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Monday, July 22, 2013
Gain for exporters, pain for the rest
The first batch of results for the June quarter has been a mixed bag. While profitability of export-intensive sectors, such as information technology (IT), surprised on the upside, a demand slowdown seemed to be spreading to the financial sector, especially private banks.
A better-than-expected show by IT biggies like Tata Consultancy Services and Infosys lifted the core operating margin (excluding other income) of non-financial companies by 80 basis points on a year-on-year basis, despite stagnant revenues and double-digit increase in wage cost. Currency depreciation helped IT companies and manufacturing exporters like Bajaj Auto to book higher rupee revenues and cushioned the blow from rising operating cost in India.
A total of 123 companies have declared their first-quarter results so far. Of those, 99 are non-financial companies, while the rest are banks, non-banking financial companies (NBFCs) and brokerages (clubbed as financials).
Maintain buy on Mindtree post Q1 FY13 results
The mid-tier software services exporter reported a better-than-expected 72% quarter-on-quarter jump in its first quarter net profit at Rs. 135cr, helped by new deal wins and foreign exchange gains. Revenue was up 6% QoQ at Rs. 648cr.
It has a nine-month target price of Rs. 1,095, an upside of 16.1% from its current market price of Rs. 943.
Brokerage summary follows...
Q1 FY14 dollar revenues for Mindtree were a positive surprise. Against our expectation of 2.5% qoq growth, the dollar revenues grew 4.2% qoq. This growth was largely volume backed with total volumes growing 4.1% sequentially. The pricing was largely stable with 0.4% qoq growth in dollar terms. The reported rupee revenues were up 5.8% to Rs6.5bn.
Among the key businesses, IT services continued to be the primary driver of the performance growing 5.4% qoq in dollar terms. The PE services on the other hand remained stable growing 1.1% qoq. The company has re-organised its primary business segments, these being Manufacturing, BFSI, Hitech, Travel and Others. Among these segments, the growth was led by Manufacturing and BFSI which grew 9.5% and 9.1% qoq in dollar terms. Among geographies, growth was largely driven by US which grew 5% in dollar terms. Within services, ADM (+9% qoq), IMS (+7.9% qoq) and testing (+6.5% qoq) drove the growth. Impressive client mining resulted in Top6-10/Non top 10 clients grew well at 6.2%/3.6% qoq in dollar terms. Its US$10mn+ clients also went up impressively from 9 last quarter to 10 currently.
The operating margin performance too was better than expected with OPM correcting only 60bps against our expectation of 120bps correction. The key headwinds of visa costs and strong employee hiring was offset by rupee depreciation and utilisation improvement (up to 74% from 71% last quarter). The revenue and OPM out-performance as well as materially better than expected other income (due to strong forex gains of Rs. 618mn) resulted in strong PAT growth 72% qoq (versus expectation of 17.5% qoq growth). The employee additions during the quarter were robust with net additions of ~700 employees (+6% of previous quarter base). Attrition too trended down to 12.4% from 13.4% last quarter.
Management’s qualitative guidance and commentary remained positive with an expectation of a better growth in FY14 than FY13. Improvement in outlook for PE services, continued traction/visibility in IT services space (driven by IMS) and overall improvement in spending behaviour of its client portfolio were the key reasons for the constructive commentary. On the margin front, weak rupee and margin levers like offshoring, utilization should help to maintain the OPM despite the headwinds of salary hikes and strong hiring. We increase our estimates to reflect out-performance and weaker rupee assumptions. We maintain BUY with 9-month TP of Rs1,095.
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IT stocks reboot after strong Q1 show from TCS
Key benchmark indices saw divergent trend on last trading day of the week after witnessing high intraday volatility. The barometer index, the BSE Sensex, logged small gains to settle at over 7-week high. The 50-unit CNX Nifty finished slightly lower. The Sensex advanced 21.44 points or 0.11%, off 106.75 points from the day's high and up 38.72 points from the day's low. The market breadth, indicating the overall health of the market, was negative.
Index heavyweight Reliance Industries rose ahead its Q1 June 2013 results today, 19 July 2013. Index heavyweight and cigarette major ITC rose marginally after striking a record high. Bank stocks dropped. In the pharma pack, Lupin scaled record high. Power equipment major Bhel dropped sharply. IT major TCS hit record high after reporting good Q1 results after trading hours on Thursday, 18 July 2013. Other IT stocks were boosted by good Q1 results from TCS. HCL Technologies scaled record high. Asian Paints reversed direction after striking a record high.
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