Investor's Eye: Pulse - Weak early monsoon predictions; negative implications but still early to take a call; Update - HCL Technologies; Maruti Suzuki India

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Investor's Eye [February 28, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   PULSE TRACK Weak early monsoon predictions; negative implications but still early to take a call Early predictions by some reputed private agencies (Indian and foreign) suggest a good probability (about 75% chances) of a weak monsoon in 2014 driven by the El-Nino effect. These agencies had rightly warned against a similar trend in 2002, 2004 and 2009 (in 2009 the rainfall reading at 27% below average had been one of the weakest ones in three decades). The sub-par gross domestic product (GDP) growth in FY2013-14 is expected to be aided by a 4.6% growth in the agriculture sector (as per CSO estimates). In the consensus view for FY2014-15, the pick-up in the GDP growth to 5.5% factors in a growth of about 3% in the agriculture segment which could get downgraded if the monsoon turns out to be weak. What's more, it would put pressure on inflation and consequently on interest rates and bond yields as well. In addition to banks (and some NBFCs), the rural demand driven sectors like FMCG, consumer durables and two-wheelers face the potential risk of an earnings downgrade. The hydro-power stocks will be adversely affected by weak rains which, in turn, could affect the power trading volumes of PTC India. However, it is still too early in the day to take a final call and the weather situation is susceptible to changes (besides, the extent of the potential weakness in the rainfall is also not certain at this point of time). STOCK UPDATE HCL Technologies Recommendation: Buy Price target: Rs1,810 Current market price: Rs1,576 Quality and consistency worth further re-rating, upgrades price target to Rs1,810 Key points In a recent interaction, HCL Technologies' management sounded confident about delivering revenue growth at the top end of the Nasscom guidance (13-15%) in FY2015. The company is experiencing a lot of traction in the deal pipeline/conversions led by the rebid market (potential deals estimated at $50 billion in CY2014).  Though the infrastructure management services vertical (accounting for 34% of the total revenues) continues to be a growth driver, but the software services vertical (accounting for 62% of the revenues) is picking up on the back of its niche offerings (13 deal wins through ALT ASM offering). This would lead to a more broad-based growth in FY2015 and also allay the Street's concerns over a lopsided growth. The margins are expected to remain broadly stable with an upward bias in the range of 20-21%.  HCL Technologies remains the best performing tier-1 IT stock with a return of around 117% given in the last one year. We have consistently had a positive call on the company in the last two years and we maintain our positive stance. With an earnings growth of 26% (CAGR) over FY2013-16, the highest among the top 4 IT companies, with a more broad-based revenue profile and a potential improvement in the dividend pay-out, the stock could see further re-rating in the next 6-12 months. We have increased our target multiple from 14.5x to 16x (similar to Wipro). Consequently, we have increased our price target to Rs1,810. We have maintained our Buy rating on the stock.    Maruti Suzuki India Recommendation: Hold Price target: Rs1,706 Current market price: Rs1,586 Fails to address investor concerns; further de-rating of multiples Key points Maruti Suzuki India Ltd (MSIL) has issued a clarification that has not only failed to ease investor concerns but also reaffirmed some of the fears related to the company's plan to source cars from the plant its parent's 100% subsidiary, Suzuki India, is setting up in Gujarat.  Contrary to MSIL's claim that the plant is being set up in Gujarat under Suzuki India because the cost of capital for the parent is close to zero (given the low interest rate in Japan), the recent disclosure of the transfer pricing and depreciation rate for the plant essentially means a higher than expected effective return on investment for Suzuki India.  After today's correction in the stock market, MSIL is trading at close to 13.5x FY2015E and 11x FY2016E earnings (the FY2015 and FY2016 estimates will not be affected by the proposed plant, which would get operational after three years). However, the controversy is not expected to end soon and would remain an overhang on the stock. Consequently, we are reducing our target multiple estimate further to 12x FY2016E, leading to a revised price target of Rs1,706. Given the limited upside in the near term, we revise our rating on MSIL to Hold. 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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