>TATA CONSULTANCY SERVICES (ICICI SECURITIES)

Spectacular show in difficult times

Tata Consultancy Services (TCS) Q1FY10 results positively surprised the Street and I-Sec, despite our estimates being at the higher end of the consensus (we rated TCS as top results pick in Q1FY10 preview note). With clear outperformance, Q1FY10 annualised EPS is now Rs31, higher than I-Sec and Street estimates for FY11 (before results). Considering management confidence on improved visibility in BFS going forward, its expectations of flat organic growth in FY10 (still implying +3% CQoQ in Q2-Q4FY10, though we estimate 1% decline in FY10) and 8-13% CQoQ decline in the past three quarters in troubled verticals of Manufacturing, Telecom & Hi-Tech, the company’s growth is unlikely to worsen significantly. We upgrade TCS to BUY from Hold.

■ We raise estimates and revise target price to Rs525. Post the overall stellar performance in Q1FY10 and extension of STPI tax exemption to March ’11, we raise FY10E & FY11E dollar revenues 3% each and EPS estimates 14% and 17% respectively. We now expect 8% EBITDA CAGR versus 3% for Infosys in FY09- 11E. With faster recovery in BFSI, we believe risk to revenue growth has reduced for TCS. Considering all these, we reduce target P/E discount to Infosys (currently at 17x FY11E EPS, which was raised post Q1FY10 results) to 5-10% from 15%. Hence, we upgrade TCS to BUY with revised price target of Rs525 from Rs385.

■ Outstanding Q1FY10 results versus peers (Table 2) with consolidated dollar revenue growth of 3.54% versus our expectations of flat growth. Though much of the growth is driven by domestic revenues, international business also grew 2.3% (growth in constant currency likely to be lower ~2%). With 190bps improvement in utilisation, 270bps in offshoring and 90bps in SG&A, EBITDA margin improved 100bps versus our expectations of 40bps decline. Despite higher fresher recruitment in H2FY10, we do not expect significant margin pressure considering the expected volume pick-up in H2FY10.

■ Resilience in growth across key metrics; higher deal wins in difficult times with eight large deals (five from the US) and pipeline of +20 deals versus Infosys winning six large deals in Q1FY10. BFSI showed good resilience and grew 5.9% QoQ, led by growth in top client. Q1FY10 results also indicate that TCS is increasing its wallet share in non-discretionary spend with ADM, IMS and BPO growing more than other services.

To see full report: TCS

>AXIS BANK (MORGAN STANLEY)

F1Q2010 – Treasury Drives Earnings; Remain UW

■ Axis Bank’s strong F1Q10 earnings were entirely driven by treasury: If we look at core earnings, they were weak. Volumes were down, NIMs were sluggish, fees were weak, and costs remained high. As a result, normalized earnings were under pressure. On our calculations, normalized earnings were around half of reported (adjusted for trading gains, write-backs and 10% provision on restructured loans), implying that the bank made single-digit normalized ROE in the quarter. Our view has been that the moment volume progression slows, earnings progression will decelerate, which appears to be happening.

■ Asset quality is under pressure: Despite the bank taking significant NPL provisioning, the coverage amount reduced, implying high charge-offs and a high level of new delinquencies. On our calculations, about 1.8% of loans are becoming NPLs annually. This is without accounting for the sharp spike in restructured loans. Including restructured loans, asset quality deterioration has intensified. The coverage for the bank on total impaired loans is about 20%.

■ Segmental earnings present little comfort: On segmental earnings, the bank made a loss on the retail banking business. The only segment that did well was treasury, which contributed about 50% of earnings. If we look at just trading gains, they were about 38% of PBT, suggesting earnings quality was weak.

■ Valuations are stretched, in our view: The stock is trading at 15x F10E earnings and 2.3x book. Moreover, core profitability is similar to the earnings profile at SOE banks. We believe that we can get better risk reward at SOE banks (trading at 5-6x PE and sub or around 1x book). We maintain UW.

To see full report: AXIS BANK

>INDIA WIRELESS (CITI)

1QFY10E: Mixed MOU Drivers, Forex Trends Could Aid PAT

■ Headline revenue growth impacted by lower termination — We forecast mobile revenue growth of 3-4% as termination cut shaves off ~3p from headline rev/min. Like-for-like, the revenue growth would be 7-8% QoQ, an improvement over 4QFY09. EBITDA margins will receive mathematical support (with lower termination) and reversal in forex losses (esp. for Bharti) will aid performance at PAT level. Overall, we expect EBITDA to grow 17% YoY and PAT at 2% YoY.

■ MOUs to reflect multiple factors in 1Q — We expect a modest 1-2% MOU growth to reflect (i) reducing impact of free mins in Jun-quarter and (ii) election led traffic activity, which will be partially offset by (iii) seasonal slowdown during the quarter. As for rev/min, we assume a additional decline of 1-2p in addition to the 3p impact of termination cut.

■ EBITDA margins flat to marginally up — Due to the reduction in headline RPM as well as interconnect cost, the EBITDA margin would mathematically move up by 1.1-1.2%, everything else remaining equal. This will be offset by (i) in:out skew esp. for GSM operators and (ii) new launches esp. for Idea (TN & Orissa). As a result, we factor in 70bps QoQ margin improvement for Bharti & 110bps for RCOM but only 10bps for Idea.

■ Losses on forex liabilities will be stemmed — Bharti would gain from MTM/derivative gains in the quarter though it could be partially offset by higher tax (MAT increased). In RCOM’s case, there will be no impact as they adjust forex gains in the gross assets; depreciation could go up sharply if GSM capex starts getting capitalized.

To see full report: INDIA WIRELESS

>LARSEN & TOUBRO (CITI)

Hold: 1QFY10 – More Or Less In Line With Expectations

■ Recurring PAT up 18% YoY — At Rs5.8bn it was 6% ahead of CIRA estimates of Rs5.5bn. Reported PAT at Rs15.9bn, up 218% YoY, was higher on account of profit on Ultratech Cemco stake sale.

■ Slower execution, but no point worrying — Gross sales at Rs74.3bn, up 6% YoY, was below CIRA expectations of Rs83.9bn. Despite slower sales growth management maintains its 15-20% FY10E guidance. We are not unduly worried as this is reminiscent of FY07 when post 12% YoY growth in 9mFY07, L&T delivered 36% YoY growth in 4QFY07 and met its FY07 guidance of 20% YoY.

■ Margin expansion, pleasant surprise — Margins expanded 115bps and made up for slower sales growth, once again reminiscent of FY07, when despite slow sales growth L&T expanded margins significantly. Margin expansion was led by the E&C business and we expect E&E and MIP businesses to bounce back in FY11E. Cost efficiency and a larger % of jobs crossing the margin threshold level being recognised in 1QFY10 led to the margin improvement.

■ Order inflows should pick up only in 3QFY10 — Order inflow at Rs95.7bn was down 22% YoY, with the company ending the quarter with a backlog of Rs716.5bn, up 23% YoY. We expect muted order inflow in 2QFY10 similar to 1QFY10, and believe that L&T is basically relying on the 2HFY10 to meet its full year order inflow guidance of 25% YoY.

■ Maintain Hold/Low Risk (1L) — Given the stock seems fairly valued at 18.9x FY11E.

To see full report: LARSEN & TOUBRO