Tuesday, July 21, 2009


Spectacular show in difficult times

Tata Consultancy Services (TCS) Q1FY10 results positively surprised the Street and I-Sec, despite our estimates being at the higher end of the consensus (we rated TCS as top results pick in Q1FY10 preview note). With clear outperformance, Q1FY10 annualised EPS is now Rs31, higher than I-Sec and Street estimates for FY11 (before results). Considering management confidence on improved visibility in BFS going forward, its expectations of flat organic growth in FY10 (still implying +3% CQoQ in Q2-Q4FY10, though we estimate 1% decline in FY10) and 8-13% CQoQ decline in the past three quarters in troubled verticals of Manufacturing, Telecom & Hi-Tech, the company’s growth is unlikely to worsen significantly. We upgrade TCS to BUY from Hold.

We raise estimates and revise target price to Rs525. Post the overall stellar performance in Q1FY10 and extension of STPI tax exemption to March ’11, we raise FY10E & FY11E dollar revenues 3% each and EPS estimates 14% and 17% respectively. We now expect 8% EBITDA CAGR versus 3% for Infosys in FY09- 11E. With faster recovery in BFSI, we believe risk to revenue growth has reduced for TCS. Considering all these, we reduce target P/E discount to Infosys (currently at 17x FY11E EPS, which was raised post Q1FY10 results) to 5-10% from 15%. Hence, we upgrade TCS to BUY with revised price target of Rs525 from Rs385.

Outstanding Q1FY10 results versus peers (Table 2) with consolidated dollar revenue growth of 3.54% versus our expectations of flat growth. Though much of the growth is driven by domestic revenues, international business also grew 2.3% (growth in constant currency likely to be lower ~2%). With 190bps improvement in utilisation, 270bps in offshoring and 90bps in SG&A, EBITDA margin improved 100bps versus our expectations of 40bps decline. Despite higher fresher recruitment in H2FY10, we do not expect significant margin pressure considering the expected volume pick-up in H2FY10.

Resilience in growth across key metrics; higher deal wins in difficult times with eight large deals (five from the US) and pipeline of +20 deals versus Infosys winning six large deals in Q1FY10. BFSI showed good resilience and grew 5.9% QoQ, led by growth in top client. Q1FY10 results also indicate that TCS is increasing its wallet share in non-discretionary spend with ADM, IMS and BPO growing more than other services.

To see full report: TCS


F1Q2010 – Treasury Drives Earnings; Remain UW

Axis Bank’s strong F1Q10 earnings were entirely driven by treasury: If we look at core earnings, they were weak. Volumes were down, NIMs were sluggish, fees were weak, and costs remained high. As a result, normalized earnings were under pressure. On our calculations, normalized earnings were around half of reported (adjusted for trading gains, write-backs and 10% provision on restructured loans), implying that the bank made single-digit normalized ROE in the quarter. Our view has been that the moment volume progression slows, earnings progression will decelerate, which appears to be happening.

Asset quality is under pressure: Despite the bank taking significant NPL provisioning, the coverage amount reduced, implying high charge-offs and a high level of new delinquencies. On our calculations, about 1.8% of loans are becoming NPLs annually. This is without accounting for the sharp spike in restructured loans. Including restructured loans, asset quality deterioration has intensified. The coverage for the bank on total impaired loans is about 20%.

Segmental earnings present little comfort: On segmental earnings, the bank made a loss on the retail banking business. The only segment that did well was treasury, which contributed about 50% of earnings. If we look at just trading gains, they were about 38% of PBT, suggesting earnings quality was weak.

Valuations are stretched, in our view: The stock is trading at 15x F10E earnings and 2.3x book. Moreover, core profitability is similar to the earnings profile at SOE banks. We believe that we can get better risk reward at SOE banks (trading at 5-6x PE and sub or around 1x book). We maintain UW.

To see full report: AXIS BANK


1QFY10E: Mixed MOU Drivers, Forex Trends Could Aid PAT

Headline revenue growth impacted by lower termination — We forecast mobile revenue growth of 3-4% as termination cut shaves off ~3p from headline rev/min. Like-for-like, the revenue growth would be 7-8% QoQ, an improvement over 4QFY09. EBITDA margins will receive mathematical support (with lower termination) and reversal in forex losses (esp. for Bharti) will aid performance at PAT level. Overall, we expect EBITDA to grow 17% YoY and PAT at 2% YoY.

MOUs to reflect multiple factors in 1Q — We expect a modest 1-2% MOU growth to reflect (i) reducing impact of free mins in Jun-quarter and (ii) election led traffic activity, which will be partially offset by (iii) seasonal slowdown during the quarter. As for rev/min, we assume a additional decline of 1-2p in addition to the 3p impact of termination cut.

EBITDA margins flat to marginally up — Due to the reduction in headline RPM as well as interconnect cost, the EBITDA margin would mathematically move up by 1.1-1.2%, everything else remaining equal. This will be offset by (i) in:out skew esp. for GSM operators and (ii) new launches esp. for Idea (TN & Orissa). As a result, we factor in 70bps QoQ margin improvement for Bharti & 110bps for RCOM but only 10bps for Idea.

Losses on forex liabilities will be stemmed — Bharti would gain from MTM/derivative gains in the quarter though it could be partially offset by higher tax (MAT increased). In RCOM’s case, there will be no impact as they adjust forex gains in the gross assets; depreciation could go up sharply if GSM capex starts getting capitalized.

To see full report: INDIA WIRELESS


Hold: 1QFY10 – More Or Less In Line With Expectations

Recurring PAT up 18% YoY — At Rs5.8bn it was 6% ahead of CIRA estimates of Rs5.5bn. Reported PAT at Rs15.9bn, up 218% YoY, was higher on account of profit on Ultratech Cemco stake sale.

Slower execution, but no point worrying — Gross sales at Rs74.3bn, up 6% YoY, was below CIRA expectations of Rs83.9bn. Despite slower sales growth management maintains its 15-20% FY10E guidance. We are not unduly worried as this is reminiscent of FY07 when post 12% YoY growth in 9mFY07, L&T delivered 36% YoY growth in 4QFY07 and met its FY07 guidance of 20% YoY.

Margin expansion, pleasant surprise — Margins expanded 115bps and made up for slower sales growth, once again reminiscent of FY07, when despite slow sales growth L&T expanded margins significantly. Margin expansion was led by the E&C business and we expect E&E and MIP businesses to bounce back in FY11E. Cost efficiency and a larger % of jobs crossing the margin threshold level being recognised in 1QFY10 led to the margin improvement.

Order inflows should pick up only in 3QFY10 — Order inflow at Rs95.7bn was down 22% YoY, with the company ending the quarter with a backlog of Rs716.5bn, up 23% YoY. We expect muted order inflow in 2QFY10 similar to 1QFY10, and believe that L&T is basically relying on the 2HFY10 to meet its full year order inflow guidance of 25% YoY.

Maintain Hold/Low Risk (1L) — Given the stock seems fairly valued at 18.9x FY11E.

To see full report: LARSEN & TOUBRO


Infrastructure is a fundamental enabler for a modern economy and infrastructure development will be the key focus area for the next five years. Public investment in infrastructure is of paramount importance. Bottlenecks and delays in implementation of infrastructure projects because of policies and procedures especially in railways, power highways, ports airports and rural telecom will be
systematically removed. Public–Private Partnership (PPP) projects are a key element of the strategy. A large number of PPP projects in different areas currently awaiting government approval would be cleared expeditiously. The regulatory and legal framework for PPP would be made more investment friendly - These words were part of President Pratibha Patil’s welcome address to Houses of Parliament after the Indian elections in May 2009. The focus on infrastructure has been taken forward by the Finance Minister in the latest budget. Keeping in line with this theme we have chosen ITD Cementation India Ltd as the Pick of the Week this time. The company is under the Italian–Thai Development Public Company. ITDs business functions include projects for specialist engineering, projects for marine and projects for bridges and industrial developments.

It is expected that there exists an investment need of $500 billion in building the infrastructure needs covered over the eleventh plan and more so for the country to sustain its forecast growth rate of 9 percent. Out of this ambitious target almost 30% is expected to come from the private sector. Thus the emphasis laid on PPP both in the Rail and Union budget. With more than half of the country's population under the age of 30, backed with increased purchasing power means the
emergence of new and demanding middle class, which is expected to put more pressure on the infrastructure needs as they shall demand high quality of living and improved facilities. Thus the resultant demand for infrastructure and subsequent spend itself will act as a cause for and a consequence of economic growth. Therefore, if this biggest impediment in the country's growth is not addressed efficiently and timely, it shall stall its recovery and make loose its competitive strength in global markets.

Italian–Thai Development Company the largest civil engineering & construction company in Thailand, expertises in activities like airports, expressways, railways, bridges, industrial plants, mining, ports, jetties, marine works, dams, hydroelectric power projects, mass rapid transit systems to mention a few. ITD India is now capitalizing on this and in joint venture with the parent company is undertaking projects like construction of Kol Dam National Highway route NH -
31c in West Bengal, Delhi MRTS project, Kolkatta Airport passenger terminal building (Rs 16000 Mn) and the Tallah–Palta water pipeline installation in Kolkatta (Rs 1873 Mn). In continuation of projects under execution for DMRC the company has been awarded a project for construction of Sushant Lok station with property development valued at Rs 920 Mn. These projects afford the company to build a strategic business base in India and develop it competitive strengths.

During the calendar year 2008 the company secured contracts worth Rs 12.9 bn which included projects like construction of wet basin for Mazagaon Dock Mumbai, civil work for iron ore port terminal at Ennore Chennai, civil and piling work for alumina refinery project at Langigarh, Orissa, driven piling, pile caps and associated civil and structural works at Mundra, Gujarat to mention a few. Thus we can see that the ITD’s presence in marine segment is further strengthened by st these orders. The order back log as of 31 December was Rs 23.4 bn which includes share in joint ventures.. In Addition to these, the company has in the first quarter of the current year received orders to the tune of Rs 1000 crs covering the marine and irrigation sectors.

Tight liquidity conditions, Delay in execution of orders and Sharp increase in input costs.

At the CMP of Rs.153, ITD trades 0.5x its CY08’s book value of Rs. 304 per share. Long term investors can add more ITD to their portfolio.

To see full report: ITD CEMENTATION


Sector View:
New: Not Rated
Old: Not Rated

Investment Conclusion
This is the Nomura reference guide for June 2009 for Indian companies under our coverage. This is a compilation of current prices, price targets and ratings as of 14 July.

With this note, we offer a single reference point for items such as market cap, price target, rating, potential upside/downside, operating performance, growth estimates, margins, valuations, absolute performance and relative performance to the Sensex for the Indian companies under our coverage.

We have 87 companies from 18 sectors under our coverage. Of these, we have BUY ratings on 25, NEUTRAL ratings on 23 and REDUCE ratings on 39.

Since last month's note, which was published on 10 June, we initiated coverage of six companies. We revised our earnings estimates for 31 companies, changed our ratings for 17 companies and revised our price targets for 29 companies.

Initiations of coverage since last issue (11 June 2009)
Change in earnings estimates, price targets and ratings since last issue (11 June 2009)
Valuation snapshot
Sector valuation

  • Agri inputs
  • Autos and auto parts
  • Banks & Finance
  • Conglomerates
  • Construction materials
  • Consumer
  • Electrical equipment
  • Infrastructure and construction
  • Insurance
To see full report: EQUITY STRATEGY


Order inflow revival to drive value. The management appears confident about avoiding one-off charges but guarded on the subject of realization and margins. We upgrade to BUY rating based on (1) signs of order inflow revival, (2) sector prospects and (3) significant upside to our target price of Rs140/share post the correction. The stock will also be driven by (1) lower working capital, (2) pick up in order inflows and (3) potential balance sheet restructuring after the Hansen stake sale and equity issuance.

Management confident about on one-off charges; guarded on realization and margins We met the management of Suzlon recently and found the management confident of not having undue one-off charges related to availability and liquidated damages going forward. The message on likely realization, margins and full year interest cost is more guarded though. The management highlighted that both equity issuance as well as Hansen stake sale are possibilities on the table and may be exercised to reduce debt levels as well as have flexibility in cash flows for pursuing objectives such as buying the balance stake in Repower.

Upgrade to BUY based on likely order inflow revival; sector prospects
We upgrade our rating on the stock to BUY from ADD earlier based on (1) signs of order inflow revival and (2) likely margin improvement led by elimination of one-off items such as availability based and liquidated damages, (3) significant tail winds in the sector as governments across the globe pushed the renewable energy agenda and (4) significant upside to our target price of Rs140/share post the correction seen in the last two weeks. We highlight that incrementally the stock would be driven by (1) working capital reduction, (2) pick up in order inflows and (3) potential for balance sheet restructuring based on Hansen stake sale and equity issuance.

Change estimates based on lower volumes and margins; retain target price on FY2011E valuation
We have changed our earnings estimates to Rs6 and Rs9.4 for FY2010E and FY2011E, respectively, from Rs7.6 and Rs10.5 earlier. We retain our EV/EBITDA multiple and SOTP-based target price of Rs140/share based on FY2011E valuation Key risks include (1) near-term slowdown in demand, (2) uphill climb to regain customer confidence post the recent blade cracking problem, (3) weak outlook for Indian wind power markets and (4) possible recurrence of one-off charges as
witnessed in 4QFY09. Key upside risks arise from (1) stronger-than-expected order inflows and execution, (2) sharp recovery in global demand environment, (3) strong platform in terms of breadth and depth of manufacturing, marketing and R&D capabilities.

To see full report: SUZLON ENERGY


  • Deal with FRX positive for sentiment
  • Lexapro is an important product for Forest Labs
  • SUNP reaches settlement with FRX
  • Difficult to quantify size and timing of upside
To see full report: SUN PHARMACEUTICALS


1QFY10 sales down 9% YoY; adjusted PAT down 28% YoY: Sintex 1QFY10 results are significantly below expectation. Sales are down 9% YoY at Rs6.6b (expected Rs7.9b). EBITDA margin is up 50bp YoY at 13.2% (expected 15%). Reported consolidated PAT is up 6% YoY at Rs606m. However, this includes ~Rs200m of unrealized forex gain on account of FCCB translation. Adjusted for this, PAT is down 28% YoY at Rs406m (expected Rs681m). The main reason for the weak quarter is low government business pending elections.

Monolithic and pre-fabs to remain growth drivers: Sintex’s monolithic construction business has an order backlog of Rs18b to be executed in the next two years. This offers revenue visibility through FY11 at least. The various government schemes announced in Union Budget 2009-10 are expected to sustain demand for Sintex’s pre-fabricated structures business in the form of rural classrooms, health clinics, toilets, worker shelters, etc.

10-15% downgrade in estimates: Based on 1QFY10 results and subsequent concall, we have downgraded our FY10 and FY11 sales estimate by 3-4%. EBITDA margins are also down 70-110bp. As a result, our FY10 EPS is downgraded by 15% to Rs23.2 and FY11 EPS by 10% to Rs31.1.

Stock trading at 8x FY10E, target price of Rs232 (10x FY10E), Buy: Even after our earnings downgrade, FY09-11E EPS CAGR is a reasonable 14%. RoE is 17-18% and the company is near zero-debt (Rs15b cash against Rs16.5b total debt including working capital). At CMP, the stock is trading at a P/E of 8x FY10E and 6x FY11E. We continue to value Sintex at 10x FY10E EPS to arrive at a revised target price of Rs232 (Rs273 earlier), 19% upside from current levels. We maintain Buy.

To see full report: SINTEX INDUSTRIES


Inline results despite lower ad revenues

Ad revenues plunge 29%: Q1 advertisement revenues fell 29% YoY (13% QoQ) to Rs1,979mn on the back of economic slowdown, shift in advertisers to sports channels during the IPL 2 season and T20 World Cup and increased competition in the GEC space. However, we see an uptick from H2FY10 and believe the worst is over.

Subscription revenues still robust: Subscription revenues grew 12% YoY to Rs2,409mn, mainly on account of hefty 88% increase in DTH revenues to Rs467mn. International and domestic non-DTH revenues, which contribute more than 40% to topline, remained flat QoQ.

Cost-cutting measures help sustain margins: The 36% QoQ decline in SG&A and other expenses, along with 11% QoQ decline in employee costs, helped the company maintain margin at 24.6% vs 26.6% in Q1FY09. The significant reduction in interest cost helped prop up adj PAT (after minority interest) to Rs1,018mn

Upgraded to Buy: We have upgraded ZEEL to Buy, as we expect ad revenues to increase, going forward. Positives also stem from the company’s strong operating performance, sustainable subscription revenues (due to increasing DTH revenues) and improved ratings of flagship channel, Zee TV. We maintain our target price of Rs209, valuing the company at 18.5x FY11E.

To see full report: ZEE ENTERTAINMENT