Research Update with Emkay; 11 January, 2011

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n        Research Update Included

Q3FY11 Results Preview: Strong numbers

Executive Summary

We expect Emkay Universe’s (ex-Oil & Gas and Banking) earnings to grow by 12.8% for Q3FY11. However, excluding RCom & Bharti (decline of 46% yoy), the growth is expected at 22%.

Ebitda margins for Emkay Universe are expected to contract by 22 bps to 20.1%. The Same are likely to contract by 11 bps to 20.5%, by 61 bps to 18.2% and by 229 bps to 13.8%  for Emkay Large Cap, Mid Cap and Small Cap Universe respectively.

Emkay Universe is likely to post Sales growth of 17.7%, EBITDA growth of 16.4% and PAT growth of12.8% for Q3FY11. Emkay Large Cap Universe is likely to show 18.5%, 17.8% and 13.8% growth in Sales, EBITDA and PAT respectively. Emkay Mid Cap Universe is likely to show 11.9%, 8.2% and 5.4% growth in Sales, EBITDA and PAT respectively.

The top performing sectors in terms of sales growth are Telecom (36.1%), Auto Ancillaries (31.7%), Construction (24.9%), Automobiles (22%) and IT Services (21.5%).

EBITDA margins are likely to improve in sectors like Metals and Mining (295 bps), Offshore Oil Field Services (147 bps) and Agri Input & Chemicals (94 bps). The same are likely to contract in case of Telecom (394 bps), Auto Ancillaries (383 bps), Construction (286 bps), Cement (277 bps) and Power (199 bps).

Sectors like Metals & Mining (27%), Telecom (21%), Automobiles (20.9%), IT Services (17%) and Pharma (16%) are expected to witness better yoy EBITDA growth while sectors like Auto Ancillaries (10.5%) and Cement (8.3%) are likely to post yoy decline in EBITDA.

Emkay Universe is likely to post a 12.2% decline in other income with 14.3% decline and 10% growth in other income of Emkay Large Cap and Mid Cap Universe respectively.

Emkay Universe is likely to post 39.7% growth in interest cost with 50.5%, 15.1% and 0.6% growth in interest cost of Emkay Large Cap, Mid Cap and Small Cap respectively.

PAT growth will be contributed by sectors like Metals & Mining (56.2%), Automobiles (51%), Pharma (24.4%, Paper (22.5%) and Engineering & Capital Goods (19.4%). While sectors like Telecom (42.1%), Auto Ancillaries (26.3%), Cement  (16.5%), Power (13.3%) and Construction (2.3%) will witness de-growth in PAT.

Emkay Universe is trading at 16.7x FY11E earnings and 13.9x FY12E earnings which is at a discount of 11% & 10% respectively to consensus Sensex PE.

Shipbuilding Sector Update; Winding-up

n    Our downturn call on the shipbuilding sector, taken on May’08 has since played out, with valuations taking a severe beating

n    But now, we are unable to determine true earnings of Indian  shipbuilders – due to (1) mixed global industry signals (2) specific domestic issues (3) inadequate management access

n    Citing lower institutional interest, we wind-up coverage on the shipbuilding sector

Patni Computers Event Update; Search for Buyer Ends; Not Rated

n    Patni’s search for buyer finally ends with Patni board accepting iGate’s offer for purchase at Rs 503.5/share. Offer values Patni at ~12.5x/14.3x Dec’10E/Dec’11E earnings.

n    Open Offer for minority shareholders in April’11. In the interim, mgmts of the 2 entities remain focused on seamless integration and fast tracking joint ‘go to market’ strategy

n    Min. acceptance ratio at ~54% (if all shareholders tender). Stock could continue to command a delisting premium given the likelihood of promoter holding at ~83% post open offer)

n    Strategically beneficial for iGate on a/c of scale benefits, cross selling opportunities ,reduced client/vertical concentration