Investor's Eye
[October 11 2013] | | |
| Summary of Contents
PULSE TRACK IIP grows by 0.6% in August 2013, much lower than market's estimates -
In August 2013 the Index of Industrial Production (IIP) slowed down to 0.6%. The lower than expected growth was largely due to the decline in the manufacturing and capital goods sectors. Moreover, the weakness in the mining sector persisted as it declined by 0.2% in August 2013. However, the July IIP growth has been revised slightly upwards to 2.8% from the provisional estimate of 2.6%. -
From the sectoral perspective, the manufacturing sector, which constitutes about 76% of the IIP, posted a decline of 0.1% year on year (YoY) in August 2013 as compared with a growth of 3.2% in July 2013. The mining output remained bleak as it declined by 0.2% in August 2013 after a 2.5% year-on-year (Y-o-Y) decline in July 2013. The electricity sector grew by 7.2% YoY in August 2013. In the use-based category, the capital goods segment declined by 2.0% YoY as against an aberration of 15.6% Y-o-Y growth in July 2013. The growth in the consumer goods segment continued to remain in the negative zone at -0.8% YoY. -
On a sequential (month-on-month [M-o-M]) basis, the IIP reading declined by 3.5% in August 2013 to an absolute figure of 165.7 (171.7 in July 2013). Barring the intermediate goods segments, all other segments in the general and the used-based category declined on an M-o-M basis. Moreover, the capital goods segment declined by 9.4% MoM as there was an aberration in its growth in July, due to the spurt in the volatile 'cable, rubber insulated' products. -
The depressing IIP growth numbers for August suggest that the revival in the industry could be slower than expected. On a three-month moving average basis, the IIP has merely grown by 0.5%. The growth in the consumer segment has come off significantly in the past few months. Going ahead though some pick up is expected in H2, an increase in the interest rates and sluggishness in the demand would continue to add pressure on the industrial growth. Since the Reserve Bank of India (RBI) is quite focused on the inflation, which has risen in the past few months, the market expects a hike of around 25 basis points in the repo rates in the monetary policy review on October 29.
STOCK UPDATE Infosys
Recommendation: Buy
Price target: Rs3,770
Current market price: Rs3,274 Upgraded to Buy with a price target of Rs3,770 Result highlights -
Back-to-back quarter of revenue outperformance: Infosys has yet again beat the Street's estimate on the revenue front with a solid 3.8% sequential growth to $2,066 million (we estimated a growth of 3% quarter on quarter [Q-o-Q]) and 4.2% on a constant currency basis. This is the second consecutive quarter where Infosys has beaten the Street's estimate on the revenue front. Contrary to a dull FY2013, where the company has delivered a top line growth of 5.8%, this time around in the first half itself the company's revenues have shown a growth of 14% year on year (YoY). The strong show in the first half has triggered an increase in the revenue guidance for FY2014 to 9-10% from 6-10% earlier. However, the current guidance also seems to be conservative (Infosys factoring flattish next two quarters to achieve a growth of 10% YoY). We believe given the current demand momentum, the company can comfortably deliver higher than its guidance. -
Salary hikes eat into margin and offset currency gains: The revenues in the rupee terms are up by 15% QoQ to Rs12,965 crore. The adjusted earnings before interest and tax (EBIT) margin has remained stable on a sequential basis at 23.6% but below than our expectation of 25.2%. For the quarter, there was a provision of Rs219 crore ($35 million) included in the selling, general and administrative expense (SG&A) expenses, as Infosys is currently contesting a legal issue with the US government for non-compliance of the US visa regime. The net income for the quarter adjusted for the one-time visa issue provision was up by 10.6% QoQ to Rs2,626 crore (our expectation was at Rs2,676 crore). -
Improved demand environment gives confidence for growth sustainability: Leaving behind the growth blues of FY2013, Infosys is steadily catching up the growth momentum in the last two quarters and the same was ably supported by the improved demand environment. The recent Information Services Group (ISG) index for Q3CY2013 indicates that the outsourcing market has bounced back strongly by registering a jump of 35% QoQ in the total contract value (TCV) to $24.4 billion. The quarter registered the highest number of contracts awarded ever, which came in at 353 compared with 208 in the last quarter. The recovery was led by both new scope of growth and restructuring deal. With pertinent signs of improvement in the demand environment and Infosys back to focusing on large outsourcing deals, we expect Infosys to sustain its growth momentum in the coming quarters. Currently, our revenue estimates stand at 12.1% and 13.9% for FY2014E and FY2015E respectively. -
Valuation-upgraded to Buy rating on revised estimates and higher target multiple: We have reset our currency estimates for FY2014E and FY2015E to Rs62 each from earlier Rs57 and Rs56 respectively. Also, we have increased our revenue assumptions for both the fiscals led by the improved demand environment and a better than expected execution from Infosys in the last two quarters. We expect earnings compounded annual growth rate (CAGR) of 14% over FY2013-15E. Infosys's performance in the last two quarters spoke more constructively on the business visibility and the management commentary gives us confidence for sustenance of the growth momentum for the coming quarters. We have upgraded our rating from Hold to Buy with an increase in the price target of Rs3,770. At our price target, the stock would be valued at 17.5x FY2015E earnings estimate .
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Regards,
The Sharekhan Research Team | |
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