| Summary of Contents STOCK UPDATE Tata Consultancy Services
Recommendation: Buy
Price target: Rs3,010
Current market price: Rs2,679 Good quarter, though misses expectation; price target revised to Rs3,010 Key points - Tata Consultancy Services (TCS) reported higher than industry average revenues growth and impressive volume growth of 6.1% sequentially in Q2FY2015. However, it fell short of heightened Street's expectations due to lower than anticipated growth in the retail and insurance verticals. In USD terms, the consolidated revenues grew by 6.4% to $3,929 million which were affected by cross-currency movement since the revenue growth stood at 7.4% QoQ on a constant-currency basis. Excluding the consolidation of revenues from Mitsubishi JV, the comparable revenue growth stood at 4.6% in USD terms. EBIT margins 55BPS to 26.8%, largely led by an absence of depreciation impact, though consolidation on JV had a 40BPS negative impact on margins. The net income was higher by 4.6% QoQ to Rs 5,288.3 crore.
- The management reaffirmed that FY2015 would be stronger than FY2014 including Mitsubishi JV (the revenues had grown at 16.2% YoY in FY2014), however, on an organic basis the growth could lag, owing to cross-currency headwinds and delay in ramp-up of retail and softness in Diligenta, insurance platform in the UK. During Q2FY2015 the company signed five large deals and increased hiring target to above 55,000 employees for FY2015. During the quarter, TCS has announced amalgamation of its 51% subsidiary CMC to create long-term value for the shareholders.
- Notwithstanding the marginal disappointment in Q2, we have largely maintained our estimates for FY2015/FY2016 and introduced FY2017 EPS estimates of Rs143.5 on this note. TCS is the undisputed market leader and would continue to benefit from the improving demand environment (and report industry-leading growth rates). Thus, we see any weakness as an opportunity to buy into TCS and are consequently rolling over our price target to Rs3,010 based on FY2017 estimates. We retain Buy rating on the stock.
Bajaj Auto
Recommendation: Hold
Price target: Rs2,338
Current market price: Rs2,363 Pending delivery on volumes, maintain Hold with revised price target of Rs2,338 Key points - Bajaj Auto (Bajaj) posted a strong operating performance on a sequential basis in Q2FY2015 aided by a favourable product mix and higher operating leverage. The higher percentage of three-wheelers and premium motorcycles (Pulsars and KTM) sold during the quarter boosted the GPM which was ultimately reflected in a 113-BPS Q-o-Q margin expansion. However, the company took a hit of Rs340 crore related to provisioning for National Calamity Contingent Duty payments on production from the Pantnagar facility. Adjusted for the same and a forex loss (Rs67 crore), the PAT was at Rs876 crore, marginally above our estimate.
- Bajaj's market share in the domestic motorcycle segment reached an all-time low of 16.3% in Q2FY2015 as the company ceded space in the executive segment. The management is confident of regaining the market share and the launch of the Discover 150 has been the first step in the direction. Another couple of launches have been lined up in H2FY2015 which, the management expects, would propel the market share to the 20% mark. Meanwhile, the three-wheeler business continues to do extremely well driving the margin performance and profit growth.
- Given the strong traction in the three-wheeler business and growth in the premium motorcycle segment, the company is expected to maintain the margins at the current levels. We have increased our earnings estimates for FY2015 and FY2016 by 2.5% and 6.4% respectively to factor in the benefit of a higher OPM. We have also introduced our FY2017 earnings estimate of Rs167. Our revised price target of Rs2,338 (vs Rs2,195 earlier) is based on 15.5x FY2016E earnings and values Bajaj's 47.9% stake in premium motorcycle manufacturer, KTM AG, at Rs105 per share (a 30% discount to the CMP). However, given that the company is yet to successfully demonstrate its ability to claw back market share in the domestic motorcycle segment, we remain cautious on the stock and maintain a Hold recommendation.
Federal Bank
Recommendation: Buy
Price target: Rs156
Current market price: Rs132 Asset quality continues to improve, price target revised to Rs156 Key points - In Q2FY2015 Federal Bank's net earnings grew by 6.4% YoY to Rs240.3 crore, driven by a strong growth in the non-interest income (up 37% YoY) and a one-off income (Rs27 crore) from the interest on an income tax refund. The net interest margin (NIM) on an adjusted basis remained stable (the reported NIM stood at 3.35%) despite a base rate cut during the quarter.
- The asset quality has showed an improving trend over the past five quarters, mainly due to the containment of slippages from the corporate segment. The fresh restructuring was also lower at Rs68 crore vs Rs88 crore in Q1FY2015. Going ahead, the management is confident of maintaining a stable to improving trend on the asset quality front.
- The growth in the advances picked up in Q2FY2015 and we expect the bank to report nearly 20% CAGR in the advances over FY2014-17 mainly from the SME and retail segments. We expect its earnings to grow at a CAGR of 19.5% over FY2014-17 leading to RoE of about 16% by FY2017. We have rolled our valuation to the FY2017 estimate resulting in an upward revision in the price target to Rs156 (1.4x FY2017E book value [BV]). We maintain our Buy rating on the stock. Key risk: While corporate slippages have been contained well, any negative surprise on the same could affect the profit.
Crompton Greaves
Recommendation: Buy
Price target: Rs260
Current market price: Rs189 Unfavourable demerger structure led to a revised price target of Rs260 Key points - Crompton Greaves Ltd (CGL) reported a net profit growth of 19% YoY to Rs70 crore in Q2FY2015, in line with our estimate, which was supported by a decent revenue growth and hefty rise in other income. During this quarter, CGL exhibited an overall margin improvement YoY in all the three segments; notably PBIT margin in industrial systems expanded by 151BPS YoY to 9.2%.
- The board of directors of CGL approved a proposal to demerge its consumer products business into a separately listed entity (called Crompton Consumer Products Ltd [CCPL]). Under the demerger scheme, existing shareholders of CGL will get three shares of CCPL for every four shares of CGL; plus CGL will hold 25% stake in CCPL upon completion of demerger. Instead of issuing equal number of shares to existing shareholders of CGL the transfer of 25% stake of CCPL to CGL does not fully unlock the value for minority shareholders (it would be seen as a strategic stake and attract holding discount while valuing CGL). Also, it gives higher indirect stake to promoters in CCPL (42.67% direct stake and around 10% indirect holding through stake in CGL).
- During post Q2 result conference call, the management sounded fairly positive on gradual recovery of its overseas operations and signs of improvement in order inflow. However, the unfavourable structure of demerger of consumer product business has disappointed investors since value unlocking benefit for the existing minority shareholders could not percolate fully. We see a 10-15% downside in the value un-locking exercise than initially estimated. Nevertheless, the stock has corrected by 8% today and any further correction should be capitalised as a buying opportunity, despite re-working post announcement of the demerger structure, there is a healthy potential upside to our revised down price target of Rs260. We retain Buy rating on the stock.
NIIT Technologies
Recommendation: Book out
Current market price: Rs377 Earnings revival seems bleak, recommend Book profit at current levels Key points - For Q2FY2015 NIIT Technologies has delivered another operationally weak performance, with revenues dropping by 0.8% QoQ to $95.6 million in a seasonally strong quarter owing to clients-specific issues. Also, despite a favourable currency impact and hedging gains, the margin improved by only 55BPS QoQ to 14%. Further, owing to a higher depreciation cost and the absence of other income, the net income was down 7.2% QoQ and 35.7% YoY to Rs40.1 crore in the quarter.
- The management does not see any meaningful improvement in the next two quarters and expects an improvement only by FY2016. Further, its commentary on order booking and margin trajectory does not inspire any confidence.
- Given the absence of improvement in the revenues and margins, we have further downgraded our estimates for FY2015 and FY2016; we now expect the earnings growth to remain muted over FY2014-16. Further, a high capex of around Rs170 crore in FY2015 and lower cash flows from operations could also affect the dividend pay-out of the company which could further de-rate the stock. We had initiated coverage on the stock at Rs210 on January 19, 2011; it has appreciated by close to 95% since then. We see a limited scope for re-rating of the stock till the company's earnings trajectory improves. We, therefore, recommend investors to Book profit of the stock at the current levels.
VIEWPOINT Dhanuka Agritech
Current market price: Rs428
View: Positive Near-term growth guidance lowered, long-term prospects intact Key points - The management of Dhanuka Agritech has lowered its growth guidance for FY2015 to 10-15% from the earlier range of 20-25% due to a weak monsoon in the kharif season. The south-west monsoon for the country as a whole remains weak, with the cumulative rainfall during the year remaining 12% below the long period average (LPA). Consequently, a much higher rainfall deficit (of 21%) in north-west India (a key area for the company) has further weakened the consumption of agrochemcials. The lowering of the guidance is likely to remain a key hangover in the near term for the stock.
- However, the long-term growth prospects of the company remain intact because the company has a robust pipeline of exclusive products (which have a relatively higher margin) and non-exclusive products which will help it to regain its growth trajectory and improve its margin. The company is planning to launch two to three new products every year which will help it achieve a decent growth and maintain the margin at the current level. Recently, the company launched exclusive products, Mortar (an insecticide) and Sakur (a weedicide for soya bean, pick-up in sales will be in the kharif season of 2015). The company is waiting for the registration of molecule Sempra (a weedicide) which will be the game changer in terms of profitability and volume.
- Taking our cue from the management guidance, we have also revised downwards our rough-cut earnings estimates for FY2015 and FY2016 to the range of 10-12%. However, any short-terms decline in the share price can be used as an opportunity to accumulate the stock at lower levels. At the current market price the stock is trading at 18.8x and 14.9x FY2015 and FY2016 estimated earnings. We maintain our positive view on the stock with a time frame of two to three years.
Aurionpro Solutions
Current market price: Rs270
View: Positive Growth at discounted valuations Key points - The mid-sized company with marquee clients and niche offerings: Aurionpro Solutions Ltd (ASL) is a mid-sized IT company, which has made its presence felt in the niche segment of Oracle IDM product and also has its presence in the IT consulting and banking products space. The company is looking at deepening its engagement with its existing relationships with 34 Fortune 500 companies to double its revenues from the Oracle practice. Further, the company's banking payment solution ($25 million) is expected to get a strong traction, in the advent of payments banks are taking shape in India, the payment solutions expect to grow much faster in the next two to three years.
- Strategic restructuring to accelerate growth: The company has undergone strategic and operational restructuring in the last three years, some of the key initiatives are 1) Consolidation of top management, and inclusion of industry stalwarts like Carol Realini, Hari Murthy and Frank P. Osusky into board level roles, which helps the company to deepen its clients' relationship and cross selling of services and accelerate the global growth. 2) With gradual exit from the low-margin business, the company will entirely phase out from the low-margin business by the end of FY2015. 3) Expansion of sales team; more than doubled in the last one year and also geographical expansion into Germany, helps to penetrate clients further 4) Rationalisation of G&A and consolidation of operations and gradual shift of clients' engagement to offshore, (plans to double offshore strength in the next two years) to have a positive impact on margins over the next three years.
- Strong earnings trajectory, 30% earnings CAGR over FY2014-16E: Driven by strategic restructuring initiatives, ASL has gradually turned around its fortune and delivered strong operating profit margins of 18% in Q1FY15, highest in the last two years. Driven by further improvement in the operational efficiency and phase out of low margin business, margins expect to improve by 830BPS over FY2014-16E to touch 20% by FY2016E. Also, a strong traction in the oracle IDM space and banking products will aid to 14% CAGR in topline over the same period. Further, with improvement in free cash flows, we expect to net cash positive by the end of FY2016 (high interest bearing India debt to the tune of Rs40 crore to over Q2FY2015) and the company is able to finance its further capital expenditure from its internal accruals in the next two years.
- Valuation: Earnings to drive re-rating: With strong operating leverage to kick in with improvement in revenues growth and exit from the low margin business augurs well for further margins improvement. We expect 30% CAGR in earnings over FY2014-16E. At the cmp of Rs270, stock trades at 6.3x and 4.7x FY2015/16E earnings estimates which leaves scope for significant re-rating from here. Thus, we have a positive view on the stock.
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