Thursday, October 13, 2011


To see presentation: DCB BANK

>IT Services:: 2 Quarter Preview

Action: Prefer HCL Tech followed by Infosys
HCLT is our top pick within tier 1 IT on expectations of strong revenue
growth (5.4% q-q), lower EBITDA margin declines despite wage hikes, on
rupee depreciation and reasonable valuation comfort. At Infosys, we
expect a cut in revenue growth guidance and think any fall in the stock
should be used as an opportunity to add positions as we believe prices
already factor in a moderation in growth. We remain cautious on TCS and
CTSH on high BFSI/Europe/Client concentration exposure and lower
valuation comfort. Wipro remains our least-preferred stock in tier 1 IT.
Catalyst: Stability in macroeconomic conditions and continuation of
rupee depreciation trends would be potential positive triggers for IT

Strong quarter: no material revenue growth pain; earnings surprises driven by rupee

No material revenue growth moderation in 2Q
We expect USD revenue growth of 3.4-6.5% q-q across tier 1 IT
companies, with CTSH and TCS leading on revenue growth. Infosys and
Wipro should be in line with guidance. The impact of the recent economic
slowdown is unlikely to be visible in results this quarter, in our view.
Likely FY12F revenue guidance cut at Infosys, EPS guidance raise
The first impact of the slowdown, in our view, would be with Infosys cutting
its FY12F revenue growth guidance to 16-18% (from 18-20%) as
discretionary demand tapers and cross-currency impacts hurt USD
revenue growth. However, we see EPS guidance being raised to around
INR135 (from INR128-130) largely driven by rupee depreciation and
optimized hiring towards year-end.

Valuation: EPS up on rupee depreciation; upgrade Patni to Neutral
We revised our EPS estimates higher as we factor a new FY13F USD-INR
rate of 45 vs 44 earlier. We upgrade Patni to Neutral from Reduce.

To read the full report: IT Services

>Power Sector Q2FY12 Preview: Operational weakness; sector reforms

Adani Power
We expect sales of 3494 MU at an overall average PLF of 74% .EBIDTA margins are expected to improve by 300bps sequentially on account of better operational efficiency. However, the next and the following quarter is expected to be tough as the rupee has depreciated over 8% We expect APL to clock a PATJSW Energy
PLFs and short-term realizations could drive Q2 FY12 results, as global spot coal prices (RB Index) are sequentially flat. Operational softness is expected to continue – SBU I-II (76% PLF), Raj West I (shutdown), Ratnagiri I (70% PLF). We forecast a 153bp Q-o-Q margin contraction as declining merchant realizations outweigh nonrecurrence of one-time expenses from Q1 FY12.

KSK Energy
We expect (1) Wardha Warora offtake and fuel dynamics and (2) taxes to be the key earnings drivers. Following the recent WCL linkage activation, we factor in lower Wardha Warora fuel costs at ` 2.75/unit but also model low project PLFs (60%) and high auxiliary consumption (12%). Q1 FY12 had benefited from a negative tax rate that we do not expect to recur.

Orient Green Power
Q2 is expected to be the best quarter seasonally for OGPL, and thus expect average Wind PLFs of 21%. We expect OGPL to sell 168MU (vs 127MU in Q1FY12) at an average realization of ` 4.6/unit. EBIDTA margins are expected to remain flat yoy and improve by 795 bps sequentially to 51%.We expect Q2FY12 PAT to come in at ` 79mln which translates to an EPS of ` 0.17
PTC India
Q2 is the best quarter for PTC in terms of volumes as cross border volumes peaks during this period. We forecast PTC to trade 9.9 BU inclusive of 3 BU of Cross border Trades at average margins of 4.5bps. We expect overall EBIDTA to come in at ` 589mln implying EBIDTA margins of 1.6% and overall PAT and EPS to come in at 552mln and ` 1.87.

PLFs have continued to decline this quarter: -842 bp among private players, -777 bp all-India. Key drivers, in our view, include SEB backing down, ongoing capacity addition, seasonally-weak demand (monsoons), and preferential use of hydropower in the merit order dispatch. This quarter also saw plenty of action in coal regulatory developments and distribution sector reforms: (1) no-go/CEPI, (2) draft MMDR Cabinet approval, (3) MRRT/Australian carbon tax, (4) proposed distribution reforms and discom tariff increases, and (5) progress toward revised Case 1/2 standard bidding documents with increased fuel passthrough.

To read the full report: POWER SECTOR