>TATA CONSULTANCY SERVICES: Guides for Gross additions of 50000 employees for FY13E

TCS results offered respite to the IT sector with topline marginally above street estimates and EBIDTA margins inline with street expectations. TCS offered positive commentary on the business environment citing uptick in discretionary spending at clients as well as new deal signings which has enabled strong order pipeline for the company. This was in sharp contrast to its earlier commentary during Q3FY12 in which it hinted of slower discretionary project starts and slower decision making cycles. Despite tapering Utilization rates and moderate hiring guidance for FY13E , TCS guided for wage hikes across the board and hinted at 8% wage hikes in India which could put nearest peer Infosys in a fix ( Infosys has not provided any wage
hikes to its employees post Q4FY12 fiasco) . BFSI vertical revenues were also flat on a sequential basis and TCS hinted at growth outlook in the BFSI vertical over the coming period driven by new deal wins. Barring rupee depreciation drive EPS upgrades we see few positive triggers for the stock in the near term and growth outlook is fairly priced in the valuations. We value TCS at a P/E of 16x on FY14E EPS of Rs70.4/share which yields target price of `1126/Share.


■  Reiterate Underperformer.
Revenues above expectations, EBIDTA Margins inline with street estimates TCS reported Q4FY12 revenues of USD2648mn up 2.4% on a QoQ basis ahead of our estimates (our estimate was USD2630mn). Volumes growth at 3.3% on a QoQ basis was ahead of peers Infosys which has reported a sequential drop in volumes. Revenues in INR terms came at `132.5bn up 0.4% QoQ and 30.5% on a YoY basis. Volume growth of 3.26%, Constant currency pricing was down 0.97%, currency impact was negative by 1.87% bps leading to rupee term revenue growth of 0.4% on a QoQ basis. EBIDTA margin came at 29.6% down
140bps QoQ predominantly driven by rupee appreciation and strong hiring by the company. PAT at `28.9 bn was marginally above our estimate due to beat in revenues and lower tax rates.


■  BFSI flat on a sequential basis, North America grows sequentially
North America, UK and APAC showed strength on sequential basis while Continental Europe declined QoQ. Retail, Manufacturing, Hitech verticals were growth drivers for the quarter while BFSI was flat on a sequential basis. BPO, ADM and asset managed services outperformed on the service line front while discretionary service lines like Business intelligence and Enterprise solution declined QoQ.


■  Guides for Gross additions of 50000 employees for FY13E
TCS guided for gross hiring of 50000 employees for FY13E (Of which 43000 are campus offers) and hinted at staggered intake during the year based on demand offtake. Utilization rates (excluding trainees) came at 80.6% down 140 bps on a sequential basis due to slower volume growth. Revenues from Top 10 clients grew by 0.2% QoQ while client mining improved across bands which hints at strong cross capabilities.


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>PRIME FOCUS: Market leader in 2D to 3D conversion & VFX capabilities

3-D to propel growth


Prime Focus is a market leader in 2D to 3D conversion and has created a mark globally by working on 10 of the top 30 worldwide blockbusters in the past 3 years. Its global world sourcing model from its 15 facilities, 4,500+ people, 24x7, 365-day work schedule makes it a strategic partner to global studios. Favourable industry trends along with strong management team give us confidence on 30.7% revenue CAGR over FY11-14E. Initiate coverage with a BUY on the stock with an upside of 86%.


■ Unique global network of integrated studios: Prime Focus has offices across 3 continents in all time zones. Its 15 facilities, over 4,500 staff, 24x7, 365-day work schedule give it major time and cost benefits. This unique platform offers all services under one roof – right from pre-production to distribution for clients across the film, broadcast and commercials space worldwide.


■ Well-positioned to capitalize on its 3D and VFX capabilities: The increasing use of visual effects (VFX) and 3D in movies opens huge market potential for Prime Focus. It has built a ‘state-of-theart’ facility at Royal Palms, Mumbai, and Chandigarh with 3,000+ seats to convert existing 2D films to stereoscopic 3D format. It is the first company worldwide to successfully complete an entire movie, Clash of the Titans from 2D to 3D in a record 8 weeks simultaneously across 7 facilities worldwide.


■ Technological leadership makes it strategic partner for content owners: Given its highly differentiated offering and high execution track record the company has been able to garner some of the most important projects from studios. It is focusing on widening and deepening studio partnerships across 2D to 3D conversion and VFX along with making the relationships global. Its customers include Hollywood studios such as Warner Bros., Lucasfilm, DreamWorks Animation, Paramount, Twentieth Century Fox, Walt Disney, Summit Entertainment, Relativity
Media and Sony.


■ Strong visibility on financials: We expect revenues to grow at a CAGR of 30.7% to Rs11.2bn over FY11-14E on the back of strong growth in 2D-to-3D conversion. Operating margins are set to expand from 29.6% in FY12E to 33.6% in FY14E on the back of increase in outsourcing to India. Profitability of the company will grow at a CAGR of 28.7% to Rs1771mn over FY11-14E led by strong topline growth and margin expansion.


■ Valuations: The stock is currently trading at 5.7x and 4.2x FY13E and FY14E EPS of Rs8.76 and Rs11.89 respectively. Prime Focus trades at a significant discount to its Indian M&E peers even though it has higher revenue growth, high RoE, higher margins and leadership in domestic operations along with strong global presence. We value Prime Focus at 8x FY14E EPS of Rs11.89 and arrive at a target price of Rs95, 86% upside from current levels.


■ Key Risks: i) Sharp fall in pricing for 2D to 3D conversion due to increase in competition; ii) Sharp currency movements that could impact profitability considering that major revenue is from UK and North America; iii) Outstanding FCCB of USD55mn which it is expected to re-pay before December 2012 with 43% premium amounting to a total of ~USD79mn.


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>Coromandel International Ltd- Q4 FY2012 Result

Coromandel International Ltd (CIL), a Muragappa Group company is engaged in fertilizer, pesticides, speciality nutrients, farm mechanization and life style products businesses. On 23rd April 2012, CIL announced its Q4 FY12 and FY12 results. The consolidated result includes the audited results of company’s subsidiaries/JV’s/Associate concerns namely Parry Chemicals Ltd, Coromandel Brasil Limitada, Tunisian Indian Fertiliser SA, Mauritius ltd, Coromandel Getax Phosphates Pte Ltd, Coromandel SQM (India) Private Ltd and consolidated results of Sabero Organics Gujarat Ltd and its subsidiaries. A glimpse of the company’s consolidated Q4 FY2012 results is as follows:

The revenue increased by 133% and 30% on quarterly y-o-y and annual basis respectively. The top line growth was driven by 994% higher subsidy income on quarterly yoy basis and higher volume sales through the push selling method to the dealers by giving higher commissions and credits. The operating profit margin (OPM) of FY12 (annual) declined by 293 basis points despite 312 basis points OPM rise on Q4 FY12 due to the increased raw material prices, international fertilizer prices and currency volatility. Furthermore, the Net Profit Margin dropped by 374 basis points and 269 basis points on y-o-y quarterly and annual basis respectively.


The Board of Directors have recommended final dividend of INR 3 per share on the face value of INR 1 per share.


View: We are having a long term positive view about the company as price of key raw materials like phosphoric acid, ammonia and sulphur jump down by around 11%, 30% and 14% respectively which is likely to increase margins. In addition to that, increasing number of retail stores is likely to boost company’s profitability. Moreover, by acquisition of 74.57% equity stake of Sabero Organics, CIL enhanced its product portfolio.


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>HINDUSTAN ZINC LIMITED: Expansion at Kayar mine is progressing (Q4FY12 results)

Silver lining in operations remains, maintain buy


Hindustan Zinc (HZL) reported better-than-expected Q4FY12 results with net sales of Rs30.9bn, up by 12.6% QoQ and PAT of Rs14.1bn, up by 10.9%QoQ. EBITDA stood at ~Rs16.6bn with margin at 53.6% (against our expectation of 52.7%), 250bps higher QoQ as new capacities in lead and silver stabilised and operational costs began to rationalise. We expect robust lead and silver volumes ahead as stabilisation process of new capacities is almost complete and maintain our positive stance on the stock on account of sound operations and attractive valuations. We factor in 50% increase in royalty from FY14E and revise our FY14E estimates lower by ~7%. Reiterate Buy with a revised lower target price of Rs151.


■ Lead and silver volumes increase more than expected: Lead and silver sales went up sequentially by ~30% and ~56% respectively as both the lead smelter and silver refinery stabilisations were faster than our expectations. Zinc volumes remained subdued with closure of high cost Vizag smelter and due to falling grade in Rampura Agucha zinc mine.


■ Margin shows sequential improvement: EBITDA improved by ~18% QoQ to Rs16.6bn and EBITDA margin stood at 53.6% (lower than our estimate of 52.7%) as operational costs were rationalized on account of stabilization of new capacities in lead and silver. Also, closure of high cost Vizag smelter and improvement in LME realizations helped in margin improvement QoQ.



■ Conference call highlights: New lead smelter of 100ktpa operated at ~80% capacity utilization in Q4FY12 and HZL expects 90% utilization in FY13E but would require some concentrate purchase from outside. Silver refinery of 350 tpa is fully commissioned and higher silver production is expected as SK mine ramps up to 2 mtpa. Expansion at Kayar mine is progressing well and mining at Rampura Agucha is expected to go underground by Q4FY14E with cost of production at ~US$300-310/tonne. The company closed its Vizag smelter and plans to make up for its ~30000 tpa zinc capacity from its Rajasthan smelters going forward. For FY13E, zinc production is expected to remain flat whereas lead and silver integrated production is expected at ~110 lakh tonnes and 350 tonnes respectively. Total lead and silver production expected is ~150 lakh tonnes and 400 tonnes respectively in FY13E. Dividends at 20% of PAT are expected going forward.


■ Earnings revised downwards for FY14E on royalty increase: We revise our earnings estimate for FY14E as we factor in ~50% increase (against proposed 100% increase in mining bill) in royalty on zinc, lead and silver from FY14E. We revise our zinc volume estimates lower for FY13E/14E and remain conservative on our LME zinc and lead realization assumptions but see upside risk to the same going forward as demand starts to improve globally. Our EBITDA and PAT for FY14E are revised downwards by ~8% and ~7% respectively. We have revised FY13E estimates upwards due to higher silver and lead volumes and cost savings on account of closure of Vizag smelter.


■ Valuations remain attractive, Reiterate Buy: We continue to like the stock due to expected strong volume growth in lead and silver, lower overall cost proposition, improvement in LME zinc and lead prices going forward and attractive valuations with favorable risk-reward. We continue to value the stock at 5x FY14E EV/EBITDA. We maintain our Buy rating on the stock with a revised target price of Rs 151.


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