Saturday, March 3, 2012

>WIPRO LIMITED: Some improvement, but still risky

Wipro continues its organisational revamp focused on improving its account mining process. Steps have been taken to simplify reporting structures, standardise back-end processing and external consultants have been asked to bring the best practices. We find confidence returning to management that the company will be able to match peers’ growth going forward despite the uncertainty in the demand environment. However, we believe that the turnaround could take more time and that the execution risks are not correctly priced. The stock is trading at a P/E of 15.7x for FY13 (7% discount to Infosys) and, hence, is not inexpensive. We maintain our 3-UW rating. 

Simplifying organisational structure: Reporting lines have been restructured so that sales and delivery primarily report to vertical heads. Senior level hires are being made to improve processes in both sales and delivery.

End-demand improvement in specific pockets: Wipro has seen end-demand stability since the beginning of the calendar year with traction in BPO and IT Infrastructure. Oil & Gas, BFSI, Retail and Healthcare are the key focus areas and likely growth drivers. 

Acquisition-led strategy to continue: According to management, Wipro’s acquisitions through the decade have had 2.2ppts accretion on the revenue CAGR with an IRR of 22%. With 20% of the current FY revenues from acquisitions, the company is unlikely to relent on its strategy and could continue to focus on smaller acquisitions.

Execution risk makes us cautious: The strong focus on top-line growth could imply a reduced margin focus near term. Given volatile environment and the changing organisational structure, there remains risk to earnings growth, in our opinion. Valuations at a P/E of 15.7x also do not provide much support. We retain 3-UW with PT of Rs360.


>INDIA STRATEGY: Five strategic threads to weave the tapestry of FY13 budget

BUDGET EXPECTATIONS: Bold economic budget after a long gap?

Budget FY13 to be woven around the following five strategic threads (1) fiscal consolidation through subsidy rationalization – through raising diesel, kerosene and LPG prices and partial decontrol of urea prices (these may be the UPA government’s boldest economic decisions). Food subsidy however may be raised as government introduces food security bill (2) withdrawal of fiscal stimulus – through raising excise and service tax rates – across the board – by 200bps and widening service tax net (3) stimulating investments and jumpstarting capital formation (4) accelerating retail investment in equity markets – through lowering of short term capital gains tax on equities and increasing tax allowances for retail investment in equity mutual funds allowing channelization of personal savings from real assets to equities and (5) socialization of personal tax structure – through raising maximum income tax exemption limit and reintroducing personal tax surcharge on high tax bracket assesses and doubling corporate tax surcharge. This may probably be the last opportunity for Finance Minister to present an economic budget in the current term of UPA, as FY14 union budget (being last full-fledged budget before General Elections in 2014) will likely be guided by the imperatives of a popular democracy. Priority shift - from excessive focus on Aam Admi (Common Man) to capital formation… for now

We believe that allocations to welfarist programs like National Rural Employment Guarantee Scheme (NREGS) are unlikely to rise from FY12 levels, allowing the government to keep expenditure under control. However we expect to see government increasing its focus on plan expenditure on projects aimed at reviving capital formation (pertaining particularly to roads, railways and irrigation). With the gross fixed capital formation showing compression in Jul-Sep qtr, we expect several fiscal measures (through budgetary allocations, tax exemptions/benefits, easier financing etc.) to kickstart the capex cycle. As per our infrastructure analysts, the government may adopt following key measures: (i) Sun-set clause on tax incentives for infra projects likely to be extended by one more year; (ii) We expect government to announce fiscal incentives for new capex; (iii) Increased focus on Accelerated Power Development and Reform Program (APDRP); (iv) Setup of National Electricity Fund to provide interest subsidy to SEBs for investments in T&D sector for reducing the losses.

Implications for portfolio construction
Higher taxes & reined in expenditure on populist schemes should result in curtailing domestic consumption modestly. Terms of trade may shift from rural to urban India, albeit temporarily. We cut exposure to both consumer discretionary and staples in our model portfolio. Increased focus on capital formation through incentivizing infrastructure investments will benefit infrastructure stocks. Our Top Picks are: Axis Bank, ICICI Bank, SBI, Coal India, L&T, TCS, Bharti, DLF.

To read full report: INDIA STRATEGY

>YES BANK: Yes, a long induction catalysis

■ Action: Initiate with a Neutral rating and a TP of INR380
We initiate our coverage of Yes Bank with a Neutral rating and TP of INR380, as we believe current valuations fairly price in the balance between a robust asset franchise and a flat near-term outlook on assetreturn ratios on increasing LLPs and operating costs. We would wait for a meaningful uptick in Yes Bank’s low-cost (CASA) deposits and its retail loan book to turn more positive, while a sharp deterioration in NPLs from here would turn us more cautious.

■ CASA – a long gestation catalyst
Despite an impressive track record over the past few years, we believe Yes Bank will face an uphill course in the next one to two years. While Yes has started to focus on CASA, savings deposit accretion is a long gestation process. Current RBI regulations that require mandatory branch additions outside the CASA rich metro & urban areas heavily tilt the scales against a rapid growth in CASA per branch, which was possible for some of the earlier private sector banks (HDFC Bank and Axis Bank). Despite the increase in its savings deposit interest rate, Yes Bank is unlikely to realise significant market share gains. While a higher savings deposit rate is ensuring increased customer acquisition for Yes, we believe strengthening of these new relationships will take some time. A slow CASA growth could curtail the super-normal loan growth rates enjoyed by Yes Bank going forward, in addition to increasing the cost ratios.

■ Valuation
YES currently trades at 2.2x our FY13F ABV and 10.3x our FY13F EPS. At our TP of INR380, YES would trade at 2.4x our FY13F ABV and 11.6x our FY13F EPS for an ROA of 1.4% and ROE of 23.6%. 31 Mar FY11 FY12F FY

To read full report: YES BANK


Overview The Ministry of Communications & Information Technology, Government of India, has just come out with the decisions made by the Department of Telecommunications (DoT) on the issues of spectrum management and telecom licensing framework, largely accepting the recommendations of the Telecom Regulatory Authority of India (TRAI) on the same. TRAI will now give recommendation on some key areas like spectrum re-farming and pricing. The key decisions of DoT, as announced by the Ministry of Communications & Information Technology on February 15, 2012, are presented in the following bullet lists. 

1. All future licences will be unified licences (ULs) and allocation of spectrum will be delinked from the licence. Spectrum, if required, will have to be obtained separately.
2. Validity of existing unified access service (UAS) licences may be extended for another 10 years at one time.
3. On extension, the UAS licensee will be required to pay a fixed fee: Rs. 2 crore for the Metro and category A Circles; Rs. 1 crore for category B circles; and Rs. 0.5 crore for category C circles.
4. The prescribed limit on spectrum will be 8MHz and 5MHz for GSM and CDMA technologies respectively, for all service areas other than Delhi and Mumbai, where the limits will be 10MHz and 6.25 MHz, respectively. However, the licensee can acquire additional spectrum beyond the prescribed limits in the open market, should there be an auction of spectrum, subject to the limits prescribed for the merger of licences.
5. The spectrum shall be paid for by separately. While extending the licence, the licensee shall be assigned spectrum only up to the prescribed limit, or the amount of spectrum assigned to it before the extension, whichever is less. Spectrum assigned to the licensee in excess of the prescribed limit shall be withdrawn.
6. Decisions on all matters relating to spectrum pricing will be taken separately.

Licence Fee
1. Uniform licence fee will be levied across all service areas, and this will be progressively made equal to 8% of the adjusted gross revenue (AGR) in two annual steps starting 2012-13.
2. Decision to bring passive infrastructure service providers under the licensing regime is deferred.

To read full report: DOT

>ASM TECHNOLOGIES: Continue to Accelerate

 Company Description
A SM Technologies, established in 1992, is a pioneer in providing world-class consulting services in enterprise solutions for the Packaged ERP products and in enterprise product development for SMB segment and in technology solutions covering embedded systems and system software to its global clientele. ASM has development centres in Bangalore (India), Singapore, Chicago, Toledo and Tampa (USA), and London (UK). Advanced Synergic Pte Ltd, Singapore, Pinnacle Talent Inc, USA, ESR Associates Inc, USA and Abacus Business Solutions Inc, USA are subsidiaries.

■ Industry Verticals
Manufacturing, Oil & Gas, Consumer Electronics, Growth Industries, Telecom, Public Utilities & Retail


  • Enterprise Applications -- SAP, Oracle Applications, PeopleSoft & J D Edwards, Microsoft Dynamics, Business Process Management, Internet Applications, Outsourced Product Development, White Papers
  • Technology Solutions -- System Software, Embedded Systems, Network & Telecom, Engineering Services, Outsourced Product Development
■ Global presence
ASM has worldwide' Global presence with offices in India, Singapore, USA (Chicago, Toledo and Tampa), Japan & UK ' Focus on enterprise applications and technology solutions. It has development centres in India (Bangalore), Singapore, and USA (Chicago). During FY11-12, ASMTL explored the possibility of setting up operations in LATAM (Latin America) Region.

■ Acquisition
During FY11, ASMTL acquired 100% of US-based Abacus Business Solutions, Inc., in an all cash deal through its wholly owned subsidiary, Advanced Synergic pte Ltd, Singapore. Abacus has been in the business for more than a decade assisting large corporations/Fortune 500 firms with Enterprise Applications, Oracle Applications, Oracle Tools and Technology, E- Commerce, Reporting and Data warehousing. The acquisition has afforded ASMTL an opportunity to expand its offerings to a larger ERP & Oracle client base in the US and thus broaden its revenue margins.

  Q3FY12 & 9MFY12 Results
During Q3FY12, consolidated net profit surged by 86.7% to `2.8 crore (`1.5 crore) on 53.4% higher sales of `38.2 crore (`24.9 crore). OP and NP margin stood at 13.9% and 7.3% as against 9.2% and 6.0% respectively in Q3FY11. (YoY)

EPS for Q3FY12 stood at `5.6.

During 9MFY12, consolidated net profit advanced by 88.3% to `8.1 crore on 46.7% higher sales of `107.0 crore. OP and NP margin stood at 13.4% and 8.1% Vs 9.7% and 5.9% respectively in 9MFY11.

EPS for 9MFY12 stood at `16.2.

■ Blue chip clients
ASMTL offers products to Fortune 500 and Global 2000 elites. ASMTL has 52% of customers from Fortune 500; 78% from Global 2000; Gets 92% of repeat business.

 Industry specific applications
The need to quickly deploy the ERP Solutions specifically designed for the different industry sectors is gaining momentum. ASMTL is addressing the needs of the Agriculture Based Industry, Process Industry, Consumer Products, Hi-Tech Industry, Clean Power Industry and 

■ Services Industry.
These Industry Specific solutions configured to the Global ERPs will ensure rapid implementation and the clients can reap the benefits of a integrated information system.

■ Enterprise Solutions
  • Development of Adaptors for Enterprise Solutions: With diverse applications used by various clients based on their business needs, ASMTL has embarked on Development of Adaptors in partnership with ERP ISVs (Independent Software Vendors), which will seamlessly integrate multiple Enterprise Applications.
  • Business Intelligence and Data Warehousing: With large amount of data getting generated across enterprises, the need for providing meaning to the data is imperative. Hence a separate practice is built around market leading tools on the Business Intelligence and Data Warehousing.
  • Product Lifecycle Management (PLM): With new product development activities / initiatives across the world gaining high momentum, there is a need to provide scientific ways of managing the Product Lifecycle and the Company is moving towards building expertise and practice in providing PLM solutions tightly integrated with the Enterprise Applications.
■ Cloud Computing
ASMTL is working in new areas, specifically in cloud computing, which will be an inclusive solution program and change the way the Industries / Business communicate with their internal and external stakeholders across multiple geographies. This solution will further be refined for Specialized Industry Verticals.

■ Prospects
The India IT sector has aggregated revenues of USD 88.1 billion in FY2011, with the IT software and services sector (excluding hardware) accounting for USD 76.1 billion of revenues, up 19% (YoY). Within exports, IT Services segment was the fastest growing segment, growing by 22.7 per cent over FY2010, and aggregating export revenues of USD 33.5 billion, accounting for 57% of total exports.

Indian IT service offerings have evolved from application development and maintenance to emerge as full service players providing testing services, infrastructure services, consulting and system integration. There is also a growing customer acceptance of Cloud-based solutions which offer best in class services at reduced capital expenditure.

■ Outlook
With a healthy surge in outsourcing demand and strong deal pipeline, IT revenues are expected to get the biggest boost in coming quarters. With enterprises globally thawing IT budgets to prepare for the future, indication is clear-strong volume momentum will be the flavor of the season and double digit volume growth won't be a surprise to the Indian IT companies, but maintaining the right pace will be a challenge.

Cloud computing is another area, which may drive the IT need of the services industry during the year mainly due to its manageable IT infrastructure and cost effectiveness. The mid market segment remains a major growth avenue for enterprise applications. Globalisation continues to drive global servicing models which ensure India to remain competitive and leverage on its talent pool. Customers are opening up to offerings around cloud computing solutions, SaaS, on demand solutions, etc., which enable service providers to address new customer segments.

 Valuation & Recommendation
ASMTL will leverage the growth phase in consolidating and growing the organization by offering more services to the existing clients across other geographies and new client acquisitions. This growth phase will also set a platform to have more long term strategic partnerships with the customers moving up the value chain from project mode and center of excellence.

ASMTL’s competitive strengths and with its global delivery model and core competencies consider to address the changing economic scenarios as an opportunity to provide greater value to existing clients and further adding new clients. This spells good business opportunity for ASMTL going forward.

At the CMP of `70, the share is trading at a P/E of 3.1x on FY12E. We maintain BUY with a target of `100 in the medium term.