Friday, July 12, 2013

Investor's Eye: Update - Infosys, Sintex Industries, Fertilisers

 
Investor's Eye
[July 12, 2013] 
Summary of Contents
 

 

STOCK UPDATE

Infosys
Recommendation: Hold
Price target: Rs2,830
Current market price: Rs2,802

Price target revised to Rs2,830, limited upside in medium term 

Result highlights 

  • Q1 results ahead of expectations but sustainability of the performance remains the key: Against the backdrop of Narayana Murthy returning to Infosys and muted expectations of the Street, Infosys has started the first earnings season of FY2014 on a positive note by reporting a decent set of numbers and beating the overall expectations of the Street on most counts. However, unpredictability has now become synonymous with Infosys' quarterly performance and doubts remain on the sustainability of the performance in the coming quarters, given the unpredictable track record of the company in recent times and the pressure on its margins (due to salary hikes and low-margin large deals). Nevertheless, the stock has reacted positively to the performance and risen by almost 11% since the announcement of the results, thereby also capping any material upside to the stock price in the near to medium term. 

  • The revenues for the quarter rose by 2.7% quarter on quarter (QoQ) to $1,991 million (ahead of our expectation of $1,945 million). On a constant-currency basis the revenues were up by 3.4% QoQ. The volume growth was at 4.1% QoQ (the highest in six quarters), with the onsite volume growing by 5.4% QoQ and the offshore volume growing by 3.3%. On the other hand, the blended pricing dropped by 0.7% QoQ (on a constant-currency basis the same remained stable QoQ). The revenues in rupee terms rose by 7.8% QoQ to Rs11,267 crore, led by currency gains (on an average the rupee depreciated by 4.9% QoQ in Q1FY2014). 

  • The earnings before interest, tax, depreciation and amortisation (EBITDA) margin remained stable QoQ at 26.5% (in line with our expectation), led by the rupee's depreciation during the quarter and profitability of the Lodestone Consulting business (which earned a profit of $1.9 million during the quarter against a loss of $3.4 million in Q4FY2013). This has negated the impact of the wage hikes (onsite hikes for FY2013 and global sales for FY2014). Going forward, the management has indicated an impact of 300 basis points on the margin in Q2FY2014 on account of the annual wage hikes in FY2014 (an 8% hike for offshore employees and a 3% hike for onsite employees). 

  • The other income fell by 14.4% QoQ to Rs577 crore led by a lower foreign exchange (forex) gain (Rs13 crore against Rs123 crore in Q4FY2013). The net income declined by 0.8% QoQ and rose by 3.7% YoY to Rs2,374 crore (ahead of our expectation of Rs2,316.5 crore). 

  • Infosys has maintained its full-year revenue guidance at 6-10% after the decent revenue performance of Q1FY2014. Now the asking rate to achieve the upper end of the guidance has turned 1.5% compounded quarterly growth rate for the next three quarters. 

More caution than optimism in management commentary: Infosys' Q1FY2014 performance has beaten the expectations on most counts. However, we remain sceptical about the sustainability of the performance in the coming quarters. Though, on a relative basis, Infosys seems attractive compared with Tata Consultancy Services (TCS), but given the uncertainties and unpredictability of Infosys' performance, we still prefer TCS and HCL Technologies (HCL Tech) to Infosys. We have reset our currency estimates to Rs57 and Rs56 for FY2014 and FY2015 respectively. Consequently, we have increased our earnings estimates for these two fiscals by 4.6% and 9% respectively. We maintain our cautious stance on Infosys and would like to wait for some stability in the company's earnings performance before taking a constructive view on it. In view of the earnings upgrade, we increase our price target to Rs2,830 and maintain our Hold rating on the stock. However, given the limited upside to the stock price in the near term, we recommend investors to take some money off the table.

 

Sintex Industries
Recommendation: Book out
Current market price: Rs40

Discontinuing coverage 

Result highlights 

Q1FY2014 result snapshot: Sintex Industries (Sintex)' reported a decent performance for Q1FY2014. The company reported a top line of Rs1,128.1 crore, which is a year-on-year (Y-o-Y) increase of 4.4%. The top line growth was mainly on account of a strong performance of the pre-fabricated business segment and the overseas custom moulding business segment (on account of new acquisitions and currency benefit). The monolithic business restricted the top line growth with the division's revenues declining by 13.5% year on year (YoY). The higher input costs resulted in a 217-basis-point decline in the operating profit margin at 14.3%, which was in line with our expectation. Consequently, the company reported a flat profit after tax (PAT) of Rs46.62 crore as against Rs46.79 crore in Q1FY2013 while the adjusted PAT declined by 28.1% to Rs49.3 crore in Q1FY2014.

Huge investment outlay in textile business makes us sceptical

  • In the Q1FY2014 press release, the management announced a huge capital outlay for the textile spinning business. The company is exploring opportunity to invest into high capital intensive, hyper competitive and commodity-led spinning segment of the textile value chain. The company estimates a capital outlay of around Rs1,800 crore for the proposed textile plant (3 lakh spindle capacity), and further stated that it is undertaking the same in order to avail of the benefits conferred on the textile segment by the Government of Gujarat (like interest subvention, low power cost etc).

  • We believe that the management's decision to undertake such huge investment outlay into a commoditised, low return business poses a significant risk to the minority shareholders who had invested in the company's stock owing to its focus on the infrastructure development (monolithic and pre-fabricated business) front.

  • We remain sceptical of the management's decision to venture into the textile business, which we believe would stress the balance sheet on account of debt, which the company would undertake to fund this huge textile expansion (the debt-equity ratio currently stands at 0.8-0.9x, which is likely to get elevated further).

Further the monolithic business continues to reel under stress: Over the last few quarters, the company's monolithic business had witnessed a slowdown (which we viewed positively on account of release of a huge working capital tied up in the business). Despite a substantial slowdown (-18 % YoY in Q4FY2013; -14% YoY Q1FY2014) in the monolithic business, we did not witness any material improvement in the working capital cycle. Further, the monolithic business shows no sign of revival for the next two to three years.

Exit Sintex; company's decision to venture into textile business poses significant risks: Owing to the shift in the management's focus towards the textile business (away from the infrastructure development), coupled with pressure on the other business segments (custom moulding, monolithic), we see limited upside potential in terms of business growth as well as stock performance. Hence, we advise investors to exit the company.


 

SECTOR UPDATE

Fertilisers 

Monthly sales recover on early monsoon

Key points

  • Demand revives in June; early monsoon plays: The demand for the fertilisers has started to revive on account of an early and well-spread monsoon across the country. For the country as a whole, the cumulative rainfall during this year's monsoon season has been 27% above the long period average (LPA) till July 3, 2013. During June 2013, the aggregate sales of the fertilisers (by 15 leading manufacturers) saw a bounce back. The sales of fertilisers improved by 14% as compared with the same period last year. The higher sales of fertilisers during the month were mainly led by a sharp improvement in the sales of urea, diammonium phosphate (DAP) and muriate of potash (MOP) fertilisers. 

  • Sales of fertilisers remained soft on YTD basis but expected to pick-up gradually: The total fertiliser sales declined by 11% on YTD basis as compared with the same period of the last year mainly on account of a decline in the demand of indigenous fertilisers along with a steep decline in the demand of imported DAP and complex fertilisers. The sales of DAP and complex fertilisers were lower by 34% and 43% respectively; whereas the sales of urea and MOP have seen some improvement as compared with the same period of the last year.

  • Performance of southwest monsoon till date (June 1 to July 3): India continues to receive excess rainfall during this year's monsoon season (except east and northeast India). Out of the 36 meteorological sub-divisions, rainfall has been excess in 21 sub-divisions, normal in 11 sub-divisions and deficient in 4 sub-divisions (Arunachal Pradesh, Assam & Meghalaya, Nagaland, Manipur, Mizoram & Tripura, Sub-Himalayan West Bengal & Sikkim). In area-wise distribution, 91% area of the country received excess/normal rainfall, while the remaining 9% area received deficient/scanty rainfall.

  • Outlook: Looking at the early arrival of monsoon and above normal rainfall across the country at the beginning of the sowing season has brightened the prospect of robust sowing across the country. An increase in the sowing acreage will ultimately improve the demand for the fertilisers, having seen severe demand destruction last year due to drought in key crop-growing areas. But on the other side, the high inventory levels in the system will restrict the imports of the complex fertilisers. So going ahead, the import of non-urea fertilisers will remain on the lower side. From a long term perspective, we have a positive view on the fertiliser sector. In the fertiliser space, we prefer stocks like Chambal Fertilisers, Coromandel International, Gujarat State Fertilizers and Chemicals (GSFC) and Rama Phosphate looking at the attractive valuation after the recent price correction.


Click here to read report: Investor's Eye

 

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

 

 


       

       

Regards,
The Sharekhan Research Team
myaccount@sharekhan.com

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