| STOCK UPDATE Tata Consultancy Services
Recommendation: Buy
Price target: Rs3,100
Current market price: Rs2,545 A soft quarter, promising outlook Key points - Tata Consultancy Services (TCS) has managed to meet the Street's expectations in a seasonally weak quarter. For Q3FY2015, it has delivered a 2.5% growth in revenues to $4,027.2 million on constant-currency terms. However, a negative cross-currency impact of 2.5% resulted in a muted revenue growth to $3,930.6 million on a reported basis. The blended volume for the quarter was up by 0.4% QoQ while the realisation was up by 2.3% QoQ, on a constant currency basis. The EBIT margin remained stable at 27% while the net income for the quarter rose by 2.9% QoQ to Rs5,444.1 crore.
- During the quarter the company bagged seven large deals across five industry verticals. The other operating metrics also remained fairly stable during the period, with the attrition rate at 13.4% as against 12.8% in Q2FY2015; gross hiring at 16,561 people (net headcount addition at 4,868 people); the utilisation rate excluding trainees at 86.7% (up 50BPS QoQ), and the number of clients increasing by one in the $100-million bucket and by three in the $50-million bucket.
- The management commentary on the demand outlook for FY2016 looks promising driven by a strong deal pipeline and a healthy order book. The management also indicated client spending would increase in CY2015 and the company would witness growth across the key geographies. However, the growth in FY2015 could lag the growth seen in FY2014 owing to cross-currency headwinds and softness in Diligenta, the insurance platform in the UK. We have tweaked our earnings estimates to incorporate the impact of the cross-currency movements and reset our USD-INR assumptions to Rs61 and Rs59 for FY2016 and FY2017 respectively. TCS has already underperformed the broader market indices and the IT index in the last three months. At the current market price of Rs2,545, the stock trades at 20.5x and 18x FY2016E and FY2017E earnings. We remain positive on TCS and maintain our Buy rating on the stock with a price target of Rs3,100.
Bajaj Finserv
Recommendation: Buy
Price target: Rs1,544
Current market price: Rs1,288 Steady earnings performance, price target revised to Rs1,544, upgraded to Buy Key points - For Q3FY2015, Bajaj Finserv reported a 23.6% growth in consolidated profit to Rs347.4 crore driven by a 35.4% growth in the operating profit. Segment-wise the financing (Bajaj Finance) and general insurance (despite a rise in claims from the Jammu & Kashmir flood and the Hudhud cyclone) segments posted a robust profit growth of 33% and 50.5% respectively.
- However, the life insurance business continued to struggle as new business premiums declined by 15.6% YoY, mainly contributed by the end of the bancassurance tie-up with Standard Chartered Bank. The shareholders' profit for life insurance declined to 13.9% YoY to Rs99 crore.
- While the financing and general insurance segments are showing strong traction, a likely revival in the life insurance segment will boost growth. We have changed our assumptions for valuation as we now account 74% economic interest of the insurance business (vs 51% earlier due to a higher possibility of an increase in stake by a JV partner at the market price). In addition, we have factored in our revised price target for Bajaj Finance which results in an SOTP-based price target of Rs1,544 for Bajaj Finserv. We upgrade the rating on Bajaj Finserv from Hold to Buy.
LIC Housing Finance
Recommendation: Buy
Price target: Rs558
Current market price: Rs466 Operating performance improves, price target revised to Rs558 Key points - For Q3FY2015 LIC Housing Finance (LIC Housing) reported a net profit of Rs344 crore (up 5.4% YoY, adjusted for deferred tax liability the growth was 16%). The operating performance was strong as the net interest income grew by 20% YoY. The spreads expanded by 3BPS QoQ while the margins were stable (2.2% vs 2.23% QoQ).
- The loan growth remained strong (up 17% YoY) contributed by a 19% growth in the loans in the individual segment. The proportion of the high-yielding products, loan against property and developer loans is expected to increase going ahead. The asset quality improved QoQ as the gross NPA declined to 0.57% from 0.63% in Q2FY2015.
- We believe LIC Housing is a play on the strong growth expected in the housing segment in the medium to long term and moderation in interest rates. We expect LIC Housing's earnings to grow at a CAGR of 19% over FY2014-17 resulting in an RoE of 20.2% by FY2017. We value LIC Housing at 2.4 x FY2017E BV which results in a new price target of Rs558.
VIEWPOINT Strides Arcolab
Current market price: Rs924 Near-term upside factored in; Book profit Key points - We had recommended entering the stock of Strides Arcolab in our Viewpoint report (dated September 30, 2014) based on three key rationales: (1) a potential upside from the merger deal with Shasun Pharma which is expected to lead to a 20% cost synergy in a couple of years; (2) sale of 25.1% stake in its biotech arm, Stelis Biopharma, to GSM Holdings at a premium of 50% which showcases the underlying value in the biotech business; and (3) a special dividend pay-out of the proceeds that the company was likely to receive from Mylan Inc.
- Since our recommendation, the company has announced a special dividend of Rs105 per share (on October 7, 2014), out of $150 million received from Mylan (apart from Rs500 per share dividend declared on December 10, 2013). The other key events during the past few months include the approval of Calcitriol softgel capsules in the US market, collaboration with Medicines for Malaria Venture to develop and supply key anti-malarial drugs, and Stelis Biopharma starting its construction work for a multi-product biologics facility in Malaysia.
- Strides Arcolab has been successful in multiplying its investors' wealth through its "build and divest" strategy. After three major divestments, the company is now focused on niche segments like softgel capsules and biological products. Though we expect the company to maintain the pace of filing products in the key markets and launch products in normal course, yet it could take a couple of years to build a strong foothold in the softgel market and gain from its bio-pharma business.
- The stock has moved up close to 30% since our recommendation and currently trades at 17.6x FY2016E earnings. From hereon we see a limited near-term upside and recommend our investors to Book profit at this level.
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