Dead Presidents! - India Equity Research

Monday, July 02, 2007

PSEC - Infosys Technologies

P-Sec report on Infosys Technologies:

This shall be one of the tough AMJ quarter for Infosys. We are revising are Rs/USD assumption to Rs 42.5 for FY08 and FY09 estimates. We are expecting operating revenues of Rs 39313 million, a q-o-q growth of 4.22% and y-o-y growth of 30.4%. However in USD terms we are estimating revenues of USD 925 million ( 7.2% q-o-q, 40.2% y-o-y) We are expecting a q-o-q margin erosion of 244 bps this quarter reflecting the impact of rupee appreciation, Salary hikes, visa expenses. Infosys has only 3.2% of the balance sheet size in the form of debtors & balance in foreign bank a/c. Hence, shall have lesser impact of mark to market of monetary assets. We continue to recommend a BUY at these levels.

HDFC Sec - Asian Hotels

HDFC Securities report on Asian Hotels:

Asian Hotels, AHL reported a turnover of Rs 4134 Mn in FY07 and a PAT of Rs 915 Mn, which were 26% and 61% higher yoy. For the quarter ended March 07, the turnover of Rs 1324 Mn and PAT of Rs 344 Mn were higher by 27% and 51% yoy, respectively. The topline growth was aided by 35% rise in ARRs and marginal increase in occupancy.

The strength in ARRs with an inconsequent increase in costs lead to OPMs surge 811 bps (much better than expected) and 600 bps for the quarter and year ended FY07 to 51.5% and 44.3% respectively. Though it slid below our topline estimate, it positively surprised on the margins front.

The board of AHL has decided to demerge the company and form three separate listed entities. Though the modalities of the restructuring still remain unclear, we have outlined the procedure, in brief ahead. On a rough cut basis, the fair value of the assets are assessed at Rs 20 bn against the market cap of Rs 17bn, an 18% upside. However, with limited information, taking into account strong earnings growth (ARRs to compound 7.5%) and constructive restructuring possibility, we reiterate its fair price at Rs 890 (in line with the AHL’s independent valuation estimate), offering an upside of 18% to the CMP. The fair price has been valued by assigning weights to three key parameters viz., PEG, EV/Room and DCF.

The stock quotes on FY07 basis at 4.6x its P/BV, EV/Ebitda of 9.2x, and offers 1.3% dividend yield. We reiterate “OUTPERFORMER”.

SSKI - IPCA Labs

SSKI Research report on Ipca Labs:

Ipca Labs (Ipca) is a formulation-focused and vertically integrated mid-sized generics company with a multi-pronged and geographically diversified business model. Ipca uses superior API development capabilities to attain global leadership in select APIs and is leveraging it to create strong formulation businesses in high profit branded formulation markets like CIS, Asia and Africa as also generic markets like USA and UK. With very strong product pipelines across geographies, we expect 22% CAGR in earnings over FY07-10. At 12.2x FY08E and 10.1x FY09E earnings, valuations are compelling given the upside possibilities. Initiating coverage with Outperformer and a price target of Rs 1013 (14x FY09E earnings).

Firing on all cylinders:

We expect 22% CAGR in Ipca’s consolidated revenues over FY07-10 driven by 27% CAGR in exports and 16% CAGR in domestic business. More profitable branded formulation exports are expected to register 32% CAGR while generic exports could clock 33% CAGR driven by scale-up in US sales. Ipca’s focus on chronic segments and brand building would drive branded formulations sales in international markets as well in India. Ipca’s ability to generate such strong organic growth momentum clearly reflects the effectiveness of its model.

Expect steady margins:

We estimate Ipca’s operating margin to remain steady at 20- 21% over FY07-10. While we expect margin improvements given faster growth in higher margin international branded formulations and scale-up in regulated market, we have conservatively built in steady gross margins to factor in rupee appreciation.

Attractive business model; Outperformer:

Leveraging its strong presence in chronic segment and brand building focus along with a 500 sales people network across multiple non-regulated markets (excluding India), Ipca is aiming at the USD 77 billion (by 2010) generics opportunity in non-US markets. Further Ipca’s US strategy of leveraging its lowest cost API production capabilities to launch select products and partnering with Ranbaxy would be a winner. At 10.1x FY09E earnings and 26.3% RoCE, Ipca is at sharp discount to peers and deserves to be re-rated.

Investment Argument:

Ipca’s initiatives for building a strong international business have started to pay off, as reflected in the 100% yoy profit growth in FY07 following two soft years. We believe Ipca’s focus on vertical integration and competencies in building successful branded businesses, combined with tight operational control, would continue to drive growth. Ipca has invested significantly in building sales networks in multiple non-regulated markets, which will start paying off handsomely with expanding product portfolios. We are positive on Ipca’s product selection strategy for the US market, which leverages its lowest cost producer status for multiple APIs. Likely deals with innovators for large scale manufacture of off patent APIs has opened yet another growth avenue for Ipca.

Financial Analysis:

We expect 22% CAGR in Ipca’s revenues and profits over FY07-10, driven by continued strong growth across business segments. Topline is expected to be driven by 27% CAGR in exports on the back of continued momentum in international formulations, initiation of US generic sales and strong scale-up in API exports. Domestic business would remain steady (16% CAGR expected). A consistently improving revenue mix, along with scale effect, would drive a 50bp EBITDA improvement over FY07-10. We expect Ipca to maintain strong return ratios (25-26%) over the period. Incremental API supply contracts with innovators and scale-up in malaria tender business will be upside triggers.

Valuations

With its geographically diversified business and strong emphasis on vertical integration as also branded formulations, Ipca is a strong business model to play the global generics opportunity. In our view, Ipca’s judicious investments in API development capabilities and for building sales front end have built a strong platform for sustained steady growth in its exports business. We remain confident of Ipca’s ability to deliver 20-25% CAGR in profit in the medium term. At 12.2x FY08E and 10.1x FY09E earnings, high growth visibility and 25%+ RoCE, Ipca is one of the cheapest stocks in the Indian pharma industry and deserves a higher rating. Initiating coverage with an Outperformer rating and a 12-month price target of Rs 1013 (16.9x FY08E and 14x FY09E earnings).

ISEC - Bharti Airtel

ICICI Securities report on Bharti Airtel:

Bharti Airtel (BAL) continued to outperform the Indian wireless industry, adding 1.9 million wireless subscribers in May ’07 and taking the total subscriber base to 40.7 million and market share to 23% (up from 20.4% in May ’06). Further, BAL’s revenue market share is notably higher across most circles due to the company registering the best ARPU in the industry on account of early-mover advantage. The surge in net-adds in the month was led by expanding geographical footprint and launch of new attractive schemes. While the pressure on the ARPU and ARPM would continue, we believe that BAL would be able to maintain its leadership position despite increasing competition due to expansive network, high usage customers and better quality services. With valuations remaining attractive at FY09E P/E of 21x and EV/EBITDA of 11x, we reiterate BUY on the stock.

Strengthening subscribers’ market share:

BAL has been one of the leading wireless players since its inception. The company has managed to differentiate itself from the competition and leap ahead by pro-actively investing in the business since the onset of the wireless rally at end-CY04. BAL has pulled up its market share from 19% in Q3FY05 to 23% as on date, adding 24% of total net-adds in the period. We believe that the company’s track record of unbeaten performance is here to stay, with BAL maintaining forefront position, riding on its existing lead and further investments in the business.

But revenue share even higher:

BAL was the first operator to attain pan-India presence and is amongst the first three entrants for 16 of total 23 circles, providing access to higher usage customers. This is reflected in the company recording the highest ARPU in the industry and taking the revenue share to 28% as against its subscriber market share of 21% in Q3FY07. In the prevalent cut-throat competition, service quality would be the differentiating factor as against pricing. We expect that BAL’s ‘Airtel’ brand pull, better quality of service and customised offerings would ascertain its leadership going forward.

Robust financial performance and attractive valuations:

Although BAL’s Infotel business (broadband & telephone, long distance and enterprise services) has performed better than the industry, it has underperformed the wireless business, resulting in a decrease in contribution from this segment from 42% in FY04 to 35% in Q4FY07. Despite the slower growth in the Infotel segment, BAL is expected to report 34% revenue CAGR and 33% earnings CAGR through FY07-09E. The stock is currently trading at FY09E P/E of 21x and EV/EBITDA of 11x, close to most large-cap companies with similar growth profile. We reiterate BUY on the stock, with target price of Rs 956.

Citigroup - India IT Services

Citigroup in their report on IT Services,

Disappointing quarter; INR impact — 1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs.41/$ assumption.

Look beyond 1Q; risk reward favorable — With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance — Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades.

Will companies revise guidance downwards? — The rupee has appreciated by 4- 6% after the FY08 guidance issued by Infosys and Satyam, respectively. We expected $-term revenue guidance to be revised upwards but do not rule out a downward revision in EPS guidance.

Infosys/TCS are our top picks — We believe Infosys/TCS are best placed in terms of margin levers. With low expectations and good business momentum, HCL Tech could spring a positive surprise.

Citigroup - Weekly Technicals

Citigroup in their weekly technical report,

Nifty — The index closed on a positive note in the opening session of the week; it consolidated in the 4,296-4,250 band mid-week. It closed on a strong note in the last session of the week. The index ended the week up 66 points.

Breakout from double inside day bar — In the last trading session of the week, the index moved past the 4,296 high of the double inside day bar formation. This suggests the index can push upwards.

Momentum Oscillators — The RSI (14) on the daily chart is 63.43 (reading of 70 signifies overbought). The MACD on the daily chart is in buy mode.

Moving Averages — The 10dma = 4,253; 20dma = 4,218. The 10&20dma crossover is positive (i.e. the 10dma has cut the 20dma from below). 10 wma = 4,192. Intra-week decline should find support around the moving averages.

Support — The support level for the weeks’ trade is around 4,250-4,253. 4,250 is the lower end of the mid-week consolidation band.

Resistance — The resistance level is around the all-time high at 4,363.

Conclusion — Stay focused on the upside till we maintain above 4,250 on a closing basis.

Infosys Technologies, Bharat Bijlee

Weekly Strategist, Tech, Wrap

Technical and Derivative Perspective

BHEL, UTI Bank, HDIL, Satyam Computers, Bajaj Auto, Suzlon Energy, BEL, MTNL, IOC, Kirloskar Brothers, Hindustan Zinc

BHEL

UTI Bank

HDIL

Satyam Computers

Bajaj Auto

Suzlon Energy

BEL

MTNL

IOC

Kirloskar Brothers

Hindustan Zinc

Market Close: 14746..All time high ! But..

Strong momentum in the market as buying in the Capital goods and Metal stocks fuelled the rally. Market touched its all time high of 14730 levels after a long gap. But, Indices paired of its gains as profit booking at higher levels pulled it down. Banking, FMCG, IT and Oil & Gas went for profit booking. Sensex slipped into red zone at final trade but managed to end in green. Cement stocks witnessed selling pressure after good rally last week. Auto stocks cames out with their Monthly sales number. Maruti was the top gainers. Midcaps and Small caps were buzzing today but also witnessed the selling pressure. Global cues had nothing to support as Asia traded mixed, while Europe trading in red.

Sensex ended up by 14 points at 14664.26. It was helped up by gains in Maruti (771.35,+4 percent), Ranbaxy (364.7,+3 percent), RCVL (529.7,+2 percent), Tata Motors (684.05,+2 percent) and L & T (2234.8999,+2 percent). Restricting the gains were Guj Ambuja (122.45,-2 percent), TCS (1134.6,-1 percent), Wipro (512.75,-1 percent), Hindalco (158.45,-1 percent) and RIL (1684.5,-1 percent).

Auto stocks traded mixed. Car major Maruti reported good sales figures for the month June which were in line with the market expectations. The company's sales were up 24% YoY. The company sold 56,000 units in the domestic market, up 25.5% YoY from 44,626 units in June 2006. It has exported around 3,917 units in June, which were up 3% YoY. The company had ramped its presence in the non-European countries leading to the rise in exports. Utility Major Mahindra & Mahindra also reported Fantastic growth with 52 % jump in June month to 17,816 units from 11,709 units sold a year earlier. Its domestic auto sales including utility vehicles, light commercial vehicles and three-wheelers surged by 50 % to 16,814 units from 11,178 units. 2389 units of its new car Renault's no-frills Logan sedan in June and the exports rose by 89 % to 1,002 units. And also sold 10,089 tractors in June which was down 3 %. Maruti (+4%) and MNM (+1.5%) rallied. TVS, Bajaj Auto and Hero Honda numbers were not up to markas all traded weak.

Prathiba Industries reported that the company had secured two contracts from Indore Municipal Corporation for two water supply schemes. The total value of the contracts is almost Rs 98 crore. The project is to be executed in 12 to 18 months. Some days back the company had also secured a contract worth Rs 27 crore from Jabalpur Municipal Corporation for a water supply scheme. The project is to be executed in 24 months. The company is engaged in infrastructure business with focus on the water segment and the company also expertise in building and developing infrastructure projects for water-supply and distribution system. The company has also passed a special resolution was for issue of securities by way of ADR/GDR not exceeding $25 million. We have a quickies call here and its rocking as it got locked up in upper circuit.

Technical Speaking: Momentom has Pushed up sensex to new high at 14746 levels. Sensex touched an intraday high of 14746 levels and low of 14639 levels. Volumes were good as the market churned Rs. 4303 Cr. Overall breadth was in favor of Advances, where the Advancers were 1490 against 1163 Decliners. As we have been telling for sometime now that the trend is up and we are mostly likely to make a new high on Sensex, a new high was made today. Some signals of worry today as we could not close above previous high. The sentiment is still bullish but caution should be taken and fresh entry should be avoided if Sensex goes below 14550. Market is extremely bullish & money flows are strong which keeps good support.

Sensex ends at new high, 15K in sight

The Sensex opened with a positive gap of 34 points at 14,685, and hit a new intra-day high of 14,746 in morning deals surpassing its previous intra-day high of 14,724.

After moving in a narrow, positive range for most part of the session, the index slipped into negative zone (low of 14,639) in late noon deals. Last-minute buying in heavyweights saw the index close with a marginal gain of 14 points at 14,664 - a new closing high.

The BSE Auto, Health Care and Capital Goods indices closed with gains of over 1% each today.

The breadth was bullish - out of 2,687 scrips traded, 1,468 logged gains and 1,153 declined today.

INDEX GAINERS & LOSERS

Maruti gained 5% in intra-day deals after reporting a 25% rise in domestic sales in June. The stock finally closed with a gain of nearly 4% (Rs 28) at Rs 771.

Ranbaxy moved up 2.8% to Rs 365. Reliance Communications added 2.5% to Rs 530. Tata Motors was up over 2% at Rs 684.

L&T, Reliance Energy, Cipla, Dr. Reddy's and Infosys also closed with gains today.

Reliance slipped nearly 1% to Rs 1,684.

Gujarat Ambuja dropped 1.7% to Rs 122. TCS, Wipro, Hindalco and ONGC also declined.

MOST ACTIVE COUNTERS

GMR Infrastructure was the most active counter with a turnover of Rs 158 crore followed by IFCI (Rs 120 crore), Divi's Labs (Rs 103 crore) , Reliance (Rs 103 crore) and ENIL (Rs 93 crore).