Investor's Eye
[December 17, 2013] | | |
| Summary of Contents
STOCK UPDATE Tata Consultancy Services
Recommendation: Buy
Price target: Rs2,600
Current market price: Rs2,047 Weakness priced in, maintain Buy with price target of Rs2,600 We recently attended the pre-quarter analyst meet of Tata Consultancy Services (TCS). The management maintained its positive stance on the demand environment after adjusting for seasonality. The overall demand trend is positive and the management maintained that FY2014 would be better than FY2013 and growth would be front-ended with H1FY2014 being stronger than H2FY2014. Owing to seasonal weakness, the revenue growth in Q3FY2014 is expected to be relatively soft. On the CY2014 budgeting cycle, the management expected the trend to be normal (clarity likely to emerge by early 2014), though it stated that the budgeting cycle would be positive compared with the last year. Given the strong demand momentum, TCS is expected to continue its impressive run in FY2015 as well. Key points -
Q3FY2014 will be soft owing to seasonal weakness: Owing to seasonal factors like lesser numbers of working days, seasonal furloughs in the key industry verticals and weakness in India business, the management stated that the revenue growth would be relatively soft in Q3FY2014. In Q2FY2014 the revenue growth was 5.4% on reported currency basis and 6% on a constant-currency basis (a 7.3% volume growth, Alti contributed 1.3% of that). Cross-currency movement is expected to have a positive impact of 100 basis points on the reported revenues while the appreciating rupee will have a negative impact of 100 basis points on the reported revenues in rupee terms (in the previous quarter the average USD/INR rate was Rs62.9). -
Margins to remain stable on a constant-currency basis: The margins are expected to remain stable on a constant-currency basis whereas the rupee's appreciation against the dollar is likely to affect the margins by 25-30 basis points quarter on quarter (QoQ). In Q2FY2014, EBIT margin was at 30.2%. The management maintained its margin guidance corridor of 27-28% and stated that the currency gains would be reinvested into the business once the local currency stabilised. -
Overall demand trend positive, FY2014 to be better than FY2013: The management maintained its optimism on the overall demand trend and maintained that FY2014 would be better than FY2013 (FY2013 saw a Y-o-Y growth of 13.7%) and H1FY2014 would be better than H2FY2014 (H1FY2014 saw a Y-o-Y growth of 16.5%). On the upcoming information technology (IT) budget for CY2014, the management stated that the trend in the budget cycle appeared positive as compared with the last year, though clarity would emerge only by January-February 2014. -
Valuation: In the last three months, TCS has underperformed the broader market indices (which are up 8%) as well as the CNX IT Index (up 14%) with a 6% return (the stock corrected by 9% from a high of Rs2,258). We believe the anticipation of a weak Q3FY2014 is already priced in the stock. At the current market price of Rs2,046, TCS trades at 20.6x and 17.3x FY2014E and FY2015E earnings. We maintain our positive stance on the IT sector and expect the sector to see a strong FY2015 led by secular volume growth. We maintain our Buy rating on the stock with a price target of Rs2,600. We also maintain our Buy rating on the other three top-tier IT companies, Infosys (price target: Rs3,770), Wipro (price target: Rs580) and HCL Technologies (price target: Rs1,350). Zee Entertainment Enterprises
Recommendation: Buy
Price target: Rs335
Current market price: Rs284 Favourable synergies, maintain Buy with a revised price target of Rs335 The event: Zee Entertainment Enterprises has approved the scheme to demerge media business from DMCL: Zee Entertainment Enterprises Ltd (ZEEL) has announced the scheme of arrangement between the company and Diligent Media Corporation Ltd (DMCL; a promoter group company) to demerge the media business from DMCL. The media business undertaking comprises the media and entertainment business of DMCL including the event management activities, TV channel licence and TV reality show formats for game based shows. The said businesses will be demerged from DMCL and vested with ZEEL. Structure of the deal: ZEEL will issue 2.23 crore redeemable, non-convertible preference shares of Re1 each (ie one preference share of Re1 each for every four equity shares of face value of Rs10 each of DMCL). The preference shares would have tenure of three years and carry a coupon rate of 6% per annum. The appointed date for the scheme of arrangement will be March 31, 2014 and the scheme is subject to necessary approvals. The total consideration for the demerger scheme works out to Rs2.23 crore and Rs0.40 crore coupon payment on the preference shares for three years. Valuation-introduce FY2016 estimates and roll over valuation and price target to Rs335: We view the demerger scheme as a favourable event for ZEEL. For a total deal consideration of merely Rs2.6 crore, the company will receive a GEC licence from the scheme of arrangement (that obtaining a government clearance for a TV licence is getting cumbersome has been acknowledged by the management). Moreover, the company shall also get tax benefits from the deferred tax assets of the demerged entity to the tune of Rs314 crore over the next two to three years which will lower the effective tax rate (currently the company's effective tax rate is at 33%). We have not incorporated any financial impact of the demerger scheme in our estimates. We have introduced our FY2016 estimates in this note and consequently rolled over our price target to Rs335. We maintain our positive stance on ZEEL and maintain our Buy rating on the stock. UPL
Recommendation: Buy
Price target: Rs210
Current market price: Rs177 Growth momentum to sustain; price target revised to Rs210 We recently interacted with the management of United Phosphorus Ltd (UPL) to obtain an overview of the current business environment and the outlook for the quarters ahead. UPL is our top pick in the agro-chemical space and the stock has appreciated by around 15% since our last update (released on October 24, 2013), when we had strongly recommended buying the stock. In our recent interaction, we saw the management was confident of comfortably meeting its guidance on revenues (a 12-15% growth) and margins (an expansion of 100-200 basis points in FY2014; not fully factored in by most analysts) with an improvement in working capital efficiency (which shall result in better cash inflows) during the fiscal. In the near term, the company shall witness better traction in the Indian and Brazilian operations. Taking into consideration the above factors, our earnings estimates for FY2014 and FY2015 have increased by 4.3% and 14% respectively. Consequently, we retain our Buy rating on the stock with a price target of Rs210. Key points -
Business environment stable across geographies; India and Brazil showing signs of improvement in demand: UPL's management has indicated that the demand environment for agro-chemicals across geographies remains strong on the back of a normal monsoon and good weather for sowing (sowing acreage has increased across geographies). Going ahead, the growth in the revenues will be largely driven by India and Latin America (Brazil) where the growth rate is likely to remain in double digits with a stable mid single-digit growth in the mature markets like North America and Europe. In H2FY2014, the performance would be driven by better sowing activity in both India (rabi crop) and Brazil. -
Uptick in margins and better working capital management are the key re-rating triggers: In the past, the valuations suffered due to the company's inability to generate expected free cash flows from operations and bring down the debt on its books. In Q2FY2014, the company managed to reduce its gross debt by Rs400 crore (to Rs3,800 crore) and is confident of reducing the debt further through better working capital management. It expects to sustain its working capital days in Q3 in spite of a higher contribution from Brazil where the working capital cycle is relatively elongated (280-340 days). The higher traction in revenues would also boost the margins (operating leverage) in addition to a favourable revenue mix (higher revenues from the branded products). The recently launched product Ulala, an insecticide, has became one of the key brands for the company (UPL sells this product for cash only at some places). The same goes for its other product, Atabron (an innovative insecticide that requires less number of sprays). -
Confident of comfortably meeting its guidance: Given that the company has already reported a 17.5% growth in revenues and a 70-basis-point improvement in its operating profit margin (OPM) for H1FY2014, the performance is largely on track to achieve the guidance of a 12-15% growth in the revenues and a 100-200-basis-point improvement in the margin for FY2014. Especially since the initial signs of demand from India and Brazil are favourable. -
Valuation-earnings growth priced in; improvement in cash flows to drive re-rating: So far UPL's performance in FY2014 has been largely on track and in line with the Street's expectations. The positive surprise can come in the form of a higher than expected improvement in the OPM (the Street and we are factoring in a less than 100-basis-point improvement in the margin) and better free cash flows (resulting in lower gross debt and savings in interest charges). As of now, we are raising our earnings estimates to account for the higher revenue traction. Consequently, we maintain our positive stance on IPL and retain our Buy recommendation on it with a revised price target of Rs210. At the current price, the stock is trading at 7.4x FY2014E earnings per share (EPS) of Rs20.9 and 7x FY2015E EPS of Rs24.5.
MUTUAL GAINS Debt Mutual Fund Picks Bond / Debt market round up -
Bond yields rose during the month but found some support after the introduction of new 10-year paper by the RBI. Initially, absence of Open Market Operations (OMOs) and weakness in the rupee hit bond yields. Moreover, disappointing HSBC Manufacturing and Services Purchasing Managers' Index data hinted that the country's economic recovery is unlikely to take place any time soon. The Consumer Price Index (CPI) based inflation also touched a high of 11.24% in November 2013 (October 2013 - 10.2%), impacting the bond market. However, bond yields found some support after the Central Bank assured investors that it would provide necessary liquidity in the market and also promised to wind down the oil-dollar swap window, if needed. Announcement of bond buyback through OMOs by the Central Bank, fall in global crude oil prices and improvement in liquidity condition in the banking system supported bond markets. -
The new 10-year benchmark bond yield closed up 12 basis points (bps) at 8.74% compared to previous month's close of 8.62%. Bond / Debt Outlook - Bond market will likely to take cues from the Upcoming RBI Mid-quarter monetary policy review to be released on December 18, 2013. The second quarter GDP numbers which rose by 4.8%, with the Central Government's fiscal deficit crossing 84% of the budget estimate in the first seven months of this fiscal, GoI may have to curtail its capital expenditure to avoid breaching the fiscal deficit target of 4.8% of GDP, which may negatively impact growth. The rate hardening cycle is likely to continue to tamp down the inflationary pressure. The improvement in liquidity condition will be viewed positively at-least in the short term. Next month, the RBI will conduct auctions for Treasury-Bills and dated securities amounting to Rs48,000 crore and Rs45,000 crore respectively.
| | | 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 | |
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