Hexaware Technologies: Buy

Investors with a penchant for risk and a one-year perspective can consider taking exposure in the Hexaware Technologies (Hexaware) stock in the run-up to its third-quarter earnings announcement on October 19. At the current price, the stock trades at a multiple of 18 times its likely calendar year 2006 per share earnings.

As technology stocks have rallied in the past quarter, investors need to temper their return expectations and utilise any broad market declines to step up exposure. The sustained traction in PeopleSoft revenues in the latest quarter, the healthy client additions and the robust second quarter performance lend confidence to the stock.

However, the risks to our recommendation are the high client concentration/client replacement risk among its top five clients, the unexpected slowdown in PeopleSoft revenues on account of restructuring by Oracle, and the pressures from high salary inflation and attrition for a mid-cap stock vis-à-vis frontline stocks.

Hexaware's core business model is its positioning as a niche software services provider of PeopleSoft suite with specialisation in the HR services domain, apart from addressing the airlines/transportation vertical and the German geography.

Established by the company in 2002-03, this model has been broad-based to include SAP and Oracle-related services in package implementation and an expanded focus into major European markets beyond Germany. While enterprise packages accounted for 32.6 per cent of its revenues, Europe contributed 26.5 per cent in the second quarter ended June 30, 2006.

In March, Hexaware also entered into an agreement with General Atlantic LLC, under which the latter invested Rs 300 crore through a preferential allotment of equity and optionally convertible preference shares.

The turbulent phase...

Hexaware's financial performance went through a turbulent phase in 2005 and early 2006. After clocking double-digit revenue growth for seven straight quarters till December 2004, the company faltered in March 2005 and went into a serious decline for almost a year. Two key factors contributed to this drop in financials. One, following the PeopleSoft-Oracle merger, Hexaware, which was running an India Services Centre for PeopleSoft, set up under the BOT model since 2003, had to transfer this centre to Oracle with effect from November 2005.

About 13 per cent of Hexaware's revenues were derived from the PeopleSoft ISC. Two, in July 2005, Hexaware had to sharply scale down its financial guidance on account of "unexpected delays in project ramp-ups in recent months and sluggish revenue growth from new clients."

... and the recovery

For Hexaware, revenues from PeopleSoft were derived both as a partner and competitor. Out of a third of revenues contributed in 2005, 13 per cent came from the PeopleSoft ISC and the rest was derived directly as PeopleSoft's implementation partner. Since PeopleSoft's acquisition by Oracle, the future of PeopleSoft implementation has been uncertain.

Since then, clarity has emerged on the PeopleSoft front. Oracle has committed that it will support PeopleSoft customer installations until 2013 and recently also released the latest version of PeopleSoft suite in the market.

As one of the largest vendors in India for PeopleSoft, Hexaware still services under one per cent of the installed base for PeopleSoft and the potential for scale-up is fairly significant from this level. In the second quarter-ended June 30, 2006, the company reported a 17.4 per cent growth in revenues on a sequential (quarter-on-quarter) basis, with this service offering continuing to power its growth.

On the new client additions front, out of 15 clients added in the second quarter of 2006, four were on PeopleSoft platform, with the balance from other verticals such as BFSI and transportation, among others. With the uncertain variables behind it, Hexaware's revenue and earnings visibility may be stronger than in the past.

Key growth drivers

A look at Hexaware's performance over the past three quarters reflects the following drivers of growth:

In the second half of 2006, Hexaware is likely to enhance its operating profit margins through higher offshore contribution, lowering its sales, general and administrative expenses (to at least 20 per cent of revenues compared to 21 per cent in the latest quarter) and improved employee utilisation.

In the quarter ended June 30, 2006, Hexaware's operating profit margins fell by 1.3 percentage points to 12.6 per cent on account of the annual salary hike and higher visa costs.

But in the third quarter, the company has projected a sequential earnings growth of 10 per cent (on revenue growth of 5 per cent), which will be dictated by enhanced operating margins.

The company has created a separate sales organisation for "hunting and farming" of new and existing clients. The management has claimed that by farming (or cross-selling) smartly among its existing clients, it will be able to enhance revenues from its top clients.

Between the first and second quarter of 2006, Hexaware added five clients in the $1-million revenue bracket taking the total to 36. And, as of the latest quarter, Hexaware had 141 clients, with 40 belonging to the Fortune 500/Global 500 category.

Infosys Technologies: Buy

Investors with an appetite for risk may consider an exposure in small lots in the Infosys Technologies stock. The stock is trading at a multiple of 31 times its projected FY07 per-share earnings and 25 times its likely FY08 earnings (assuming a 30 per cent growth rate).

As the stock has run up by nearly 10 per cent since its earnings announcement, investors need to temper their return expectations to 10-15 per cent over a one-year perspective. Moreover, as a key Sensex constituent, with a significant weightage, the stock's appreciation is likely to be far more sedate than over the past few months.

We have `buy' recommendations outstanding on this stock at Rs 1,400 in mid-June and Rs 1,650 in mid-July. As growth stocks such as Infosys have low tolerance for earnings disappointment, investors with exposure at considerably lower price levels can use every uptrend to lock into gains on part of their holdings. A strong mid-teen growth in revenues and earnings for two consecutive quarters, all-round improvement in operational metrics and an upward revision in financial guidance for FY07 sustain its reputation as one of the better picks among frontline technology stocks.

Robust revenue growth from both its top client and those in the top five, strong increase in the number of clients across the entire order pipeline between $5 million and $50 million and offshore billing rates perking up by 1.1 per cent after a flat trend seen in the past five quarters are all pointing towards a blockbuster year.

Strong growth across all verticals, especially financial services and telecom; sharp rise in contributions from service offerings such as package implementation, testing, consulting and business process management; double-digit growth across geographies; and record employee additions in the latest quarter also bolster the positive outlook.

The risks to our recommendation are an unexpectedly sharp slowdown in the US affecting offshoring by its top-10 clients, competitive threat from multinationals such as IBM and Accenture, sustaining its growth in new service offerings and a strong appreciation in the rupee against the dollar in the coming months.

Motilal Oswal - India Strategy

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Indian Banking - Mckinsey

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Edelweiss - Bartronics - BUY

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No, Time Warner isn't suing Google

The UK's Guardian has an intriguing little story today: Time Warner CEO Dick Parsons (who, one must disclose, signs the Browser's paychecks) is negotiating with YouTube to deal with the problem of videos that infringe his company's copyrights, and now that Google's buying the video-sharing site, Parsons says he's going to move those negotiations to his company's partner, which owns a 5 percent stake in Time Warne's AOL unit. A sensible approach, and smarter than suing, right?

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Sharekhan Eagle Eye - Oct 16

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Sharekhan Investor's Eye - Oct 13

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs490
Current market price: Rs410

Price target revised to Rs490

Result highlight

• UTI Bank's Q2FY2007 net profit at Rs142.0 crore was in line with our expectations.
• The net interest income (NII) grew by 43% year on year (yoy) backed by a strong growth in the advances.
• Remarkably UTI Bank's net interest margins (NIMs) expanded by 12 basis points yoy and by 24 basis points quarter on quarter (qoq) as the yield on the assets expanded and there was a growth in the demand deposits at almost one and half times the growth in the overall deposits.
• The fee income too grew by a strong 66% yoy backed by a strong growth in the fee income from the cash management and retail businesses.
• The operating profit for the quarter grew by a slower 16% yoy to Rs274.5 crore. The slower growth was attributable to a steep rise in the employee and other cost. However, we believe that the rise in the cost is justifiable looking at the rapid growth expected in the bank's branch network.
• The net profit grew by a faster 30.2% due to a lower provisioning for investment depreciation and a higher loan provisioning.
• The net non-performing assets (NPAs) as a percentage of the bank's customer assets were flat at 0.74% compared with 0.73% in Q1FY2007. However, the same have come down substantially over Q2FY2006.
• UTI Bank's Tier-I capital adequacy ratio (CAR) stood at 6.71% at the end of Q2FY2007 whereas its overall CAR stood at 11.5%. The bank will have to go in for further Tier-I capital raising to sustain the growth.
• We expect UTI Bank to go in for plain equity issuance of $250 million by the end of FY2007 or early FY2008 which will raise its book value to Rs167 by the end of FY2008, up by 16% from our current estimates.
• At the current market price of Rs410, the stock is quoting at 14.1x its FY2008E EPS and 2.7x its FY2008E book value (BV). We reiterate our Buy recommendation on the bank with a revised price target of Rs490 based on our revised earnings as well as estimated increase in its book value.
  

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,474
Current market price: Rs1,388

Merger to be earnings accretive
The board of directors of Indian Hotels Company Ltd (IHCL) has approved the proposal for amalgamation of 4 of its subsidiary/associate companies with itself. Specifically, the proposal seeks to amalgamate Indian Resort Hotels Ltd, Gateway Hotels and Gateway Resorts Ltd, Asia Pacific Hotels Ltd and Taj Lands End Ltd into the company in terms of a scheme of amalgamation under section 391-394 of the Companies Act 1956.

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Uptrend may continue

The latest rally on the domestic bourses has been a part of the firm trend seen across global markets. Dow Jones hit a record high on 12 October 2006. The key benchmark index in Singapore hit a record high on 13 October, and Hong Kong’s Hang Seng hit a six-year peak, the same day.

The fresh rally on the domestic bourses has materialized just at the onset of the earnings season. Market men expect strong Q2 results from corporate India. Earnings have been a key driver of the bull-run that began on the bourses in 2003.

In the near term, funds and high networth individuals are likely to churn their portfolios depending on Q2 results, and outlook from company managements.

Major results scheduled next week are TCS, HCL Tech, HDFC Bank, Bajaj Auto, Grasim, Hindalco, Wipro, ACC, HDFC, L&T, Reliance Industries, Ranbaxy, ONGC, Reliance Energy, and Satyam Computer.

In recent months, lower oil price has eased inflation and interest rate worries. This has also bolstered the bourses. Crude price at current $58.25, is sharply down from a record high of $78 a barrel of mid-July 2006.

A section of the market attributes the strong performance of the Indian bourses since late-July 2006, to long-term growth drivers such as a favourable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation. Prime Minister Mahmohan Singh has promised a complete policy on infrastructure, including regulatory and institutional framework, to make it attractive for private participation in the near future.

FII inflows for October 2006, till 11 October 2006, totaled Rs 1,628.60 crore. Mutual funds sold shares worth a net Rs 34.11 crore in October 2006, till 12 October 2006.

Meanwhile, a large mop up from IPOs is expected in the next few months. Cairn India said on 12 October 2006, it will raise $2 billion through an IPO sometime in December. Another mega IPO in the pipeline is that of real estate conglomerate DLF.

Sharekhan Movers & Shakers

• Suzlon Energy rallied sharply after the company reported that its Denmark subsidiary has bagged an order in South America.
• Crest Animation Studios hit the upper circuit breaker of 10% on getting the board's nod to raise Rs41 crore via preferential share sale to DE Shaw Composite Investments of Mauritius.
• Dolphin Offshore Enterprises rose on reports that the company has signed a MoU with IMPaC Offshore engineering of Germany.
• Deccan Aviation ended higher on reports that the company has roped in European banks to fund its aircraft purchases.

Motilal Oswal - Midcap Ideas

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Thanks Ramesh

Time Warner suing Google?

GigaOM has the story

Motilal Oswal Reports

Bharti Airtel

Bharat Electronics

Shree Cement

Infosys

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Poweryourtrade.com Trading Calls

Buy HCL Technologies with a stop loss of Rs 540 for a target of Rs 660

Buy Wipro with a stop loss of Rs 507 for a target of Rs 600

Buy Indiabulls (409.95) with a stop loss below Rs 401.50 for a target of Rs 422 – 424

Buy Action Construction (218.20) above Rs 220.75 with a stop loss below Rs 213 for a target of Rs 235

Gateway To Growth

Patrick Mange is a doctorate in Economics from Germany. During his Ph.D days he floated a company with a few university friends. Years later he sold his shares in the company and joined Deutsche Bank in Frankfurt before moving to Paris. In the beginning, he was in bond research. Afterwards, he worked for Merrill Lynch and subsequently moved to BNP Paribas as head of strategy and research. He was recently in India after BNP Paribas took a 49.9 per cent stake in Sundaram AMC. Excerpts from an interview:

What is your view on global markets? The markets across the board have fallen and now there are worries like the middle-east crisis. So where do you see the global markets heading?
That is a hundred million dollar question! We are again in a transition phase in terms of monetary policies, economic growth and profit growth, at least in the US, which remains the benchmark and thus in focus as regards global equities. Such phases are characterised by low visibility and thus high volatility, which generally last for some time. We believe that markets, equities as well as bonds, are going to be quite choppy through the summer months if not a bit longer. But we are also convinced that equities will do well in the medium run, once investors recognise that we are not facing a hard landing and that profits growth is unlikely to collapse. We are still positive on equities but have progressively reduced the risk of our portfolio since the start of the year to take on jittery times ahead. We have also come back to close to neutral on government bonds. They are still expensive, but we think that yields are not likely to increase much from here.

There are certain exogenous factors — things related to geo-political events for example — that also have to be taken into account. If the middle-east crisis spreads, then we will have some more worries in the markets, as the likelihood of a faster downturn would meaningfully increase. But we don’t expect this to happen. I believe that geo-political risk premium will remain in the markets for the next few years. But its importance in the eyes of investors will be variable as in the past. Among the global markets, we are overweight on the US after a long time. This means that we are automatically a bit more defensive since the US has a lower beta to the MSCI World. We are tactically underweight on Japan, a bet which was difficult to take because we are still positive on Japan in economic terms. But we are more positive on some other countries as regards cyclical positioning of the economy.

Among the emerging markets, we are currently underweight on India. But here again it is an alpha story not a beta story. We believe that there are some other markets in the rest of the emerging world, which are likely to outperform now.

We are tactically underweight on China too, despite strong economic growth. Growth is not everything. You make profits with volume, or you make profits with margins. And I believe that making profits with margins is better. And therefore, we would not bet upon China yet. But we would now start to bet upon South Korea, a market that has been strongly sold lately, and to some extent Taiwan. The tech news is getting in such a negative territory that it’s difficult to believe it can get bad further. The rest of Asia is more or less neutral or underweight. We are overweight on the high beta Latin American markets. Markets like Chile, Brazil and Mexico are the ones we are looking at more closely. These markets also play the role of a commodity proxy or hedge. Thanks to commodity revenues, they have built up huge financial reserves and hence, look sheltered against any deep financial crisis. Generally we remain strategically bullish on emerging markets, which undoubtedly are in a much better shape from a structural point of view. They are the markets of today, not yesterday.