| Summary of Contents STOCK UPDATE Wipro
Recommendation: Buy
Price target: Rs645
Current market price: Rs584 Soft performance, growth to catch-up in the H2FY2015 Key points - For Q2FY2015, the IT services revenue was up by 1.9% QoQ to $1,771.5 million, on a constant-currency basis revenues grew by 3% QoQ to $1,793 million, which was closer to the mid-level of guidance range of $1,770-1,810 million. The softness in revenues growth was led by the headwinds in some of the key top 10 accounts in Europe, which was primarily in commodity-linked industries, management expect these accounts to pick-up by Q4FY2015. The IT services EBIT margins decline by 80BPS QoQ to 22%, largely attributable to effective wage hikes for two months, though the improvement in gross utilisation by 130BPS to 70% supported the margins. For the quarter, IT services margins includes the sale of strategic investments to the tune of Rs60.8 crore, excluding that the margins stood at 21.4%. The net income for the quarter was down by 0.9% QoQ to Rs2,084.8 crore. In the INR terms, the consolidated revenues were up by 4.9% QoQ and 8.5% YoY to Rs11,683.8 crore.
- During the quarter, the company won eight large deals and also consolidated its acquisition; Alberta-based ATCO (acquired in July 2014 for $195 million with projected revenues of $112 million annually for the next ten years). It added 50 new clients during the quarter and made net addition of 6,845 employees (around 550 headcounts from ATCO acquisitions) taking the total to 154,297 employees. For Q3FY2015, despite a seasonally soft quarter, Wipro has given a strong guidance of 2.2%-3.9% sequential growth in the revenues to $1,810-1,840 million (without any incremental revenues from ATCO).
- Wipro continues to lag industry-level growth, despite winning strong deals and the improvement in win rates on account of the industry and clients specific issues, which is expected to sort out by Q4FY2015. The management appears to be positive about catching up on the growth in the coming quarters and indicated that the second half of the fiscal would be stronger, and strong guidance for Q3FY2015 reflects acceleration in growth in the H2FY2015. Though, we believe the sustainability and meaningful improvement in the earnings performance is only visible in FY2016. We have broadly maintained our earnings estimates. The stock trades at a reasonable valuation of 16.3x and 14.3x FY2015 and FY2016 earnings estimates. We retain our Buy rating on the stock with a price target of Rs645.
Housing Development Finance Corporation
Recommendation: Hold
Price target: Rs1,100
Current market price: Rs1,030 DTL provisions, lower dividend slow earnings growth Key points - For Q2FY2015 HDFC reported a profit of Rs1,357.6 crore (up 7% YoY) due to a lower dividend income and a higher tax rate (because of deferred tax liability provisions). However, the operating performance was quite healthy with the net interest income showing a growth of 19% YoY. The reported spreads were marginally higher at 2.30% (vs 2.29% in Q1FY2015) on a sequential basis.
- The loan book grew by 19% YoY (including the loans sold) with the individual loans growing at 23% YoY. The developer loans, which were muted for the past several quarters, grew in double digits. On the other hand, the asset quality remained stable in both developer and retail segments (gross NPAs were at 0.69%).
- HDFC continues to report a superior performance at the operating level led by a strong growth, steady margins and robust asset quality. While competition continues to intensify in the mortgage space, any significant moderation in the borrowing rates or pick-up in the non-retail loans will be the key thing to watch. However, since the stock is trading at a premium valuation (4.5x FY2016E book value) we maintain our Hold rating with a price target of Rs1,100.
Mcleod Russel India
Recommendation: Book out
Current market price: Rs246 No signs of revival, Book out Key points - Mcleod Russel India posted a dismal operating performance in H1FY2015, with revenues declining by 12% and PAT declining by 31%. The dismal performance can be attributed to lower tea production in north India, where the tea output was down by 10% in the first half of the current fiscal. With no major recovery in production expected in Q3FY2015, we believe FY2015 will be yet another fiscal with lower profitability of the business in India.
- Further, the international subsidiaries in Vietnam, Uganda and Rwanda had posted a sharp decline in the profitability due to flat tea production and decline in the sales realisation. The tea prices in Kenya fell by about 20%, which affected the performance of the African subsidiaries. The demand from tea importing countries (mainly the European and Middle-Eastern countries) is yet to revive and hence the Kenyan tea prices are expected to remain lower YoY in the coming quarters as well.
- Going ahead, FY2016's profitability would remain under stress of a new wage agreement which will be signed by the company with plantation workers in India in January 2015. If the wage hike is about 15%, it will have a negative impact on the stand-alone business' profitability (in the absence of any significant increase in the sales realisation), as the employee cost constitutes around 45% of the overall cost of the company.
- Hence in view of the near-term demand head winds in the international tea market and no substantial visibility of a margin revival in the near to medium term, we are discontinuing active coverage on the stock.
VIEWPOINT Can Fin Homes
Current market price: Rs491 Healthy gains of 30% in less than two months, Book profits Key points - Can Fin Homes has outperformed the key indices (Sensex and BSE Bankex) and appreciated by 30% from our recommended price within two months (since August 28, 2014) and now it trades at a 52-week high. Consequently, the valuations have increased from 1.2x to 1.6x (FY2016E book value) which is closer to that of larger housing finance companies like LIC Housing Finance and Indiabulls Housing Finance.
- A strong growth in advances especially contributed by the new branches has contributed to the earnings growth. Since corporate credit growth is likely to remain tepid in FY2015, the competition is growing in retail (especially mortgage segment) from banks and bigger housing finance companies, which may affect its spread.
- Given its niche operations and smaller book size, it is expected to sustain higher growth rates, though the existing valuations (1.6x FY2016E book value) largely factor the same. We have a positive outlook on the housing finance sector though we prefer LIC Housing Finance. Can Fin Homes has appreciated by 30% in less than two months (recommended at Rs380 on August 28, 2014) and 280% since our initiation (in December 2012). We therefore recommend investors to Book profit from the stock.
| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
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