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STOCK UPDATE Axis Bank
Recommendation: Buy
Price target: Rs1,450
Current market price: Rs1,095 Earnings ahead of estimate, asset quality outlook weakens Result highlights -
Axis Bank's Q2FY2014 net profit came in above our estimate as it grew by 21.3% year on year (YoY) to Rs1,362.3 crore. Apart from the healthy net interest income growth (up 26.2% YoY, in line with our estimate), the repatriation of accumulated profit from the overseas operations (Rs281.62 crore) aided the net profit growth. -
The net interest margin (NIM) was up by 33 basis points YoY (down 7 basis points QoQ) to 3.79%. The equity raising by the bank (in Q4FY2013) and the reduction in wholesale deposits cushioned the cost of funds and the management expects to report +3.5% NIM in FY2014. -
Overall, the advances grew by 16.9% YoY (about 14% YoY excluding the rupee's depreciation), a tad lower than the industry rate. The advances growth was driven by a growth of 37.4% YoY (7.3% quarter on quarter [QoQ]) in the retail and a growth of 28.7% YoY (8.5% QoQ) in the small and medium enterprises (SME) segments. The current and savings account (CASA) ratio was largely stable at ~43% levels. -
The non-interest income grew by 10.9% YoY while the fee income grew by modest 6.6% YoY (8.7% QoQ). During the quarter, the bank realised a gain of Rs281.6 crore on repatriating accumulated profits from its overseas operations, which compensated for the loss of Rs114.3 crore on shifting of government securities (G-secs) from the available-for-sale (AFS) to held-to-maturity (HTM) category. -
The asset quality witnessed stress as impaired loans (slippages + restructured loans) amounted to Rs1,649 crore. Also in view of the stress on the economy, the management has revised loan impairment guidance upward by 15-20% (Rs5,000 crore guided earlier for FY2014). The provision coverage ratio (PCR) was maintained at 80% (including written-off accounts). Price target revised downward to Rs1,450
While the operating performance of the bank remains sound, the rise in the loan impairments has been a concern. Going ahead, we expect some more deterioration in the asset quality in the coming quarters, though it may remain within the manageable limits. Therefore, we raised our non-performing assets (NPAs) and provisioning estimate further and expect the earnings to grow at 10.3% compounded annual growth rate (CAGR; FY2013-15). Consequently, we have revised the price target downward to Rs1,450 (1.5x FY2015 book value). On the other hand, the improving liability profile, asset diversification, higher PCR and capitalisation (tier I capital adequacy ratio [CAR] of 11.68 %) are comforting. The current valuation of 1.2x FY2015 book value seems reasonable, though the asset quality trends will be a key moniterable. We maintain our Buy rating on the stock. Bajaj Auto
Recommendation: Hold
Price target: Rs2,342
Current market price: Rs2,165 Price target revised to Rs2,342 Key points -
Q2FY2014 results; Operating performance beats estimate; lower other income and higher tax negate benefit: For Q2FY2014, Bajaj Auto Ltd (BAL)'s results were ahead of our as well as the Street's estimate on the operating front. The higher export realisations boosted the operating performance. BAL realised exchange rate of Rs60.9/$ in Q2FY2014 as against Rs50/$ realised in Q2FY2013 and Rs55.6/$ in Q1FY2014. The operating profit margin (OPM) at 21.9% was 130 basis points ahead of our estimate. However, the lower other income (Rs124.6 crore) and higher taxation significantly negated the benefits of a strong operating performance. Consequently, the profit after tax (PAT) at Rs837.1 crore was marginally better than our estimate of Rs824 crore. -
Domestic motorcycles to witness low single-digit growth: After clocking a flat growth in H1FY2014, the industry is expecting a recovery in H2FY2014 on account of the festive season and higher crop realisations. For FY2014, the industry is expecting a growth of 2-4%. -
Competition intensifies; BAL to focus on executive segment to regain market share: Honda Motorcycles & Scooters India Private Ltd (Honda) has enhanced focus on the domestic market by launching products in the entry-level space (Dream Yuga and Dream Neo) leading to a market share loss for incumbents. To regain market share, BAL plans to launch upgraded "Discover" series over the next two to three months. -
Exports to recover in H2FY2014: As against a negative growth in H1FY2014, the exports are likely to recover in the second half on account of price corrections in certain markets and a recovery in the key market of Egypt. BAL expects a mid-single-digit growth for exports in FY2014. -
Outlook and valuation-Neutral view maintained with revised price target: The volumes for FY2014 are expected to remain flattish for BAL. We have marginally raised our revenue assumptions for FY2014 and FY2015 given the higher realisations on exports. We are also slightly raising our margin assumptions given the favourable currency environment. We have increased our FY2014 and FY2015 earnings per share (EPS) estimates by 0.8% and 4.4% respectively. Our revised EPS estimates stand at Rs132.5 and Rs164.3 per share for FY2014 and FY2015 respectively. We maintain "Hold" recommendation on the stock with a revised price target of Rs2,342/share. HCL Technologies
Recommendation: Buy
Price target: Rs1,350
Current market price: Rs1,083 Price target revised to Rs1,350; Buy maintained Result highlights -
In line quarter: HCL Technologies (HCL Tech) continues to deliver on the expectations and delivered yet another quarter of strong performance for Q1FY2014. For the quarter, the revenues were up by 3.5% quarter on quarter (QoQ) to $1,270 million (broadly in line with our estimate of $1,268 million). The top line growth continues to be led by the infrastructure management services (IMS) vertical, which reported a 8.7% quarter-on-quarter (Q-o-Q) growth (8.6% compounded quarterly growth rate [CQGR] in the last four quarters), whereas the information technology (IT) services continues to remain soft at 0.9% Q-o-Q growth (a CQGR of 0.8% in the last four quarters) and the business process outsourcing (BPO) business grew by a decent 3.5% QoQ. -
Impressive margin performance led by weak rupee: The earnings before interest and tax (EBIT) margin improved by 300 basis points QoQ to 23.8% (in line with our expectations of 23.3%). The improvement in the margin was led by the currency benefits (250 basis points), and the general and administrative expenses (G&A) rationalisation and an improvement in the utilisation (100 basis points), while the company took a 50-basis-point impact on account of the annual wage hike. For Q2FY2014, the management has indicated another impact of 120 basis points on account of the wage hikes (spread over Q1 and Q2FY2014). On the margin outlook, the management indicated at a currency re-investment strategy to strengthen the sales engines while rationalising the G&A. -
Net income up by 18.7% QoQ: There was a foreign exchange (forex) loss for the quarter to the tune of Rs236 crore against a net gain of Rs29 crore. On the other hand, the net income jumped sharply by 142% QoQ to Rs116 crore. The net income for the quarter was up by 18.7% QoQ to Rs1,416 crore (broadly in line with our estimate of Rs1,414.5 crore). -
Lesser disclosures in operating metrics could restrict re-rating: Though the management has indicated in its commentary (for the June 2013 quarter) that there will be lesser number of disclosures pertaining to the segment-wise profit and loss (P&L; IT services, IMS and BPO) in the forthcoming quarters, but the management has also stopped disclosing clients information pertaining to the number of new clients added and the number of total clients. Also, there is no disclosure on the revenue mix and effort mix. We believe the lesser disclosure levels from HCL Tech would act as a deterrent for any meaningful re-rating. -
Valuation: From the past several quarters, HCL Tech is consistently delivering on the expectations and is well poised to take benefits of the improved demand environment (testimonial being total contract value [TCV] wins of over $4 billion in the last four quarters). However, the consistent lopsided growth in the IMS (33% of revenues) in comparison with the IT services (62.6% of revenues) rings a warning bell. In the last eight preceding quarters, IMS has reported a revenue CQGR of 8.3%, whereas the IT services reported a lame 1.1% revenue CQGR. We believe given the currency weakness and momentum in the IMS vertical, HCL Tech is well poised for a strong earnings growth (earnings compounded annual growth rate [CAGR] of 29% over FY2013-15E). The multiple re-rating could be restricted on account of the single vertical-driven growth coupled with the lesser disclosure metrics. Nevertheless, HCL Tech continues to remain a better investment option in the IT space, given its strong earnings momentum. We have reset our currency estimates to Rs62 for FY2014E and FY2015 each and consequently tweaked our earnings estimates. We value HCL Tech at 35% discount to the target multiple of Tata Consultancy Services (TCS) and arrive at a price target of Rs1,350. We maintain our Buy rating on the stock. CMC
Recommendation: Hold
Price target: Rs1,500
Current market price: Rs1,354 Downgraded to Hold, maintained price target at Rs1,500 In line quarter, revenue growth surprises positively: After reporting a lacklustre Q1FY2014, CMC has delivered a strong performance for Q2FY2014. Though the overall performance was broadly in line with our expectations, the revenue growth for the quarter surprised positively. The revenues for the quarter were up by 15% quarter on quarter (QoQ) to Rs560.8 crore (ahead of our estimate of Rs536 crore). The revenues outperformance was led by a strong growth in the systems integration (SI) business (up 24% QoQ) and a 16% quarter-on-quarter (Q-o-Q) growth in the IT-enabled services (ITeS) business. -
The SI business (64.9% of revenues) was up by 24% QoQ to Rs363.8 crore, where the revenues from the international business were up by 27.7% QoQ to Rs326.9 crore, whereas the revenues from the domestic business remained flat. -
The ITeS business (15% of revenues) was up by 16% QoQ to Rs83.9 crore, where the revenues from the international business were up by 7.1% to Rs38.9 crore, whereas the revenues from the domestic business reported a strong growth of 25% QoQ to Rs45 crore. -
The customer services (CS) segment (15.9% of revenues) was down by 7.9% QoQ to Rs89 crore, where the revenues from the domestic business were down by 8% QoQ to Rs77.2 crore, whereas the revenues from the international business were down by 3.9% QoQ to Rs11.8 crore. -
Overall, the services revenues (93% of revenues as against 90% in Q1FY2014) were up by 19% QoQ t0 Rs522.4 crore, whereas the revenues from the equipment segment were down by 20.7% to Rs38.4 crore. -
The international revenues (69% of revenues as against 64.5% in Q1FY2014) were up by 23.5% QoQ to Rs387.9 crore, led by a weakness in the rupee and a strong growth in the international SI revenues (up by 27.7% QoQ). -
The revenues through Tata Consultancy Services (TCS)' joint go-to-market strategy contributed 59% of revenues as compared with 54% in Q1FY2014. Margin remains stable; management commentary suggests modest margin improvement despite rupee weakness
The annual wage hikes coupled with a sharp jump of 29% in the sub-contracting cost (led to 170-basis-point shift in the onsite revenues to 79.3%) wiped out the entire currency gains (a depreciation of 10.7% QoQ) on the margin, which has remained stable at 15.8% for the quarter (lower than our estimate of 17.3%). Going forward, even though the currency tail winds will have a positive impact, it seems unlikely the that CMC will deliver any meaningful improvement in margin at least in the next couple of quarters, given the high onsite revenue components (in the last one year, the onsite ratio shifted by 530 basis points year on year [YoY], contrary to the management's earlier assumptions of 10% shift in the offshore components). The management continues to maintain a margin corridor of 15-16%, even at the rate of Rs60-62 per dollar. Net income up by 27% QoQ
Driven by a strong top line growth, a stable margin and a lower tax rate (20% against 34.4% in Q1FY2014 pertaining to the dividend distribution tax on dividend received from CMC Americas), the net income for the quarter was up by 26.7% QoQ to Rs67.3 crore (our expectations was Rs69.3 crore). Valuation
We have reset our currency estimates to Rs62 for FY2014E and FY2015E each, from earlier estimates of Rs57.4 and Rs56 respectively. Further, we have tweaked our earnings estimates to incorporate the lower than margin assumptions of 15.6% and 15.8% as compared to the earlier 16.5% and 16.8%. On a long-term perspective, we still remain positive on CMC, given its strong earnings visibility led by the joint go-to-market strategy with TCS (which now contributes close to 60% of revenues) and a successful traction in the products and solutions (28% of revenues). At the current market price (CMP) of Rs1,369, the stock trades at 16.5x and 13x FY2014E and FY2015E earnings estimates. Given the limited upside in the stock from the current levels, we have downgraded our rating on CMC to Hold from Buy earlier with a price target of Rs1,500.
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