Tuesday, September 11, 2012

>INFOSYS: Inorganic Booster – Acquired Lodestone

Infosys announced acquisition of Lodestone, a Switzerland based management consulting company. The company has paid an enterprise value of CHF330m ($349m) in cash for the acquisition. We see the acquisition as a step towards Infosys 3.0. This will enhance consulting and system integration practise of Infosys. The transaction is expected to close by the end of October, 2012.

􀂄 About Lodestone – Strength in C&SI: Lodestone, headquartered in Zurich (Switzerland), current has ~850 employees, including 750 SAP consultants in the company. Lodestone Management Consultants is founded on August 1, 2005, by Ronald Hafner, Jürgen Bauer and Peter Ödman. All three founders have broad consulting and industry experience. It has more than 200 clients across industries including Manufacturing, automotive, life sciences, chemicals, and consumer goods sector. Post acq uisition Infosys would have Consulting and
Package Implementation revenue of $1bn+.

􀂄 Lodestone reported steady growth: Lodestone had reported revenue of
CHF207mn for 2011, growing from CHF181mn in 2010. Lodestone has presence in 17 countries across five continents, with the headcount growing steadily since 2005. It has in its kitty marquee clients like Allianz, BMW, Kimberly Clark, Sandoz SHAPE, Warner Chilcott, Munich Re, AGCO System and Roche. The acquisition will enhance the presence of Infosys in Europe and emerging markets like Latin America and Asia Pacific. Revenue for the Lodstone has grown at CAGR of 45% (2005‐11), whereas employee strength has grown steadily by 57% (2005‐12).

􀂄 Valuation & Recommendation – Much needed inorganic booster, Reiterate BUY: Infosys has been looking for acquisition from a long time to strengthen its presence in Consulting and Package Implementation domain. After loosing-out on Axon acquisition, Infosys organically grew its C&SI revenue to $525m (5% CQGR over last 20 quarters). We see this acquisition as much needed inorganic booster for the company. We reiterate “BUY” rating with a target price of Rs2,850.

To read report in detail: INFOSYS

>Why is the oil price not falling?

The current and expected slowdown in global growth has led to a decline in prices of cyclical commodities (metals), but not in the oil price, which has held up despite the slowdown in global demand for oil. Why is the oil price insensitive to the current global economic cycle? Probably because:

1- A shortage of oil remains the outlook for the medium term, even though it has been deferred;

2- The producer countries (mainly Saudi Arabia) adjust their production according to demand;

3- Geopolitical risks have led to substantial precautionary stock-building.
The fact that the oil price remains very high while growth is weak is obviously pro-cyclical.

To read report in detail: OIL PRICES



Rolta reported another quarter of revenue below expectation with margin ahead of expectation. The currency depreciation resulted in higher interest cost and MTM losses eroding bottom-line. As Rolta moves away from the services business to solution business, we continue to see likelihood of volatile earnings performance in H1FY13. The company has managed to honor its FCCB comittment by raising debt at 7.75% interest cost. High interest cost in a challenging demand environment makes the outlook for the company cautious. We retain our ‘Accumulate’ rating.

􀂄 Another quarter of low revenue but margins ahead: Rolta reported revenue growth of 4.4% QoQ to Rs4.45bn (PLe: Rs4.90bn, Cons: Rs4.60bn). EBITDA  margin expanded by 886bps QoQ to 54.6% (PLe: 45.9%, Cons:42.4%), driven by margin expansion in EGIS, EDOS and EICT segments by 977bps, 1557bps and 604bps QoQ, respectively. EPS de-grew by 29% QoQ to Rs2.97 (PLe: Rs4.22, Cons: Rs3.72), due to lower lower tax rate and stronger margin performance.

􀂄 Order book grew steadily in the quarter: Order book grew by 3.5% QoQ to Rs21.42bn, strongest growth in the last five quarters. EICT order book grew by 8.3% QoQ, the sharpest growth among all the segments, whereas EGIS and EDOS grew by 1.8% and 2.7% QoQ, respectively. Book-to-Bill (LTM) overall moved to high teens for the first time in the last five quarters. Q4FY12 book-tobill remains at 1.17, highest level since Q3FY11. The company’s decision to move away from low-end services business to solution offering could put additional pressure on order book. We expect order book to remain volatile.

􀂄 Other highlights: 1) FY13 Revenue growth guidance of 10-15% YoY 2) Total Capex in FY13: Rs500-2000m ) Tax Rate FY13: 18-20% 4) Total Debt: Rs23.5bn 5) Avg. interest rate on debt: 7.75% (Quarterly int. cost Rs420-450m @ Rs55/$)

􀂄 Valuation and Recommendation – ‘Accumulate’, target price of Rs85: We believe that the decline in the revenue is a matter of concern. We believe that a high interest cost in depreciating currency and a weak business environment could result in decline at the bottom-line. We retain our ‘Accumulate’ rating, with a target price of Rs85, 6x FY13e earnings estimates.

To read report in detail: ROLTA INDIA


Back to Yes!

 Upgrade to Outperform: Over the past 3 months, YES Bank stock has underperformed the wholesale funded institutions by ~18% which we believe is unwarranted. We consider current levels a good opportunity to accumulate the stock. Upgrade to Outperform and TP raised to Rs415 from Rs380.

 Falling wholesale rates and improving CASA should help margins: With wholesale rates having corrected very sharply (down 250bps from the recent high on 30 March 2012) and current account savings accounts (CASA) expected to improve steadily in the next few years, we believe margins are likely to rise from 2.8% to 3.2% in the next three years. Higher margins should give YES Bank a cushion against a possible credit cost rise due to asset quality issues.

 Asset quality – too much fuss unwarranted: We think the market is overly worried about YES Bank’s asset quality which is probably the reason why the stock has underperformed relative to other wholesale funded institutions. Firstly, YES Bank has a very well-diversified portfolio with no concentration in any specific sector. Secondly, its quantum of restructured assets is well below that of peers. Thirdly, exposure to stressed sectors like infrastructure, iron and steel, textile etc is lower than its larger private sector peers. Fourthly, there is too much worry about its off-balance sheet activities. If one looks at riskweighted assets (RWA) as a proportion of total assets, YES Bank’s number is the lowest among large private sector banks, indicating that off-balance sheet transactions are not much different or riskier than for others. Finally, we have
already built in credit costs increasing virtually from nil levels last year to 50- 55bps in the next two years. Our numbers take into account an expected three-fold increase in gross NPLs over the next 2 years.

 Return ratios to be very healthy despite equity dilution: Despite the increase in credit costs and a 15% equity dilution factored into our numbers, we expect ROA of 1.4% and ROE of 20% in the next three years on average.

Earnings and target price revision
 We are marginally fine-tuning earnings. We raise our TP by 9% to Rs415 as we roll forward our valuation to FY14E.

Price catalyst
 12-month price target: Rs415.00 based on a Gordon growth methodology.
 Catalyst: Strong growth in profit, greater traction on CASA deposits.

Action and recommendation
 Favourable risk-reward, one of our top picks in financials: The stock trades at 1.6x FY14E P/BV (1.8x if we exclude equity dilution). It is now below its historical average valuation and risk-reward is very favourable at current levels. YES Bank is one of our top picks in the financial space.

To read report in detail: YES BANK

>STATE BANK OF INDIA: Striving to maintain market share in retail space

 Retail lending rate cut: SBI had cut its lending rates in its retail portfolio such as Home loans (upto Rs30 lakh) by 25bp to 10.25% and Auto loans by 50bp to 10.75%. SBI’s rate cut followed the RBI’s decision to decrease the Statutory Liquidity Ratio (SLR i.e. the amount of deposits that have to be invested in government bonds and other liquid assets), by 100bp to 23%. The 100bp reduction in the SLR has freed additional Rs10,000cr for SBI, coupled with Rs6,500cr released through the reduction in export refinance, which led the bank to cut lending rates in retail.

 Striving to retain market share amidst increasing competition in retail: The Indian economy has been witnessing a slowdown with receding capex loan pipeline, and hence, majority of the banks are increasing their lending portfolio in retail segment, since the consumption story in India remains robust. For instance, the
gross bank credit for scheduled commercial banks as on June 29, 2012 has increased 3% since March 23, 2012 to ~Rs45 lakh crore, however, the retail sector grew by 4.1% to ~Rs8 lakh crore during the same period. Considering SBI’s strong distribution network with access to cheaper deposits, the bank has
one of the lowest costs of funds as compared to some other peer group banks. Hence, in anticipation of increasing competition in the retail space, due to drying term loan demand, SBI cut its retail rates to maintain the market share in home loans (~26%) and auto segment (~18%). SBI had cut lending rates by 50-350bp
(earlier in June 2012) across various categories of borrowers such as SME and agriculture segments. The bank had also reduced the tenor premium on term loans by 40-100bp. We believe that the margins should be maintained at 3.8% for FY2013 considering the CRR and SLR cut.

 Asset quality issues: GNPAs in absolute terms increased 69.8% yoy and 18.9% qoq to Rs47,156cr, whereas, NNPAs increased 63.4% yoy and 28.5% qoq to Rs20,324cr as on 1QFY2013. Gross slippages increased by 2.5x sequentially to Rs10,844cr on the back of higher stress in Mid-corporate and SME sectors. Management has guided for Rs3,000-4,000cr by way of recoveries and upgradations. Cumulatively, the restructured book stood at Rs36,904cr out of which 20% has slipped into NPA.

Outlook and Valuation
Given the monsoon deficit in the country and the prevailing stress in the overall economy, we forecast continued asset quality pressure on SBI (at least for another 2-3 quarters). The bank reported its worst asset quality numbers with unprecedented rise in slippages in 1QFY2013. At the CMP of Rs1,845, the stock is trading at 1.1x its FY2014E standalone ABV (after adjusting for its associate banks and non-banking subsidiaries). We maintain our Buy recommendation (based on SOTP methodology) on SBI with a target price of Rs2,142.

To read report in detail: SBI

>CEMENT SECTOR: Higher profitability to sustain, given increasing capex cost

 Volumes are likely to grow 8-9% in FY13, driven by individual housing and expected infrastructure push. Seasonal price correction has been sub-normal till August due to delayed monsoon.

 Capacity addition should slow down to ~60mt over FY13-15. Increase in capex cost necessitates sustenance of higher profitability; downside risks are limited.

 The costs of power, fuel and freight, which have been rising, are likely to stabilize at elevated levels. The focus would remain on enhancing operating efficiencies and maintaining margins.

 We (MOTILAL OSWAL) prefer Ambuja and Grasim/Ultratech among large-caps and Shree Cement among mid-caps.

To read report in detail: CEMENT SECTOR

>ING Vysya Bank

From our recent interaction with the ING Vysya management, we gather that it remains focused on higher-than-industry credit growth, productivity improvement and maintaining robust asset quality. On an enhanced RoE of ~16.9% by FY15e (14.2% in FY12), we reiterate a Buy.

 Better-than-industry credit growth guidance. Management remains confident of achieving higher-than-industry credit growth. We expect its credit to grow at 22% in FY13, with a positive bias towards retail loans, wherein the bank has recently introduced three new retail products viz. gold loans, new CV finance and personal loans.

 Focus on productivity, leverage existing setup. Cost-income and costassets in FY12 at 59.1% and 2.6%, respectively, are higher than peers with significant scope for improvement. With investments towards, creation of a pan India network and robust systems, almost over, the bank intends to bring down its cost-income to ~50% by FY15 by leveraging its existing infrastructure. We expect asset growth to outpace operating expenses growth, with cost-assets improving to 2.3% by FY15.

 Stable asset quality, adequate capitalization. Asset quality has remained largely stable despite deterioration in the macro economy. This is attributable to better underwriting standards, conscious policy decision of zero exposure to airlines, oil and project finance, and no bilateral restructuring. Management is confident on its telecom exposure, completely backed by guarantees. Additionally, best-in-class NPA coverage (91%) will hold the bank in good stead. Capital adequacy of 13.4% (Tier-1: 10.7%) is sufficient to sustain a 23.3% loan CAGR over FY12-15e.

 Valuation. At our Sep ’13 price target, the stock would trade at a PABV of 1.6x FY13e and 1.4x FY14e. Our target is based on the two-stage DDM (CoE: 15.0%; beta: 0.8; Rf: 8.0%). Risk: Slower-than-expected economic growth could impair loan growth and credit quality.


>FERTILISERS: Demand for complex fertilisers moderates further

Key points
  • Weak monsoon and high prices dent demand environment: In August 2012, the aggregate sales of fertilisers (by 15 leading manufacturers) declined by 14% as compared with that in the same period of the last year. The sales fell mainly because of a steep decline in the demand of DAP and complex fertilisers. In August 2012, the production and imports of non-urea fertilisers, DAP and complex fertilisers declined drastically due to a lower demand for and higher prices of non-urea fertilisers. The imports of DAP and complex fertilisers decreased by 22% and 74% respectively during the month due to lower imports by Indian Potash and IFFICO. The imports of MOP and urea were higher by 20% and 1,414% respectively on the back of higher imports from Indian Potash.
  • Fertiliser sales decline on YTD basis: The total fertiliser sales declined by 16% on a year-till-date (YTD) basis as compared with that in the same period of the last year. The fertiliser sales declined largely due to lower production and lower imports of non-urea fertilisers owing to a lower demand and higher prices of non-urea fertilisers. The sales of DAP, urea and complex fertilisers were lower by 38%, 4% and 34% respectively whereas the sales of MOP increased by 21% due to higher imports by Indian Potash, which is one of the major importers of potash in India. The imports of urea on a YTD basis declined by 32% to nearly 4.95 lakh tonne as compared with that in the same period of the last year. 
  • Outlook: We maintain our cautious outlook on the complex (non-urea) fertiliser manufacturers but the recovery of the monsoon in the later part of the season could have a positive impact on the demand which augurs well for the rabi season. However, we continue to prefer the cheaper alternatives like urea and SSP as compared with DAP and the other NPK fertilisers due to the price differential. A possible hike in the price of urea is also a trigger for pure urea stocks like Chambal Fertilisers, Zuari Industries and SPIC. We also maintain our preference for pure SSP players like Rama Phosphates and Liberty Phosphate.


Key points
  • Pharma outperformed benchmark indices: Given the general preference for the defensives and the robust financial performance of the pharmaceutical (pharma) companies (partially aided by the benefits of the rupee’s depreciation), the pharma stocks have attracted a lot of attention from investors in the past few quarters. Consequently, on a one-year forward price-earnings ratio, the BSE Healthcare Index has outperformed the benchmark indices. The BSE Healthcare Index trades at a 53% premium to the Sensex which is much higher than the average premium of 39% the pharma benchmark index has enjoyed over the Sensex for the last five years.
  • Rally in pharma stocks sustainable: Notwithstanding the strong outperformance of the pharma stocks, the current valuations of the BSE Healthcare Index are at a 10-14% discount to its long-term (three-year and five-year) average multiples. Even within our coverage universe, the pharma stocks are trading at a premium of only 4-6% over their long-term average multiples. Thus, we believe that the outperformance of the pharma stocks is sustainable.
  • Divergence in valuations within pharma stocks: Though we maintain our positive stance on the pharma sector, but we believe that it is time to get selective. We suggest playing on the divergence in the valuations within the universe of the pharma stocks. Our analysis shows that a lot of positives are already priced in Lupin and Sun Pharmaceuticals, which are trading at a huge premium to their long-term average multiples. On the other hand, Cipla and Dr Reddy’s Laboratories are at a discount to their long-term average multiples and offer a better risk-reward ratio. Similarly, within the mid-cap space, we see valuation comfort in Torrent Pharmaceuticals and Cadila Healthcare.