Q4FY2007 IT earnings preview
The street expectations have toned down considerably in terms of both Q4 performance and the annual guidance for FY2008, and the recent underperformance of the tech stocks indicates that the same has already been factored in the valuations. This essentially means that the negatives have been priced in, leaving limited scope for downside. But positive surprises, especially in terms of higher than expected annual guidance by Infosys, are not ruled out. However, the continued strengthening of the rupee and seasonal weakness in Q1 (due to wage hikes and additional visa related cost) would continue to influence sentiments on tech counters in the short run. We believe that any further weakness would be an opportunity to accumulate the front-line tech stocks and prefer Infosys and TCS.
STOCK UPDATE
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs711
Logan unveiled
Key points
- Mahindra Renault has made the much-awaited launch of its passenger car Logan. Three variants of the car have been launched—two in the petrol segment and one in the diesel segment.
- The vehicle has been priced aggressively as its petrol version is priced between 4.28 lakh and 5.69 lakh, and its diesel version is priced between Rs5.47 lakh and Rs6.44 lakh.
- Currently, the vehicle is being manufactured at the company's Nasik plant. With the setting up of a new greenfield plant near Chennai by mid-2009, the capacity would be scaled up by 300,000 units. Also, the localisation content would improve from 50% currently to about 80-90%.
- We expect the car to do well in the Indian markets, mainly on account of its pricing. We expect the launch of Logan to have a negative impact on models like Maruti's Esteem, Tata Motors' Indigo, and Hyundai's Getz. The launch of the passenger cars also further diversifies M&M's business model.
- At the current market price of Rs711, the stock discounts its FY2008E consolidated earnings by 10.4x. We maintain our Buy recommendation on the stock with a price target of Rs1,050.
SECTOR UPDATE
Cement
Government cuts CVD on cement imports
Key point
- The government on Tuesday scrapped the 16% countervailing duty (CVD) as well as the 4% additional duty on cement imports into the country, which is a sequel to the import duty cut in January (refer to our note dated January 23, 2007).
- With this move, the import parity price, which acts as a pricing benchmark for the domestic prices, will come down from Rs245-255 per bag to Rs210-215 per bag.
- The government has also expressed a possibility of a roll-back of the excise duty hike affected in the budget. If that happens, then the retail prices will come down to Rs210-215 per bag in line with the import prices.