KPIT Cummins Infosystems Ltd.
Visit Note
We met Mr. Sanjay Sinha, Head – Business Development & Investor Relations and Karthik Krishnan, Manager – Investor Relations to get an update of the recent business developments and to check management’s preparedness and confidence for achieving revenue and earnings target under its Mission 2010.
Under the Mission 2010, the company has set a target of achieving US$250mn in revenues and US$40mn in earnings by FY10. This calls for a CAGR of ~35.5% in revenues from FY07E US$100mn and ~50.5% in earnings from FY07E US$11.6mn over FY07-10. Management has clarified that it should not be construed as a formal guidance as it actually defines the general direction of growth of the company.
RBI continues monetary tightening- Hikes CRR and LAF Repo rate
Major highlights
- CRR hiked by 50 bps in 2 stages effective from 14th and 28th April 2007
- Cut in interest paid on excess CRR above 3% to 0.5% from 1% earlier
- Repo rate hiked by 25bps to 7.75% widening interest rate corridor to 175bps
India’s Central Bank once again hiked policy rates to contain inflationary pressures in the economy. This is sighting high credit growth of 29.4% and inflation, which has sustained over 6% for 11 weeks in a row (currently at 6.46%). While the hike in CRR (by 50bps in 2 stages) and Repo rate (by 25bps with immediate effect) is not unwarranted, the timing of the move certainly is; as the Monetary Policy Review is scheduled on April 24, 2007. RBI has also reduced the rate of interest paid on excess CRR (above 3%) maintained with itself from 1% to 0.5%. While inflation is expected to come down from May 2007 due to the high base effect and impact of monetary measures, sustainable drop is likely with structural changes through capacity additions and better food grain supplies.
All the monetary measures are expected to make money dearer and we expect Banks to once again increase lending and deposit rates. The drop in interest rate on CRR is likely to impact margins marginally by around 2bps, which we expect this to be recovered through lending rates. Sharp rise in interest rates over the past 12 months has seen affordability reduce and could impact asset quality in the future. We maintain our neutral stance on the sector. PNB, BOI and BOB are our top picks, while Canara Bank is our top SELL in our coverage. We are in the process of updating our ratings and will realease it soon.
Sugar Incentives - positive move in short term
Government support for the sector positive in the short term Government has reportedly announced a series of measures to provide short term support to the sugar industry. These measures include:
- A subsidy of Rs1.35/kg for coastal states like Maharashtra, Tamil Nadu, Karnataka and Gujarat while a subsidy of Rs1.45/kg for north based mills.
- Creation of a buffer stock of about 2mn tons.
- With an estimated sugar inventory of about 8mn tons by September 2007, the buffer stock would lower the cost of holding for the companies which would be borne by the government.
Beneficiary Companies
Companies with sizable re-export obligations are expected to take advantage subsidy schemes to partially liquidate their inventories accumulated as a result of bumper cane crop in the current seasons.
For instance, Sakthi Sugars, one of the largest exporters, has an obligation under the Advance License Scheme (ALS) of about 200,000MT to be exported by December 2007. The average import price of raw sugar was about US$200/ton while the company expects export realizations of about US$310/ton which would translate into domestic price of Rs13.2/kg which, coupled with the export subsidy of about Rs1.35/kg, would lead to net export realization of about Rs14.5/kg.
No Impact On Larger Players
Larger sugar companies like Bajaj Hindustan, Balrampur Chini Mills and Triveni Engineering and Industries do not have any obligation under ALS hence would remain unaffected by any such scheme. These companies may, however, look at fresh exports if domestic prices tumble further since this would help them liquidate mounting stocks albeit at lower international realizations.