Search Now

Recommendations

Friday, April 20, 2007

Sharekhan Investor's Eye dated April 20, 2007


STOCK UPDATE

  • Inflation spurts above 6%


STOCK UPDATE

Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs708
Current market price: Rs580

Price target revised to Rs708

Result highlights

  • Wipro's global information technology (IT) service business reported a growth of 5.1% quarter on quarter (qoq) and 32.6% year on year (yoy) to Rs3,035.7 crore (under US GAAP) for Q4FY2007. The numbers are largely in line with our expectations. In dollar terms, the revenues grew at a reasonably healthy rate of 7.8% sequentially to $690.7 million, which was contributed by a 7.4% growth in the IT service business and an 11.3% growth in the business process outsourcing (BPO) business. The sequential growth in the IT service business was driven by a volume growth of 5.4% and an improvement of 2% in the average realisations. On the other hand, the sequential growth in the BPO business was purely driven by a 13.9% improvement in the average realisation with a decline of 1.4% in the volumes.
  • In terms of its operating profit margin (OPM), the adverse impact of wage hikes (a 3-4% hike to the onsite employees with effect from January 2007; a net impact of 60 basis points) and the rupee appreciation (a negative impact of 80 basis points) was partially mitigated by the smart improvement in realisation (in both the IT service and BPO businesses), an improvement in employee utilisation, lower losses in the acquired entities and other cost efficiencies. This resulted in a net impact of 20-basis-point sequential decline in the OPM (to 23.5%) of the global IT service business.
  • On the flip side, the revenue growth guidance of $711 million implies a muted sequential growth below 3% in the revenues of the global IT service business during Q1. In fact, given the appreciation of the rupee, the growth in rupee terms could be flat or even negative during Q1FY2008. However, the first quarter tends to be generally slow for the company and doesn't reflect the robust demand environment and strong visibility of its revenue growth.
  • In addition to a decent growth in the global IT service business, the robust sequential growth of 15.8% in the Indian IT service business enabled the company to report a healthy growth of 9.3% qoq and 42% yoy in its consolidated revenues to Rs4,334.5 crore. The OPM declined by 50 basis points to 18.9% largely due to higher sales, general and administrative (SG&A) expenses, resulting in a relatively lower growth of 6.2% qoq in its consolidated earnings to Rs791.4 crore (after adjusting for the tax write-back of Rs70 crore) during the quarter.
  • We have slightly revised down the FY2008 earnings estimates to factor in the lower exchange rate and introduced the FY2009 earnings estimates. At the current market price the scrip trades at 23.5x FY2008 and 18.8x FY2009 estimated earnings. We maintain our Buy call on the stock with a price target of Rs708 (23x FY2009E earnings).

Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs550
Current market price: Rs473

Q4FY2007—first cut analysis

Result highlights

  • Satyam Computer Services (Satyam) reported a revenue growth of 7.1% quarter on quarter (qoq) and 35.4% year on year (yoy) to Rs1,779 crore during the fourth quarter. The revenue growth was higher than expectations and was driven by a healthy volume growth of 9.5% on a sequential basis. On the other hand, the 1.7% appreciation in the rupee limited the sequential growth in the revenue during the quarter.
  • The operating profit margin (OPM) declined by 162 basis points to 23.1% on a sequential basis, largely due to the adverse impact of the charges related to restricted stock units (RSU; 91 basis points) and higher personnel cost (135 basis points). It was partly mitigated by a 64-basis-point saving in the selling, general and administrative (SG&A) expenses as a percentage of sales. Thus, the operating profit was flat on a sequential basis.
  • However, the earnings growth was boosted by the steep increase in the other income component to Rs70.4 crore (up from Rs10.1 crore in Q3) as the company accrued better yield on investments and reported foreign exchange (forex) gains of Rs3.8 crore as against a forex fluctuation loss of Rs35.5 crore in Q3FY2007. Consequently, the consolidated earnings grew by 16.7% qoq and 38.3% yoy to Rs393.6 crore, which is much ahead of the consensus estimate of around Rs358 crore.
  • On the full year basis, the consolidated revenues and earnings grew by 35.3% to Rs6,485 crore and 43.1% to Rs1,404.8 crore respectively. The OPM declined by 60 basis points to 23.7% in line with the revised guidance of the company.
  • In terms of the guidance for FY2008, the consolidated revenues and earnings are guided to grow in a healthy range of 28-30% and 27-29% respectively. The growth in the rupee terms would be dented by the 600-basis-point appreciation in the rupee (exchange rate of Rs42.3 per US dollar assumed in guidance), resulting in the revenue and earnings growth guidance of 20-22% and 18-20% respectively. The margin is expected to remain flat in FY2008 as the cumulative adverse impact of around 6.2-6.5% from the rupee appreciation, wage inflation and RSU charges (around $20 million) are expected to be nullified by better realisation (200-300 basis points), better performance of its subsidiaries and other cost efficiencies (like offshore shift, lower SG&A as a percentage of sales, broadening of the employee pyramid and better management of the fixed priced projects). On the flip side, the earnings growth guidance for Q1FY2008 is quite subdued (flat or marginally negative).
  • We would review the FY2008 earning and introduce the FY2009 estimates in the detailed note. At the current price the stock trades at 18x FY2008 estimated earnings (including the non-cash charges for the stock options). We maintain our Buy call on the stock.

ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs880
Current market price: Rs791

Price target revised to Rs880

Result highlights

  • ACC's pre-extraordinary net profit for the first quarter of CY2007 grew by 39% year on year (yoy) to Rs344 crore, in line with our expectations.
  • The net sales grew by 26.7% yoy to Rs1,674 crore of which Rs1,619 crore came from selling cement. Even though cement volumes dipped by 3.8% yoy on account of maintenance and shut-downs during the quarter, the drop was more than offset by higher realisations (a growth of 30% yoy).
  • The expenditure grew by 15% yoy but remained flat on a quarterly basis at Rs1,167 crore. On account of a higher realisation growth, the operating profit grew by 60.9% yoy. The operating profit margin (OPM) expanded by 650 basis points on a yearly basis and by 140 basis points on a sequential basis.
  • The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne for the quarter stood at Rs1,040, clocking a year-on-year (y-o-y) growth of 67% and a quarter-on-quarter (q-o-q) growth of 6.7%.
  • The interest cost stood at Rs4 crore whereas the depreciation provision dropped to Rs62 crore.
  • To enhance its focus on the ready-made concrete (RMC) business, the company's board approved the transfer of the RMC business to a 100% subsidiary called ACC Concrete.
  • Cushioned by an other income component of Rs28 crore, the profit after tax (PAT) grew by 39% yoy to Rs344 crore. Considering an extraordinary income of Rs19 crore on account of the sale of ACC's residual stake in Everest Industries, the net profit stood at Rs363 crore.
  • In order to boost its volume growth in future, the company is carrying out a slew of measures that will result in higher capacity in each of the next three years. By the end of the current year, the company's total capacity will expand by 4 million metric tonne (MMT) on account of de-bottlenecking at its various plants.
  • Taking cognisance of the price freeze for the next one year and expecting the fresh capacities to start kicking in by the second half of the next financial year, we have assumed a realisation growth of 6% for CY2007 and no growth for CY2008. Thus, we are downgrading our CY2008 earnings per share (EPS) estimate by 16% to Rs66. But considering the lower depreciation provided by the company in the quarter, we are marginally upgrading our CY2007 EPS estimate to Rs71.4.
  • At the current market price of Rs791 per share, ACC is trading at 11.0x its CY2007E earnings and 12.0x its CY2008E earnings. On an enterprise value (EV) per tonne basis, the stock currently trades at USD127 per tonne on CY2008E capacity. The last three months have been tumultuous for the cement industry on account of uncertainties over prices due to excise duty hikes, price freeze etc. It may be recalled that we had mentioned in our previous note that we would be reviewing our price target. Now considering the revised earnings estimates for CY2007 and CY2008, we are downgrading our price target to Rs880 per share.

Sharekhan Investor's Eye dated April 20, 2007