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Monday, April 28, 2008
HCL Technologies: Buy
HCL Technologies is among the Tier-I software players which has delivered good numbers for this fiscal, supported by strong March quarter numbers.
The company’s differentiated service offerings and the good growth prospects suggest that investments with a one-year perspective can be considered in the stock. At Rs 262, the stock trades at a modest valuation of 13 times its estimated 2007-08 earnings.
In an uncertain macro environment where Tier-1 and only select Tier-2 players are, perhaps, well-placed to weather the slowdown-related difficulties, HCL Technologies appears a better investment bet.
IMS holds the key
Infrastructure management services (IMS) contribute as much as 15 per cent of HCL’s total revenues and have grown 40 per cent over the past year.
This places HCL Tech above all other Tier-1 players in the proportion of revenues derived from this service offering. Infrastructure services is a key component of many large outsourcing deals (multi-million, multi-year, multi-service) that have flowed to IT majors in the past year. IMS is billed at higher rates compared to other volume-driven services and a higher contribution from this service means better realisations.
HCL Tech takes an ‘asset-light’ approach to IMS by focussing on the services component of the deals alone. Its becoming both hardware and vendor ‘agnostic’ would help in this endeavour.
Changing service and geographic mix
In terms of service mix, engineering and R&D services which command higher billing rates, have grown over the year and now contribute 25 per cent of its total revenues.
This may stem from the fact that HCL Tech was a late entrant to the BFSI client segment. The advantage here is that verticals such as Hitech (including aerospace, automotive verticals), at 29.5 per cent of revenues, have overtaken BFSI (28.4 per cent) as the key contributor to revenues.
The automotive and aerospace sectors are becoming increasingly software-driven and are expected to drive the proportion of IT outsourcing upwards. HCL Tech, given its relationships with top automotive and aircraft manufacturing and design companies, is well-placed to tap this pie.
Similar is the case with the telecom vertical (16.5 per cent). In terms of geographic spread, higher contributions from Asia-Pacific (14.5 per cent) and Europe (29.6 per cent) are healthy trends.
The company has been able to win multi-million, multi-year, multi-service deals from relatively newer outsourcing geographies such as New Zealand and Australia, reducing the company’s exposure to any US-centric problems.
Recent acquisition strengthens BFSI
HCL Technologies’ $40-million all-cash acquisition of Capital Stream in the US may help expand its offering to its financial services clientele.
Capital Stream provides processing solutions to banks in the areas of credit analysis, prospecting and sales, due diligence, documentation and portfolio monitoring.
HCL Tech had been using these products since 2002, which suggests that it would already have fair understanding and comfort in Capital Streams’ offerings. There appear to be two advantages from this acquisition.
One of the products of Capital Stream is a Web-based application. This will mean easier and quicker delivery of certain services at lower cost, as manpower required for this mode of delivery would be low. Capital Stream’s solutions could also be used to tap into clients in geographies outside North America.
Improvements in operational-metrics
Fixed-price contracts now contribute 35 per cent of HCL Tech’s revenues. Fixed-price contracts require greater planning in terms of resource allocation and utilisation and definitive timelines of implementation.
It enables the company to predict cash-flows better, formulate a suitable hedging strategy and generate realisations.
This may become even more relevant in the current turbulent times where clients of HCL and, indeed, all Tier-1 IT service companies’ clients are demanding output/outcome-based pricing with service-level agreements.
Utilisation at 71.3 per cent has improved over the past year and still leaves some room to drive volume growth.
The increase in offshore revenues, which now contributes in equal measure as onsite revenues, creates a lower cost structure for HCL Tech. Attrition has come down from 17.5 per cent to 15.2 per cent, lowering execution risks.
Concerns
Two of HCL Tech’s top 10 clients have kept IT budgets at the same level. The company has indicated that clarity from other clients on IT spend will emerge over the next few months.
The visibility on IT spend and pricing continues to be an area of concern for all Tier-1 IT companies. Infosys has indicated that 76 of its top 100 clients have suggested flat to lower IT budgets. Infosys and Satyam expect clarity on the BFSI-related problems and its effects on IT spends only over the next few months.
The pricing or billing rates are not expected to grow and may remain flat.
This may hinder any increase in realisations and may lead to a more volume-driven growth. Most of these concerns also apply to HCL Tech.
Nicholas Piramal: Buy
Investors with a 12-month perspective should consider buying shares of Nicholas Piramal, a leading pharma company engaged in custom manufacturing drugs for Western companies and selling branded formulations in India. It is one of the top contenders in India to capture a fair share of the $15-billion outsourced pharmaceutical manufacturing market, as it has both the expertise and capacities to make the cut.
At the current market price of Rs 355, the stock trades at 17 times its estimated 2008-09 earnings per share. This appears reasonable given the company’s strong growth in 2007-08, which has the potential to improve over the next couple of years.
In the last 12 months, Nicholas Piramal’s sales grew by a handsome 16.2 per cent and net profit by 53 per cent. The company has turned its focus to contract research and manufacturing services recently, buying Pfizer’s drug unit in 2006 and Avecia’s unit in 2005 (both in the UK).
Operating margins have scope for improvement to 20 per cent-plus on greater momentum in its India-based custom manufacturing (CMG) contracts and the rationalisation measures at its UK operations. With increasing number of long-term supply contracts (shipments to five started this year) and rising profitability of the CMG business with the expected entry into injectables, Nicholas Piramal has significantly expanded its portfolio to over 175 molecules. This endows the company with a strong product pipeline.
Nicholas Piramal also derives about 45 per cent of its revenues from the domestic market through sale of branded formulations. The company is set to see good growth in anti-infectives, nutritionals and anti-diabetic segments, where it has already outpaced the market.
Sales from the newly acquired Anafortan and CEFI brands, introduction of a new derma-cosmetic division and launch of new over-the-counter products are some of the initiatives to watch out for. Along with a huge field-force (above 3,000), Nicholas Piramal is positioned to perform well.
Adverse movement in euro-rupee rates may hurt the drug major’s profitability, because of euro denominated realisations. The historical pattern suggests that first half results may be muted. Given the significant domestic component, any increase in the scope of drug price controls or restrictive policies on the same, will hurt the company.
Saturday, April 26, 2008
Put up credit policy that can absorb global shocks: ASSOCHAM
In view of global turbulence and shaking of investor’s confidence in the Indian market, the ASSOCHAM has advocated for a forward looking monetary policy that can absorb and withstand implications of global slowdown.
In a note submitted to the RBI Governor, the Chamber President, Venugopal N. Dhoot has proposed that the RBI should increase surveillance of entire financial system so that a crisis situation does not arise. The Chamber Chief has further suggested that Indian companies should be permitted to hike their overseas investment limit by 250% from current level of 200% of their total networth.
Dhoot said that the capital inflows should be diverted towards the infrastructure investment as this would help in solving the problems of access liquidity on account of capital flows and help in removing the infrastructure constraints.
The current investment boom in Indian economy can be hampered because of high borrowing costs particularly for small and medium enterprises and therefore, interest cut has become absolutely essential to ensure that SMEs contribution is enhanced towards domestic production and equally to exports. This would be possible with extension of liquidity to these enterprises particularly at lower borrowing costs.
The Chamber has also recommended that RBI should consider increasing the overall ceiling from US$ 22 billion and raising the company wise ceiling of US$20mn towards the domestic use of funds raised through the external commercial borrowing routes. The tightening of end-use norms for using the funds raised through this route should also be eased.
Since, the domestic companies are doing reasonably well, Dhoot said that India Inc. should be permitted to hike their overseas investment by 250% of their total networth so that their capital realization is used for capacities expansion with stronger currencies, added Dhoot.
The Chamber has pointed out that adequate liquidity infusion at appropriate time during crisis in the financial markets is a key element to avoid the situation of major turbulences as witnessed in the stock market in the last few months
India is 2nd biggest wireless telecom market
India has become second largest wireless network in the world after China by overtaking USA, as per data available on CTIA (International Association for the Wireless Telecommunications Industry) website. The total wireless subscribers base stood at 261.09mn at the end of March. A total of 10.16mn wireless subscribers have been added in March as against 8.53mn wireless subscribers added in the month of February. A total of 10.4mn telephone connections were added during March compared to 8.49mn in February. Total number of telephone connections reached 300.51mn at the end of March as against 290.11mn in February. The overall tele-density is 26.22% at the end of March versus 25.31% in February. In the wireline segment, the subscriber base increased to 39.42mn in March as against 39.18mn in February. Total broadband subscribers base reached 3.90mn from 3.47mn in February.
Inflation spikes further
India's inflation, based on the Wholesale Price Index (WPI), rose further in the second week of April even as the Government reiterated its resolve to contain inflation by taking all the necessary steps. The annual inflation accelerated to 7.33% in the week ended April 12, from the previous week's gain of 7.14%, the Commerce & Industry Ministry said. Inflation was 6.34% during the corresponding week of the previous year.
The WPI for All Commodities rose by 0.1% to 226.9 from 226.6 in the week ended April 5. The index for Primary Articles advanced 0.5% to 237.1 while the index for Fuel & Power was up marginally at 342.1. The index for Manufactured Products was unchanged at 197.6 while the index for Minerals Group surged 5.8% to 630.2 due to higher prices of iron ore and other minerals.
Meanwhile, the Government revised inflation rate for the week ended Feb. 13 to 5.66% from a preliminary estimate of 4.89%. The WPI for the same period stood revised at 220.4 as against the earlier forecast of 218.8. The Centre also said that the annual average rate of inflation during the year ended March 2008 works out to 4.51% compared to 5.42% during the previous fiscal year.
The Government will take all steps to reverse the rising trend in inflation, Prime Minister Dr. Manmohan Singh told allies of the ruling Congress-led coalition at a meeting in New Delhi. The Prime Minister also said that the Government is confident of increasing procurement of foodgrains this year. He said that indications are of improved food production, which will further contribute to increased food procurement.
Separately, Finance Minister P. Chidambaram told the parliament that the Government will seek to maintain the country's strong economic growth momentum and will take more steps to curb inflation. The Finance Minister also expressed confidence that inflation will moderate over time as the impact of fiscal and monetary measures kick in.
Friday, April 25, 2008
Market may start buoyant
The benchmark indices, Sensex and Nifty, are expected to commence on a firm note and witness significant rally during intra-day trades, as international markets backed by firm US and Asian indices may help the sentiment remain buoyant. Among the Asian majors, Nikkei has surged 271 points at 13812 while Hang Seng has moved down 107 points at 25574. On the technical front, the Nifty could test in the 5,050-5,085 range on the upside and has support at 4915, while the Sensex has a likely support at 16570 and may face resistance at 16855.
US indices posted steady gains on Thursday with the Dow Jones moving 86 points up to close at 12849, while the Nasdaq added 24 points to close at 2429.
Among the Indian ADRs trading on the US bourses, Satyam was the major gainer by 4.80%, followed by ICICI Bank up by 2.80%, HDFC Bank advanced 2.71%, VSNL gained 2.37% and Infosys scaled up 2.11%. Wipro & Tata Motors were up around 1%. However, Patni, Rediff, MTNL and Dr Reddy's slipped into the red.
Crude oil prices in the US market moved down, with the Nymex Light crude oil for June delivery moving down by $2.24 to close at $116.06 a barrel. In the Commodity segment, the Comex gold for June series lost $19.60 to settle at $889.40 a troy ounce.
Positive global cues, healthy rollovers may trigger early rally
Local market is expected to open firm following positive global cues. Healthy rollovers may lift the sentiment further. The alarming rise in inflation is a cause of concern, which is now way above Reserve Bank of India’s caution limit of 5%. All eyes will be on inflation figures to be released by noon today for the week ended 12 April 2008.
Cues from derivatives front were strong. As per reports, marketwide rollover from April 2008 series to May 2008 series stood at 82% as compared to 79% in the previous series, March 2008 to April 2008. Nifty rollover stood at 71% as compared to 63% in the previous series.
Market may turn cautious ahead of Reserve Bank of India (RBI)’s monetary policy review on 29 April 2008. Analysts are split whether the central bank will raise interest rates, with a slim majority of economists polled, predicting no change to interest rates.
The near-term market will be driven by the quality of earnings rolled out by corporates in the coming days. Aggregate results of 301 companies showed 18.20% rise in net profit on 23.80% rise in net sales in Q4 March 2008 over Q4 March 2007. There was 29.40% rise in net profit on 24.40% rise in net sales in FY March 2008 over FY March 2007.
Important results to be watched out for during the day are ABB, Bharti Airtel, Siemens, Ambuja Cements, Titan Industries and Cipla among others.
Most Asian markets were trading firm today, 25 April 2008. Japan's Nikkei (up 2% at 13,811.90), Taiwan's Taiwan Weighted (up 0.25% at 9,013.06), Singapore's Straits Times (up 0.02% at 3,178.09), South Korea’s Seoul Composite (up 1.06% at 1,818.35) rose. However, Hong Kong's Hang Seng slipped 0.55% at 25,540.81.
US markets advanced yesterday, 24 April 2008 as investors focused on the Labor Department data showing weekly unemployment claims dropped and word that Ford had a $100 million profit in the first quarter. The Dow Jones industrial average rose 85.73 points, or 0.67%, to 12,848.95. The Nasdaq Composite index added 23.71 points, or 0.99%, to 2,428.92.
The Dow Jones Industrial Average climbed 79.79 points or 0.63% to 12,843.01. The tech-rich Nasdaq composite rose 23.71 points or 0.99% to 2428.92 and the broad-market Standard & Poor's 500 index advanced 8.48 points or 0.61% to 1388.41.
Back home, the 30-share BSE Sensex gained 23.04 points or 0.14% at 16,721.08 on 24 April 2008. The broader based S&P CNX Nifty lost 22.95 points or 0.46% at 4,999.85.
As per provisional data, foreign institutional investors sold shares worth a net Rs 759.16 crore yesterday, 24 April 2008. Domestic funds bought shares worth a net Rs 442.88 crore on that day.
FIIs were net buyers of Rs 591.53 crore in the futures & options segment on Thursday, 24 April 2008. They were net sellers of index futures to the tune of Rs 229.12 crore and bought index options worth Rs 740.36 crore. They were net buyers of stock futures to the tune of Rs 40.13 crore and bought stock options worth Rs 40.16 crore.
World oil prices, which had threatened to break the $120-a-barrel level, fell further in Asian trading after a strengthening US dollar and rising US crude stockpiles prompted traders to lock in profits. New York's main oil futures contract, light sweet crude for delivery in June, fell 46 cents to $115.60 per barrel.
Morning Call - Apr 24 2008
Market Grape Wine :
In House :
Sensex at a supp at of 15600 and 15560 with a resis of 16780 and 17020
Cash :
Buy :Reliance above 2603 target 2636 with a s/l of 2590
Future:
Buy : Hindoilexp above 140 with target 148 with a s/l of 136
Satyamcomp above 441 target 460 with a s/l of 433
Out House :
Markets at a support of 16591 & 16661 and resistance at 16786 & 16961 levels .
Buy : RPL & RPower
Buy : RIL
Buy : LKP
Buy : IOLN
Buy : BombayDye
Buy : GujNRE
Buy : Coreproject ( bullet )
Buy : HDIL
Buy : IBulls
Dark Horse : HDIL, IBull , CORE , IOLN , RIL , RPOWER & RPL
Bullet of the day : HDIL & CORE
TGIF : Thank God Its Friday : Buy Low Sell High call of the day , stay invested at dips .
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