Fw: Investor's Eye: Pulse - Industrial output remains flat in April 2012; Update - Wipro (Upgraded to Buy from Hold), Maruti Suzuki India (Merger of Suzuki Powertrain with MSIL)

 

 

Investor's Eye [June 12, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK Industrial output remains flat in April 2012 The Index of Industrial Production (IIP) remained flat in April 2012, registering a growth of 0.1%, which was significantly below the market's expectation of a 1.7% growth. The sluggish growth in the manufacturing sector and the decline in the mining sector continue to stress the IIP's growth. The March 2012 IIP numbers have been revised marginally upwards to -3.2% from -3.5%. For FY2012, the IIP growth has been revised upwards marginally to 2.9% as against 8.2% in FY2011. Outlook The IIP numbers have been quite volatile recently and remained flat in April 2012. Based on the 3-monthly moving average, the IIP growth is 0.3% whereas for FY2012 the growth has been revised to 2.9%. Both the indicators point to a slowdown in the industrial activity along with the weak GDP growth for Q4FY2012 at 5.3%. In view of the recent decline in the crude oil prices and the dismal GDP and IIP numbers, the market expects the RBI to reduce the CRR by 25-50 basis points in the coming mid quarter policy review.   STOCK UPDATE Wipro Cluster: Apple Green Recommendation: Buy Price target: Rs450 Current market price: Rs393 Upgraded to Buy from Hold  We recently attended the annual analyst meet of Wipro. The company's chairman Azim Premji, and CEO - IT services, T.K. Kurien addressed the meet along with various other senior members of the management team. The management indicated that the re-alignment of organisational structure is complete with enhanced focus on creating differentiation at the front-end (client interaction/sales team) and standardisation of the back-end (developers/project delivery team). Though there are cases of delay in decision making and signs of lower client spent among banking, financial services and insurance (BFSI) clients (contribute 26% of total revenues), the demand environment in some of the other industry verticals is much more optimistic. On the valuation front, the stock has corrected since our last update and we have still not factored in the potential upgrade in earnings due to depreciation in the rupee. Consequently, we are upgrading our recommendation to Buy from Hold. However, we continue to maintain Tata Consultancy Services (TCS) as our preferred pick among the large-cap front line stocks.    Valuation Wipro's management remains committed to achieve aspiration goals from its organisational alignments in the coming years. However an uncertain macro environment has pushed ahead the timeline for the same. Nevertheless, we derive comfort from Wipro's strategy to strengthen its front-end with its clients-centric approach and the same would augur well for business visibility. At the current market price of Rs393, the stock trades at 15x FY2013 and 13.5x FY2014 estimated earnings. The stock has corrected since our last update and we have still not factored in the potential upgrade in earnings due to depreciation in the rupee. Consequently, we are upgrading our recommendation to Buy from Hold. However, we continue to maintain TCS as our preferred pick among the large-cap front line stocks.      Maruti Suzuki India Cluster: Apple Green Recommendation: Hold Price target: Rs1,430 Current market price: Rs1,146 Merger of Suzuki Powertrain with MSIL  Maruti Suzuki announces the merger of Suzuki Powertrain India  Suzuki Powertrain India Ltd (SPIL) was a 30:70 joint venture (JV) between Maruti Suzuki (Maruti) and Suzuki Motor Corp, Japan. The JV was commissioned to manufacture diesel engines for Maruti's requirement in the domestic market. SPIL's current diesel engine capacity has been expanded from 2.5 lakh units to 3 lakh units annually.  During FY2012, SPIL reported net sales of Rs4,551 crore, growing 13% year on year (YoY). The company reported an operating margin of 12.1% in FY2012 against 15.9% in FY2011. The profit after tax (PAT) declined by 4.6% to Rs115 crore in FY2012.    Management indicated of multiple operational benefits post merger Maruti's core strategy now revolves around gaining better control on the diesel business. A single management control, higher localisation, raw material synergies and right capital allocation are the top agendas behind the merger.  In the short term, Maruti's management seeks to lower import content from 30% currently and increase localisation. Capital productivity would be increased by avoiding group transactions. Joint procurement of materials and adjusting to demand dynamics are the other focus areas aimed at bringing down costs.    Valuation offered for Suzuki powertrain looks reasonable Maruti would issue 1.317 crore shares to acquire the 70% stake in SPIL from its parent company. Based on the closing price of June 12, 2012, the valuation is estimated at Rs2,436 crore. This compares with Rs1,317 crore being invested in SPIL by both the partners since 2006.  Considering Rs1,700 crore of brownfield investment in the Gurgaon engine plant for equal capacity with tooling already available, the current valuation given for SPIL by Maruti looks reasonable considering Rs500 crore of cash profit it generates every year.    We estimate a 1.2% impact on Maruti's EPS We expect a 4.6% equity dilution based on the fresh shares issued by Maruti. However, consolidating 100% of SPIL's profit with the main company and computing earnings with the expanded equity base, we estimate an earnings per share (EPS) impact of 1.2% without taking into account any synergy benefits.  We are keeping our FY2013 estimates unchanged as the full effect of the merger would be felt only from Q4FY2013. For FY2014, we expect the marginal EPS impact to get offset by cost savings post the merger. We believe that the stock price would be influenced more by the Reserve Bank of India's policy on rate cuts, government's fuel pricing and the demand scenario for petrol cars. We keep our recommendation as Hold.   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.