| Summary of Contents STOCK UPDATE Tata Tea
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs943
Put on Hold Key points -
Tata Tea has sustained market leadership position in branded tea market with a volume market share of 19.9%, which is about 130 basis points higher than that of the second best player Hindustan Unilever, which has a volume market share of 17.3%. -
With portfolio of strong brand that compete well with the regional brands, we don?t expect the consumers to shift to regional brands in the wake of the price increases effected by the company. -
The raw tea prices are expected to remain firm in the domestic and international market in the coming months with no signs of easing of the deficit globally. However we expect the company to maintain its profitability on back of price increases implemented in key markets. -
Since we upgraded our recommendation on Tata Tea from Hold to Buy in our stock update dated October 29, 2009, the stock has gained 10% and achieved our price target of Rs939. -
At the current market price the stock trades at 14.7x and 13.0x its FY2010E and FY2011E earnings respectively. We believe the valuation looks ripe and thereby it is advisable for the investors to book partial profits. -
However considering the long-term growth visibility and strong brand equity that Tata Tea enjoys among FMCG stocks we put the stock on Hold. Also, we shall review our price target after an interaction with the management following Q3FY2010 results.
SHAREKHAN SPECIAL Q3FY2010 IT earnings preview -
Q3FY2010 will see the frontline information technology (IT) companies continue benefiting from the increased utilisation rates (due to increase in the number of new deals signed) and favourable cross-currency movement (a positive impact of 0.8% to 1.3% on their dollar-term revenues). Despite lower number of working days during the quarter, we expect IT majors to post a healthy volume growth due to higher business integration and transformation work coming from mergers and acquisitions. On these observations, we see the IT frontliners to easily exceed their Q3FY2010 dollar-term revenue guidance. We expect Infosys Technologies (Infosys)? dollar-term revenues to grow by 3.4 % sequentially to US$1,194 million, beating the guidance of US$1,155-1,165 million. Wipro?s IT services revenues are expected to grow by 4.6% sequentially to US$1,115 million, surpassing the guidance of US$1,092-1,113 million. For Infosys, HCL Technologies (HCL Tech) and Tata Consultancy Services (TCS), we see the benefits of higher utilisation and positive cross-currency movement largely offset by the appreciation in the rupee against the US dollar in Q3FY2010. -
We expect frontline IT companies to report a 90-180 basis points sequential decline in their OPM in the quarter on the back of salary hike, marginal increase in selling expenses and the appreciation in the rupee, partially offset by the expected improvement in the utilisation rate and favourable cross-currency movement. -
On FY2010 guidance front, we expect Infosys to revise its dollar-term revenue guidance to 0.0%-0.7% growth in FY2010 compared to ?1% to ?1.3% guided earlier. We highlight that Infosys would be maintaining its conservative approach in its guidance in terms of demand environment (as was the case in the last quarter), and any upward revision would come on the back of outperformance of Q3FY2010 results and favourable cross-currency movement. In terms of earnings in rupee terms, we expect Infosys to revise its FY2010 earnings per share (EPS) guidance to Rs101-103 compared to Rs99.6-Rs100 guided earlier. -
While global IT spending is expected to decline by 6-8% in CY2009, the street is keenly waiting for management commentary on IT budgets for CY2010. We expect CY2010 IT budgets to remain flattish or marginally higher compared to CY2009. Further, guidance on hiring front, wage revision and investment in selling and marketing initiatives would be the key things to watch out for, as it would provide outlook on growth and margins. -
In Q3FY2010, BSE IT (the IT index) appreciated by 12.5%, far outperforming the broader indices such as the Sensex (that grew by 1.9% during the quarter). The outperformance was on account of improvement in the business environment, encouraging economic data from the US and better decision-making cycle leading to better deal flow for IT vendors. Q3FY2010 Capital Goods & Engineering earnings preview -
We expect the top line growth of capital goods and engineering companies to improve in Q3FY2010 over that in H1FY2010. The top line growth in the quarter will be on the back of improving order execution, better industrial capital expenditure (capex) cycle and favourable base effect. For the quarter under review, we expect the cumulative top line of the capital goods and engineering companies under Sharekhan Universe to grow by 16.1% year on year (yoy). This cumulative top line growth will be mainly be driven by strong growth registered by large companies like Bharat Heavy Electricals Ltd (BHEL), while most of the companies are still expected to witness single-digit growth only. -
Capital goods companies particularly those under our coverage will continue to gain from infrastructure spending particularly power, roads, and oil and gas. Further, these companies would see financial cost pressure easing and profitability boost on the back of improving working capital cycle. In spite of the massive investment in infrastructure sector, increasing competition from new players, both local and global, is bound to put pricing pressure and margin pressure, if not immediately, in the medium to long term. Still we believe, those companies that scale up their capacities, increase their expertise either organically or inorganically are going to stay and benefit from the increased infrastructure spending. -
Notwithstanding their strong business outlook, valuations of some of the companies under our coverage (L&T and Thermax) look stretched in view of the recent rally in these stocks. Our top picks in the space remain BHEL and EMCO.
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