Investor's Eye: Stock Idea - Gabriel India; Update - Tata Consultancy Services

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Investor's Eye [April 16, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA   Gabriel India Recommendation: Buy Price target: Rs46 Current market price: Rs33   Quality business, ordinary valuations   Key points Better times ahead: Gabriel India (Gabriel), a leading manufacturer of shock absorbers, has been facing head winds due to the current slowdown in the passenger and CV segments. However, a pick-up in the volumes in these segments after the general election, increase in the market share with HMSI and continued growth in the aftermarket sales are expected to drive the revenue growth going forward. Better utilisation to boost margins: The fall in the capacity utilisation levels has translated into an erosion of the OPM for the company. With increasing utilisation levels and higher proportion of revenues from the profitable CV segment, the OPM is expected to expand from 6.6% in FY2013 to 7.8% in FY2016. What's more, there is scope for further improvement as the company used to report a steady margin of 9-10% during periods of a supportive business environment.  Healthy balance sheet and return ratios: Despite a drop in the volume offtake driven by a slowdown in the auto sector and a lower proportion of the relatively higher-margin CV segment, the company has managed to significantly reduce the gross debt on its books. The debt-equity ratio has come down to 0.3x in FY2013 from 1x in FY2010. The company generated net operating free cash flow of close to Rs240 crore (50% of the market cap today) in the past three years. The return on equity is also estimated to come back to 18% in FY2015 and 19% in the next fiscal. Risk: A delay in the revival of the CV segment beyond the later part of FY2015 is the biggest risk to our estimates and would affect the financial performance and valuation multiples of Gabriel. Quality play on recovery in auto sector, recommend Buy: In spite of the recent run-up in the stock price, the stock's valuation is still at over 25% discount to its average price-earnings multiple and ignores the healthy growth of close to 24% expected in the earnings over FY2014-16. Moreover, it is a high quality auto ancillary company with a strong balance sheet, proven track record and healthy return ratios. Consequently, we initiate coverage on Gabriel with a Buy rating and price target of Rs46 (EV/EBITDA of 5x on FY2016E financials; implies PE of 8.5x FY2016E earnings). STOCK UPDATE   Tata Consultancy Services Recommendation: Buy Price target: Rs2,500 Current market price: Rs2,195   Gearing up for a stronger FY2015, retain Buy   Result highlights For Q4FY2014, Tata Consultancy Services (TCS) delivered a revenue growth of 1.9% sequentially to $3,503 million, attributed to seasonal weakness and muted growth in India. Whereas, the business investments impacted the EBIT margin by 60BPS QoQ to 29.1%. Owing to an adoption of the IFRS-9 accounting standard, the other income for the previous quarters has been reclassified. Thus, the net other income was up by 29.8% QoQ. The net income for the quarter was up by 2.3% QoQ to Rs5,296.7 crore.  The management reaffirmed that FY2015 would be stronger than FY2014 (a revenue growth of 16.2% YoY in FY2014). During the quarter, the company has signed nine large deals and indicated at an impressive hiring target of 55,000 employees for FY2015.  TCS is among the key beneficiaries of the secular demand revival in the sector. Also, the management's confidence on delivering a higher growth in FY2015 lends support to our positive stance on the company. We maintain our Buy rating on TCS with a price target of Rs2,500.  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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