Fw: Stock Idea: Persistent Systems (Persistently innovating)

 

 

Stock Idea [September 28, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK IDEA Persistent Systems Cluster: Emerging Star Recommendation: Buy Price target: Rs552 Current market price: Rs414 Persistently innovating Key points Well placed in the under-penetrated OPD space: Persistent Systems Ltd (PSL) is a niche player in the highly under-penetrated outsourced product development (OPD) market. According to industry reports, the OPD market was worth close to $8 billion in 2009 and is expected to grow at 19.1% CAGR over 2009-13. The addressable worldwide R&D/product engineering services market was worth approximately $35.4 billion in 2009 and is expected to reach $65.7 billion by 2013, growing at a CAGR of 16.7%. PSL has helped its customers develop over 3,000 products over the last five years. With strong domain expertise and years of experience in the OPD business, PSL is well placed to garner the incremental spending taking place in the global R&D space.  Investing for the future growth augurs well for deeper client mining: Over the last four years, PSL has consistently invested in the areas of innovative technologies (cloud computing, analytics, collaboration and mobility) to penetrate deeper into clients' wallet and the expertise that it has built in these areas over the years has started reflecting in its numbers. In the last two years, these four areas have contributed close to 40% of the total revenues and their combined contribution is poised to increase in the coming years with the increasing size of the funnel of orders in these segments. On the other hand, the proactive efforts to invest in the newer technologies would help the company to offer a better value proposition to its clients, get a bigger share of their R&D spending and diversify its offerings further. PSL is amongst the few Indian IT companies with considerable expertise in the area of innovative technologies with niche offerings in the OPD space.  Higher IP-led revenues = Margin improvement: With expertise in the OPD business and confidence of its clients, PSL continues to invest in acquiring and building intellectual property (IP) to gain a foothold in the non-linear side of the business. Its IP-led revenues have grown from $1 million in FY2007 (1.5% of total FY2007 revenues) to $18.3 million in FY2012 (8.8% of total FY2012 revenues). Currently, the company owns around 14 IPs and is continuously investing in building IP both on its own (close to 5% of its manpower deployed on IP creation) and through collaborations with leading universities, research laboratories and clients. PSL is also actively looking at the inorganic route (it has already made three acquisitions in the IP space) to acquire the right IPs to enhance its growth prospects. Going forward, the management is aiming to earn 20% of its revenues from the non-linear space in the next three to four years. This, we believe, will differentiate the company from the rest and help improve its margin in the coming years.  Undemanding valuation, buy: PSL has proven expertise in the OPD space, a strong presence in the newer technologies, strength to improve its IP base and the best-in-the-class margin profile which set it apart from the other mid-cap IT companies. Its earnings are expected to grow at a CAGR of 23% over FY2012-14. At the current market price of Rs414, the stock trades at 9.3x and 7.7x FY2013 and FY2014 earnings estimates respectively. In view of the niche offerings, the best-in-the-class margin profile and strong cash kitty (Rs85 per share), the current valuation seems to be undemanding. We initiate coverage on PSL with a Buy rating and a 12-month price target of Rs552 based on our target PER of 10x FY2014E earnings.  Click here to read report: Stock Idea < /font>   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Thematic Report (Forex gains for auto sector, impact on FY2013 earnings)

 

 

Thematic Report [September 27, 2012]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Forex gains for auto sector, impact on FY2013 earnings   Maruti and Hero MotoCorp in OEMs and Apollo Tyres in ancillaries to benefit the most from rupee's appreciation The rupee has appreciated by 4.4% to 53.25 against the dollar and by 3.3% to 0.685 against the yen in the last one month. We evaluated our automobile (auto) tracking universe to ascertain the impact of the strengthening rupee on their earnings in FY2013. The rupee's appreciation benefits Hero MotoCorp and Maruti Suzuki (Maruti) the most amongst the original equipment manufacturers (OEMs) as their royalty bill will reduce and the import of components from Japan will get cheaper. Among the ancillaries, Apollo Tyres stands to gain the most. Exporters such as Bharat Forge and Bajaj Auto appear to be affected as their export realisations will be lower but there may not be any impact on their earnings in FY2013 as they have hedged their inflows for the rest of the year. Mahindra and Mahindra (M&M) remains the most insulated from the volatility in the currency market. At a macro level, the rupee's appreciation, the lower international crude prices and the moderation in the auto loan financing rates are expected to revive sentiments during the forthcoming festive season. Our preferred picks in the auto sector are M&M and Maruti. Royalty-paying companies benefit: Hero MotoCorp and Maruti  Maruti: Royalty forms 5.5% of the company's sales. The company pays royalty bi-annually and generally hedges its rupee-yen exposure for the following quarter. The benefit of the rupee's recent appreciation would accrue in Q4FY2013. We estimate an impact of 0.9% on the company's EPS purely on account of the royalty if the rupee sustains at the current levels. Hero MotoCorp: After splitting from Honda Motor Company (Honda) the company originally agreed to pay Rs180 crore as a fixed royalty to Honda and charges the same under "Depreciation" every quarter. However, the company faces the risk of the rupee's depreciation. Due to a sharp depreciation in the rupee, the royalty payable every quarter had swelled to Rs228 crore in Q1FY2013. On new models, such as Ignitor, Impulse and Maestro, the incremental royalty is guided at around 1% of the total sales. We estimate an EPS benefit of 1.4% in FY2013 assuming the rupee-yen rate sustains at the current levels. Outlook  Directionally, the study above indicates Maruti, Hero MotoCorp and Apollo Tyres will be the primary beneficiaries of the rupee's appreciation with the assumption that the rupee shall sustain at the current levels for the rest of the year. However, we are not changing our Hold recommendation on the stocks on which we have a rating (Maruti and Apollo Tyres) because of specific issues related to each company. Maruti would announce extremely weak Q2FY2013 numbers while Apollo Tyres would face the Competition Commission of India's penalty in the near term.  Also, in view of the fact that the rupee has limited visibility in the medium term, we continue to prefer the stock that is insulated from the fluctuations in the currency market, ie M&M. Our price target of Rs849 for M&M was achieved today. We will review our call on M&M after the announcement of its September 2012 volume numbers for a possible upgradation.   Click here to read report: Thematic Report     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Company Report - MCX Ltd - Opportunity abound - BUY

 

MCX Ltd: Opportunity abound – BUY CMP Rs1,318, Target Rs1,510, Upside 14.7% Financial Technologies promoted Multi Commodity Exchange (MCX) is a market leader in India's burgeoning commodity derivatives market. Its journey of becoming a dominant commodity exchange with 86% market share has been fascinating. Interestingly, the next largest player has only 10% market share. The domestic commodity derivatives market after being opened up in 2003 has witnessed robust 85% CAGR in turnover. This was driven by widening commodity portfolio and rising interest in hedging and speculation due to increasing price volatility. In the aforesaid time, MCX registered a much stronger 200% CAGR in its turnover. MCX's strategic initiatives of building a globally referable commodity portfolio, product innovation, global strategic alliances and cutting edge trading technology helped it garner a dominant market share. More importantly, trading depth/liquidity has substantially improved and remains a cornerstone of its dominance. Aided by increasing turnover and fixed cost leverage, MCX's OPM has seen tremendous expansion; doubling to 63% over FY08-12. With further room for capacity utilization improvement, margin will most likely be sustained at elevated levels The opportunity for growth remains huge given a much lower derivative turnover/total physical flow multiple of India versus the developed markets. For instance, gold turnover on MCX is just 15x of the total physical flow in the economy versus 75-85x in the developed economies. Similar is the case for crude, aluminium, copper among others. Additionally, positive regulatory announcements (passage of FCRA bill) could open host of growth avenues. We conservatively estimate revenue/earnings to witness 14%/15% CAGR over FY12-14 considering recent moderation in revenue growth. Current valuation of 17.5x FY14E P/E is inexpensive for a secular growth story like MCX; also attractive in comparison with emerging market peers. Initiate with BUY and 9-month TP of Rs1,510. Company's investment in MCX-SX can provide further upside to our price objective. Click here for the detailed report on the same. Warm Regards, Amar Ambani

Fw: Investor's Eye: Update - Grasim Industries (Price target revised to Rs3,405), Banking (CDR restructuring cases continue to rise)

 

 

Investor's Eye [September 26, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE   Grasim Industries Cluster: Apple Green Recommendation: Hold Price target: Rs3,405 Current market price: Rs3,237 Price target revised to Rs3,405 Key points VSF prices increase in September 2012  The price of viscose staple fibre (VSF) has increased in September 2012 and with that the average price for Q2FY2013 is expected to be higher by around Rs3/kg on a quarter-on-quarter (Q-o-Q) basis. The VSF realisation of Grasim Industries (Grasim) was Rs128/kg in Q1FY2013. Now, as per the current price, the average realisation for Q2FY2013 is expected to be around Rs131/kg. The recent price hike is supported by a better demand environment and an increase in the prices of the competing fibres like cotton (whose price has increased by Rs8-10/kg).  VSF volume in Q2FY2013 to be higher on Y-o-Y as well as Q-o-Q basis The better demand environment for VSF products in the domestic as well as the international markets will help the company to register a higher volume in Q2FY2013 as compared with Q2FY2012. The VSF volume is also expected to be higher on a sequential basis as the VSF plant was shut for about 27 days in Q1FY2013. Therefore, the likely growth in the realisation and the volume is expected to support the stand-alone revenues of the company in the coming quarter.  Government authority recommends de-allocation of Grasim's coalfield in Chhattisgarh As per media reports, the Inter-Ministerial Group looking into coalfield allocations has recommended taking back coal blocks from Grasim. Grasim and Electrotherm jointly hold a coal block in Bhaskarpara, Chhattisgarh. The government panel has recommended that the block be cancelled. Grasim acquired the coal block in Chhattisgarh to produce cement and reduce its dependency on imported coal. However, the block is not operational and is not contributing to the coal requirement of the company at present. Therefore, the likely move will not have any direct impact on the earnings of the company. Further, the de-allocation of the coal block is just a recommendation made by the panel and needs to be finalised by the government.  Cement prices increased by Rs5-6/bag to offset the diesel price hike; the average cement price remains lower compared with Q1FY2013 On account of the recent hike in the diesel prices by Rs5/litre, the cement manufacturers have increased cement prices by Rs5-6/bag to offset the cost inflation. However, cement prices corrected significantly in August and early September 2012. Therefore, the average price of cement in the major Indian cities has corrected by around Rs10-12/bag compared with the Q1FY2013 level. Further, as per our channel check with the cement dealers, the price correction has been relatively high in the southern region and less in the northern and western regions. On the demand front, most of the regions in India have witnessed a slowdown on account of slower than expected execution of the infrastructure projects and a sluggish demand from the real estate segment. Therefore, the revenues of Grasim's cement business would decline sequentially in the coming quarter. However, the revenues from the cement business are expected to be higher in Q2FY2013 on a year-on-year (Y-o-Y) basis.  Outlook and valuation We continue to prefer Grasim to the other large players due to its strong balance sheet, comfortable debt-equity ratio (0.32x Q1FY2013), attractive valuation and diversified business. On the valuation front, we continue to value the stock using the sum-of-the-parts valuation method and arrive at a revised fair value of Rs3,405 per share. However, on account of a sharp run-up in the stock price of the company in recent times (Grasim has appreciated by 27% in the past three months), we maintain our Hold recommendation on the stock with a revised price target of Rs3,405. At the current market price, the stock trades at a price/earnings ratio of 11.5x and 10.4x, discounting its FY2013 and FY2014 estimated earnings per share respectively.   SECTOR UPDATE Banking CDR restructuring cases continue to rise We recently met the deputy general manager of the Corporate Debt Restructuring (CDR) cell to understand the asset quality scenario and the reasons for a rise in the restructuring cases.  Restructuring proposals rising rapidly  Due to weakness in the macro economy there has been a significant increase in the number of bank loan restructuring proposals. In the first five months of the fiscal, around 60 cases amounting to Rs31,000 crore were approved by the CDR cell. Going ahead, the cumulative restructured loans could inch up to Rs3.25 lakh crore by FY2013 end (~6.1% of the system's advances) as projected by rating agency CRISIL. Iron & steel the largest contributor so far; infrastructure's contribution could rise The iron & steel sector is the largest contributor (23%) to the restructured loans followed by the infrastructure, textiles and telecommunications sectors. As per the CDR cell, the proportion of restructuring proposals from the infrastructure sector is expected to increase due to the ongoing issues in the power and road segments.  RBI committee's recommendations on restructuring largely positive for the sector The Reserve Bank of India (RBI) committee's recommendations on restructured loans are positive for the banking sector. The committee recommended increased provisions and higher promoters' contribution in sacrifice in cases of restructuring of loans. Banks have submitted the feedback and the final guidelines are expected by October end. ...but two points of contention emerge The banks have a difference of opinion over mainly two points, ie on the regulatory forbearance and the calculation of the sacrifice amount. According to them, doing away with the regulatory forbearance on standard restructured loans would result in a sharp increase in the non-performing assets (NPAs) and provisioning. The banks want clarity on the calculation of the diminution in the fair value of the restructured advances. Further, the banks also want some relaxation in the right to recompense which is 100% at present. Private banks better placed vs PSBs  The number of restructuring proposals continues to rise at a scorching pace and the public sector banks (PSBs) have seen a faster growth in the number of restructuring proposals. The sharp increase in the CDR referrals and even in the non-CDR restructuring cases suggests rising stress on the asset quality of banks. Going ahead, we believe the restructuring proposals would increase, albeit at a slower rate, since most of the big-ticket accounts, Air India etc, have been restructured. Further, the RBI's final guidelines on restructuring (expected by October end) will also discourage the non-genuine cases. The private banks are better placed as for them the proportion of restructured loans (1.6% of advances vs 5.7% for the PSBs) remains much lower than the PSBs'. Though we are cautious on most PSBs because of their high exposure to the troubled segments and higher proportion of restructured loans, we prefer Bank of Baroda, Punjab and National Bank, and State Bank of India due to their reasonable valuation and stronger earnings profile which shall help them to withstand asset quality pressures. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Bank of India (Margins likely to improve but asset quality worries remain), Power (Restructuring of the SEBs' loans to provide relief)

 

 

Investor's Eye [September 25, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Bank of India Cluster: Apple Green Recommendation: Hold Price target: Rs310 Current market price: Rs302 Margins likely to improve but asset quality worries remain We recently met the management of Bank of India (BoI) to get an update on the bank's asset quality and capital requirement as well as industry trends. The bank's management believes that the pressure on the bank's asset quality remains due to the weakness in the economy but going ahead the rate of slippages may moderate compared with the previous quarters. The big-ticket accounts of the bank have already been restructured, eg the state electricity boards (SEBs) and Air India. The bank expects its advances to grow by about 15% with its focus on the retail segment. It is also hopeful of marginally improving its net interest margin (NIM) in the coming quarters.  The asset quality concern is relatively higher for BoI because it has a higher proportion of restructured loans (7.8% of its advances) in its books and a relatively high exposure to the troubled sectors (infrastructure, metals, textiles, realty etc). Moreover, it has relatively lower NIM and return ratios (return on equity [RoE] of 14% and return on asset [RoA] of 0.7%) as compared with some of the other comparable banks. Thus, we believe that it would attract 10-15% discounted valuation as compared with its peers like Punjab National Bank (PNB) and Bank of Baroda (BoB). We maintain our Hold rating on the stock with a price target of Rs310 (0.9x FY2014 adjusted book value). We continue to prefer PNB and BoB to BoI.   SECTOR UPDATE Power Restructuring of the SEBs' loans to provide relief Key points Government approves bail-out package for the SEBs: The government approved the bail-out package for the state electricity boards (SEBs) by a scheme to restructure their short-term loans. As per the approved scheme, 50% of the outstanding debt would be converted to bonds guaranteed by the state governments and the remaining 50% will be restructured by the banks. Support for three-year transition period: Currently, the SEBs make losses as the average tariff is still short of the average cost of Rs1.45/unit. The SEBs would have to bridge the gap through tariff hikes and improvement in the operational efficiencies over the next three years. During the transition period, the central government would support the SEBs through a transitional finance mechanism (TFM) fund. View-the package eases the balance sheet stress of the SEBs but sustainability remains questionable: The bail-out package would ease the pressure on the balance sheets of the SEBs, which are an integral part of the power distribution value chain. However, it remains to be seen whether the incentives offered are enough to turn the SEBs profitable in the proposed three-year transition period. Nevertheless, the definitive direction of the SEBs restructuring package would have a rub-off effect on the balance sheets of the power generation companies and the associate companies like Power Grid and PTC India (PTC). In the meanwhile, lenders would be taking the pain to restructure and the states will have to take the responsibility gradually for the restructured loans. Click here to read report: Investor's Eye Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Update - Marico (Price target revised to Rs201), Bharat Heavy Electricals (Maintain Hold with price target of Rs260)

 

 

Investor's Eye [September 24, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE   Marico Cluster: Apple Green Recommendation: Hold Price target: Rs201 Current market price: Rs191 Price target revised to Rs201 We recently interacted with the management of Marico to get a view on the current business environment in the domestic and international markets. The key takeaways from our interaction are discussed in this note. Key takeaways Growth momentum to sustain in key domestic categories  Despite headwinds, such as a below normal monsoon and sustained high food inflation, Marico has not witnessed any significant slowdown in demand for its products in some of its key domestic categories.  Parachute witnessed an abnormal volume growth of 18% year on year (YoY) in Q1FY2013. However, Marico expects the growth rate to stabilise in the range of 8-10% in the coming quarters.  Saffola is likely to achieve a volume growth of around 11-12% YoY in FY2012 (compared with a five-year compounded annual volume growth of about 15% YoY). The company has been witnessing a slight slowdown in the upgradation of consumers from the other edible oil brands to Saffola edible oil for the past four to five months. However, the company says it is a short-term phenomenon and expects the growth rate to improve to 14-15% per annum in the long run. The value-added hair oil portfolio is expected to grow by 15-20% in the coming quarters. The key growth drivers shall be innovations in the product portfolio and improvement in the penetration of products. Mixed trend in raw material prices  The copra prices have corrected significantly from their highs but remained volatile in the recent past. The prices currently stand at around Rs4,175 per 100gm, down by almost 30% YoY.  In view of the volatile trend in the raw material prices the company has not passed the full benefits of the softening copra prices to the consumers. The company recently introduced a promotional offer of Rs2 on 45ml and 100ml packs. It will keenly monitor the price momentum in the coming months before taking any price reduction in the rigid packs.  On the other hand, the prices of the key inputs of Saffola have maintained their upward momentum. The prices of sunflower oil, safflower oil and rice bran oil were higher by 8%, 58% and 17% YoY respectively during the period July-August 2012.  The company last took a price hike in the range of 7-9% in January 2012. It is not likely to take any further price increases in the edible oil portfolio in the coming months to avoid any pressure on the sales volume.  This will have an impact on the margins of the Saffola edible oil portfolio. International business showing some improvement  Bangladesh (which contributes about 40% to the international business' revenues) has seen an improvement in the macro environment in the past few months and is expected to post a better performance in Q2FY2013. In Q1FY2013 Bangladesh had posted a decline of 2% YoY. The overall environment in the Middle East and North Africa region (which contributes around 25% to the international business) is better than in the previous year. In the Middle East the company has lost some momentum due to the new pack transition. However, the company has made efforts to communicate the same to the end-consumers and expects things to improve in the coming quarters. Egypt is showing signs of revival and the business environment is becoming normal. South East Asia (accounts for ~25% of the international business) is expected to maintain above-20% growth in the revenues on the back the sustained strong performance of the X-men business in Vietnam and the Code 10 business in Malaysia.  Overall, the international business is expected to grow in mid teens in FY2013. Going ahead, the company is banking on steps like cross-pollination, entry into new categories and improvement in the distribution reach. It expects the growth of the international business to revert to the 18-20% range over FY2014-15 and the operating profit margin (OPM) to improve above 11%. Outlook and valuation: We have fine-tuned our earnings estimates after incorporating the FY2012 annual report numbers. We expect Marico's top line and bottom line to grow at CAGR of ~17.0% and ~24.0% over FY2012-14. However, any significant moderation in the sales volume growth of some of the key domestic segments and any substantial increase in the prices of the key inputs would act as a key risk to the earning estimates. At the current market price the stock is trading at 31.0x its FY2013E earnings per share (EPS) of Rs6.2 and 24.7x its FY2014E EPS of Rs7.7. We have revised our price target upwards to Rs201 (valuing the stock at 26x its FY2014E EPS of Rs7.7, in line with the current valuation of the fast moving consumer goods basket). However, the current valuations do not provide any significant upside to the stock price. Hence, we maintain our Hold recommendation on the stock.     Bharat Heavy Electricals Cluster: Apple Green Recommendation: Hold Price target: Rs260 Current market price: Rs248 Maintain Hold with price target of Rs260 Key points Policy uncertainties abating: Bharat Heavy Electricals Ltd (BHEL) has witnessed a severe downgrade in valuation multiples in the last couple of years on account of a policy inaction-driven slowdown in the demand environment. However, the proposed initiatives to restructure debt on the books of the state electricity boards (SEBs), tariff hikes and flexibility in raising tariffs in future have kick-started the reforms at one end of the power sector, leading to renewed interest in the power generation and equipment companies. We believe the second stage of power reforms in the form of fuel security and quick regulatory approvals would boost the viability of power projects and consequently give a fillip to the power stocks. Competition remains intense but order cancellation concerns overdone: Despite the government's sudden activeness in pushing forward policy measures, the competition from the private sector and Chinese players remains intense and BHEL is likely to continue to lose market share. Thus, the incremental growth in fresh order intake in the boiler-turbine-generator (BTG) segment is likely to remain subdued despite the recent policy measures. However, in terms of the existing order book, we believe that the concern over the cancellation of BHEL's orders from the private power developers seems overplayed as the Inter Ministerial Group hasn't de-allocated any coal mine of BHEL's private clientele after scrutinising 29 coal mines. While the bank guarantee of two of its clients, GVK Power and DB Power, would be deducted as penalty, the bigger threat of large-scale order cancellations looks limited to us.  Breakthrough in non-BTG segment would be a positive trigger: The company is now focusing on the non-BTG segments, like railways, logistics and transmission & distribution (T&D), that have a significant growth potential. Recently, BHEL in consortium with Hitachi was among seven companies that bid in the Delhi Metro tender for the supply of 486 coaches. The company has also bagged India's first 800HVDC transmission line order worth Rs1,590 crore. Its spares and services business for renovation and modernisation of power plants also holds potential whose order inflow share has increased to 10% in FY2012 from 4% in FY2011. Margins and earnings to remain under pressure; maintain Hold with price target of Rs260: In addition to the firm input prices and competition-led margin pressure, there is a growing risk of liquidation damages being slapped by some of its clients who are blaming BHEL for delaying project execution. Moreover, the relatively lower order intake in recent years would reflect on its revenue growth and result in a marginal decline in the earnings over the next two years. However, a lot of negatives are reflected in the serious de-rating of the stock over the last two years. Thus, we maintain our relatively more positive view on the stock with a revised price target of Rs260 (10x FY2014 earnings). We maintain our Hold recommendation on BHEL despite the recent upsurge in the stock price.  Click here to read report: Investor's Eye < /font>   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.