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| Summary of Contents | STOCK UPDATE Tata Consultancy Services
Recommendation: Buy
Price target: Rs2,684
Current market price: Rs2,381 Strong start to FY2015, retain Buy Key points - TCS has started FY2015 on a strong note with a 5.5% sequential growth in revenues (to $3,694 million vs our estimate of $3,690 million), volume growth of 5.7% and constant-currency growth of 4.8%. The EBIT margin was down by 285BPS QoQ to 26.3% (our estimate was 26.9%) because of wage hikes, higher depreciation (a one-time charge of Rs174.6 crore, on account of a change in useful life of assets) and the rupee's appreciation against the dollar. Excluding the one-off depreciation impact, the EBIT margin for the quarter stood at 27%. The net income for the quarter was down by 4.5% QoQ and 27% YoY to Rs5,057.8 crore (our estimate was Rs5,004.5 crore).
- The management reaffirmed that FY2015 would be stronger than FY2014 (revenues had grown at 16.2% YoY in FY2014 in dollar terms). During Q1FY2015 the company signed seven large deals and maintained the hiring target of 55,000 employees for FY2015. The management indicated the revenues from Mitsubishi Corp. merger will be lower than expected because of the yen's depreciation against the dollar (revenues from the merger are going to accrue from Q2FY2015).
- Being the undisputed leader among the Indian IT incumbents, TCS continues to set higher benchmarks for the sector and a solid start in Q1FY2015 clearly points to the strong momentum for FY2015. Further, given its scale of operations, it is well armoured to face head winds as compared with its peers. At the current market price of Rs2,381, the stock trades at 21.3x and 19.4x FY2015E and FY2016E earnings respectively. We maintain TCS as our top pick among the large-cap IT companies and retain our Buy rating with a price target of Rs2,684.
Federal Bank
Recommendation: Buy
Price target: Rs142
Current market price: Rs124 Outlook on growth, asset quality improves Key points - Federal Bank reported a net profit of Rs220 crore for Q1FY2015 contributed by a steady growth in the NII (up 11% YoY). The pre-provisioning profit declined by 10% YoY due to a lower treasury income compared with Q1FY2014. The margin (adjusted) improved sequentially to 3.25% during the quarter.
- The asset quality continues to improve partly contributed by a control on slippages and sale of NPAs to ARCs (Rs141 crore in Q1FY2015). The bank restructured Rs88 crore worth of loans in Q1FY2015. The comfort on asset quality increased as the loans under watch declined from about Rs400 crore a few quarters ago to Rs150-200 crore in Q1FY2015.
- Over the past few quarters the bank has delivered on key metrics and is now focusing on improving the balance sheet and fee income growth. This should lead to an improvement in the RoA. The management is aiming for RoA of 1.3% and 1.5% in FY2015 and FY2016 respectively. An improving outlook on asset quality and a strong capital position are among the key positives for the stock. We maintain our Buy rating on the stock with a price target of Rs142.
Zydus Wellness
Recommendation: Reduce
Price target: Rs520
Current market price: Rs580 Disappointment continues, Reduce maintained Key points - Zydus Wellness posted a disappointing performance for Q1FY2015 with revenues declining by 6% and PAT dropping by 25%. Sustained sales pressure on the discretionary categories and heightened competition in segments, such as face wash, affected the sales of the Everyuth brand (the Q1FY2014 revenues of the brand had included sales of Everyuth soaps and Menz which were absent in this quarter). Nutralite sales were affected by a 2.5% price cut taken in January 2014. The Sugarfree brand continues to do well and grew in mid teens during the quarter.
- A new distribution system would be in place by the end of Q2FY2015. The management has hinted that the new distribution system along with adequate media spending would help it to post better sales from H2FY2015. The higher cost towards the implementation of the new distribution system and increase in distributor's subsidy would result in an OPM of 19-21% in the coming years.
- Zydus Wellness has a portfolio of brands catering to niche segments (that have seen a strong growth in recent times). The entry of multinationals in segments such as face wash and peel-offs has affected the market share of the company. Along with a new distribution set-up the company should also focus on adding new variants under the existing brands and improving product awareness among consumers to expand the market share in the key categories. This will help it deliver a better performance in the coming years.
- The stock is currently valued at 24x FY2015E earnings which is not commensurate with the current business' current fundamentals. Hence, we maintain our Reduce rating on the stock. However, we revise our price target upwards to Rs520 by increasing the valuation multiple to 18x on expectation of a better sales performance from the second half of the current fiscal.
CMC
Recommendation: Hold
Price target: Rs2,000
Current market price: Rs1,881 Downgrade to Hold with a revised price target of Rs2,000 Key points - Coming out of the high base of Q4FY2014 (Q4 is usually a strong quarter for the company), CMC has delivered a sequential decline of 1.9% in revenues to Rs592.6 crore (a 0.8% sequential growth in dollar terms) for Q1FY2015. On a Y-o-Y basis the revenues were up by 21.8%. The OPM contracted by 140BPS to 15.4% largely because of the rupee's appreciation against the dollar. Excluding net extraordinary items of Rs14.5 crore in Q4FY2014 and Rs18.8 crore in Q1FY2015, on an adjusted basis the net income grew by 3.4% QoQ and 45.4% YoY to Rs77.3 crore during the quarter.
- The management commentary on the overall demand environment remained optimistic, but the exciting part of the commentary pertained to the huge opportunities in the domestic market. Given CMC has offerings in sectors like mining, defence, port, railways, insurance, energy, road transportation, vocational training (skill developments) and mega e-governance projects, the management expects the bulk of the deals to come from these areas in the next three years. In view of the opportunities present in the business, the management expects the high-margin solution business (accounts for 20% of the total revenues) to double from the current levels.
- Under the current pro-growth government if deals/projects start flowing as anticipated by the management, we see big potential for upgrades in the company's consensus earnings estimates for FY2016 and FY2017. At the current levels the stock trades at 16x FY2016E earnings. The stock's multiple seems justified considering the earnings potential of the company, though in order to outperform the market CMC would require deal flows as well as earnings upgrades. As CMC is a proxy for TCS and has the potential to spring a big earnings surprise relative to the other mid-cap IT companies over FY2016 and FY2017, we have increased our target multiple to 17x (ie a 23% discount to TCS) and arrived at a price target of Rs2,000 (ie a 6.3% upside). We downgrade the stock to Hold from Buy (and advise investors to wait for the right opportunity to accumulate).
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| Regards,
The Sharekhan Research Team |
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