Thursday, July 15, 2010

>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 MalĂ© (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.

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


Ador Welding Limited, one of the leading players in the welding consumables & equipment space is all set to benefit from a pick up in the investment cycle in the core infrastructure space resulting in strong demand outlay for its welding products. AWL is expected to exhibit a revenue & PAT CAGR of 24% & 26% for the period FY10-12 respectively on the back of strong volume growth of 25% and capex in continuous welding equipment which is margin accretive. We value
AWL at 10x its FY12e earnings and initiate a BUY at CMP with a price target of Rs 298, representing a potential upside of 42% over a 15-18 months horizon.

Volume expansion: key growth driver
In FY10 AWL clocked a volume growth of ~42% from 18,655 TPA in FY09 to ~24,000 TPA in FY10. Considering a further uptick in the demand for electrodes, we expect a volume growth of 25% (on conservative basis) over the next two years. With the volume growth set to kick in, the revenues in the welding consumables segment are expected to exhibit a CAGR of 26% from Rs 196 crore in FY10 to Rs 310 crore in FY12.

Capex in continuous welding segment to fuel further growth
With the demand for continuous electrodes outpacing manual electrodes, AWL has initiated a Rs 15 crore capacity expansion programme which would add 10,000 TPA of capacity space in the form of adding special wires. The main purpose behind this expansion is to enable AWL to enter into high growth & niche areas of welding application which includes nuclear power, super critical
boilers & some special steel applications. This would not only help in widening its product profile but would enable the company to improvise on its margins backed by low competition in these niche segments.

Uptick in infrastructure spending spells good opportunity for welding players
We are currently witnessing a strong pick up in the capex cycle across its user segments viz Steel industry, petrochemicals, fertilizer, hydro electric and thermal power, nuclear power, ship building and heavy machinery, etc. This would present increasing opportunities for the Welding players. AWL which has a market share of ~23% is expected to be one of the biggest beneficiaries.

Clean balance sheet, Zero Debt Company with attractive return ratios
AWL has one of the cleanest Balance Sheets apart from being a debt free company. Further it has a track record of paying dividend since more than 12 years with the current dividend yield placed at 2.8%. The ROE & ROCE which stands at 18% & 26% respectively in is expected to further increase to 22% & 32% respectively in FY12e on the back of improved financial performance.

To read the full report: ADOR WELDING

>ASIAN PAINTS: Painting the town red

We initiate coverage on Asian Paints with ‘BUY’ rating and a target price of Rs2,600, an upside of 9%. Healthy earnings growth CAGR of 19% for FY10-12E, continued pickup in urban discretionary demand and leadership position in a growing market with relatively benign competitive intensity, underline our positive investment thesis on Asian Paints.

Continued robust demand to drive healthy 18% earnings CAGR: Asian Paints is an undisputed leader in the Indian paints market (55% market share of the organized segment), with more than 2x the share of its next competitor. Pick-up in urban discretionary demand and continued healthy volume growth in semiurban and rural markets will result in robust 18% earnings CAGR for FY10-12e, in our view.

Expect 80bps EBITDA contraction in FY11e: We model for 80bps contraction in FY11e EBITDA margin, given the high base (highest EBITDA margin of 18.4% in FY10) and sequential increase in input costs. We believe that Asian Paints has enough pricing power to pass on any adverse input cost hike (~4% price hike in May 2010).

Favourable macro catalysts: We believe that Asian Paints is a direct play on the growing economy and India consumption story. Apart from consumption and penetration-led opportunity, several favourable demographic catalysts viz. rising income levels, increasing urbanisation and nuclear families can act as structural growth drivers for decorative paints demand growth.

Valuation and Outlook: We value Asian Paints at a P/E of 23x (3 year average) to arrive at target price of Rs2,600, an upside of 9%. We expect the valuations to sustain, given our expectations of healthy earnings CAGR of 19% for FY10-12E, led by a pick-up in urban discretionary consumption. Asian Paints has the pricing power to pass on input cost inflation (price hike of 4.15% in May and 2.8% in July). We initiate with ‘BUY’. Upside risk includes better-than-expected margin performance (we model for 100bps decline in FY11e) and downside risk including moderation in rural demand on account of poor monsoon.

To read the full report: ASIAN PAINTS