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| Summary of Contents | STOCK UPDATE Maruti Suzuki India
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs3,339 Yen depreciation a positive, maintain Buy with a revised price target of Rs4,000 Key points - The Japanese Yen (JPY) has witnessed a sharp depreciation as against the US Dollar (USD) since the mid-October. The JPY, from the levels of 105 at which it was trading, has depreciated by nearly 12.5% and is currently trading near the 120 mark. Maruti Suzuki India (Maruti) has a significant exposure to the JPY by way of imports (both direct as well as indirect) and royalty payments to its parent company Suzuki Motor, Japan. The current trend of JPY depreciation will have a favourable effect on the margins of the company, going forward.
- Maruti has been a key beneficiary of the change in consumer sentiment post the general election and continues to report a double-digit volume growth given its extensive product portfolio, especially in the entry car segment and strong sales and service network. The company reported a domestic volume growth of 14.7% in H1FY2015 thus significantly outperforming the industry growth of 4.2%, thereby expanding its market share by 405BPS. Maruti has a robust product pipeline, including entry in the fast growing compact sports utility vehicle (SUV) segment, which will be rolled out over the medium term and help maintain its leadership position.
- The depreciation of the JPY will have a positive effect on Maruti's profitability but with a lag as the company hedges near-term foreign exchange exposure. We have raised our OPM estimates for FY2016 and FY2017 by 30BPS and 100BPS respectively. Consequently, our earnings estimates for FY2016 and FY2017 are higher by 3% and 8.8% respectively. We continue to remain positive on the stock and reiterate a Buy recommendation with a revised price target of Rs4,000 (earlier Rs3,600) discounting FY2017E EBITDA 10.5x.
Firstsource Solutions
Recommendation: Buy
Price target: Rs51
Current market price: Rs35 Growth on track, weakness in stock offers opportunity to Buy Key points - We have interacted with the management of Firstsource Solutions Ltd (FSL) to get an insight on the current state of business and also touched upon the broad expectations for the Q3FY2015 earnings. The management expects a topline growth to accelerate in FY2016 by more than 8% with margins more than 14% with exit margins of around 13.8-14% by Q4FY2015 and expect a comfortable earnings growth of 25% plus in FY2016. For Q3FY2015, owing to seasonal weakness, the earnings expect to remain flattish, topline growth expects to be muted and margins are also expected to be stable on a sequential basis and bottom line also to remain flattish.
- The management maintains its stance of having a muted to marginal topline growth for FY2015, owing to ramp down of its clients. However, the management has indicated at adding new clients and strong order pipeline of $400 million and total annual contract values (ACVs) in north of $91 million, though adjusting for $35 million client lost in the telecom and media space, net ACVs will be close to $66 million. Recently, FSL has ramped up its facility in Colorado Springs as the earlier lost clients are on a ramp back mode (60% of the old scale of work) and also added two new clients for the same facility in payer's space and expect to touch 550 headcounts by Q1FY2016. Overall, the management is seeing a strong growth in the healthcare segment and a decent growth in BFSI and T&M space and expect a topline growth to accelerate by more than 8% in FY2016.
- In the last one month, FSL has corrected by about 18% owing to its lackluster quarterly performance in Q2FY2015 and the anticipation of a further drop in the earnings momentum in FY2015. However, FSL with 28% earnings CAGR over FY2014-16E, improving balance-sheet health (deleveraging its books through internal accruals) coupled with improving RoE profile, we believe the correction is overdone in the stock and the current weakness offers a good opportunity to buy into the stock. Further, impairments of goodwill in the books in Q4FY2015 and FY2016, does not really have any business impact on the company. The stock is trading at an attractive valuation of 7x PER and 5.4x EV/EBITDA based on FY2016 earnings estimates. We maintain our Buy rating on the stock with an unchanged price target of Rs51.
| | 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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