was comparatively lower for Grasim and Ultratech Cement (Ultratech). The margin expansion came on the back of a surge in the realisation which offset the cost pressure in terms of increase in power & fuel cost (due to an increase in coal price) and higher freight cost (due to increase in lead distance). On the other hand Shree Cement and some other large players reported a contraction in the margin by 200-500bps. However, in the coming quarters we believe the margin will contract sequentially due to the recent correction in cement prices. -
Earnings improved 27.8% due to margin expansion and revenue growth: Revenue growth (supported by realisation) coupled with margin expansion have resulted in a better than expected earnings growth during the quarter. On a cumulative basis the Sharekhan cement universe has registered a 27.8% growth at the net profit level. Q1FY2012 Construction earnings review Key points -
Yet another disappointing quarter: In Q1FY2012 the construction companies reported another poor set of results. The net profit of the engineering, procurement and construction (EPC) companies (ex Punj Lloyd) in the Sharekhan universe fell by 24% year on year (YoY) and was 11% lower than our expectation. This was on account of a lower growth in the revenue followed by a higher interest burden. The revenue for the same universe grew by just 10% YoY (4% below expectation) while the interest cost jumped by 61% YoY. However, the operating profit margin (OPM) was stable for all the companies except IVRCL. In case of the road developer companies, the reported results were better than expected. The profit after tax (PAT) for IRB Infrastructure Developers (IRB) and IL&FS Transportation Networks (India) Ltd (ITNL) cumulatively grew by 12% YoY led by a 47% growth at the revenue level and a 29% increase at the EBITDA level. -
IRB and Ramky beat expectations: While IRB and Ramky Infrastructure (Ramky) beat the Street's expectations, IVRCL and NCC Infrastructure Holdings (NCC) disappointed the Street the most. IRB saw a 57% growth in its revenue followed by a 12% increase in its PAT as against the Street's expectation of a flat net profit. Similar was the case with Ramky, which surprised the Street with a 44% revenue growth followed by a 25% rise in its net profit along with margin expansion. Both saw good execution across projects which supported the revenue growth. On the other hand, due to slower execution IVRCL saw flat revenue and a 152-basis-point contraction in its operating profit margin (OPM) which led to an 85% fall in the PAT. Despite an 11% growth at the operating level the PAT of NCC dropped by 44%. -
Outlook: For most of the companies in our universe, we have downgraded our estimates for FY2012 and FY2013 to factor in the interest burden that was higher than our previous estimate. The sector can come out of the woods only if the interest cycle turns around, more policy reforms are announced along with quicker clearances of the stalled projects. Given the steep correction in the sector and its underperformance compared to the broader market over the last 12-18 months, the valuation of the major companies in this space has turned very attractive. However, the sector is likely to continue its underperformance in the near term due to the absence of any catalyst in the short term. Our top picks in the sector are ITNL, Pratibha Industries (Pratibha) and Unity Infraprojects (Unity) among our coverage stocks, and Ramky among the non-coverage stocks that could be watched by the investors.
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