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STOCK UPDATE NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs320
Current market price: Rs286 Downgraded to Hold; price target revised to Rs320 Result highlights -
Earnings below estimates: The disappointments in the revenues of Geospatial Information Services (GIS; revenues dropped by 3.8% quarter on quarter [QoQ]) business, Room Solutions (revenues dropped by 11.8% QoQ) coupled with lower than expected ramp up in the Crime and Criminal Tracking Network and System (CCTNS) revenues (hardware sales dropped by 36% QoQ) have led to revenues miss for the quarter for NIIT Technologies (NIIT Tech). The consolidated revenues were up by 6.5% QoQ to Rs500.1 crore (lower than our estimate of Rs529.2 crore). On a constant currency basis, the revenues were up by 3% QoQ and the benefit from currency movement was 3.5% QoQ. -
During the quarter, the revenues from the Morris Communication joint venture were up 1.9% QoQ to Rs26 crore, whereas Proyecta reported revenues of Rs12.7 crore, down 10.6% QoQ. -
The earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins were up by 100 basis points QoQ to 17% (below our expectation of 17.4%). Despite witnessing improvement in utilisation (130 basis points) and currency benefits (3.5%), margin improvement was restricted to 100 basis points on account of crash in margins in GIS business (dropped to 1% from 15% in Q1FY2013) and 400 basis points quarter-on-quarter (Q-o-Q) fall in Room Solutions margins to 19%. -
The company reported a foreign exchange (forex) loss from revaluation of assets and liabilities of Rs15 crore as compared with a forex gain of Rs17 crore in Q1FY2013. The resultant net profit for the quarter was down by 25% QoQ to Rs 43.1 crore. -
Multiple headwinds in offing could restrict earnings momentum: The delay in the billing in the CCTNS projects coupled with slower traction in the GIS and Room Solutions (expect to ramp only by Q4FY2013) could lead to disappointments in the revenues in the next two quarters. The higher onsite cost pertaining to the initial ramp up of the recent deal wins could restrict the margins improvement in the coming quarters. Further, the possibility of pricing cut (2-5%) in the renewal deals as well as new deals coupled with absence of currency benefits could affect the earnings performance in FY2014. -
Valuation and view: On account of the lowering of margin assumption and currency reset, we have revised our earnings estimates by 18.5% and 10.5% for FY2013E and FY2014E respectively. Further, the possible earning disappointments in the medium term could restrict any material re-rating of the stock. We are downgrading our rating from Buy to Hold with a revised price target of Rs320. Axis Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,370
Current market price: Rs1,146 Strong traction in retail business Result highlights -
Axis Bank's Q2FY2013 results were in line with our estimates at the net interest income (NII) level but slightly lower than estimated at the net profit level (up 22% year on year [YoY] to Rs1,124 crore). Higher provisions (up 25.6% YoY) affected the growth in the earnings though the effect was partly offset by treasury profits. -
The NII growth of 16% YoY was in line with our estimate. The growth in the NII was driven by a sequential expansion in the net interest margin (NIM; 3.46% vs 3.37% in Q1FY2013) and a healthy growth in the advances (up 22.9% YoY). -
Led by a strong growth in the retail advances the total advances increased by 22.9% YoY. Further, the retail term deposits expanded to 40% of term deposits. The current account and savings account (CASA) ratio improved by 200 basis points quarter on quarter (QoQ) to 41% backed by a healthy savings deposit inflow. -
The non-interest income displayed a robust growth of 29.0% YoY (up 19.3% QoQ) on the back of a treasury gain of Rs207 crore and a 19.8% year-on-year (Y-o-Y; up 16.4% QoQ) increase in the fee income. The retail fee expanded by 43% YoY while the corporate fee grew by 15% YoY. -
The asset quality showed some stress as slippages were relatively higher contributed by a chunky account. Consequently, provisions increased by 25.6% YoY. The bank restructured Rs323 crore worth of advances in Q2FY2013. As a result, the restructured book increased to 2.3% of the net advances -
Axis Bank's Q2FY2013 performance points to a structural shift towards the retail business as both retail deposits and advances showed traction during the quarter. We largely retain our estimates and expect the bank's earnings to grow at a compounded annual growth rate (CAGR) of 15% over FY2012-14. We maintain our Buy rating on Axis Bank with a price target of Rs1,370. CMC
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,551
Current market price: Rs1,118 Impressive margin performance Result highlights -
Strong growth in SI business: In Q2FY2013 CMC maintained the strong growth momentum in the system integration (SI) business, which reported a strong sequential growth of 6.3% in its revenues. The customer services business' revenues were down by 13.8% quarter on quarter (QoQ) on account of lower equipment sales during the quarter. The consolidated revenues for the quarter increased by 1.4% QoQ and 28.2% year on year (YoY) to Rs458.6 crore. -
The services business' revenues rose by 5.6% QoQ to Rs434.4 crore (accounting for 94.8% of the total revenues) whereas the equipment business' revenues were down by 41.7% QoQ to Rs23.8 crore (accounting for 5.2% of the total revenues). -
The revenues of CMC Americas (its US subsidiary) grew by 5% QoQ and 25% YoY in US dollar terms. In rupee terms, the revenues of the subsidiary rose by 6.3% QoQ to Rs197.7 crore. The revenues earned through joint go-to-market with Tata Consultancy Services (TCS) were stable at 56% of the total revenues on Q-o-Q basis. -
The international revenues were up by 3.5% QoQ and 44.1% YoY to Rs304.1 crore (accounting for 66.4% of the total revenues). The domestic revenues were down by 2.8% QoQ but up by 5.5% YoY to Rs154.1 crore (accounting for 33.6% of the total revenues). -
Impressive margin performance: Despite wage hike and lower benefits from rupee depreciation during the quarter, CMC managed to keep its operating profit margin (OPM) stable at 16.7% as against 16.6% in Q1FY2013. Lower equipment sales (down 41.7% QoQ) and a higher contribution from the services business helped stabilise the margin, which was ahead of our expectation of 15.7%. Going forward, the management has maintained the margin range of 16-17% for the coming quarters. -
Higher tax and lower other income drags profitability: For the quarter, the net other income (NII) declined by 80% QoQ to Rs1.1 crore on account of a foreign exchange (forex) loss of Rs1.6 crore and a lower treasury income. Further, a significant rise of 33.2% QoQ in the tax provision to Rs22.7 crore on account of an amount of Rs4.5 crore pertaining to the tax on the dividend from CMC Americas led to a 15.5% sequential fall in the net income to Rs49.4 crore. On a Y-o-Y basis the net profit rose by 51.3%. However, adjusting for the one-off item of the tax on the dividend for the quarter, the net profit declinewas restricted at 7.8% QoQ to Rs53.9 crore. -
Management remains upbeat about the demand environment: The CMC management remains upbeat about the business visibility. The company is experiencing strong traction in the SI business, which is the spearhead of the company's growth strategy. Within the SI segment, the company is witnessing traction in the embedded systems and real-time systems, product engineering services, validation and testing services in the USA. The company is also witnessing traction in the solution-led businesses in the insurance, port and transportation segments both in the domestic and international markets. CMC is exploring newer geographies like the Middle East, Africa, Asia Pacific and Eastern Europe for its solutions. The information technology enabled services (ITES) segment is also witnessing traction in the digitisation and work flow management segments. The company is strategically placing its services as knowledge process outsourcing services, like analytics and business intelligence. In India, the company expects increased spending on e-Governance and is well placed to garner an incremental share of the same. -
Valuation: CMC continues to deliver a strong operational performance. The deal flows in the SI, ITES and IMS businesses have improved and the management has increased focus on the international and emerging geographies. All this would maintain the growth momentum in the coming quarters. We have marginally revised our earnings estimates for FY2013 and FY2014 on account of higher tax assumptions and currency reset. We maintain our positive stance on CMC on account of the strong predictability of its earnings among the mid-cap IT stocks and a 41% CAGR in earnings over FY2012-14E. We maintain our Buy rating on the stock with a price target of Rs1,551. Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs915
Current market price: Rs813 Price target revised to Rs915 Result highlights -
Earnings in line with estimate: Despite an unexpected surge in the effective tax rate, Reliance Industries Ltd (RIL) posted an adjusted net profit of Rs5,376 crore (declined by 5.7% year on year (YoY) which is much in line with our estimate. The gross refining margin (GRM) of $9.5 per barrel reported by the company is also in line with expectations but the margin in the petrochemical business is ahead of the Street's expectations. A higher than expected net other income of Rs2,112 crore mitigated the impact of the surge in the tax rate during the quarter. -
Strong growth in refining business; falling output dents E&P revenues: RIL reported a revenue growth of 15% YoY to Rs90,335 crore for the quarter. The revenue growth was mainly driven by a healthy revenue growth of 23.2% YoY in the refining division. The petrochemical division of the company registered a revenue growth of 4.7% YoY to Rs22,058 crore in the same quarter. However, the exploration and production (E&P) division continues to post a decline in revenues-its revenues declined by 36.7% in Q2FY2013 on account of a falling output from the Krishna-Godavari (KG)-D6 basin. -
Refining margin improved QoQ supported by better product cracks: During the quarter the refining plant of the company achieved a 112% utilisation rate and refined 17.6 million tonne of crude oil against 17.1 million tonne in Q2FY2012. The GRM improved to $9.5/barrel in Q2FY2013 (in line with our estimate) from $7.6/barrel in Q1FY2013. The sequential improvement in the GRM was largely on account of an expansion in the gas oil and gasoline cracks. The refining segment's revenues grew by 23.1% YoY to Rs88,878 crore. However, on account of a year-on-year (Y-o-Y) fall in GRM the earnings before interest and tax (EBIT) grew by only 15.3% to Rs3,544 crore. -
Petrochemical margin better than Street's expectation: During the quarter the revenues from the petrochemical division grew by 4.7% YoY and 1% quarter on quarter (QoQ). On the margin front, the division has displayed a better than expected performance with an EBIT margin of 7.9%, which is largely flat on a quarter-on-quarter (Q-o-Q) basis as against the Street's expectation of a higher contraction. However, on a Y-o-Y basis the margin was still on the lower side mainly on account of a reduction in the deltas across petrochemicals including polypropylene (PP), purified terephthalic acid (PTA) and mono ethylene glycol (MEG). Consequently, the EBIT from the division declined by 28.2% YoY to Rs1,740 crore. -
Gas output from KG-D6 basin continues to fall: The gas production from the KG-D6 basin dropped on both Y-o-Y and Q-o-Q bases during Q2FY2013. The average daily production rate during the quarter dropped to 29 million metric standard cubic metre per day (mmscmd) as compared with 45mmscmd in Q2FY2012 and 33mmscmd in Q1FY2013. The oil production from the Panna-Mukta-Tapti (PMT) oilfield declined by 17.9% during the quarter due to a natural decline in the reserve. The average crude oil price realisation for H1FY2013 was $103 per barrel for the KG-D6 basin and $111 per barrel for the PMT oilfield. -
Maintain Buy with revised price target of Rs915: We have largely maintained our earnings estimates for FY2013 and FY2014 at Rs61.5 and Rs64.9 respectively. The declining output from the KG-D6 basin and the margin pressure in the petrochemical business are the key concerns for the company. On the flip side, the expected bottoming out of the petrochemical cycle with an improvement in the spreads going ahead, the increasing production of unregulated shale gas and the potential revival of capital expenditure (capex) in the E&P segment are some of the positive triggers for the stock. Hence, we maintain our Buy recommendation on RIL with a revised price target of Rs915 (arrived at using the sum-of-the-parts valuation method). Currently, the RIL stock is trading at a price/earnings (P/E) of 13.3x and 12.6x FY2013 and FY2014 estimated earnings.
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