Investor's Eye
[January 03, 2014] | | |
| Summary of Contents
SECTOR UPDATE Cement Sustained weak demand environment puts pressure on price We have done a channel check with the cement dealers across most of the major cities in the country to know about the current status on the pricing and demand environment. The key highlights of our interaction are as follows: -
Cement price corrects across regions: According to our channel check, the price of cement in the past one month has seen a decline on an average of Rs9 per bag (cement bags weighing 50 kilograms) across the country. Among the regions, the correction in the cement price was highest in the northern region, where the price corrected on an average of Rs22 per bag owing to a weak demand environment and stiff competition (due to year-end for multinational corporations [MNC]). On the other hand, the correction in the cement price was relatively less in the western, southern, central and eastern regions, where the price corrected on an average of Rs6 per bag. The eastern region witnessed a marginal price decrease average of Rs3 per bag on a month-on-month (M-o-M) basis. With the recent correction in the cement price, the all-India cement price dropped to Rs301 per bag as against Rs310 per bag at the end of December 2013. The cement dealers are of the mix view that the price could go up in the northern, eastern and central regions, whereas the cement price is likely to remain flat in the western and southern regions in January 2014. -
Demand environment continues to remain weak: The demand environment has remained weak on account of a slower than expected execution of the infrastructure and housing projects (specifically the rural housing demand remains weak) across regions except the eastern region. The demand for cement in the major cities of the western, southern and northern regions witnesses a sluggish demand environment because of the absence of infrastructure projects and a slow recovery in the private housing segment. Dealers are of the view that the demand is likely to recover in the eastern and central regions from mid January 2014 (once the festival season starts). -
Outlook-demand environment weak; cost pressure to escalate: Given the lower than expected demand growth in FY2013 (below 6%) and the continued deterioration in the macro environment, we expect the demand growth to remain flattish to marginally positive in 2013-14. However, the utilisation levels will decline due to stabilisation of supply from new capacities. The firm crude prices and the expected hike in diesel prices would put pressure on the cost side in terms of higher freight costs, and power and fuel costs. The only hope for the cement companies emerge from the possible demand emanating from the pick-up in the execution of stalled infrastructure projects cleared recently. On the other hand, the valuations had corrected significantly. However, given the lack of any triggers for re-rating in the near term, it is advisable to remain very selective. We prefer UltraTech Cement Ltd (UltraTech) due to its strong balance sheet, pan-India presence and the recent correction in its stock price.
SHAREKHAN SPECIAL Q3FY2014 IT earnings preview
Seasonal weakness prevails amidst a strong demand environment Key points -
Owing to seasonal weakness on account of the lower number of working days and furloughs, the December quarter has traditionally been a soft quarter for the information technology (IT) sector. For the December 2013 quarter, we expect the aggregate revenues growth of the top four IT companies at 3.4% quarter on quarter (QoQ) against 4.2% QoQ in September 2013 quarter. On a constant currency basis, the growth will be soft at 2.6% QoQ (excluding cross-currency benefits of 50-90-basis-points). -
Given the absence of rupee tailwinds (which remained broadly stable QoQ against 11% QoQ depreciation in Q2FY2014), the margins of the top four IT companies is expected to remain stable except for HCL Technologies, where we expect a EBIT margin decline of 114-basis-points QoQ on account of the impact of the wage hikes (salary hikes to be taken into account for some of its employees with effect from October 1, 2013). -
Key monitorables for the quarter will be: (1) management's commentary on CY2014 IT budgets (expect to remain positive) and the general demand trend in the US and Europe; (2) the announcement of large deal wins; (3) Infosys' and Wipro's guidance. Infosys is likely to revise its guidance upward to 'at least 12%' from the current 9% to 10% and Wipro likely to guide at 2-3.5% QoQ growth for the March 2014 quarter; and (4) outlook on the margins given the stability in rupee in the last three months and company's re-investment strategy of the currency gains. -
We have been running our positive stance on the IT sector since the last two years with our preferred bets on Tata Consultancy Services (TCS) and HCL Technologies in the tier-I IT pack, and both have delivered exceptional returns of 83% and 212% respectively. In the mid-cap space, Persistent Systems and CMC Ltd (CMC) have absolute return of 135% and 48% respectively from our initiation price. -
We continue to maintain our positive stance on the sector, which is driven by the improving business visibility and is also supported by currency tailwinds. All the top four Indian IT companies (Infosys, TCS, HCL Technologies and Wipro) stand with a Buy recommendation, as they are well placed to capture opportunities offered by the improving operating environment in key geographies like the USA and Europe (will see more secular recovery in FY2015/16E), and in the midcap space we continue to like NIIT Technologies Ltd (NTL), Persistent Systems and CMC. Valuation and price target: roll-over price target multiple to FY2016E
Given the pertinent signs of improvement in the operating environment and impressive earnings outlook for FY2015 and FY2016E, we now roll-over our target multiple of the remaining lot of our IT coverage universe to FY2016E (we have already roll-over the target multiple of some of our coverage companies in the recent updates). We now value Persistent Systems at 12x FY2016E as compared to 11x earlier, given the re-rating in the other mid-cap IT companies and consequently upgrade our rating to Buy from Hold earlier, with a revised price target of Rs1,100. -
Large-cap: In order of preference, we like HCL Technologies, TCS, Wipro and Infosys. -
Mid-cap: Based on risk-reward profile and absolute returns, our order of preference is NIIT Technologies, Persistent Systems and CMC.
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Regards,
The Sharekhan Research Team | |
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