| Summary of Contents | | | | STOCK UPDATE BASF India
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs501
Current market price: Rs460
Price target revised to Rs501
Result highlights -
BASF India?s stand-alone Q1FY2011 net profit came in at Rs48.9 crore, up 19% year on year (yoy). However the results are not strictly comparable due to consolidation of the financials of Ciba India. -
The net sales for the quarter were up by 72.7% yoy to Rs659.84 crore, driven by a 1.6x year-on-year (y-o-y) rise in the revenue from the performance products business. The robust growth in the performance products business was largely due to the merger with Ciba India. The plastic division also logged in a good show with the revenue up by 60% yoy. -
The operating profit grew at a slower pace than the top line, expanding by15.6% yoy to Rs79 crore in the quarter, due to around 590-basis-point contraction in the operating profit margin (OPM) to 12%. The OPM contraction was as a result of the amalgamation with Ciba India, which has lower margins than BASF India, as well as decline in the margins for the agricultural solutions business. -
The interest charges remained largely flat on a y-o-y basis whereas the depreciation charges witnessed an uptick to Rs8.94 crore in the quarter as compared to Rs6.87 crore in the same quarter of the last year. -
BASF India has reported a strong set of numbers for Q1FY2011 on the back of a healthy traction in demand across all its businesses. The OPM, however, witnessed some pressure as a result of the amalgamation of Ciba India with itself and lower margins for the agricultural solutions business. We have tweaked our earnings estimates for FY2011 and FY2012 to factor in the Q1FY2011 performance and our revised earnings per share (EPS) now stands at Rs31.7 for FY2011 and Rs41.8 for FY2012. At the current market price of Rs460, the stock trade at 11x its FY12E EPS and 2.9x FY12E book value (BV). We maintain our Hold recommendation on the stock with a revised price target of Rs501. Tata Consultancy Services
Cluster: Evergreen
Recommendation: Hold
Price target: Rs920
Current market price: Rs832
Price target revised to Rs920
Result highlights -
Tata Consultancy Services (TCS)? Q1FY2011 results were above the Street?s and our expectations. The company has positively surprised us by reporting a strong 6.4% sequential growth in its dollar-term revenues, supported primarily by a strong 8.1% sequential growth in volumes. Moreover, in spite of a wage hike and currency fluctuations during the quarter, the company has reported only a marginal 36-basis-point drop in the earnings before interest and tax (EBIT) margin for the quarter. The company is confident of sustaining its EBIT margin at 27% in FY2011. -
The growth during the quarter was broad based with all the verticals registering a healthy growth. The major growth drivers were: telecommunications (telecom; a growth of 10.8% quarter on quarter [qoq]), retail (a growth of 7.4% qoq), life sciences & healthcare (a growth of 6.4% qoq), energy & utilities (a growth of 17.0% qoq), hi-tech (a growth of 11.2% qoq), and media and entertainment (a growth of 12.3% qoq). The management has said that the outlook for the banking, financial services and insurance (BFSI) vertical (a growth of 4.3% qoq) is positive with the majority of the new deals that the company is pursuing being from this vertical. -
The consolidated revenue (as per US GAAP) grew by a strong 6.2% sequentially to Rs8,217 crore, which is ahead of our estimate of Rs8,070 crore. The revenue growth was driven by an 8.1% growth in the volumes, which was partially offset by the pricing impact (-0.32%), effort mix (-0.48%) and exchange fluctuations (-1.09%). The revenue in dollar terms grew by 6.4% sequentially to USD1,794 million, which is above our estimate of USD1,767 million. -
The EBIT margin dropped marginally by 36 basis points sequentially to 27.1% (ahead of our expectation of 26.5% for the quarter). The company was largely able to mitigate the negative impact of the wage hike (-215 basis points) and currency fluctuation (-32 basis points) through selling general and administrative (SG&A) efficiencies (+139 basis points), better offshore shift (+15 basis points) and productivity gains (+57 basis points). -
The net income was down by 5.3% sequentially to Rs1,844 crore in the quarter, ahead of our expectation of Rs1,798 crore. The decline in the net income was mainly due to an increase in the effective income tax rate to 19.1% in the quarter from 14.8% in the previous quarter. The net income was also hit by a lower other income of Rs83 crore in the quarter (versus Rs163 crore in the previous quarter). The other income includes a foreign exchange (forex) loss of Rs47.2 crore in Q1FY2011 versus a forex gain of around Rs42 crore in Q4FY2010. -
The management commentary was optimistic in terms of the demand environment and highlighted that TCS is pursuing 15 new deals (out of which five are from the discretionary spend area). The robust deal pipeline hints towards a strong demand environment and validates the company?s optimism regarding the volume growth going forward. In terms of pricing, the company does not expect any decline in the pricing and with the strong demand it in fact expects the pricing to improve by the last quarter of FY2011. The company has mentioned that although the UK and Europe witnessed growth in Q1FY2011, yet it is concerned about the macro-economic situation in the region. -
TCS outperformed the market expectation during the quarter and surpassed its peers in terms of volume growth (8.1% qoq for TCS versus 7.6% qoq for Infosys Technologies [Infosys]) and the performance of the earnings before interest, tax, depreciation and amortisation (EBITDA) margin (a marginal 57-basis-point sequential decline for TCS versus a 236-basis-point sequential decline for Infosys). The broad-based growth, the wining of ten new deals and a robust deal pipeline are better than that of Infosys. -
We have increased our revenue estimates in view of the assumption of a higher volume growth and a revision in our exchange rate assumption for FY2011 to Rs45.5 and that for FY2012 to Rs45. We now assume a higher income tax rate of 22% for FY2012 (versus our previous assumption of 21% for the year). After incorporating the above changes, we have increased our earnings per share (EPS) estimate to Rs39.7 for FY2011 and that to Rs45.8 for FY2012. We maintain our Hold recommendation on the stock with a revised price target of Rs920. At the current market price, the stock trades at 21x its FY2011 and 18.2x its FY2012 earnings estimates. Axis Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,560
Current market price: Rs1,359
Price target revised to Rs1,560
Result highlights -
For Q1Y2011 Axis Bank has reported a net profit of Rs741.9 crore, an increase of 32% year on year (yoy). The reported profit was in line with our estimate of Rs728 crore. The top line too was in line with our estimate and was driven largely by a surge in the balance sheet?s growth rate. -
The net interest income (NII) grew by a strong 44.8% yoy to Rs1,513.8 crore. The growth was on account of a strong 39.1% year-on-year (y-o-y) growth in the advances (well above expectations) which overshadowed the sequential contraction in the calculated net interest margin (NIM). Though the blended yields were largely stable at 7.2% on a sequential basis, the cost of funds rose by 26 basis points to 4.5% leading to a contraction in the NIM (down 26 basis points quarter on quarter [qoq] to 3.27%). -
The non-interest income during the quarter grew by a moderate 4.4% yoy to Rs1,000.8 crore on account of a 40% y-o-y drop in the treasury gains. Meanwhile, the core fee income growth was healthy at 18.5% yoy. The operating expenses grew by 28.6% yoy and by 5.4% qoq, and translated into a cost-income ratio of 42.3% (stable qoq). -
The provisioning expenses were largely stable at Rs333 crore (up 6% yoy but higher sharply on a sequential basis as the bank continued to make higher provisions on loan loss that came in at Rs304 crore. Also, there was provision for investment depreciation as against the write-back in Q1FY2010 which increased the overall provisions for the bank. The provision coverage ratio, including the technical write-off, currently stands at 76.62%. -
The asset quality of the bank was stable on a sequential basis as the gross non-performing assets (NPAs) increased by just 1.7% qoq to Rs1,341 crore during Q1FY2011. In relative terms too, the percentage of gross NPAs was stable at 1.13%. The resulting provisioning coverage improved by about 100 basis points qoq to 69.2% (76.6% including the prudential write-offs). -
During the quarter the bank restructured assets worth Rs30 crore, though the cumulative restructured assets stood reduced to Rs2,151 crore, constituting 1.81% of the gross customer assets. Of these, a total of Rs460 crore or approximately 22% of restructured assets have slipped into the NPA category. -
The business growth picked up during the quarter, as the advances grew by 39.1% yoy to Rs108,609 crore, while the deposits grew by 33.8% yoy to Rs147,479 crore. The loan book growth was supported by all the segments with the ?large & mid corporate? segment and agri-advances growth strong at 54.7% and 28.8% yoy respectively. Going ahead, the advances growth is likely to moderate. The demand deposits continued their upward trend showing a growth of 34% yoy with the current account and savings account (CASA) ratio now forming 40.2% of the total deposits. -
The capital adequacy ratio (CAR) of the bank stood at 14.54% (vs 15.8% in Q4FY2010) with the tier-I capital adequacy ratio at 10.32%. -
At the current market price of Rs1,359, the stock trades at 13.3x 2012E earnings per share (EPS), 7.3x 2012E pre-provisioning profit (PPP) and 2.6x 2012E book value (BV). Though we are maintaining our estimates and believe that the positives are largely priced in, the consistency in the bank?s earnings performance since the last four quarters may lead to a re-rating of the stock. Essentially, a narrowing in the valuation discount to HDFC Bank is quite likely going forward. We maintain our Buy recommendation on the stock with a revised price target of Rs1,560, valuing the stock at 2.9x FY2012E BV per share (about 20% discount to HDFC Bank).
SECTOR UPDATE Telecommunications June net additions up 9.2% led by Idea and Uninor -
In June 2010, GSM operators (excluding Reliance Communications and Tata Teleservices which are yet to disclose their numbers for the month) added 12.29 million new subscribers, indicating a robust 9.2% growth over May 2010. This took the total subscriber base to 440 million, 2.87% higher than that in May. -
The incumbents collectively added 10.66 million subscribers in the month, up 9.5% month on month (mom) while on the back of the strong numbers from Uninor and Videocon the new players posted a net addition of 1.66 million subscribers (constituting 13.5% of the overall net additions) for the month. Among the incumbents, Bharti Airtel maintained its consistency and added 3 million subscribers for the fourth month in a row (prior to this its net addition run rate was 2.8 million). Vodafone and Idea Cellular also saw a strong growth in their net subscriber addition for the month, up by 4.7% and 50.1% respectively. During the month Uninor launched its services in five circles and for the month garnered strong 1.01 million subscribers. On the other hand, another new entrant Videocon, which debuted in the market last month, added 0.55 million subscribers (down 72% mom).
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