WIPRO: Result Update 1Q FY11

WIpro’s IT services volume growth was in-line with our expectation but way lowerthan peers; however we expect it to catch up peers (in terms of volume growth) from 2Q FY11 onwards. Further, our view of the company gaining ground is corroborated by double-digit onsite volume growth indicating strong momentum in new projects and 6.1% QoQ revenue growth guidance for 2Q FY11 (in US$). Moreover we are impressed by the company’s ability to maintain margins despite decline in billing rate, dip in utilization rate, cross currency headwinds and impact of wage hike (it was effective from February 2010). Considering, strong momentum in new projects, 6% QoQ revenue growth guidance (in US$) for 2Q FY11 and the company’s ability to manage cost despite many headwinds, we upgrade our recommendation on the stock to “BUY” from “HOLD” and assign P/E of 19x to FY12E EPS of INR24.6.

Highlights
• Consolidated revenue recorded modest growth: Wipro’s consolidated revenue in 1Q FY11 increased 3.7% to INR72.4 billion, from INR69.8 billion in 4Q FY10, primarily led by IT services and consumer care and lighting segment. The IT products business continues to be under pressure for the third consecutive quarter.

• Growth in IT led by double-digit onsite volume increase: Global IT services’ revenue was US$1218 million (in constant currency) in the quarter, marginally higher than the management’s guidance of US$1215 million.


To read the full report: WIPRO

>AXIS BANK LIMITED (ASIT C MEHTA)

Axis Bank is the third largest private bank with a network of 1,027 branches across India. Axis Bank has established a track record of expanding its loan book at a faster pace than the industry. We expect Axis Bank to maintain its growth momentum and expand its loan book in FY 2010-FY 2012 at a CAGR of 25%. We expect the net profit to grow at a CAGR of 27.6% over the same period. We have estimated RoA of 1.5% and 1.6% and RoE of 17.5% and 20.7% in FY11 and FY12 respectively, driven by loan growth and higher Net Interest Margins (NIM). Given the robust loan growth and relatively superior return ratios, we assign a multiple of 13.5x to FY12 EPS of INR100.1 to arrive at a target price of INR1,350. We thus initiate coverage with a “BUY AT DECLINES” rating on the stock. At CMP of INR1,228 the stock trades at 2.4x FY12E ABVPS and 12.3x FY12E EPS.

Recommendation Rationale
■ Strengthening Liability Franchise
As on FY 2010, the bank had a network of 1,027 branches. Axis Bank plans to add another 200 branches in FY 2011, which would help the bank to increase its CASA base and support CASA ratio. This we believe will help lower cost of funds and, support Net Interest Margin (NIM). As on FY 2010, the bank’s NIM stood at 3.75%. We expect NIM to grow in long term as rising interest rates will improve yields on advances and higher CASA ratio will lower the cost of funds.

■ Loan growth momentum to continue
Axis Bank has established a track record of expanding its loan book at a faster pace than the industry. Its loan book has grown at a CAGR of 46.2% over FY 2005-FY 2010 compared to industry growth of 24.7% over the same period. The bank has a
Capital Adequacy Ratio (CAR) of 15.8% and tier 1 capital of 11.2%, which provides enough headroom to grow its loans & advances. We expect higher CAR, strengthening branch network, acquisition of new customers along with improving macro-economic conditions will support loan growth going forward.

■ Core fee income to support revenues
Axis Bank derives its fee income from Corporate segment, Retail segment, Treasury, Agri & SME Banking, Business Banking and Capital Markets segment. Core fee income as a percent of non-interest income has been around at an average of 75% from FY 2006 - FY 2010, reflecting the stability of non-interest income. We expect core fee income to grow at a CAGR of 29% over FY 2010-FY 2012.

■ Adequately capitalized
Axis Bank has been raising sufficient capital at regular intervals to ensure growth in its balance sheet. In Q2 FY10, the bank had undertaken a Qualified Institutional Placement (QIP) and preferential allotment to raise capital amounting to INR37.6 bn. Consequently as on FY 2010, the bank has a Capital Adequacy Ratio (CAR) of 15.8% with tier 1 capital at 11.2%. Also infusion of tier 1 capital would provide enough room to raise tier 2 capital in future, which will further reinforce CAR and give enough headroom for the bank to grow its loan book and capitalize on emerging growth opportunities.

To read the full report: AXIS BANK

>TEXMACO LIMITED (ASIT C MEHTA)

Poised to pick up speed…

Texmaco is the leader in the wagon segment with a 25% market share. It has sustained its leadership in the past and has an established performance track record. The company has an order backlog of ~5,500 wagons and we believe that Texmaco will continue to maintain its leadership. Moreover, increasing investments in hydel capacity augur well for the hydromechanical division. However, the hydel power generation industry typically suffers from significant delays in orders and execution.

Texmaco has formed a JV with United Group (Australia) for manufacturing metro and EMU coaches, which is expected to commence operations in the next 10-12 months. We initiate coverage on Texmaco with a BUY recommendation and a price target of INR124.

Recommendation rationale

■ Wagon orders adequate: The company has an order backlog of 5,500 wagons, which should be adequately sustain FY10 performance. IR releases tenders for wagons annually. A tender for 5,862 wagons was recently floated in July 2009 and the balance is expected during Q3FY10. Thus, bulk of the benefit from new orders being awarded will be reflected in FY11, in our view and gives us comfort over revenue visibility. However, over the past two years, there has been considerable
delay in award of orders and quantity tendered lower-than-planned. IR targeted procurement of 20,000 wagons annually in FY08 and FY09; against this, actual procurement was ~50%.

■ MRTS coaches will take time: The metro and EMU coaches will take another 10-12 months to commence operations. The Texmaco-United-Kawasaki JV will face competition from established global players such as Bombardier and domestic manufacturers such as BEML. Further, with orders that may flow to the JVs, Texmaco will capture 50% or lower share of profit.

■ Hydromechanical orders will take time: Hydel projects are subject to long gestation and execution periods. Even with a renewed target of tapping 50,000MW, many projects are suffering due to hurdles in relocating the affected population. Hence, even with an increase in order flows, execution will take 2-3 years. Equity issue to dilute equity: Texmaco has raised INR1.7 billion through a QIP at a price of INR104/share. This will lead to a 14.8% increase in equity to INR127.1 million. Further, IR has steadily lowered the free-issue components and the same will have to be procured by the company. This will imply increasing inventory levels and can impact ROCE & RONW.

Valuation and Recommendation
At CMP of INR109, the stock trades at a P/E of 15.1x FY10E EPS of INR7.2 and 12.3x FY11E EPS of INR8.9. The announcement of a 61% increase in procurement in the Railway Budget for FY10 points to increasing focus on easing infrastructure bottlenecks for the industry. We initiate coverage on Texmaco with a BUY recommendation and a price target of INR124 at a target P/E of 14x FY11E. We have not factored in any value from its Delhi land as it has been under litigation for
the last many years without result.

To see full report: TEXMACO LTD

>JINDAL COTEX LIMITED (ASIT C MEHTA )

Public issue of 12.5 million shares with a face value of INR10 at a price band of INR70-75 aggregating to INR 871.8 million - INR 934 million. The issue is through 100% book building process.

Background
Jindal Cotex manufactures acrylic, polyester and polyester-viscose, and polyester cotton combed and carded yarns. The yarns are used in apparels, hosiery and garments.

Objects of the issue
1) Setting up a new facility for manufacturing of Cotton Yarn, Yarn Dyeing and Garments

2) Investment in subsidiaries:
a) Jindal Medicot Limited;
b) Jindal Specialty Textiles Limited

3) Meeting public issue expenses.

Valuation
In FY09 company had an adjusted EPS of INR 3.5 but on a post issue basis EPS is INR 1.7 which translates into a P/E of 40.3 at the lower band(INR 70) and 43.2 at the higher band(INR75). Majority of the issue proceeds will be used for its subsidiaries which are foraying into “functional textiles”, a very nascent industry. Compared to its peers, like Ambika Cotton and Himachal Fibres the issue appears expensive. Hence we recommend “Avoid” to the issue.

To see full report: JINDAL COTEX LIMITED