>GODREJ CONSUMER PRODUCTS: Shopping for growth

We initiate coverage on Godrej Consumer Products (GCPL) with a „BUY‟ rating and a target price of Rs420, an upside of 20%. GCPL has rapidly transformed itself, with inorganic expansion as its single largest driving force. Having consummated five accretive acquisitions in the space of two months, we believe GCPL is on its way to achieve our expected 28% earnings CAGR for FY10-12E. Synergies from the acquired companies, coupled with reduced dependence on the Soaps portfolio and enhanced presence in „high growth-low penetration‟ categories like Household Insecticide, will drive GCPL‟s performance, in our view.

■ Accretive inorganic expansion to drive earnings growth: In the near term, integration of Godrej Household Products (GHPL, erstwhile Godrej Sara Lee) with GCPL can result in savings in distribution as well as overhead costs. Crosspollination of various products across different geographies (e.g. Hair colours in Indonesia, Western Africa) will provide the revenue trigger in the near-tomedium term. According to the management, recent acquisitions are expected to add Rs600m to PAT in FY11e.

■ Dependence on Soaps to come down, Personal care and Household care hold the key: Post the recent acquisitions, including the buy-out of Sara Lee‟s 51% stake in JV, we believe GCPL‟s dependence on Soaps which is a highly competitive and heavily penetrated category, to come down from 51% in FY09 to 25% in FY12e. Consequently, the overall margin profile is likely to improve as we expect GCPL to drive penetration and distribution-led growth in Hair Colours and Household Insecticides.

■ Robust earnings growth to help sustain re-rating: GCPL has undergone significant re-rating in the last twelve months, driven by various accretive acquisitions, beginning with transfer of 49% stake of GSL JV to GCPL in June 2009. We expect GCPL to sustain these valuations on the back of robust 28% expected earnings CAGR for FY10-12E. Any additional accretive acquisition and realisation of higher-than-guided earnings accretion of the concluded acquisitions (guidance of Rs600m for FY11E) can provide upside trigger, in our view. Integration of recent acquisitions remains a key monitorable.

To read the full report: GODREJ CONSUMER PRODUCTS

>TATA CONSULTANCY SERVICES: UK May Renegotiate Large IT Deals with Vendors

Quick Comment: As per media reports, UK officials have started meeting with large technology vendors to renegotiate contracts. We believe IT services vendors could also be asked by the UK authorities to renegotiate key government contracts. TCS, Accenture, BT, Cap Gemini, and Fujitsu are some of the key IT vendors for UK government.

TCS PADA deal may be over US$500mn: TCS recently won a 10-year deal (estimate ~US$500mn) with the UK‘s Personal Accounts Delivery Authority (PADA) to provide administration services for PADA’s pension scheme. We believe TCS emerged as the most competitive vendor for the deal. Although the critical elements of the deal would be based onsite, TCS is likely to also use offshore delivery for development work on the deal.

Implications for TCS: There has been a lot of speculation recently on the fate of a 10-year UK
government deal recently won by TCS. We believe the UK government is likely to pursue aggressive cost cutting to contain its deficit. There is a risk that large IT suppliers to the government may be asked to lower prices and give up some profitability on government deals as a result of renegotiations, in our view. To us, it appears that TCS might retain the deal as it was already the lowest bidder. However, it is not clear if the UK will push TCS to further reduce the overall cost to the government on the deal – which remains a key risk.

TCS F1Q Preview: We expect TCS to report revenue of US$1,775mn (+5.3% QoQ, +19.9% YoY). EBIT margin is likely to decline by 100-150bp to ~26-26.5% due to wage hikes, currency, and pricing during the quarter. Higher FX loss of Rs800-1,000mn (vs. FX gain of Rs420mn in 4Q10) could lead to net profit declining to Rs18bn (-7% QoQ, +18% YoY). TCS reports on July15,
2010. Call is at 8pm IST; dial in no. +91 22 6629 5827.

To read the full report: TCS

>GMR INFRASTRUCTURE: Largest asset gets commissioned

Our visit to GMR's new terminal at Delhi airport highlighted its project execution capability in building the world's sixth largest terminal in 37 months. With this Rs80bn commissioning, we expect GMR's airport sales to jump sharply. Supported by sufficient cash for ongoing projects, we reiterate Buy.

■ World’s sixth largest airport terminal commissioned in a record 37 months
Our visit to GMR’s new Terminal 3 (T3) at Delhi airport, which opens to traffic in the coming week, impressed us on the company’s large project execution capability (Rs80bn of Delhi airport’s Rs124bn project cost). Covering 80 acres and consuming 0.57m tonnes of cement and 0.14m tonnes of steel, the terminal was completed in around 60% of the time of similarsized terminals elsewhere. Delhi terminal capacity now exceeds demand (34m passengers vs 26m) for the first time, and management is aiming to make best use of the 5.5m sq ft inside the airport to raise non-aeronautical revenue from the 43% of gross sales in FY09.

■ Strong traffic growth in existing projects and new opportunity in the Maldives
We believe FY11 has started well for GMR’s airport division, with management disclosing yoy passenger traffic growth in April-May 2010 ahead of our expectations: 20-22% at Delhi and 16-24% at Hyderabad vs RBS estimates of 15% for each. We view GMR’s successful US$380m bid to construct a new terminal and expand the runway at Malé (Maldives) as an attractive opportunity as GMR will hold 77% in this profitable airport in a popular tourist destination and it won the bid with a 7% premium over the next closest bid. We await traffic details and financial closure information before incorporating this project’s valuation.

■ Reiterate Buy rating, with 33% upside potential as large asset commissioned
With the commissioning of this large Delhi airport asset and traffic growth ytd ahead of our forecasts, we forecast that GMR will grow its airport division gross sales 85% yoy to Rs38.2bn in FY11, with Delhi contributing 63% vs 50% in FY10F. With the T3 project demonstrating GMR’s physical execution skills, supported by its successful US$510m equity raising, we believe the company is set to build a world-scale infrastructure in airports and power generation and thus create shareholder value. We reiterate our Buy rating, with an SOTP-based target price of Rs78.40, as we expect ROE to improve from its low in FY10.

To read the full report: GMR INFRASTRUCTURE

>GREAT OFFSHORE LIMITED: Weathering cyclical waves

Great Offshore (GOL) is one of the largest offshore logistics companies incIndia with operational track record of over 25 years. It is operating in allcsegments of offshore oil field services with a diversified fleet of 47 vessels.

The company has demonstrated its competance in new ventures such ascmarine engineering and construction projects.

■ Capacity addition to drive earnings growth
The company has acquired 6 vessels (5 OSV and 1 jack-up rig) in FY10 at an outlay of INR5bn. GOL has 2 vessels (1 Jack-up and 1 MSV) on order and has plans to modernise fleet to tap the requirements of growing deep water exploration market.

■ Under exploited domestic E&P industry
Growing energy demand and high energy import dependency (~80%) along with unexplored domestic market, makes strong case for growth in offshore industry. Significant growth potential in domestic E&P is expected as only 44% of sedimentary basins initiated exploration with low drilling density. The overall drilling density in offshore is 1.09 compared to exploration activities
in shallow water with density of 54.2.

■ Favourable macro scenario
The strong supply side fundamentals with concerns on additional supply and growing energy requirement, particularly in emerging countries, are raising concerns on energy security. ‘Peak oil’ and ‘decline in spare capacity of OPEC’ are expected to remain the key drivers for exploration activities.

Valuation
At CMP of INR433, the stock is trading at 9.1xFY11 and 6.5xFY12 earnings of INR47 and INR66, respectively. We have valued the company on an earnings multiple of 8.5xFY12, which is 35% discount to four year average P/E. We initiate coverage with BUY recommendation and a target price of INR565, representing an upside of 30% from current levels.

To read the full report: GREAT OFFSHORE