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| Summary of Contents | STOCK UPDATE IRB Infrastructure Developers
Recommendation: Buy
Price target: Rs280
Current market price: Rs257 Resolution of road sector issues to revive growth; price target revised to Rs280 Key points - IRB Infrastructure Developers is expected to show a pick-up in its BOT revenues in Q1FY2015 on the back of higher tariffs in some of its key projects, like the Mumbai-Pune Expressway (up 18% YoY), the Talegaon-Amravati (up 18% YoY), the Ahmedabad-Vadodara (up 6% YoY) and the Tumkur-Chitradurga (up 6% YoY) projects. The execution of the Goa-Kundapur project will increase the company's construction income. A higher contribution from the BOT business would also positively affect the margins (which will expand by 250-300BPS YoY).
- The NHAI's recent plans to improve modal concession agreement and expedite the land acquisition process provide better visibility of new orders and tendering (NHAI has a target of 7,000km for 2014-15). Additionally, the road ministry's attempts to garner foreign funds and revive stalled projects are expected to improve project execution (construction of 30km per day by 2016 targeted). An improvement in the overall economy and the possibility of the easing of interest rates over the next 12-24 months will be the key triggers for the sector.
- The improving macro environment (better visibility of tendering, potential easing of interest rates etc) and a potential upside from a better than expected growth in traffic on the back of an economic revival are the key re-rating triggers for the stock. Thus, in spite a sharp appreciation in the stock price recently, we continue to like IRB Infrastructure which could offer handsome gains over the next 12-18 months. We maintain our Buy rating on the stock with a price target of Rs280 (one should look at increasing exposure on declines).
Eros International Media
Recommendation: Hold
Price target: Rs256
Current market price: Rs235 Downgraded to Hold with a revised price target of Rs256 Key points - Economic revival would also bring cheers to Bollywood: Led by the pro-growth and business government India's economy is poised to revive in the next two years, bringing in cheers to India's media and entertainment sector. An increase in the per capita income and the benefits of an increase in the tax slabs in the upcoming budget would result in higher spending on entertainment (more so on movies) in the coming years which will directly benefit Eros International Media Ltd (EIML).
- Cinema screens and ATP on upswing which augurs well for EIML: Sensing an upsurge in the footfalls of the movie-goers (the occupancy rate is expected to increase to over 30%), most of the multiplexes are on an expansion spree. Also, the average ticket price (ATC) is on an upswing. With a rise in the footfalls, increase in the number of screens and uptick in the ATP, EIML will recover its cost faster.
- GST roll-out to immensely benefit film industry: The implementation of the GST in the upcoming budget and clarity on the other tax issues will immensely benefit the film industry by bringing down the tax implication from the existing levels of 45-50%. This will reduce the overall cost for the film industry.
- Downgrade to Hold, wait for better entry levels: At the current market price of Rs235, the stock is trading at reasonable valuations of 9.0x and 7.8x the FY2015E and FY2016E earnings estimates. We increase our price target multiple for EIML to 8.5x FY2016E and arrive at a revised price target of Rs256. We maintain our positive stance on EIML. However, in the last three months the EIML stock has witnessed an upmove of around 40%. Thus, we advise investors to take home some profits and wait for better entry levels. We downgrade the stock to Hold.
CESC
Recommendation: Buy
Price target: Rs878
Current market price: Rs755 Better times ahead; price target revised to Rs878 Key points - We recently interacted with the management of CESC which reaffirmed our confidence in the stock. Its core business of power generation and distribution in Kolkata would get a boost with the commissioning of a 600-MW power plant at Haldia in FY2016 (a 50% increase in its regulated power asset base).
- The concern related to the non-linkage of coal and the partial PPA of its Chandrapur power plant could also recede as the coal linkage committee recently decided in favour of power plants that are ready to be commissioned but do not have coal supply assurance yet. This is a positive development for its Chandrapur plant.
- The performance of its subsidiaries, Firstsource Solution Ltd (FSL) and Spencer's, continues to be healthy. In line with our expectations, FSL continues to repay debts by generating adequate cash from operations while the store-level EBITDA of Spencer's is expanding gradually and Spencer's is selectively adding stores now, after two years of consolidation.
- Given the improving outlook for the overall sector due to expectations of a revival in the economy, we are realigning our valuation multiple (revised P/BV from 1x to 1.2x FY2016 estimates) for CESC's Kolkata based utility business with that of its peers. Further, considering the Haldia project to be commissioned in the next 12 months, we have marginally revised upward valuation of the same plant. In this note, we have also incorporated our revised price target for FSL but assigned a holding discount of 30% in the SOTP valuation. Consequently, we revise our SOTP based price target for CESC to Rs878 and continue to recommend Buy on the stock.
SECTOR UPDATE Q1FY2015 IT earnings preview Key points - Pick-up in revenue growth expected as seasonally strong period sets in: The first quarter of FY2015 is expected to be better than Q4FY2014 driven by seasonality. We expect the revenue growth in reported currency for the tier-1 Indian IT companies to be closer to 4% QoQ as against 1.6% reported in Q4FY2014. TCS (a 5.3% revenue growth QoQ) and HCL Tech (a 4.0% growth QoQ) are expected to lead the revenue growth in Q1FY2015 while Infosys (a 2.5% revenue growth QoQ) and Wipro (a 1.5% revenue growth QoQ) would be behind the pack (though the revenue growth for both is expected to catch up post-Q2FY2015). During the quarter the rupee appreciated against the dollar by 2.5% sequentially while favourable cross-currency movements are expected result in a positive impact of 50BPS on an average basis. We expect a fairly soft quarter for most of the tier-2 companies under our coverage including NIIT Tech, Persistent Systems and CMC.
- Wage hike and rupee appreciation to hit margins: After two consecutive quarters of a strong margin performance a moderation in the margin could be expected on the back of head winds like wage hikes, visa related costs and an appreciating rupee. TCS and Infosys have indicated an impact of about 250BPS on their margins due to wage hike while Wipro will absorb a one-month impact of wage hike (an impact of 80-100BPS) while HCL Tech's margins are expected to be affected by 30BPS due to a staggered wage hike policy. Overall, the margin performance is expected to remain soft due to an appreciating rupee and wage hikes. Going ahead, the margins for tier-1 Indian IT companies are expected to remain stable over FY2014 as the impact of wage hikes will be reversed in the coming quarters leveraging other tail winds like utilisation and cost optimisation.
- Key monitorables: (1) commentary on demand environment (expected to remain positive); (2) European business, which is expected to continue to outperform the US business (driven by outsourcing led demand); and (3) outlook on re-investing currency-led gains in the business.
- Valuation: the CNX IT Index has underperformed the broader market indices in the last six months, led by rebalancing of portfolio towards cyclical stocks, though in the last one month the IT index has outperformed the market with an 11% gain and the relative valuation has got attractive after a sharp underperformance. We believe that given the earnings predictability coupled with strong return ratios and impressive cash flows, the IT sector's valuation will catch up with the broader market indices. We maintain our positive stance on the sector and our order of stock preference in the large-cap space will be TCS, HCL Tech, Wipro and Infosys and in the mid-cap space we like FSL.
| | 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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