9am with Emkay 01 April, 2011

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9am with Emkay

01 April, 2011

Contents

n        Research Views

CAD drops sharply to USD9.7bn for Q3FY11

The current account deficit (CAD) for Q3FY11 fell by almost 40% qoq driven by lower crude imports. The lower crude import were driven by (1) rise in the domestic crude production of 16% during the quarter and (2) partial shutdown at the Reliance refinery resulting in 16% qoq drop in trade deficits.

The invisible earnings remained stable with the income from software services as they grew by 15% qoq. The remittances were however a disappointment as they stood at 3.3% of GDP vs an average of 3.7% for previous four quarters.

The capital account inflows dropped by 30%qoq, although largely driven by lower FII inflows as expected.

We expect Q4F11 current account to have a very low deficit of USD1bn or a break even. We expect India to end FY11E with CAD of 2.4% GDP or USD38bn.

The lower CAD has definitely helped the liquidity situation which has remained at ease despite sharply high 23.2% credit growth till date and lower capital inflows. With lower CAD and lower than expected government borrowings, we believe that the liquidity situation is likely to remain at ease in coming few quarters.

Sectoral deployment of credit suggests strong and broadbased growth

n    The data on sectoral deployment of non-food credit released by RBI suggests continued strong and broadbased underlying growth in the economy in Q4FY11

n    The personal consumption categories like consumer durables, vehicle loans and personal loans show strong growth of 12.3% qoq, 7% qoq and 9.8% qoq respectively

n    Credit to industry continues to grow at strong pace and has grown by 7.8% qoq suggesting robust underlying business activity

n    Growth in industry not only driven by inflation as the core industries like cement, iron and steel, other metals and mining has witnessed strong growth

Quick Comments on HCL Tech post discussions with Head, IR

Our discussions with HCL Tech IR indicate that the revenue growth during March’11 quarter could be relatively tepid(vis-vis performance in the past 2 quarters) driven by carve out some part of onsite BPO business( quarterly revenue run rate of US$ 3.5 mn) along with the impact of recall of onsite workers working in Japan ( Japan ~3% of overall revenues, onsite revenues from Japan ~1% of co wide revenues, so impact of ~US$ 2-3 mn in the quarter). Current street estimates are 5-6% QoQ growth along with ~100-130 bps improvement in margins sequentially. 

Further  we are attaching herewith a news release on HCL Tech (http://www.belfasttelegraph.co.uk/business/business-news/1000-hcl-call-centre-staff-in-northern-ireland-get-jobs-ultimatum-15130973.html) which talks about trouble with HCL ‘s BPO in Northern Ireland that has ~1,200 people servicing clients like BT, Abbey and Thames Water. This news release talks about HCL Tech has issued an ultimatum to it’s employees to accept a series of changes to their working conditions or face losing their jobs. Our rough cut calculations suggest that HCL Tech’s BPO operations in Ireland would contribute ~US$25 mn in annual revenues (~0.8% of co wide revenues).

Although in our view, any troubles at this facility would have negligible financial impact, we believe that this along with the company citing trouble in Japan, carve out of some part of the onsite BPO business  could end up being another instance of ‘unpredictability’/one off instances impacting revenue and margin performance.We believe that this event is another addition to the string of ‘one off revenue losses/costs incurred’ which makes HCL Tech inconsistent and unpredictable V/s a more predictable and consistent Tier 1 competition and that is why HCL Tech’s valuation discount to peers should sustain

We have a HOLD rating on the stock with a price target of Rs 540. At Rs 480, HCL Tech Trades at ~15x/12.5x FY12/13E earnings of Rs 32/38.4 respectively

n        Technical Comments

Nifty

In the midst of the positive global cues, Nifty too started the day with a positive bias. However, on account of expiry we saw massive volatility throughout the day which made Nifty swing almost 200 points during the day. But the final landing of Nifty was above 5800; clearly in the bulls square. Moreover, the positive monthly close at the support of 20-monthly simple moving average clearly indicates that the overall uptrend has resumed and any fall from current level should only be used as a fresh buying opportunity. Also, Nifty has gone past the Golden retracement (i.e. 61.8%) of the entire fall from 6178 to 5177, meaning that this entire rally was fresh impulsive move and not just a pull back rally. So, now the next target to watch out for is the resistance area of the downward sloping trendline and 78.6% retracement, packed at 5950-6000.