>Areva T & D (ANGEL BROKING)

Areva T&D India is the subsidiary of the France-based Areva Group, which is a world-wide leader in the nuclear power business and the third largest player in the global Transmission & Distribution (T&D) space. The Indian subsidiary has been gradually gaining market share over the last few years and has now edged past ABB to achieve the Number 1 position in the Indian T&D market in 2008. However, in the current challenging scenario, several headwinds emerging due to the unfavourable macro-economic environment are taking its toll on the entire Capital Goods Sector including Areva T&D. At the current price of Rs214, the stock is quoting at 19.2x and 15.7x CY2009E and CY2010E EPS respectively, which we believe is expensive. Against this backdrop of an unfavourable broader environment, we Initiate Coverage on the stock, with a Reduce rating and Target Price of Rs177.

* Economic Slowdown weighs heavily on the Sector: Post a strong GDP growth of more than 9% for three consecutive years, the Indian economy has shifted to a lower growth trajectory of around 6-7% atleast for the next couple of years. The Corporate capex plans are also showing signs of deceleration with an increasing number of projects either being shelved or deferred. Hence, in the near term there would be a rising pressure both on future order inflows as well as execution of the current order book for the entire Sector.

* Areva T&D vulnerable to slowdown: Areva T&D too, with around 35-40% private sector orders cannot remain completely immune from the slowdown. In terms of end customer classification as well, the mix for the company stands at 50:50 for Utility and Industrial. Again, the industrial clients are expected to be hit the hardest in wake of the ongoing slowdown.
* Generation delays to impact T&D growth: In the present macro environment, though the Power Sector capex is relatively resilient with majority of projects being envisaged by the Central and State sector utilities, major worry for the T&D Sector is delays in the generation capacity addition. The execution rate even for the current Plan period is pretty dismal with around 54% of projects already running behind schedule.

To see full report: AREVA

>hcl technologies (ANGEL BROKING)

‘Axed on’ growth'

HCL Technologies’ Axon acquisition, while a long-term positive, is expensive and will lead to Margin and Bottom-line pressures, given lower Margins of Axon, US $585mn debt taken on and goodwill write offs. The slowdown has led to greater uncertainty in HCL's prospects and has started reflecting in its financials. Even as valuations are at historic lows, we see little scope of re-rating, given the headwinds faced by the company and 1.4% EPS compounded fall estimated over FY2008-10E. We Initiate Coverage on the stock with a Reduce recommendation and Target Price of Rs96, implying a P/E of 6x FY2010E EPS.

* Axon, an expensive acquisition: HCL Tech had acquired the UK-based Axon Group plc last year for £441.1mn (US $658mn). While the strategic rationale of the deal is well understood, in the medium-term, owing to lower Margins of Axon, debt of US $585mn taken on and goodwill write-offs, HCL Tech's Margins and Bottom-line are expected to remain under pressure. We expect the Axon deal to become EPS-accretive only post-FY2011.
* Forex losses expected owing to significant hedged positions: HCL Tech had a significant US $1.6bn as outstanding hedged positions at the end of 2QFY2009 (nearly 75% of FY2009E Revenues). In an environment of currency volatility and Rupee depreciation, this subjects the company to significant risks. Accumulated losses in "Other Comprehensive Income" in the Balance Sheet stood at US $210mn. With the Rupee not expected to strengthen anytime soon against the greenback, forex losses are likely to continue to negatively impact Earnings, even as the company is not taking any fresh hedges.
* Valuations low, but little scope for re-rating; high dividend yield provides cushion: HCL Tech's stock has traded in a historical 1-year forward P/E band of 5-21x over the past six years. However, over the past year, with the global economic slowdown and deterioration in prospects of the sector, the stock has been severely de-rated with its trough P/E multiple at just 5x. Thus, at current levels of 6.7x P/E multiple, the stock is trading close to its life-time low levels. However, we do not expect any major re-rating going forward given the weak global economic environment, overhang on account of the Axon acquisition and a disappointing 1.4% EPS compounded de-growth estimated over FY2008-10E. However, a dividend yield of 8.4% provides some downside cushion.

To see full report: HCL TECHNOLOGIES

>Investor’s Eye (SHAREKHAN)

Pulse Track >> IIP back in the negative terrain
Stock Update >> Union Bank of India
Sector Update >> Automobiles

To see full report: INVESTOR'S EYE

>Equtiy Weekly Watch (ANAGRAM)

INFOSYS TO GUIDE THE MARKETS


From next week hectic preparations for India’s 15TH General Elections will start with full earnest. Ensuing week will also mark the beginning of whole host of important quarterly results starting with Infosys Technologies on 15th April. We are concerned regarding the clients delaying outsourcing projects and the increased risk of pricing pressures on I.T. companies. On the top of the woes on business front, we are expecting turbulence on account of currencies also. Fundamentals of Rupee suggest it is likely to appreciate in medium term. We advise investors should caution on the IT front.


Elsewhere in Asia, Minutes of the Bank of Japan's monetary policy meeting in March. showed that members of the board shared a view that "economic conditions had deteriorated significantly and were likely to continue deteriorating for the time being".


To see full report: WEEKLY WATCH