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STOCK UPDATE Tata Consultancy Services
Recommendation: Buy
Price target: Rs2,600
Current market price: Rs2,218 Price target revised to Rs2,600; Buy maintained Result highlights -
Another stellar quarter: Tata Consultancy Services (TCS) reported yet another stellar quarter and met the heightened Street's expectations with an impressive set of numbers. This was a back-to-back quarter of 6% volume growth for the company (on an organic basis). TCS continued to demonstrate a superior execution and the management commentary gave us confidence on the growth outlook. -
The blended volume for the quarter including Alti grew by 7.3% quarter on quarter (QoQ). The revenues were up by 5.4% QoQ (our estimate was at $3,324 million). Out of the total revenue growth, 1.2% was contributed from Alti (a recent acquisition). On a constant currency basis, the revenues were up by 6% QoQ. In the rupee terms, the revenues were reported at Rs20,977.2 crore. -
The earnings before interest and tax (EBIT) margin improved by 310 basis points to 30.2% (the highest ever), led by a weak rupee coupled with an improvement in the operational efficiency (40 basis points). The management maintained its stance of re-investing the currency gains into the business. However, they also indicated at some benefits passing into the margin. Overall, the management indicated at a margin corridor of 26-28%. -
There was a loss of Rs42.7 crore at the other income level on account of Rs377.1 crore losses on the foreign exchange (forex; lower than our estimate of Rs500 crore). The net income for the quarter was higher by 23.9% QoQ to Rs4,701.8 crore (ahead of our estimate of Rs4,485.9 crore). Valuation and view: On account of its superior execution coupled with an overall improvement in the business environment and its broad-based revenue profile, we expect TCS to continue to lead the IT pack among the Indian IT incumbents. We have marginally tweaked our earnings estimates upward to incorporate the higher revenues estimates (17.7% and 19.7% for FY2014E and FY2015E respectively). We estimate a 29% earnings compounded annual growth rate (CAGR) over FY2013-15E. Also, given the strong earnings predictability and consistency in the performance delivery, we have now assigned a target multiple of 22x (earlier 20x) based on FY2015E earnings estimate. Consequently, we have increased our price target to Rs2,600. We maintain our Buy rating on the stock. Reliance Industries
Recommendation: Buy
Price target: Rs1,010
Current market price: Rs867 Petchem in driver's seat; Buy retained Result highlights -
Earnings in line with our expectations; petchem segment surprised positively: In Q2FY2014, Reliance Industries Ltd (RIL) reported a net profit of Rs5,490 crore, which is in line with our estimate (Rs5,480 crore) but ahead of the Street's expectations. The improved margin and higher volume of the petrochemical (petchem) business were the major drivers of the profit in Q2FY2014. Though the refining segment also exhibited a healthy sales growth, but the gross refining margin (GRM) declined to $7.7 per barrel during this quarter, as expected. Hence, the profit of the segment declined. However, RIL's GRM was resilient as the comparable Singapore GRM contracted more sharply than that of RIL during this period, thereby indicating the expansion of RIL's GRM over that of Singapore GRM. The exploration segment continued to suffer with a declining output from the Krishna-Godavari (KG)-D6 basin. Overall, the lower profitability in the refining and exploration segments was largely compensated by the improved profit from the petchem business. -
Petchem profit contribution surged: RIL reported a sales growth of 15% year on year (YoY) and 18% quarter on quarter (QoQ) to Rs103,758 crore in Q2FY2014, with a healthy performance from both the petchem and refinery businesses. However, as mentioned earlier, due to a lower profit from the refining and exploration segments, the operating profit in the quarter remained flat YoY but grew by 11% QoQ to Rs7,849 crore. The operating profit margin (OPM) was reported at 7.6%, which is lower by 104 basis points YoY and 51 basis points QoQ. The earnings before interest and tax (EBIT) contribution of the petchem segment improved significantly from 28% in Q2FY2013 to 41% in Q2FY2014. The other income was lower by 2% YoY and 19% QoQ in Q2FY2014. The interest cost grew by 9% YoY due to the depreciation of the Indian Rupee. Consequently, the profit after tax (PAT) reported a growth of 2% YoY and 3% QoQ to Rs5,490 crore in Q2FY2014, which is in line with our estimate. -
View and valuation--remains positive on improved outlook for downstream business: We maintain our positive stance on the stock and believe the improved outlook for the petchem and refining businesses led by the expansion of projects (petcoke gasification project, polyester capacity expansion and refinery off-gas cracker) will lead to a better earnings outlook. Moreover, the weak rupee would continue to be beneficial for the company in the coming quarters. Hence, largely the continued weakness in the exploration business would be more than compensated. Nevertheless, a healthy ramp-up is visible in the shale gas business. RIL's stock is trading at a price/earnings ratio of 12x its FY2015E earnings and 9x its FY2015E EBITDA. Hence, we maintain our Buy rating on the stock and retain the price target of Rs1,010. HDFC Bank
Recommendation: Hold
Price target: Rs712
Current market price: Rs651 Earnings in line, NIMs deteriorate Result highlights -
HDFC Bank's Q2FY2014 net profit grew by 27.1% year on year (YoY) to Rs1,982.3 crore, which was in line with our estimate. The strong growth in the non-interest income (especially the foreign exchange [forex] income) and a lower than expected growth in the provisions contributed to the growth in profit and helped to absorb the treasury losses. -
The net interest income (NII) grew by 15.3% YoY to Rs4,476.5 crore, which was slightly lower than our estimate. The net interest margin (NIM) declined by 25 basis points sequentially to 4.30% due to a rise in the deposit costs and marginal standing facility (MSF) rates, and a lag in the re-pricing of assets which impacted the NII growth. -
The bank intentionally lowered the credit expansion during the quarter (up 16.0% YoY) due to the lower incremental spreads (led by a sharp rise in the cost of funds). The deposits grew by 14.2% YoY while the current and savings account (CASA) ratio was stable at 45% level. -
The non-interest income showed a healthy growth of 25.3% YoY driven by a strong growth the forex income (Rs60 crore one-off income). The bank reported treasury losses of Rs173 crore (Rs135 crore mark-to-market [MTM] losses) as the bank decided to absorbed the entire amount of investment depreciation in Q2FY2014 (didn't opt for amortisation as permitted by the Reserve Bank of India [RBI]). -
The asset quality showed a marginally deterioration as the gross non-performing asset (NPA) increased to 1.09% from 1.04% in Q1FY2014 largely contributed from the retail segment. Outlook
HDFC Bank's Q2FY2013 results clearly reflect the pressure on the NIM and the rising competition in the retail segment which could have some impact on earnings. The management continues to guide for a loan growth of 4-5% higher than industry rate and NIM at +/-15 basis points from the current levels. The asset quality remains amongst the best in the industry and is likely to sustain due to a strong focus on the retail segment and a nominal exposure to the troubled sectors. However, the bank trades at a premium valuation of 3.1x FY2015 P/BV and hence an upside is limited. We maintain our Hold rating and the price target of Rs712 on the stock. NIIT Technologies
Recommendation: Hold
Price target: Rs305
Current market price: Rs288 Another soft quarter Result highlights -
Another soft quarter: NIIT Technologies Ltd (NTL) reported yet another soft quarter with a flat revenue growth (0.3% on a constant currency basis) and without any meaningful improvement in the margin (up 60 basis points quarter on quarter [QoQ]). Though the operating performance was broadly in line with our estimate, we are disappointed due to the management's hesitant indications on the revenue trajectory and improvement in the margin profile (if any) for the coming quarters.
Further, an increase in the days sales outstanding (DSO) days to 100 from 98 days in Q1FY2014, the deterioration in its balance sheet with a decline in the cash and cash equivalents to Rs212 crore (a decline of Rs120 crore in the last two quarters, part which is attributed to Rs55 crore dividend payout) and an increase in the debt to Rs28.1 crore from Rs8.9 crore raised concerns on the quality of growth profile of the company. -
The revenues of NTL were up by 8.4% QoQ to Rs587.3 crore, which is in line with our estimate of Rs588.6 crore. On a constant currency basis, the revenue growth was 0.3% QoQ. Excluding the hedging loss of Rs10.9 crore in the revenues against Rs1.8 crore gain in Q1FY2014, the revenues were up by 10.8% QoQ. The revenues from the hardware business for the quarter stood at Rs47 crore against Rs59 crore in Q1FY2014. -
The operating profit margin (OPM) for the quarter improved by 60 basis points QoQ to 15.1% (our estimate was at 15.5%), largely driven by the weakness in the rupee. -
For the quarter, the other income stood at Rs18.2 crore (down 11.7% QoQ; much higher than our estimate of Rs7.8 crore). The higher than expected other income was on account of a higher than expected gain from the foreign exchange (forex), which stood at Rs15.5 crore. The net income for the quarter was up by 17.3% QoQ to Rs62.4 crore (our estimate was at Rs58.5 crore). -
Valuation: Absence of any meaningful improvement in the earnings performance and the deterioration in its balance sheet numbers do not support a case for re-rating for NTL in the near to medium term. Though there are pertinent signs of improvement in the business environment for the information technology (IT) sector with recovery in the USA and some pockets of the Euro zone, its seems like NTL will lag behind with a soft growth for FY2014 (far lower than the National Association of Software and Services Companies [Nasscom] industry estimate of 12-14%). Though the management indicates at an increase in the order book intakes and an improvement in execution in the coming quarters, we remain sceptical. We have re-set our currency estimates and also tweaked our margin assumptions lower for FY2014 and FY2015E. At the current market price (CMP) of Rs289, the stock is quoting at 7.1x and 6.4x FY2014 and FY2015 earnings estimates respectively. We maintain our Hold rating on the stock with a price target of Rs305. Bajaj Corp
Recommendation: Hold
Price target: Rs270
Current market price: Rs237 Downgraded to Hold with revised price target of Rs270 Result highlights -
A disappointing quarter: Bajaj Corp posted a disappointing performance in Q2FY2014 with the revenue growth, operating profit growth and net profit growth all staying well below our as well as the Street's expectations during the quarter. The volume growth decelerated from an average of 20%+ year on year (YoY; in the past eight to nine quarters) to 15% YoY in Q2FY2014. Despite higher advertisement and promotional spending the company was not able to sustain the strong volume growth momentum of the previous quarters which gives us a clear indication of the pressure on the demand for consumer products in an inflationary envionrnment. During the quarter the company acquired the NOMARKS brand for Rs141 crore (3.5x its sales) and partly funded the acquisition by raising debt of around Rs60 crore. This resulted in an interest cost of Rs1.3 crore which dented the bottom line growth further. The remaining funding of the acquisition will be done through internal accruals. -
Revenue growth moderated in Q2FY2014: The total revenues of Bajaj Corp grew by 16.5% YoY to Rs158.4 crore in Q2FY2014. The company clocked a volume growth of 15.0% YoY in Q2FY2014 which is lower in comparison to some of the previous quarters when the volume growth had stood in the range of 20-24% YoY. Its flagship brand, Almond Drop Hair Oil (ADHO)" registered a volume growth of 15.9% YoY, which is ahead of the industry growth during the quarter. The sustained inflationary pressure has affected the consumer sentiment resulting in a slowdown in the shift from non-branded hair oil to branded hair oil and also resulted in consumer downgrading from large packs to small packs. Kailash Parbat Cooling Oil (KPCO)'s sales volume stood lower by 7% YoY at 0.12 lakh cases in Q2FY2014 as against 0.13 lakh cases in Q2FY2013. The second quarter of a fiscal is normally weak for cooling oil in India. On the other hand,the company's sales realisation was higher by just 1.5% YoY despite the price increases undertaken in ADHO at the beginning of the year. This, we believe, was largely on account of a higher contribution of sachets to the overall sales, which have lower sales realisation in comparison to the large packs (including 100ml and 200ml).\ -
GPM improved substantially: The price of light liquid paraffin (LLP; which accounts for 37% of the total raw material cost) stood lower by 7.5% at Rs75.3 per kg vs Rs81.4 per kg in the corresponding quarter of the last year. Also, the prices of refined vegetable oil were substantially down by 16.6% YoY to Rs70.9 per kg during the quarter. The lower input prices resulted in a 333-basis-point year-on-year (Y-o-Y) improvement in the gross profit margin (GPM) to 60.5%. This was the sixth consecutive quarter of a significant improvement in the GPM. -
Higher advertisement spending affected OPM; higher interest cost further dented the PAT growth: Bajaj Corp continued to spend heavily on advertisement and promotional activities during the quarter. In Q2FY2014 the advertisement and promotional spending as a percentage of sales grew by 383 basis points YoY to 17.6%. Hence despite a sharp increase in the GPM the higher advertisement and promotional spending resulted in a 122-basis-point decline in the operating profit margin (OPM) to 27.5%. Hence, the operating profit grew by 11.6% YoY to Rs43.6 crore. However, a flat other income and a higher interest cost led to a 6.3% Y-o-Y growth in the adjusted profit after tax (PAT) to Rs40.8 crore. The extraordinary item included amortisation charges of Rs5.1 crore related to the acquisition of the NOMARKS brand and intangible assets. -
Downward revision is earnings estimates: We have revised downwards our earning estimates for FY2014 and FY2015 by 8.8% and 14.6% respectively to factor in the lower than expected volume growth, higher than expected advertisement and promotional spending, and the interest cost for the debt undertaken for the acquisition of the NOMARKS. -
Downgraded to Hold: The light hair oil category witnessed a slowdown in volume growth in Q2FY2014, largely on account of lower demand from the urban markets. Though we expect the demand for consumer goods to remain strong in rural India, but we will not see any significant improvement in the volume growth of Bajaj Corp (as urban India contributes more than 60% of the company's overall revenues) in the near term. However, the management expects this to be a short-term phenomenon and hopes the volume growth momentum to improve in FY2015. Over the long run, the company would continue to focus on four broader areas of growth: (1) achieving a strong growth in the ADHO brand (through market share gains and rural expansion); (2) improving the rural penetration; (3) launching new products; and (4) undertaking inorganic initiatives. We believe the volume growth momentum and the movement in the prices of the key inputs (such as LLP and vegetable oil) will have to be keenly monitored in the coming quarters.
At the current market price, the stock trades 19.6x its FY2014E earnings per share (EPS) of Rs12.1 and 15.9x EPS of Rs15.0. In line with the downward revision in earning estimates, we have revised our price target to Rs270. Hence, with a limited upside from the current level and the concerns over the volume growth momentum, we also downgrade our rating on the stock from Buy to Hold. Bajaj FinServ
Recommendation: Hold
Price target: Rs728
Current market price: Rs655 Financing, general insurance segments drive earnings Result highlights For Q2FY2014 Bajaj FinServ has reported a consolidated net profit of Rs276.5 crore (up 27.5% year on year [YoY]) led by a strong growth in the lending business (Bajaj Finance) and the general insurance business. The company's total income from operations grew by 29.8% YoY to Rs1,308.6 crore in Q2FY2014. Life insurance--slowdown in premiums continues
The combined profit of the life insurance business declined by 18.2% YoY to Rs252 crore in Q2FY2014 led by a decline in the policyholders' surplus (down 34.1% YoY to Rs145 crore). The gross written premium (GWP) declined by 9.9% YoY contributed by a drop of 17.6% in the renewal premium. The assets under management (AUM) declined by 9.0% YoY (down 1.8% sequentially) to Rs36,961 crore in the quarter. General insurance--operating metrics and profitability improves
The general insurance business reported a profit of Rs113 crore for Q2FY2014 as compared with a profit of Rs78.0 crore for Q2FY2013. The net premium increased by 37.9% YoY driven by 17.1% YoY increase in the GWP. The combined ratio (including motor pool losses) declined to 95.8% from 100.8% in Q2FY2013 (99.8% in Q1FY2014). The company reported an underwriting profit of Rs56 crore despite a rise in the claims ratio to 66.7% from 59.2% in Q2FY2013. Bajaj Finance--maintains strong growth momentum
Bajaj Finance showed a strong growth in profit (up 29.8% YoY to Rs167.0 crore) in Q2FY2014. The growth in the profit was driven by a strong uptick in the net interest income (NII; up 31.5% YoY) and investment income of Rs27 crore. The deployments of the company grew by 20.0% YoY to Rs5,199 crore during the quarter while its AUMs expanded by 29.0% YoY. Valuation
Bajaj FinServ's overall earnings growth in the past few quarters was aided by a strong growth in the general insurance and lending businesses. However, the premium continues to decline in the life insurance business, though the investment income boosted shareholders' surplus. In view of the weak growth outlook for the life insurance sector, the top line and the margin are likely to contract for the life insurance business. We, therefore, maintain our sum-of-the-parts (SOTP)-based price target Rs728 and Hold rating on the stock. The company's subsidiary, Bajaj Finance has applied for a banking licence but we have not factored any upside from this angle. We believe Max India is a better play in the insurance sector, as it is expected to maintain its growth and its valuation is attractive.
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