Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,508
Current market price: Rs1,342
Results ahead of expectations
Result highlights
- Tata Consultancy Services (TCS) has reported a growth of 8.4% quarter on quarter (qoq) and of 40.8% year on year (yoy) in its consolidated revenues to Rs4,860.5 crore. The sequential revenue growth was driven largely by a 7.87% growth in the volumes, a 2% improvement in the billing rates and productivity gains of 2.6% on the fixed price projects. On the other hand, the revenue growth was dented by the appreciation of the rupee (to an extent of 2.46%) and an increase in the offshore contribution (to an extent of 1.56%).
- The earnings before interest and tax (EBIT) margin improved by 79 basis points to 26.1% on a sequential basis. The steep appreciation of the rupee dented the margin by 1.37% but the dip in the margin was more than made up by the positive impact of the higher billing rates (1.74%), the shift towards the high-margin offshore business (0.28%) and the cost efficiencies (0.14%). The company maintained its broad guidance of sustaining the full year margin at close to 25.8%, as reported in FY2006. However, we have factored in a decline of 60 basis points in the margin on a full year basis.
- The other income stood at Rs30 crore (includes foreign exchange fluctuation gain of around Rs3.6 crore), up from Rs7.7 crore in Q2FY2007. Consequently, the earnings grew at a relatively higher rate of 11.4% qoq and 47.2% yoy to Rs1,104.7 crore, which is much higher than the consensus estimate of around Rs1,086 crore.
- In terms of operational highlights, the company added 5,562 employees and 55 new clients during the quarter. It also bagged five large deals, including two deals of over $100 million and three deals of over $50 million. The management also indicated that it is currently pursuing around ten large deals of over $50 million each.
- Given the better than expected performance, we are revising upward the earnings estimates by 3.8% for FY2007 and by 5.6% for FY2008. We maintain the Buy call on the stock with a price target of Rs1,508.
Bajaj Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs3,300
Current market price: Rs2,775
Profit margins disappoint, other income perks up
Result highlights
- Bajaj Auto's Q3FY2007 results have perked up due to the other income component while the operating margins continued to be under pressure during the quarter.
- The net sales rose by 28.4% to Rs2,568.2 crore, which is slightly ahead of our estimates, led by a 22.9% growth in the volumes and a 4.5% growth in the realisations.
- Higher sales of the entry-level bikes, high raw material costs and intensified competition leading to higher selling costs exerted pressure on the margins. The operating margins declined by 370 basis points year on year (yoy) and by about 80 basis points sequentially to 14.2%. Consequently, the operating profit rose by just 1.5% to Rs363.6 crore.
- Higher other income of Rs161 crore and lower interest costs helped the company to pst a 22.8% growth in its net profit at Rs357.1 crore. The profit after tax (PAT) after extraordinary items rose by 23.3% to Rs345.2 crore.
- Our view is that Bajaj Auto is the best pick in the two-wheeler space with its strong brand equity and product mix in comparison to its peers. The operating profit margins should improve going forward. We maintain our positive stance on the stock on back of the company's strong position in the two-wheeler industry and continued growth in the insurance segment. A possible demerger of its investment portfolio may act as a further trigger for the stock in the coming times.
- At the current market price of Rs2,775 , the stock discounts its FY2008E earnings by 18.3x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 10.7x. We maintain our Buy recommendation on the stock with a sum-of-parts price target of Rs3,300.
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,341
Current market price: Rs1,038
Price target revised to Rs1,341
Key points
- Sun Pharmaceuticals Industries (Sun Pharma) recently received the approval for the 100-milligram capsules of the anti-convulsant drug, Phenytoin, used to treat seizures related to epilepsy and neurosurgery. Anticipating a 20% market share for Caraco Pharmaceuticals (Caraco) at 50% price erosion, we believe this approval is likely to add revenue worth $20 million to the FY2008 revenues.
- In view of the recent launches like Phenytoin, Ondansetron and Glipizide, and the potential revenue flowing from the tentative approvals (eg Zolpidem Tartarate and Carvedilol), we expect Caraco's revenues to grow by 44.1% and 48.9% to Rs537.1 crore and Rs799.6 crore in FY2007 and FY2008 respectively.
- The rest-of-the-world market is likely to maintain the CAGR at 53% for the next two years. Hence, our revised export estimates stand at Rs1,026.8 crore and Rs1,484.2 crore for FY2007 and FY2008 respectively. That is a CAGR of 49.4%.
- On the domestic formulations front, the evolution index of Sun Pharma is 106% whereas the industry grew at above 17% in the last couple of quarters. Hence, we have revised our growth estimates for the business from the earlier 16% to 18%. As a result, our revised top line estimates for the company stand at Rs2,145.8 crore and Rs2,791.2 crore for FY2007 (up 31.1%) and FY2008 (up 30.1%) respectively.
- With more and more revenues flowing from the high-margin US market, the OPM is likely to expand by 390 basis points to 33.9% in FY2008. As per our revised estimate, the net profit would grow at over 27% CAGR to Rs712.2 crore n FY2007 and to Rs927.2 crore in FY2008.
- The demerger of the innovative research unit is expected to be completed by the end of FY2007. Post-demerger, the R&D expenses would reduce by ~35%, leading to the accretion of Rs2.1 and Rs2.7 to the FY2007E and FY2008E EPS respectively.
- Our revised EPS estimates stand at Rs36.7 (up 7.5%) and Rs47.5 (up 3.5%) for FY2007 and FY2008 respectively. As per our revised estimates, we have valued the base business at Rs1,287 and the demerged R&D entity at Rs54 per share (as per our previous estimate). This gives us a fair value of Rs1,341 for Sun Pharma. Hence, we maintain our Buy recommendation on Sun Pharma with a revised price target of Rs1,341
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