SHAREKHAN SPECIAL
Q4FY2007 Capital Goods earnings preview
The Working Group on Power for the 11th Five-Year Plan has envisaged an addition of around 69,000 megawatt (MW) of power generation capacity during the plan period (FY2007-12) and an additional capacity of 86,500MW during the 12th Five-Year Plan. Looking at the current status of the 10th Five-Year Plan’s (FY2002-07) capacity addition programme, these targets looks quite aggressive since the government had planned a capacity addition of 41,110MW during the 10th Plan period whereas the actual achievement is likely to be around 25,000MW (only 61% of the target). Out of this about 17,995MW of capacity had already been commissioned till December 31, 2006. However the fact that a total of 31,345MW of capacity is already under construction gives the panel's plan a lot of credibility.
Looking at the huge power generation capacity addition programme of the government (totaling to around 155,000MW in the next ten years), the order flow momentum for the capital goods companies engaged in the power sector, such as Bharat Heavy Electricals Ltd (BHEL), Crompton Greaves, Bharat Bijlee, Indo Tech Transformers, KEI Industries and Genus Overseas, is expected to be robust. Going by the recently announced provisional results of BHEL, wherein its order flow for the full year ended March 2007 registered an increase of 88% to Rs35,633 crore and the order backlog stood at an all-time high of Rs55,000 crore, the time ahead for power ancillary companies appears even more promising.
STOCK UPDATE
Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,508
Current market price: Rs1,250
Disappointing performance
Result highlights
- Tata Consultancy Services (TCS) has reported a growth of 5.9% quarter on quarter (qoq) and 38.2% year on year (yoy) in its consolidated revenues to Rs5,146.4 crore during Q4FY2007. The sequential revenue growth was largely driven by a 6.42% growth in the volumes and a cummulative growth of 1.33% in the billing rates (0.89%) and employee productivity (0.44%). On the other hand, the appreciation of the rupee adversely affected the revenue growth by 1.87% sequentially.
- The earnings before interest and tax (EBIT) margin declined by 47 basis points to 25.6% sequentially, largely due to the adverse impact of the rupee's appreciation.
- The other income stood at Rs89.8 crore and included a one-time extraordinary income of Rs66.3 crore from the sale of the stake in Sitel. Excluding the one-time income (adjusted for tax), the consolidated earnings have grown at a disappointing rate of 1.1% qoq to Rs1,116.8 crore, which is much lower than the consensus estimate of around Rs1,185 crore.
- In terms of the outlook, the company doesn't give any specific growth guidance. However, it has indicated that the demand environment continues to be robust and the gross employee addition would be higher than 32,462 reported in FY2007 (12,000 campus offers have been made). The TCS management also expects to maintain the margins around the level of 25% reported in FY2007, in spite of the aggressive salary hikes in FY2008 (13-15% for the offshore employees and 3-5% for the onsite employees).
- The key operational highlights for Q4 are: an addition of 43 clients; a healthy sequential growth of 9.3% in revenues from the Top 10 clients; the attrition rate in the information technology service sector at a comfortable level of 10.6%; closure of two large deals worth over $50 million each and one deal of $35 million; and a healthy pipeline of large deals. On the flip side, there has been a slowdown in the sequential growth of revenues from the banking, financial services and insurance (BFSI) and manufacturing industry verticals.
- Given the lower than expected performance and the steep appreciation in the rupee, we have revised down our FY2008 earnings estimate by 0.5% and have also introduced the FY2009 estimates. We maintain the Buy call on the stock with a price target of Rs1,508 (around 23x FY2009 earnings per share).
UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs575
Current market price: Rs465
Robust growth continues
Result highlights
- UTI Bank’s Q4FY2007 profit after tax (PAT) was better than our expectations at Rs211.9 crore, up 39.6% year on year (yoy) compared to our estimate of Rs186.2 crore mainly due to a higher than expected net income and lower operating expenses during the quarter.
- The net interest income (NII) was up by 48.4% to Rs464.2 crore compared to our estimate of Rs435.9 crore. UTI Bank's reported net interest margins (NIMs) expanded by 10 basis points yoy and by 6 basis points quarter on quarter (qoq). However the same included a one-time cash reserve ratio (CRR) interest of around Rs22 crore received during the quarter otherwise the NIMs would have had a downward bias on a quarter-on-quarter (q-o-q) basis.
- The non-interest income was up 32% yoy and 8% qoq to Rs301.1 crore and the fee income growth remained robust at 58.8% yoy and 29% qoq. However the treasury income declined by 34.3% yoy and 46% qoq.
- The operating expenses grew in line with the overall business growth; however the provisions were up 56.3% yoy and 40% qoq mainly due to the increased provisioning requirement on the standard assets for Rs68.1 crore, which is a one-off item.
- Although UTI Bank has grown at a robust pace in the last couple of years there are no visible signs in the deterioration of its asset quality yet. The net non-performing asset (NPA) level (as a percentage of its net customer assets) improved to 0.61% from 0.68% in Q3FY2007.
- Currently the bank’s capital adequacy ratio (CAR) is at 11.57% with Tier-I at 6.42%. The bank has also aggressively raised its hybrid capital and has left itself very little headroom to grow its balance sheet. The bank plans to come out with a follow-on offer in FY2008 to boost its CAR. We have factored in an equity dilution of 3.6 crore shares (12.8%) of the pre-issue equity capital at an issue price of Rs500 per share.
- The bank opened 80 new branches during the quarter. Its deposits grew by 46.5% to Rs58,785.6 crore of which savings and current deposits grew by 50.3% and 41.8% respectively. The current and savings account (CASA) ratio remained stable on a year-on-year (y-o-y) basis but improved on a q-o-q basis to 40% from 37.1% reported in Q3FY2007 mainly due to an increase in the current account deposits, which as a proportion of deposits increased from 16.6% in Q3FY2007 to 19.2% in Q4FY2007. Advances reported a strong growth of 65.3% to Rs36,876 crore of which the retail advances were up by 37.6% to Rs8,928 crore. However on a q-o-q basis the retail advances have declined by 2.7% mainly due to a sell down in the personal loan portfolio.
- The actual PAT for FY2007 was 4% above our estimates at Rs659 crore and we have upgraded our FY2008 numbers by 4.8% to Rs851.1 crore mainly on account of lower operating expenses estimated for FY2008. At the current market price of Rs465 the stock is quoting at 17.4x its FY2008E earnings per share (EPS), 8.5x its FY2008E pre-provisioning profits (PPP) and 2.5x its FY2008E book value (BV). We feel the dilution would be book value accretive and maintain our Buy recommendation on the stock with a price target of Rs575.
HCL Technologies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs410
Current market price: Rs301
Q3FY2007—first cut analysis
Result highlights
- HCL Technologies has reported a revenue growth of 7.6% quarter on quarter (qoq) and 39% year on year (yoy) to Rs1,577.1 crore for the third quarter ended March 2007. This is the third consecutive quarter of close to double-digit sequential growth in the revenues (in dollar terms) and far ahead of the street expectations. The sequential growth was contributed by a 16.4% growth in the business process outsourcing (BPO) revenues. On the other hand, the infrastructure management service (IMS) and software services businesses grew at a relatively lower rate of 6.4% and 6.5% respectively, on a sequential basis.
- The earnings before interest, tax, depreciation and amortisation (EBITDA) margins improved by 115 basis points to 23.3% on a sequential basis, despite the adverse impact of the steep appreciation of the rupee (1.6% appreciation in the average realised exchange rate against the US dollar). The sequential improvement in the margins was largely aided by the cumulative impact of better realisations (including non-effort-based gains from the output-based priced projects), higher utilisation (especially in the BPO business) and a 70-basis-point saving in the selling, general and administration (SG&A) cost as a percentage of sales.
- In terms of the segments, the EBITDA margins of all the three business lines improved on a sequential basis. The BPO business reported a second consecutive quarter of robust improvement in its margins, up by 360 basis points to 26.5%. The software services and IMS businesses reported an 85-basis-point and a 13-basis-point improvement respectively.
- The earnings grew at a robust rate of 15.9% qoq and 72.1% yoy to Rs331.8 crore (ahead of our expectations of Rs290 crore and the consensus estimates of a flat or negative growth sequentially, especially after the higher base resulting from the robust performance in the previous two quarters). The growth in the earnings was also aided by the foreign exchange (forex) gains of Rs41.8 crore on the open forward contracts, up from Rs34.7 crore reported in Q2FY2007.
- In terms of the operational highlights, the ramp-up in the large deals is beginning to make a material impact on the overall performance. Moreover, the company continues to bag new multi-million, multi-year, multi-services deals and has announced six new deals in Q3--five in the range of $25-50 million each and one over $50 million.
- Given the company's higher-than-expected performance for the past three consecutive quarters and the continued traction in the intake of large deals, we would upgrade our estimates for FY2007 and FY2008 and introduce FY2009 estimates in the detailed result analysis report. At the current market price the stock trades at 18x FY2007 and 14.5x FY2008 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs410.
MUTUAL FUND: INDUSTRY UPDATE
Equity AUMs rise in line with market movement
The AUM for equity funds rose by 1.3% to Rs139,147 crore in March 2007. The rise in the AUM was more or less in line with the market movement of 1%.
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