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STOCK UPDATE Tata Consultancy Services
Recommendation: Buy
Price target: Rs1,650
Current market price: Rs1,459 Upgraded to Buy Result highlights -
In line performance, impressive outlook: Tata Consultancy Services (TCS)' performance in Q4FY2013 was in line with our as well as the Street's expectations. But, what makes the positive difference for TCS among the top four information technology (IT) companies is its consistency in meeting the expectations on most counts. -
TCS' top line grew by 3.1% quarter on quarter (QoQ) to $3,040 million (a tad below our expectation of $3,052 million). The company's volume grew by 4.4% QoQ whereas the pricing declined by 1.2% QoQ (the constant currency realisation remained stable QoQ). On a constant currency basis, the revenues were up by 4% QoQ to $3,065.7 million. In rupee terms, the revenues were up by 2.2% QoQ and 23.9% year on year (YoY) to Rs16,430.1 crore. -
The performance of the earnings before interest and tax (EBIT) margin was in line with our expectation at 26.5% (our expectation was 26.6%). During the quarter, the EBIT margin was impacted by the settlement of a seven-year-old case in the USA filed by two former employees to the tune of $30million. The impact of which was 98 basis points. However, an improvement in the productivity (+94 basis points ) has negated the impact. -
The net other income was up by 96.3% QoQ to Rs418.5 crore, led by foreign exchange (forex) gains of Rs146.7 crore against a loss of Rs53.6 crore in Q3FY2013. The net income was up by 1.3% QoQ to Rs3,596.9 crore (in line with our expectation of Rs3,601 crore). -
During the quarter, the company made a gross addition of 20,098 and net addition of 12,559 headcounts. For FY2013, the company has added a gross addition of 69,728 and net addition of 37,613 headcounts. For FY2014E, TCS plans to add 45,000 headcounts, out of which 25,000 will be from campus recruitment. The company plans a wage hike of 7% for offshore and 2-4% for onsite employees. During the quarter, TCS has added 52 new clients as against 31 in Q3FY2013. Valuation and view: TCS has been consistently delivering on the Street's expectations driven by its strong execution capabilities. Among the top-tier IT companies, TCS is the only company where the management is supremely confident on delivering growth higher than the industry average (12-14%) for FY2014E. In the last one month, the company's stock has corrected close to 10%. In the near term, owing to an overhang pertaining to the US immigration bills and a potential appreciation of the rupee, the performance of the stock could be further impacted. However, we believe at the current juncture, TCS is the best stock among the IT large packs, with most predictable and less volatile earnings performance. At the current market price (CMP) of Rs1,459, the stock trades at 18x FY2014E and 16x FY2015E earnings. We have broadly maintained our earnings estimates for FY014E and FY2015E. We have upgraded our rating to Buy from Hold with a with a price target of Rs1,650. HCL Technologies
Recommendation: Hold
Price target: Rs830
Current market price: Rs751 Downgraded to Hold Result highlights -
In line with expectations, net income beats estimates driven by higher other income: For Q3FY2013, HCL Technologies (HCL Tech) performance was broadly in line with our as well as the Street's expectations. However, the net income has beaten our estimates driven by a higher than expected other income and foreign exchange (forex) gains. -
For Q3FY2013, HCL Tech's revenues were up by 3.2% quarter on quarter (QoQ) to $1,190.8 million, which is in line with our estimate of $1,189.4 million (on a constant currency [CC] basis, revenues were up by 3.8% QoQ). The infrastructure management services (IMS) vertical continues to drive the incremental growth in revenues, which is up by 8.6% QoQ to $356.1 million (ie 77% of the incremental revenues), whereas the revenues of the software services vertical were up by 1% QoQ to $783.3 million. -
The EBITDA margin remained stable at 22.4% as against 22.6% in Q2FY2013. The margin of the software services vertical declined by 50 basis points QoQ to 23.3% whereas that of the IMS vertical improved by 40 basis points QoQ to 21.9%. The margin of the business process outsourcing (BPO) vertical remained stable at 11.6%. -
The net other income was up by 135.5% QoQ to Rs65.7 crore, which also includes sell of CapitalStream during the quarter to Linedata for a consideration of $45 million (out of which some amount was allocated to other income and to goodwill), whereas there was a forex gain of Rs23.1 crore as against a loss of Rs12.5 crore in Q2FY2013. The net income was up by 7.8% QoQ to Rs1,039.7 crore (ahead of our expectation of Rs981.2 crore). -
IMS continues to drive incremental growth, other service line growth remains muted: The IMS vertical continues to deliver a strong revenue momentum. For Q3FY2013, it reported a sequential growth of 8.3% QoQ on top of a 10.9% quarter-on-quarter (Q-o-Q) growth in Q2FY2013. In the last four preceding quarters (Q4FY2012-Q3FY2013), out of $110 million incremental revenues, 80% was led by the IMS. On the other hand, other services, excluding BPO, contributed 18% of the incremental revenues over the same period (out of which 14% came from the customer application alone). In the last three preceding quarters, there was a net reduction of 3,142 employees in the software services vertical, which signals a soft growth visibility in the vertical (0.8% compounded quarterly growth rate [CQGR] growth in the last four quarters). On the other hand, out of the total deal wins ($1 billion), the majority deals comprised of the IMS vertical with over 75% of the total contract value (TCV), which gives comfort on the revenue visibility for the IMS segment for the coming quarters. -
Management comfortable at EBIT margin range of 18-19%: In the last three preceding quarters, HCL Tech has managed an EBITDA margin of above 22% (average earnings before interest and tax [EBIT] margin of close to 19.7%). An improvement in the margin in the last few quarters was a reflection of the steady-state margin in some of the large deal engagements coupled with an improvement in the operating levers like utilisation and selling general and administrative expenses (SG&A) leverage. Going forward, the management expects the EBIT margin to remain in the range of 18-19% in the medium term, despite addition of trainees in the coming quarters. -
Valuation and view: In the last six months, HCL Tech has been the best performing stock among the information technology (IT) packs (up by 30%). We continue to remain positive on HCL Tech's earning predictability over FY2014 and FY2015E driven by a stable margin and momentum in the revenues of the IMS vertical. In the near term, an overhang relating to the immigration bills in the USA and a potential appreciation of the rupee in the near term could act as a sentiment dampener for the IT sector. On the earnings front, we have upgraded our earnings estimates for FY2014 and FY2015E largely on account of the higher other income/forex gains estimates. However, after a sharp run in the stock price, the upside seems to be capped in the near term. Thus, we have downgraded our rating to Hold from Buy with a price target of Rs830. Yes Bank
Recommendation: Buy
Price target: Rs600
Current market price: Rs480 In line with expectations Result highlights -
Yes Bank's Q4FY2013 results were in line with our estimate as the net earnings grew by 33.2% year on year (YoY; 5.8% sequentially). The growth in the profit was driven by a robust growth in the non-interest income and net interest income (NII). -
The NII of the bank grew by 42.4% YoY (9.2% quarter on quarter [QoQ]) led by a strong growth in the customer assets. The net interest margin (NIM) was stable on a sequential basis at 3.0%. Going forward, the management expects about 15-20-basis-point improvement in the NIM by FY2014. -
The growth in advances including credit substitutes was at 30.9% YoY (excluding credit substitutes, the growth was at 23.7% YoY). This was largely driven by a strong growth in the branch banking (up 44% QoQ, partly due to the priority sector lending [PSL] loans and regrouping of retail, and small and medium enterprises [SME] loans). -
The deposits grew by 36.2% YoY on account of a robust growth in the current account and savings account (CASA) deposits. The CASA ratio of the bank expanded by 61 basis points sequentially to 18.95% in Q4FY2013, driven by an equitable contribution from both the savings as well as the current account deposits. -
The non-interest income showed a strong growth of 42.4% YoY (up 21.1% QoQ) aided by a continued uptrend in the financial advisory income. The other verticals like transaction banking and retail fees also posted a strong growth. The cost-to-income ratio remained stable at 37.7% in Q3FY2013. -
The asset quality was largely stable on a quarter-on-quarter (Q-o-Q) basis as the gross and net non-performing assets (NPAs) were maintained at 0.2% and 0.01% respectively. Moreover, the absolute restructured advances book declined to Rs144.2 crore from Rs189.1 crore in Q3FY2013. Outlook and valuation
Yes Bank continues to deliver strong set of numbers driven by a strong operating performance. We expect the company's earnings to grow at a compounded annual growth rate (CAGR) of 15.8% over FY2013-15. This should lead to return on equity (RoE) of more than 20% (after factoring in the dilution) and return on assets (RoA) of ~1.5% over the next two years. We maintain our price target of Rs600 (2.3x FY2015E book value [BV]) and Buy rating on the stock. Reliance Industries
Recommendation: Buy
Price target: Rs1,010
Current market price: Rs774 Q4 earnings in line with estimate Result highlights -
Earnings largely in line with estimate; petchem margin disappoints: For Q4FY2013 Reliance Industries Ltd (RIL) has posted an adjusted net profit of Rs5,589 crore (a growth of 31.9% year on year [YoY]), which is largely in line with our as well as the Street's estimate. The strong earnings growth was supported by a better than expected gross refining margin (GRM) of $10.1 per barrel (as against our expectation of $9.85 per barrel) and a strong other income of Rs2,243 crore. However, contraction in the petrochemical (petchem) margin was a negative surprise and against the expectation of a margin improvement on a sequential basis. The net sales declined by 1.2% YoY to Rs84,198 crore, which is lower than our as well as the Street's estimate on account of a lower than expected revenue growth of 2.2% in the refining division. The petchem division has posted a 3.5% revenue growth YoY for the quarter. However, the exploration and production (E&P) division continues to post a decline in revenues, which dropped by 38.8% during the fourth quarter on account of a falling output from the Krishna-Godavari (KG)-D6 basin. -
Refining margin supported by better product cracks; challenging environment ahead: During the quarter the company refined 16.1 million tonne of crude oil as against 16.3 million tonne in Q4FY2012. The GRM for Q4FY2013 improved to $10.1 per barrel (better than estimated) as compared with $7.6 per barrel in Q4FY2012 and $9.6 per barrel in Q3FY2013. The GRM improved largely on account of an expansion in the gas oil and gasoline crack due to unplanned refinery outages. The refining segment's revenues grew by 2.2% YoY to Rs77,872 crore. Further, on account of an expansion in the GRM, the earnings before interest and tax (EBIT) from the division came at Rs3,520 crore as against Rs1,696 crore in the corresponding quarter of the previous year. However, in the past couple of weeks the GRM has corrected as few refineries resume operations after a maintenance shutdown which has boosted inventories. Hence, in the coming quarter the company may witness pressure on the GRM on a sequential basis. -
Petchem margin disappoints, below Street's expectation: During the quarter the petchem margin negatively surprised with a sequential contraction of 23 basis points against the market's expectation of a margin improvement. The revenues from the division grew by 3.5% YoY to Rs22,158 crore but remained largely flat quarter on quarter (QoQ). During the quarter the EBIT margin stood at 8.6% as compared with 10.2% in the corresponding quarter of the previous year. The margin contracted on account of an increase in the price of feedstock like ethylene, propylene and naphtha. -
Gas output at KG-D6 basin continues to fall; performance of US Shale gas business improved: The gas production from the KG-D6 basin dropped both YoY and QoQ during Q4FY2013. The average daily production rate dropped to 26mmscmd during the quarter from 36mmscmd in Q4FY2012 and 28mmscmd in Q3FY2013. In case of the Panna-Mukta-Tapti oilfield, the oil production declined by 18.2% QoQ due to a natural decline in the reserve. On the brighter side, the ramp-up in the shale gas business in the USA remains healthy with a sharp jump in the production of gas to 19bcf in Q4FY2013 (from 7.9bcf in Q4FY2012). The net volume including natural-gas and condensate increased by 12% QoQ to 31.1bcf. -
Earnings estimates for FY2014 and FY2015 fine-tuned: We have fine-tuned our earnings estimates for FY2014 and FY2015 mainly to factor in the lower than expected production growth in the E&P division. We have also marginally lowered our GRM estimates. Consequently, our revised earnings per share (EPS) estimates for FY2014 and FY2015 now stand at Rs64.4 and Rs73.9 respectively. -
Maintain Buy with price target of Rs1,010: Given the persistent margin pressure in the petchem business and the recent correction in the GRM, we believe in the near term the business environment remains challenging and the company could experience margin pressure in the coming quarter. However, a healthy ramp-up in the US shale gas business and a likely revision in the price of gas from March 2014 would provide visibility of the future earnings growth. Further, any approval for further development of the KG-D6 block could be a positive for RIL. Hence, we maintain our Buy recommendation on the stock with a price target of Rs1,010. Currently, the RIL stock is trading at price/earnings (PE) of 12x and 10.5x of FY2014 and FY2015 estimated earnings.
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