Investor's Eye: Special - Q3FY2014 IT earnings review; Update - Bharti Airtel, ICICI Bank, Crompton Greaves; Viewpoint - TVS Motors

Investor's Eye [January 29, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   SHAREKHAN SPECIAL Q3FY2014 IT earnings review Key points  The top four IT companies delivered a decent performance in a seasonally soft quarter with an aggregate revenue growth of 2.8% QoQ. But the margin performance surprised positively across the board, with back-to-back quarters of margin improvement driven by operational efficiencies.  Management commentary on the demand outlook remains positive and indicates a secular improvement in the demand trend and maintains that FY2015 would be stronger than FY2014.  We maintain our positive stance on the sector driven by the buoyancy in the business outlook led by an improvement in the USA and Europe. Based on the risk-reward profile of the large-cap IT companies, our preferred bets in order of preference are HCL Technologies, Tata Consultancy Services, Wipro and Infosys. In the mid-cap space we like NIIT Technologies, Persistent Systems and CMC. Risk: recent news flow indicates that the USA may push for the introduction of the immigration bill in the near term; this could be an overhang for the sector's performance.  After a 21% correction from the recent high in the stock after the announcement of the results, the risk-reward ratio has become favourable for CMC; hence we upgrade the stock from Hold to Buy with a price target of Rs1,800. STOCK UPDATE Bharti Airtel Recommendation: Buy Price target: Rs395 Current market price: Rs302 Q3FY2014 mixed bag-India performs in line; while Africa disappoints Key points Bharti Airtel's Q3FY2014 consolidated revenues grew by 2.9% on a Q-o-Q basis, led by a 2.5% growth in the Indian mobile business. The operating leverage from employee cost (down 5.1% QoQ) and a reduction in license and spectrum charges (down 3.1% QoQ) resulted in an overall margin expansion. The consolidated margin was up 29BPS QoQ from 32% in Q2FY2014 to 32.3% in Q3FY2014. The 3.8% sequential operating profit growth and a reduction in overall interest cost resulted in a 19.2% sequential growth in the reported earnings. After adjusting for the exceptional and one-offs like forex movement and one-time tax expense, the adjusted net profit came at Rs967 crore (over 19.6% on a Q-o-Q basis).  The management sounded reasonably confident on the Indian mobile business and mentioned that there still exists a 30-40% gap between the realised rate and the headline tariff, which it would continue to narrow by clamping down on the discounts and the freebies. It expects the operating leverage to continue playing down on the Indian business.  After incorporating a weak Q3 net earnings, our FY2014 estimate gets revised downwards, while we maintain our FY2015 estimate and introduce our FY2016 estimate in this note. Our EPS for FY2015 and FY2016 is Rs15.4 and Rs18 respectively. An attractive valuation of 6.3x FY2015 EV/EBITDA leads us to maintain our Buy rating on the stock with a price target of Rs395. Aggressive and irrational bidding in the upcoming auction would be a key risk to our rating and price target.   ICICI Bank  Recommendation: Buy Price target: Rs1,195 Current market price: Rs1,002 Strong earnings performance though stressed loans rise Key points The Q3FY2014 earnings growth remains strong (up 12.5% YoY to Rs2,532 crore) despite a deferred tax provision of Rs215 crore (9MFY2014). A strong growth in the net interest income (NII), the treasury profits (Rs447 crore YoY) and a dividend income from the life insurance subsidiary (Rs120 crore) aided the growth in earnings. Chinks appeared on the asset quality as the bank restructured Rs2,046 crore (Rs1,076 crore in Q2FY2014) worth of loans in Q3FY2014 and raised the guidance for restructuring pipeline (Rs3,000 crore vs Rs2,000 crore in Q2FY2014).  The operating performance remains strong while the asset quality pressure will be within the manageable limits. The valuations seem reasonable considering a superior RoA (over 1.6%) and strong capitalisation. We maintain our Buy rating with a SOTP-based price target of Rs1,195. Key risks: a rise in the slippages and restructured loans above the guided levels may lead to a downgrade in the earnings.   Crompton Greaves Recommendation: Hold Price target: Rs135 Current market price: Rs102 On the recovery path; reiterate Hold  Key points CGL reported a net profit of Rs62 crore in Q3FY2014 as against an adjusted loss of Rs69 crore in Q3FY2013 and sequentially grew by 6%. A healthy performance by the power systems and the consumer segments helped to achieve the growth. However, the industrial segment remained laggard with slower sales and margin pressures.  While the stand-alone business continues to show a stable performance, the international business is still in loss (Rs2 crore operating loss in Q3) due to the struggling Canadian operations. The Canadian setup is facing structural issues but the management expects to it turn around in FY2015 with an ongoing cost rationalisation, outsourcing option and a recently bagged high margin orders.  We retain our earnings estimate and keenly watch the development at the Canadian operations which would be crucial for the turnaround of international business and a possible re-rating. We retain our price target of Rs135 (14x FY2015E) and continue to rate the stock as Hold.   VIEWPOINT TVS Motors  New product launches to drive earnings  Key points  The strong improvement in the realisation on the back of an improved product mix and the price hikes helped the company to post a double-digit growth in the revenues in Q3FY2014. A reduction in the interest expenses further boosted the profitability leading to a strong double-digit earnings growth. The new product launches and a recovery in the domestic demand would lead to a double-digit volume growth for the company, helping it to regain its market share. A strong revenue growth is likely to lead to a double-digit growth in the earnings over the next two years. We expect the stock to trade at 9.5x its one-year forward earnings. Given the strong earnings growth, we have a positive view on the stock. 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

 

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