Friday, July 16, 2010

>INDIAN TECHNOLOGY: EU-‘phoria’ or EU-‘phobia’ – Part 2

We reassess the risk associated with the revenue exposure of Tier-1 IT companies to Europe. HCL Tech (HCLT) has not only got the highest exposure, but also its top-10 clients’ revenue has got highest exposure to Europe. However, the current cost pressure has increased acceptability towards outsourcing. We believe that Indian IT Services companies will be benefitted from the current macro-economic environment of Europe. We reiterate Tier-1 IT companies as our top pick.

HCLT – sailing steadily in troubled waters: HCLT, among Tier-1 Indian IT Services Companies, has got the highest exposure to Europe. HCLT drives ~26% of revenues from Europe. In addition to that, their top 10 clients have got the highest exposure to Europe. HCLT’s top 10 clients derive 55% of their revenue from Europe, posing revenue risk for HCLT. However, winning strong new deals and mining non-top 10 clients helped them deliver stronger-than-peer revenue growth. We believe that HCLT would continue to deliver stronger-than-industry average growth as discretionary spend in Europe show signs of recovery.

Global Tech majors indicate increase in global discretionary spend and European recovery: Quarterly results of Accenture, Oracle and SAP indicated an increase in the discretionary spend across the board, along with strong demand recovery in Europe. Accenture’s consulting revenue grew by 9.1% YoY, whereas Oracle and SAP licenses revenue grew by 14.2% and 11.4% YoY, respectively in the most recent quarterly results. Moreover, European revenue for Accenture, Oracle and SAP grew by 3.9%, 30.7% and 6.5% YoY, respectively. A strong performance by tech major is the lead indicator of strong demand recovery in Europe. We believe that cost conscious Europe would increase outsourcing, benefiting Indian IT companies.

Cross currency movement – margin headwinds tough to contain: According to our estimates, Euro/GBP depreciation against USD will have ~1-1.5% impact on USD terms revenue. Moreover, rupee appreciation against USD, EUR and GBP by 0.7%, 8.7% and 5.1% QoQ, respectively would create a margin headwind of 95- 110bps QoQ. We believe that a wage hike, along with currency headwind, will have 50-100bps impact on the margin.

Reiterate Infosys as our top pick, accumulate HCLT on declines: We advocate owning structural winners and in this context Infosys remains our top pick, given least revenue exposure to troubled economy. We believe HCLT’s recent underperformance (down 10% since Q3FY10) represents a buying opportunity for investors. Trading below 16x our FY11e EPS (~20% discount to tier-1 Indian IT), we think the market has now factored in too many negatives ignoring strength in new deals win.

To read the full report: INDIAN TECHNOLOGY


Economic recovery to drive momentum

We remain Equalweight on the logistics sector with a Buy rating on Aegis Logistics and Allcargo Global Logistics, Sell on Container Corporation (Concor) and Hold on Gateway Distriparks (GDL) and Transport Corporation of India (TCI). We expect container volumes to revive in FY11E, once the overall economy recovers. We estimate 8.4% volume growth (TEU terms) for FY11E and 10.5% growth for FY12E, as trade picks up.

Container volumes buoyant…: Container traffic remained buoyant during Q1 and registered a healthy growth of 21.3% YoY to 1.28mn TEUS in April and May. Volumes at India’s largest container port JNPT grew 16.8% YoY to 0.75mn TEUs during the same period.

…on back of healthy EXIM trade: India’s exports and imports too improved during Q1, implying higher movement of goods and containers at the ports. While exports grew 35.7% YoY in value terms during April- May 2010, imports registered an impressive growth of 40.9% YoY during the same period.

Domestic industrial activity: India’s Index of Industrial Production (IIP) showed a robust growth of 17.6% in April 2010, primarily led by the manufacturing sector. We believe this robust growth would have led to increase in demand for domestic logistics services and higher movement of goods at the ports.

Maintain Buy on Aegis and Allcargo: Aegis is our top pick in the overall logistics space with a Buy rating and a target of Rs430. Allcargo remains our proffered pick in the container logistics space on back of attractive valuations of 13.3x CY10E and global presence. We believe Concor is currently trading at an expensive valuation of 20.8x FY11E earnings and maintain Sell with a target of Rs1,200. We remain neutral on TCI and GDL with a Hold rating.

To read the full report: LOGISTICS SECTOR


Flat quarter expected
At the operating level, with the exception of PTC India, utilities under coverage are expected to see flattish performance, as no major capacity addition occurred during the quarter.

Sales to decline: Sales are likely to decline marginally by 4.9% QoQ, as no major capacity additions took place in the year. Utilities are likely to see a marginally declining trend on a YoY basis, due to lower tariff assumption on the back of lower fuel cost assumptions.

PTC India’s volumes to improve: We expect PTC India’s volumes to improve 26.6% YoY due to higher volumes from long-term trading. PTC’s long-term trading volumes are expected to more than double to 1100 MU.

Flat EBITDA expected: EBITDA to remain flat YoY for utilities like NTPC and Tata Power, while CESC is likely to witness YoY growth of 21.8% due to the commercialization of Budge Budge during the last quarter of FY10. On the back of higher volumes, we expect PTC’s EBITDA to grow 33.3% YoY to Rs207mn.

PAT likely to fall: With the exception of NTPC, most utilities are likely to see a fall in PAT, despite better operating performance, due to lower other income. We expect PTC’s PAT to fall 6.5% YoY despite higher volumes due to lower other income. In the case of CESC PAT is expected to fall by 6.2% YoY to Rs985mn.

To read the full report: POWER SECTOR

>SUGAR SECTOR: Q3FY10 Result Preview (CENTRUM)

Higher sales, but lower profits
Sugar prices have plunged ~20% QoQ, but are still 18% higher on a YoY basis. Higher sugarcane cost during H1FY10 led to increased cost of cane sugar production (up by ~30% YoY). Margins from cane sugar are expected to be very low during the quarter. The allied businesses of power and distillery are expected to help sugar mills report positive operating margins during the quarter. The revision in levy of sugar price from Rs13.5/kg to Rs17.5/kg is expected to result in a writeback of Rs4/kg (write-back will be on total levy sugar volume, i.e. 20% of cane sugar sale for season 2009-10 ).

Strong topline growth expected: We estimate strong top-line growth fuelled by volume growth (main growth will come from through put in raw sugar). Raw sugar release was higher during the quarter, reflecting in higher volumes and resultant higher top-line growth. Sugar prices continued on a downward trajectory, with ~20% QoQ fall to an average of Rs28,500/tonne.

Margins to contract: We expect operating margins of our sugar universe to contract by ~900bp YoY due to depressed sugar prices and higher cost of production of cane sugar.

Write-back on levy sugar: As the government has revised the price of levy sugar from Rs13.5/kg to Rs17.5/kg, we estimate a write-back of the earlier provision (for inventory write-down in respect of levy sugar by Rs4/kg).

BJH expected to report losses; BRCM, SRS andTriveni to report profits: The sugar companies are expected to report subdued performances. We expect Bajaj Hindusthan to report losses. Balrampur Chini, Shree Renuka Sugars and Triveni Engineering are likely to report profit.

To read the full report: SUGAR SECTOR

>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