| Summary of Contents STOCK UPDATE Godrej Consumer Products
Recommendation: Buy
Price target: Rs796
Current market price: Rs709 Q3FY2013 results-First cut analysis Result highlights -
Godrej Consumer Products Ltd (GCPL)’s performance in Q3FY2013 was a mix bag. The revenues grew by a strong 25.8% year on year (YoY) to Rs1,691.3 crore (an organic revenue growth of 19%), which is largely in line with our expectation of Rs 1,668.6 crore for the quarter. The strong growth in the revenues can be attributed to a growth of about 20% in the stand-alone (domestic) business and an above 30% growth in the international business. -
The strong growth in the domestic business can be attributed to a sustained strong revenue growth of 20% and 28% YoY in the soap and household insecticide segments respectively. The soap segment reported a volume growth of 12% (actual growth stood at 2%) in Q3FY2013. Also, the domestic hair colour segment registered an improved revenue growth of 17% YoY during the quarter. -
The international business’ revenues grew by about 34% YoY to Rs758 crore. The organic growth of the international business stood at 16% YoY in Q3FY2013. The strong organic growth was led by a revenue growth of about 30% YoY in the Indonesian business. The African and Latin American businesses grew by 21.5% and 82.9% YoY respectively during the quarter. -
The improved revenue mix and lower prices of the key inputs YoY resulted in a strong improvement (of 249 basis points) in the consolidated gross profit margin (GPM) to 55.5%. The same improved by 366 basis points on a sequential basis. The stand-alone business’ GPM improved by 150 basis points to 54.9% in Q3FY2013 (the domestic soap segment’s GPM improved YoY and sequentially, largely due to the softening of the palm oil prices). -
Though GCPL’s consolidated GPM improved significantly on a Y-o-Y basis, but the operating profit margin (OPM) declined by 319 basis points YoY largely on higher advertisement expense, employee expense and other expenses. As anticipated, the advertisement spending as a percentage of total sales rose by 236 basis points YoY to 10.7% as the company continues to back its new launches (of the last two quarters) with adequate media spending. Also, the employee cost and the other expenses increased by 42.3% YoY and 42.0% YoY respectively during the quarter. This resulted in a drop of over 300 basis points YoY in the consolidated OPM during the quarter. Hence, the operating profit increased by just 5.8% YoY to Rs284.9 crore and the reported profit after tax (PAT) grew by 3.1% YoY to Rs172.2 crore. -
The stand-alone business’ OPM declined by 258 basis points YoY to 18.3% affected by the higher advertisement spending. The EBIDTA margin of the international business was down by 431 basis points YoY to 15.3% (largely on account of a 1,070-basis-point Y-o-Y decline the EBIDTA margin of the African business on a high-margin base of Q3FY2012). -
We will review our earnings estimates for FY2013 and FY2014 and come out with a detailed note on the company’s Q3FY2013 performance after the company’s conference call. At the current market price the stock trades at 30.6x and 23.7x its FY2013E and FY2014E earnings respectively. Currently we have a Buy rating on the stock with a price target of Rs796. ICICI Bank
Recommendation: Buy
Price target: Rs1,320
Current market price: Rs1,191 Strong performance continues Result highlights -
ICICI Bank reported strong set of numbers for Q3FY2013 as the net profit increased by 30.2% year on year (YoY) to Rs2,250.2 crore, which was ahead of our estimate. A strong growth in net interest income coupled with a decline in the credit cost contributed to the growth in profit. -
The net interest income (NII) increased by 29.0% YoY led by a sequential expansion in the net interest margin (NIM) and a strong growth in advances. The NIM increased by 7 basis points quarter on quarter (QoQ) to 3.07% mainly contributed by an expansion in the overseas NIM (1.31% vs 1.22%). -
The business growth remained strong as advances grew by 16.9% YoY, mainly contributed by the corporate segment (up 27% YoY). The deposits grew by 9.9% YoY while the current account savings account (CASA) ratio remained stable at 40.9%. -
The asset quality continued to improve as the gross and net non-performing assets (NPAs) declined on a sequential basis. The slippages were to the tune of Rs850 crore, which were offset by recoveries of Rs565 crore and write-offs of Rs520 crore. The outstanding restructured loans were at Rs4,169 crore, which were largely at the Q2FY2013 level. -
The non-interest income increased by 17.1% YoY mainly driven by the treasury profit of Rs251 crore. The overall fee income growth remained subdued, though the retail fees continued to show traction. Valuation and outlook
ICICI Bank continued to post ~30% growth in profit for the past four quarters along with an improvement in the asset quality. The margin expansion led by a deployment of surplus of liquidity coupled with an improvement in the liability base will drive the operational performance. ICICI Bank remains our top pick in our banking universe and we maintain Buy rating with sum-of-the-parts (SOTP)-based price target of Rs1,320. Punjab National Bank
Recommendation: Buy
Price target: Rs998
Current market price: Rs912 Earnings beat estimate; NPAs stabilise Result highlights -
Punjab National Bank (PNB)’s Q3FY2013 results were above our estimate as the net profit grew by 13.5% year on year (YoY) to Rs1,305.6 crore. Though the net interest growth was in line with our estimate (up 13.5% YoY), the lower than expected provisions (down 25.4% quarter on quarter [QoQ]) contributed to the growth in profit. -
The net interest margin (NIM) was largely stable at 3.47% in Q3FY2013 as compared with 3.50% in Q2FY2013. There was an interest income reversal of Rs80 crore, which impacted the net interest margin (NIM) by ~7 basis points. -
The business growth appeared to be muted as the advances grew by 13.2% YoY (up 0.9% QoQ) and the deposits grew by 8.2% YoY (down 3.7% QoQ). The bank reduced the overall deposits to 15.3% from the proportion of bulk deposits in Q3FY2013 from 20.8% in Q2FY2013. -
After showing a rise in the non-performing asset (NPA) over the past eight quarters, the asset quality improved on a quarter-on-quarter (Q-o-Q) basis led by a strong growth in recoveries. The bank also restructured Rs3700 crore of advances (including ~Rs1,500 crore of fresh loans to restructured discoms), leading to rise in restructured advances (10.2% of book). -
The non-interest income growth was subdued as it grew by a mere 1.7% YoY. The fee income declined by 4% YoY. Apart from the treasury gain of Rs73.0 crore, the growth in the non-interest income was aided by the recoveries from the written-off account (Rs145 crore). Valuation
PNB’s Q3FY2013 results were better in terms of a decline in slippages and a pick-up in recoveries, which points to peaking of asset quality pressure. The management’s focus on sustaining recovery efforts coupled with a reduction in bulk deposits will improve the operational performance. Currently, the stock trades at 0.9x FY2014 book value (BV). We upgrade our recommendation to Buy on PNB with a target price of Rs998 (0.9x average of FY2014-15 BV). Lupin
Recommendation: Buy
Price target: Rs704
Current market price: Rs604 Price target revised to Rs704 Result highlights -
Strong US business boosts Q3 performance: For Q3FY2013, Lupin reported a 37.6% year-on-year (Y-o-Y) rise in net sales to Rs2,465.9 crore, mainly driven by the US business that jumped by 67.9% year on year (YoY) to Rs1,039 crore on account of key launches like Tricor, Lexapro and some oral contraceptives. Besides, the Japanese market also reported an impressive growth of 48% YoY to Rs366 crore on account of launches of new products. The limited competition products in the USA and Japan helped Lupin achieve a 375-basis-point Y-o-Y jump in the operating profit margin (OPM) to 23.1%, despite a higher research and development (R&D) expenditure during the quarter. However, due to higher effective tax rate (38.1% in Q3FY2013 vs 20.3% in Q3FY2012), the net profit grew by 42.3% YoY to Rs335.2 crore. The net sales and net profit came at 6% and 18% respectively (better than our expectation). -
India and European businesses record weaker performance; we trim revenue estimates for these regions: The Indian formulation business recorded a 9.8% Y-o-Y rise to Rs571 crore during the quarter, which was the slowest in the past several quarters. The management expects an 18% growth in FY2013 from the Indian business, which is significantly lower than our estimate of a 25% Y-o-Y growth. The European business recorded a decline of 7% YoY to Rs60 crore. We have trimmed our revenue estimates from these regions for FY2013 and FY2014. However, a strong growth in the USA and Japan would substantially make up for the shortfall. -
Sharp rise in effective tax rate is a big drag, we reduce earnings estimates for FY2013 and FY2014; introduce FY2015 estimate: In 9MFY2013, the effective tax rate stood at 34% as compared with 18.6% in 9MFY2012. We expect a similar level of tax rate to continue through FY2013 and FY2014, which will dent Lupin’s net profit. Having factored these changes in our forecast, our earnings estimates stand revised down by 3.8% and 4.2% for FY2013 and FY2014, respectively. We have introduced estimate for FY2015 and also rolled over our valuation on average earnings estimates for FY2014 and FY2015. -
Price target revised to Rs704; maintain Buy: We have revised our price target upwards by 7% to Rs704 on account of a roll over in our valuation to average earnings for FY2014 and FY2015. Our price target implies 20x average earnings for FY2014E and FY2015E. We maintain our Buy rating on the stock. Union Bank of India
Recommendation: Buy
Price target: Rs295
Current market price: Rs255 Price target revised to Rs295 Result highlights -
Union Bank of India (Union Bank)’s Q3FY2013 net profit grew by 53.5% year on year (YoY; down 45.5% quarter on quarter [QoQ]) to Rs302.4 crore, which was significantly lower than our estimate. This was due to a sharp sequential increase in provisions (up 76.0% QoQ) to Rs857.3 crore. -
The net interest income (NII) grew by 6.2% YoY (2.2% QoQ), which was in line with our estimate. The net interest margin (NIM) declined by ~7 basis points to 2.95% in Q3FY2013 led by an increase in the cost of funds coupled with a decline in yield on advances. -
The advances grew by 19.0% YoY (7.5% QoQ) while the deposits grew 16.6% YoY (5.9% QoQ). The current account savings account (CASA) improved by 75 basis points to 31.3% as against 30.5% in the previous quarter. -
During Q3FY2013, the asset quality improved materially as the gross and net non-performing assets (NPAs) declined on account of lower slippages and healthy recoveries. However, the bank restructured Rs1,205 crore of advances in Q3FY2013, taking the restructured advances to 8.4% of total advances. -
The non-interest income grew at a healthy rate of 17.2% QoQ as the bank recovered Rs109 crore (Rs56 crore in Q2FY2013) from the written-off accounts. The treasury profit and forex income grew by 49.3% and 17.2% respectively on a sequential basis. However, the fee income growth remained subdued (down 2.0% QoQ), which was in line with the industry trends. Valuation and outlook
Though the earnings growth was lower than our estimate, Union Bank continues to focus on recoveries and restrain its slippages, which have contributed to an improvement in the asset quality on a sequential basis. We have revised our price target to Rs295 (0.85x FY2014 adjusted book value) and maintained Buy recommendation on the stock. Grasim Industries
Recommendation: Hold
Price target: Rs3,300
Current market price: Rs3,007 Price target revised to Rs3,300 Result highlights -
Consolidated earnings largely in line with estimates: For Q3FY2013, Grasim Industries (Grasim) posted a net profit of Rs549.2 crore (-17.9% year on year [YoY]) on a consolidated basis, which is largely in line with our estimate. However, the stand-alone performance of the company, which was reflected in the viscose staple fibre (VSF) business and chemical business, disappointed with the net profit declining by 27.9% YoY to Rs198 crore (lower than our estimate). The performance of the cement business came better than our estimate. -
Revenue growth supported by cement and chemical divisions: The consolidated net sales of the company grew by 7.3% YoY to Rs6,717.5 crore, which were supported by a revenue growth in the cement division (increased by 7.6%) and chemical division (increased by 12.2%). The revenues from its VSF division grew by 4.9% YoY. The revenue growth in the cement division was largely supported by a higher growth in the average blended realisation whereas the volume (cement and clinker sales) declined by 1.4%. In case of the chemical division, the revenue growth was supported by higher realisation. -
Improved realisation of cement and chemical divisions offset by severe margin pressure in VSF: On the margin front, a better cement realisation and an expansion in the profitability in its chemical division were able to offset the severe margin pressure in the company’s VSF division. Hence, the overall operating profit margin (OPM) of the company contracted by 219 basis points YoY to 18.7% (in line with our estimate). The profit before interest and tax (PBIT) margin in the chemical division improved by 409 basis points YoY due to an increase in the realisation by 13% on a year-on-year (Y-o-Y) basis. On the other hand, the margin in its VSF business contracted by ~13% YoY to 8.7% on account of (a) a decrease in the realisation by 5% YoY, (b) an increase in the cost of production, and (c) a loss of Rs33 crore from the joint venture operations. Further, the margin in the cement division also lowered by 70 basis points YoY. Consequently, the overall operating profit of the company declined by 3.9% YoY to Rs1,256.4 crore (as compared with 7.3% growth on the revenue front). -
VSF plant at Harihar (Karnataka) faces water shortage: Due to a rainfall deficiency in the region, the water authority decided to curtail release of water from the Bhadra dam on an intermittent basis. This will result in suspension of the VSF manufacturing facility at company’s plant from time-to-time till the river gets sufficient water. Currently, the company manufactures 190 tonne per day of VSF from the Harihar plant. Thus, to meet the shortfall from the Harihar plant during the stoppage period, the company will be operating at full capacity utilisation at its other two plants, namely Kharach (Gujarat) and Nagda (MP). However, we believe the stoppage of the VSF production at Harihar plant is negative for the company and could affect production and profitability of the division. -
Exiting from investments made in unrelated business: Recently, the company has entered into an agreement to sell its entire holding of 15% unquoted equity share in Alexandria Carbon Black Company (ACB) and 2.75% quoted equity shares in Thai Carbon Black Public Company (TCB) to another Aditya Birla Group company. Hence, in the coming quarter, the company is expected to book extraordinary gain on sale of investments. -
Expansion on track, balance sheet is strong to fund the capex: The expansion projects on VSF, chemical and cement are progressing well and are expected to come on stream as per schedule. The cement division is likely to add another 10.2 million tonne per annum (MTPA) of capacity by Q1FY2014, the VSF capacity is likely to increase by 156,000 tonne by the end of FY2013 and the chemical division is likely to increase by 182,000 tonne. Further, the company plans to set up greenfield VSF project in Turkey in a joint venture with other group companies. The funding of the new capacity addition will be met through a mix of internal accruals and borrowings. The present debt:equity (D:E) ratio stands at 0.36, which ensures a strong balance sheet and comfortable scope for raising debt to fund the capital expenditure (capex). -
Earnings estimates downgraded for FY2013 and FY2014; introduced FY2015 estimates: We are downgrading our earnings estimates for FY2013 and FY2014, mainly to factor in recent correction in the VSF price and lower than expected production growth in the VSF division. Consequently, the revised consolidated earnings per share (EPS) estimates now stand at Rs302.5 and Rs324.5 for FY2013 and FY2014 respectively. We are also introducing our FY2015 earnings estimate with an EPS of Rs356.1. -
Maintained Hold with a revised price target of Rs3,300: Though the company has a good diversified business model with a strong balance sheet and a comfortable D:E ratio (0.36x 9MFY2013), the near-term concern in terms of sharp correction in the price of VSF and production shut down at its Harihar plant due to water shortage will be an overhang on the stock. Hence, we have revised our price target downwards to Rs3,300 based on the sum-of-the-parts (SOTP) valuation methodology and maintain our Hold recommendation on the stock. At the current market price, the stock trades at a price/earnings ratio of 9.3x and 8.4x discounting its FY2014 and FY2015 estimated EPS. Ipca Laboratories
Recommendation: Hold
Price target: Rs554
Current market price: Rs492 Q3 performance nearly meets expectations Result highlights -
Q3FY2013 results marginally below expectations: For Q3FY2013 Ipca Laboratories (Ipca) has reported a 15.1% year-on-year (Y-o-Y) rise in net sales which is 7.5% lower than our estimate. The operating profit margin (OPM) of the company declined by 134 basis points year on year (YoY) to 21.6% (vs our estimate of 22%) because of an unfavourable change in the product mix. During the quarter the company provided Rs18.6 crore as foreign exchange (forex) loss as compared with a Rs39.9-crore loss recorded in Q2FY2012. This led the net profit to jump by 37.5% YoY to Rs87.9 crore. However, adjusted to exclude the forex items, the net profit rose marginally by 2.6% YoY to Rs106.5 crore (vs our estimate of Rs108.4 crore). The lower than expected results are attributed to the lower revenues booked in the generic business and certain segments of the branded formulation business. However, the international branded business continues to show an impressive performance. -
Temporary factors affected international generic business: The international generic business declined by 14% YoY to Rs116.4 crore during the quarter, mainly on account of a disruption in the supplies to the UK market for around 45 days (a revenue loss of Rs30-33 crore). The disruption was caused by issues related to the distributors in the UK. As the things are getting settled, we expect a strong recovery in sales in the subsequent quarter. Besides, the revenues were also affected by a slower offtake in the anti-malaria business (seasonal factors) in the domestic market and the discontinuance of manufacturing of neutraceutical products from its pharmaceutical (pharma) manufacturing facilities (a quarterly revenue loss of Rs2 crore). -
Supplies from Indore SEZ to US market may be delayed to H2FY2014: Since the outcome of inspections by the US Food and Drug Administration (USFDA) officials is pending we do not expect the supplies to the US market from Indore special economic zone (SEZ) facility to start soon. The management is hopeful of starting supplying from this facility from H2FY2014. -
We broadly maintain estimates, price target and recommendation: We broadly maintain our earnings estimates for FY2013 and FY2014 (earnings estimates marginally revised up by 2%). We maintain our price target of Rs554 (13x average earnings for FY2014 and FY2015). We also maintain our Hold rating on the stock. Greaves Cotton
Recommendation: Buy
Price target: Rs95
Current market price: Rs82 Better outlook for FY2014, upgraded to Buy Key points Overall growth to improve in FY2014 on back of improved economy and new product launches
GCL expects an improved outlook for FY2014. The overall improvement in the macro-economic environment should result in higher revenues for GCL. An improved economic growth and the softening interest rates are likely to improve the demand in the user industries, thereby improving the revenues for GCL. GCL also plans to launch new products in the construction equipment and farm equipment sectors over the next one year which is likely to bolster its revenues. We expect GCL’s revenues to grow in double digits in FY2014. Margin improvement to sustain
GCL has reported margin improvement after five quarters. Given the improved revenue outlook, we believe the margin improvement is likely to sustain. We expect the benefits of operating leverage to help sustain the margin. Besides, the reduction in the raw material cost and the overall cost rationalisation initiatives taken by the company are likely to support the margin. Capex for FY2014 guided at Rs120 crore, to focus on new product development
GCL is likely to incur capital expenditure (capex) of Rs120 crore for FY2014. This would include the completion of the expansion work at the Ranipet plant, capacity increases in the construction equipment sector and introduction of new products. A large part of the capex would be directed towards research and development, and new product launches. GCL would introduce products in the construction equipment and farm equipment segments to boost revenues. The company also plans to indigenise certain products in the farm equipment segment in which it currently carries only trading activity Valuation
To factor in the improved margin we are raising our FY2013 earnings per share (EPS) estimate from Rs6.0 to Rs6.3. We are, however, maintaining our FY2014 EPS estimate at Rs6.9. We are also introducing our FY2015 estimates in this note. Our FY2015 EPS estimate stands at Rs7.9. Given the better revenue outlook and margin improvement, we upgrade our recommendation on the stock from Hold to Buy. We assign a multiple of 12x to the FY2015 earnings estimate to arrive at a price target of Rs95. Crompton Greaves
Recommendation: Hold
Price target: Rs120
Current market price: Rs107 Pain persists Result highlights -
Substantial restructuring cost dragged overall profitability: In Q3FY2013, Crompton Greaves Ltd (CGL) reported a net loss of Rs189 crore against our estimate of a net profit of Rs37 crore led by significantly higher than expected restructuring expenses. Though it reported sales broadly in line with our estimate at Rs2,972 crore, the operating profit was reported at merely Rs2 crore (against our estimate of Rs124 crore) as Rs108 crore of restructuring-related expenses have been added in appropriate operating cost heads. Even if we exclude this, there is a visible pressure on its operating profit margin (OPM), which would be attributed to the declining margin trend in its power system business. Nevertheless, its disturbed Belgium operations have dragged the overall consolidated profitability as the consolidated operating profit was reported at merely Rs2 crore in spite of Rs132 crore of operating profit in the stand-alone business. Further, Rs108 crore of restructuring-related expenses have been added by the company on its problematic international business in Europe. Additionally, Rs121crore of employee liability was charged for restructuring exercise under extraordinary items during the quarter. Consequently, CGL reported a net loss of Rs189 crore in Q3FY2013, which was significantly lower than the Street’s and our estimate. -
No restructuring charges ahead; but international operations to operate at sub-optimal level in the near future: We learned from the management that the restructuring (shifting Belgium operations to Hungary) is completed now. Thus, there would be no restructuring charges ahead. We believe the uncertainty related to restructuring charges was the major hangover. Hence, this should bring a relief to the stock price. Going forward, the management should focus on stabilising the operations gradually, which would result in cost saving (expected cost saving of around €40 million when operations get stabilised fully), and increasing the profit contribution from its international operations. However, we expect a gradual improvement in the next two to three years. -
Order backlog improves, but margin sustainability would be key: The consolidated order inflow during Q3FY2013 declined by 33% year on year (YoY) to Rs2,267 crore. This decrease was led by a 41% year-on-year (Y-o-Y) decline in the order inflow from the power system business and a 17% Y-o-Y decline in the order inflow from the industrial system business. However, the consolidated order backlog position stood at Rs9,232 crore (up 13% on a YoY). The management believes that there is a huge potential in the Indian extra high voltage (EHV) segment and hopes to recover in the coming quarters. CGL intends to bag more orders from Power Grid Corporation of India Ltd (PGCIL) in the near future as it believes PGCIL would be floating more orders in the 765kV and high-voltage direct current (HVDC) segments, which the company intends to bid. However, we believe the visible margin pressure could be a reflection of the rising competition in the power system segment in the domestic market. The consumer product segment is likely to witness a healthy growth but due to rising competition, sustaining margin would be crucial going ahead. -
Revised estimates; expect underperformance in near term but negatives priced in: We have revised down our earnings estimates by 45% for FY2013 and 28% for FY2014 to build in (1) the higher restructuring cost in FY2013; (2) the margin pressure witnessed in the domestic power system business; and (3) the gradual stabilisation of operations in Hungary. We have also introduced FY2015 estimate, where we expect the international business to stabilise. The stock currently trades at 15x and 10x its estimated earnings of FY2014 and FY2015 and 6x and 4x its EBITDA margin for FY2014 and FY2015 respectively. We believe at the current market price, most of the negatives are factored in and the restructuring is behind us. Nevertheless, it would be crucial to watch how the expected gradual recovery would shape up in the coming quarters. Though we feel a downside is limited, we would prefer to see signs of improvement in the upcoming results before we turn our rating to positive. Hence, we maintain our Hold recommendation on the stock with a target price of Rs120 (12x its FY2015E earnings).
SHAREKHAN SPECIAL Q3FY2013 IT earnings review
A mixed bag Key points -
Q3 results a mixed bag, Infosys surprises positively: The December 2012 quarter performance of the Indian information technology (IT) sector was a mixed bag, with Tata Consultancy Services (TCS) managing to broadly meet expectations, Wipro continuing to disappoint on the headline numbers and HCL Technologies (HCL Tech) impressing with a better than expected margin performance. However, the quarter will be best remembered for the turnaround in Infosys’ performance after several quarters of disappointments. In the mid-cap space, among our coverage universe CMC surprised positively with strong numbers whereas Persistent Systems and NIIT Technologies (NIIT Tech) reported a soft performance. Our picks in the mid-cap space, Persistent Systems and CMC, have paid off handsomely with both the stocks smartly outperforming the broader market indices with returns of 18% and 29% respectively in the last four months. Our top pick in the tier-I IT space, HCL Tech, continues to outperform, with a return of 19% in the last four months and a whopping 78% return in the last one year. -
Consensus on commentary, FY2014 being better than FY2013: Despite lingering concerns over the clouded macro-economic environment and the mixed quarterly performance, there seems to be a consensus in the management commentary of the IT companies that FY2014 would be better than FY2013. Though the management commentary of most companies indicates the IT budgets would remain stable or see a marginal decline in CY2013, but at least the expectations of a timely closure of IT budgets with minimal delay in decision making augurs well for demand visibility. Further, discretionary spending is expected to pick up in FY2014 and there are already signs of an improvement in that space. On the other hand, HCL Tech continues to witness opportunities in the non-discretionary spending and under-penetrated markets, and expects to bag more deals in the re-bid markets with infrastructure management services (IMS) segment being the primary driver. On the flip side, there are still concerns over the final shape of the fiscal cliff and the tapering off of the currency benefits in the recent months. -
Valuation and view: In view of the stable IT budgets and signs of an uptick in discretionary spends, we are optimistic about the demand improvement in FY2014. However, it will be a while before we see a secular demand uptrend in the sector and the performance polarisation among the top IT companies is expected to continue, nevertheless the extent of the divergence will decline in FY2014. We maintain our positive stance on HCL Tech (at the forefront of the gainers in the re-bid markets), our sole Buy rating in the tier-1 IT space. On the other hand, after the recent sharp run-up in Infosys, we do not see much upside in the stock in the near term and at the current levels TCS seems to be closer to its fair valuation. On the other hand, we continue to prefer CMC and Persistent Systems in the mid-cap space for the next 12 months.
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