Research calls

iGate Global Solutions Recommendation: Buy Reco price: Rs 286 Current market price: Rs 280 Broking firm: Edelweiss

iGate Solutions exceeded analysts’ expectations for its first quarter FY08 results, where concerns had risen due to slow-down in the sub-prime mortgage market in the US and erosion of operating margins due to rupee appreciation.

The impact has been mitigated as the company has been able to manage costs, drive productivity, and increase its offshore contribution. As a result, revenues have been down 5.1 per cent q-o-q to Rs 200 crore for Q1FY08, marginally better than analysts’ expectation of a 6.5 per cent decline.

Owing to better realisation, improved utilisation, and increased proportion of offshore revenues, iGate’s operating margins were at 13.2 per cent, as against an expected 11.2 per cent, reporting a decline of 210 bps q-o-q. At Rs 286, the stock trades at 13.4 times and 8.8 times its estimated FY08 and FY09 earnings, respectively.

Infosys Technologies Recommendation: Neutral Reco price: Rs 1930 Target price: Rs 1928 Current market price: Rs 1935.95 Broking firm: Man Financial

Man Financial downgraded its recommendation from “Buy” to “Neutral”, revising its earnings estimates for Infosys. Infosys’ revenues remained flat sequentially in rupee terms during Q1FY08, while its operating margins declined 300 basis points sequentially, on account of the impact of rupee appreciation, seasonal salary hikes, and visa costs. Net profit too, declined q-o-q by 5.7 per cent to Rs 1,079 crore in spite of higher other income and lower effective taxes.

Man Financial expects earnings growth momentum to further slow down, as earnings may grow at a compounded annual rate of 19.3 per cent between FY07-FY09, as against a compounded growth of 42.3 per cent between FY07-FY07.

As a result, the earnings estimates are revised downward by approximately 7 per cent and 16 per cent for FY08 and FY09 respectively. At Rs 1928, Infosys trades at 23.9 times and 20 times its estimated FY08 and FY09 earnings, respectively.

Bajaj Auto Recommendation: Hold Reco price: Rs 2,195 Current market price: Rs 2171 Broking firm: ASK Securities

Bajaj Auto reported topline of Rs 2,110 crore, a drop of 4.2 per cent y-o-y, weakest in the last five years. This weak performance could be attributed to the drop in volumes, which fell 11.8 per cent y-o-y on account of high interest rates and slowdown in lending.

The decline in revenues was arrested due to better than expected realizations. Operating margins during the quarter declined by 330 bps y-o-y to 13.1 per cent leading to an 18 per cent y-o-y fall in net profit to Rs 226 crore.

Going forward, ASK Securities expects higher volume growth from second half of FY08, riding on successful launch of the new platform and correction in dealer inventory pipeline. Further, higher contribution from the executive and premium segments and price hikes on Platina and Discover recently are expected to improve the overall profitability.

ASK Securities upgraded the stock from “Sell” to “Hold”, as it arrived at a sum-of-the-parts valuation of Rs 2,260 per share for the company. At Rs 2,195, the stock is valued at 11.6 times and 9.8 times its estimated FY08 and FY09 earnings respectively.

KEC International Recommendation: Buy Reco price: Rs 555 Current market price: Rs 583 Target price: Rs 652 Broking firm: Pranav Securities

KEC International, a player in the power transmission segment, has witnessed a compounded growth of 36.7 per cent annually in its topline, over the past three years. Currently, the company has an order book worth Rs 3,000 crore, around 1.4 times its FY07 sales.

For the coming three years, Pranav Securities expects KEC to record a topline growth of a compounded 23 per cent, while the bottomline is expected to grow at a compounded 29.3 per cent. Internationally transmission and distribution sector is expected to witness an investment of $ 424 billion in next five years. KEC International with more than 70 per cent of its order book from international business seems well set to take advantage of the available opportunity.

Further, the domestic power transmission sector has seen a boom in last few years and Pranav Securities expects it to sustain for the coming 4-5 years driven by government plans to add more than 1,00,000 MWs power generating capacity till 2012. At Rs 555, the stock traded at 15.7 times and 11.9 times its estimated FY08 and FY09 earnings respectively.

Reliance Capital Recommendation: Outperformer Reco price: Rs 1,110 Current market price: Rs 1189.35 Target price: Rs 1,337 Broking firm: Prabhudas Lilladher

Reliance Capital’s foray into insurance and asset management are expected to be the major contributors to its value. Further, the company’s entry into high growth ventures like broking and consumer finance to act as a catalyst for future growth.

Life insurance premium for the company is expected to grow by 4.6 times during FY07-FY09, increasing its market share from 4.8 per cent in FY07 to 8.25 per cent in FY09, amongst private insurers.

Add to this, its asset management business is expected to continue growing significantly, registering a compounded growth of 48 per cent over FY07-FY09. Again, its forays into broking, distribution and consumer finance would offer the company a huge opportunity to cross-sell its products.

Summing up the parts – life insurance, asset management, broking and consumer finance – Prabhudas Lilladher arrived at a valuation of Rs 1,337 per share for Reliance Capital, which implies a potential upside of over 20 per cent from the current levels.