>DLF alleges INR2.8bn fraud; 4Q write-off likely

Event: According to a news report in the Times of India today, DLF has filed two complaints alleging that it was cheated out of INR2.8bn by Hyderabad based developer GSG Group, with whom it had entered into joint ventures to develop projects. The story states that as per the complaint registered by DLF with the police, the promoter of GSG Group entered into a JV with DLF to develop three projects but failed to keep its commitment on any of them and has also failed to return to DLF advances of INR2.8bn. These transactions took place between October 2006 and August 2008, while the total land area under question is 280 acres, according to the article. The report also states that the promoter of GSG Group at the moment is absconding.


Our view: This alleged fraud could result in DLF writing off INR2.8bn from its balance sheet in 4QFY12, and we estimate that this one-time loss could wipe out its profit for the quarter. While the amount is small in relation to the size of the company, we believe this case could raise questions about DLF’s management capabilities considering that despite the GSG Group failing to meet its commitment on the first project (the complaint alleges that GSG Group “deceitfully” mortgaged an alreadys old property against the advance, according to the Times of India article), DLF entered into two further alliances with the group where, too, the group failed to keep its commitment or return DLF’s advance payment, according to the report. Also, the company filed a complaint 3.5 years following the latest transaction –in our view, a significant and very surprising delay in taking action.


RISH TRADER

>MICROSOFT CORPORATION: “Windows 8 – It’s Alive” (Positive Assessment of Windows 8 Consumer Preview)

No Surprises, Consumer Preview Looked Solid


■ First take on Windows 8 Consumer Preview
We attended Microsoft’s Consumer Preview of Windows 8 at the Mobile World Congress in Barcelona. The product looked very stable. It was running live and with live apps from the app store. The User Interface has been finished and the fit and finish looked very good. We liked the ability to use touch together with the mouse and keyboard in any combination to permit users to have the optimum experience in any of the many form factors we expect from OEM partners. The adaptation for mouse and keyboard was better than we had expected, improving the potential upgrade opportunity for notebooks and Ultrabook touch devices. We continue to expect the release to manufacturing (RTM) by August and general availability (GA) by late September or October.


■ Criticism will likely be from UI changes
The main concern may center on the difference of the overall user experience, and how jarring this change is for the end-user. Obviously, people like the touch interface of the iPad, so the fact that there is change to accommodate a new user experiences is not bad in and of itself. The issue is more how this is implemented across devices from tablets to Ultrabook touch and notebook devices, and desktops. The Windows team has made significant changes to the UI in order to optimize the experience for the introduction of touch across devices. Our assessment is that the changes are easily discoverable and enable new experiences and form factors, and while they will require users to reorient to the new interface, this is a positive end result and is well implemented across devices. Not just about competing with Apple and Android on tablets Also, in our view the key will be not just enablement of touch, but collaboration among workgroups with the new Office and integration of cloud services such as storage through SkyDrive to provide sharing of data and apps across devices. This is a big opportunity for innovation; it is not just about competing on tablets with Apple and Android. Reiterate our Buy rating on the shares and favorable valuation Still like the shares at current levels, which are trading at 10.3x our CY12 earnings estimate (ex-cash) and 9.2x EV to unlevered free cash flow.




To read full report: MICROSOFT
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>RESPONSIVE INDUSTRIES LIMITED: Accreditations to help in exports demand

Presence in niche product segments within PVC market; competition primarily in global markets Responsive is a dominant PVC-based product manufacturer in India and manufactures wide varieties of PVC flooring, PVC leather cloth, PVC rigid blister pack, and PVC soft sheeting. PVC flooring and PVC leather cloth cumulatively formed around 91.8 per cent of the total revenues for the company on a standalone basis in FY11. Both these products find application in various industries. Responsive manufactures a wide variety of PVC flooring, which finds application in residential, commercial spaces, public transport, hospitals, theatres etc. The PVC leather cloth (or artificial leather cloth as it is commonly known) find application in railway and bus seats, automobile upholstery, three-wheeler canopy, hospital bed covers, soft luggage, footwear, etc.


With over 63.9 per cent of the standalone revenue from the international market, the key competition is from the international PVC flooring and PVC leather cloth manufacturers such as Tarkett Inc., Armstrong World Industries Inc., James Halstead Plc., Gerflor Group and LG Hausys Ltd. In India, the company has the largest PVC flooring and PVC leather cloth manufacturing capacities. Responsive had around 44,000 million tonnes per annum (MTPA) of PVC products capacity as at the end of FY11, which is scheduled to increase to 90,000 MTPA by the end of FY12.


Demand from railways, automobile sector to support growth in PVC flooring and PVC leather cloth 
Although, PVC leather cloth finds various end uses, it is commonly used in railways, public transport and automobiles as seat cover. PVC leather cloth is also used in three-wheelers for upholstery and canopy. Also PVC flooring is used as a floor covering in automobiles and public transports. Responsive is the preferred supplier for PVC leather cloth for Indian Railways, various State Transport Corporations and automobile and three-wheeler Original Equipment Manufacturers (OEMs). The company has around 85 per cent market share in the domestic surface transport and 95 per cent market share in the domestic three-wheeler upholstery and canopy market. The company also supplies around 98 per cent of Indian Railways' requirement for PVC flooring and artificial leather used in passenger coaches. 


We expect healthy demand for PVC products from both Indian Railways and Automobiles sector going forward. The Indian Railways is expected to add around 44,000 new coaches during FY13 – FY20 resulting in 5,500 new coaches per year as per the „Railway Vision 2020‟ report. This would result in sustained demand for the artificial leather seat covers and PVC floorings. Also, as per CARE Research automobiles sales is expected to grow at a CAGR of 9-10 per cent over the next 5 years. In addition, there is a strong demand expected from the replacement market too. Given the market leadership, we expect demand from railways and automobiles segment to fuel growth in demand for Responsive.


Shift to PVC flooring options and low penetration level of pucca flooring in domestic market to result in strong demand for PVC flooring from domestic market PVC flooring (or vinyl flooring) is more economical and relatively easy to install and maintain. Also, it offers durability and is more affordable than most other flooring options. While the international floorings market is estimated to be around USD 150 billion, the Indian flooring market is still relatively nascent. The penetration of pucca floorings in India is still low when compared to the world average. The growth in pucca floorings (marble, granite, ceramic, vitrified tiles) has been supported by the commercial, residential construction in last few years. Compared to conventional marble flooring which costs anywhere between Rs. 400-2500 per sq metres, or ceramic flooring (higher end) which cost around Rs.300-600 per sq metres, PVC flooring is a cheaper alternative costing around Rs. 200-300 per sq metres. Also, PVC flooring is more durable, provides more design options than other conventional flooring options and requires less time to fix resulting in savings in labour cost and wait-time, and is therefore emerging as a cost-effective alternative to conventional floorings both for new constructions and replacement market.


Axiom Cordages Limited (Axiom) to benefit from growth in shipping ropes demand Axiom, a subsidiary of Responsive, is a manufacturer of synthetic ropes with an annual capacity of 52,500 MTPA. The company manufactures a variety of synthetic ropes such as 3-strands, 4-strands, 8-strands and 12-strands ropes, from polymers such as polyester, nylon, and polypropylene. Exports formed around 61.1 per cent of its total revenues and 36.9 per cent of total production.


To read full report: RESPONSIVE INDUSTRIES
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>INFORMATION TECHNOLOGY SECTOR: Rest of the World (RoW) performance was subdued during the quarter

■ Decent result in a seasonally weak quarter
Despite operating in an uncertain macroeconomic condition and the December quarter being a seasonally weak quarter (due to lower number of working days); large cap IT companies delivered reasonable revenue growth in constant currency (CC) terms in a range 3.7% - 4.5% QoQ. However, adverse cross currency movement has dented the Dollar revenue growth which was in the range of 2% - 4.6% QoQ.


In December quarter on an average the rupee has depreciated around 11% against the US dollar which has aided large cap IT companies to report rupee revenue run rate in the range of 11.4% – 15.4% QoQ.



■ Mid cap a mixed bag
During the quarter Midcap IT companies delivered a mixed bag of performance. Companies such as Hexaware, Eclerx, KPIT Cummins and NIIT Technologies delivered over 3.5% sequential revenue growth in dollar terms and Persistent, Polaris, Mastek, Mindtree and Geometric delivered sub 3% revenue growth. 



■ Pricing to remain Stable
Pricing by and large continues to remain stable. Among Tier-I companies, Infosys pricing increased by 0.8% in constant currency terms. Although HCL Tech pricing has gone down in reported currency, in terms of constant current it has seen a slight increase. For Wipro and TCS; though the like-to-like pricing remained stable, revenue productivity during the quarter was up due to effort and service mix. Among the mid cap IT companies, Eclerx and Mind Tree saw a price hike in the range of 2.5 – 3.5% YoY and the price increase of the latter was partially due to one time transition revenue. For KPIT Cummins on a like-to-like basis newer contracts got minor pricing uptick while for Geometric and Hexaware pricing was largely stable. Going forward IT companies expect pricing to remain stable unless the business proposition changes.


■ Margin expanded due to favorable currency
Margins expanded well during the quarter, for all IT companies under our coverage, largely aided by rupee depreciation. In the large cap space Infosys topped the list in margin expansion (EBIDTA) with 300 bps, while in the mid cap segment Persistent, Polaris and Eclerx margins expanded over 6% sequentially.


Companies such as Cognizant, Wipro and Geometric witnessed margin expansion less than a percentage. Mastek reported a swing of 11.1% in its EBIDTA margins, which was mainly on account of change in Forex accounting treatment (adopted AS-30) where the MTM on any forward contract is reflected directly in the reserves under the Balance sheet, leaving no trace on P&L. Going forward, rupee appreciation is likely to act as a headwind; however, increasing offshore effort and moderate wage hikes are likely to curtail margin downside.



■ Growth by Vertical
During the quarter, BFSI segment continued to grow at a reasonable pace with Wipro and Infosys in the large cap and Mastek; Geometric and NIIT Technologies in the mid cap grew over 3% sequentially in dollar terms.


In the Manufacturing vertical, Tier I companies posted a positive growth for the sixth consecutive quarters. Infosys and HCL Technologies posted a sequential growth of 4.5% and 3.8% well above their respective overall revenue growth. In the Retail & Transportation segment, HCL Tech has outpaced its peers by registering a sequential growth of 5.6%, TCS and Wipro grew 3.7% and 3.6% respectively. After the stupendous run in last few quarters, Energy & Utilities segment of Tier I companies took a pause, however Infosys has bucked the trend and reported 8.9% sequential growth. Life science segment was under lime light during the quarter with HCL Technologies reporting a sequential growth of 15.4% and Infosys grew by 9%.



■ Growth by Geography
By and large revenue from North America increased for most of the IT companies, barring a few like Sasken, Mindtree and Polaris which de-grew by 6.14%, 1.54% and 0.22% respectively. Eclerx in the Tier II and HCL Tech in the Tier I continue to top their respective pack by growing 12.57% and 7.48% QoQ respectively.


Infosys revenue from Europe grew 14% QoQ after posting a subdued performance for last two quarters. Mindtree’s European revenue grew 11.9% QoQ, posting a double digit sequential growth for 5 consecutive quarters and tops the Tier II pack. We expect Europe to grow faster compared to US, because of the low penetration of offshoring in Europe compared to US. Moreover the current economic distress in Europe will force the European companies to become cost efficient thus leading to more offshoring. 


By and large Rest of the World (RoW) performance was subdued during the quarter; revenue from RoW for HCL Technologies degrew by 16.07% QoQ and amongst Tier II vendors Eclerx, Sasken and Mastek revenue degrew by 30%, 23.7% and 10.6% respectively.


To read full report: IT SECTOR




RISH TRADER