9am with Emkay 4 April, 2011

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9am with Emkay

4 April, 2011

Contents

n        Research Views

Government revenues to overshoot even revised targets

The gross fiscal deficit shrank to Rs2.7tn (68.6% of the FY11 revised estimates), down almost 28% yoy helped by higher revenue receipts and slower growth in spending.

We expect the government to overshoot the revenues target by further Rs150bn over their revised estimates as the tax revenues have already reached 82% of FY11RE compared with ~79% last year and also the recovery of loans were higher by Rs50bn.

We believe with over achievement in revenue and lower expenditure the fiscal deficit for FY11 will come at even slightly lower than the revised estimate of 5.1% of GDP. We expect the government to carry forward balances of Rs300-350bn next year which is already reflected in lower than expected Rs1.9tn net borrowing in H1FY12.

Some softness after the strong Sep’10 and Dec’10 show

We expect a 3.8-4.7% QoQ US$ revenue growth for our Tier I IT coverage universe with TCS and HCL Tech leading peers on revenue growth.  Amongst the Tier II companies we expect ~2.6-6.7% sequential US$ revenue growth with Infinite Solutions leading the mid tier pack. We expect primarily a volume led revenue growth for the sector with marginal cross currency and pricing gains. While we expect margins to remain flat sequentially for Infosys, margins could dip by ~30 bps QoQ for TCS on account of normalization of bad debt provisioning. We expect Wipro to report ~40 bps improvement in margins sequentially driven by benefits from higher utilization.

Infosys could guide for ~18-20% sequential revenue growth, EPS outlook of Rs 134-138

We expect Infosys to guide for 18-20% revenue growth which would essentially entail a 3.5-4.2% CQGR through FY12. Similarly , in terms of earnings outlook, we expect Infosys to guide for FY12 earnings of Rs 135-138(+13-15% YoY growth) building in ~150 bps decline in margins conservatively and US$/INR exchange rate of Rs 45.

Key areas of investor focus

We expect investors to focus on (1) Infosys’s annual revenue guidance apart from Wipro’s June’11 quarter guidance (given that Infosys’s quarterly revenue guidance has continued to be conservative for past several quarters), (2) wage increments for FY12 (most companies announce salary hikes in April), (3) hiring outlook (most notably campus recruitments), (4) outlook on margin levers ( supply side pressures have only got stiffer over the past 2-3 quarters) and (5) outlook on discretionary spending (especially after strong results from global majors Oracle and Accenture) and pick up in IT spending in the telecom vertical

Earnings upgrade need to wait for a while

A more modest March’11 quarter would keep consensus earnings upgrades in check in our view for now (street largely building in a 26-27% YoY revenue growth for Tier I players) with supply side pressures only getting stiffer. We believe that demand continues to be strong, a view reinforced by good results by global tech majors recently. We maintain ACCUMULATE on Infosys (TP Rs 3,400) and TCS (TP Rs 1,275) amongst Tier 1 companies.

HUL - Event update - Pricing actions in laundry portfolio

Event

HUL has taken price increases in its laundry portfolio as follows:

n    2% hike in Surf Excel Quick Wash (1 Kg pack) –from Rs 154 to Rs 156

n    7% hike in Rin powder (1 Kg) – from Rs 54 to Rs 58

n    10% Wheel (1 Kg) –  from Rs 31 to Rs 34

Our view

n    Much awaited pricing intervention in the laundry portfolio to mitigate input costs pressures (LAB prices up 10% QoQ)

n    On a blended basis, these price increases would be approx 1% of the total revenue

n    Directionally positive for the company’s topline - higher prices will result in incremental sales growth for the laundry segment in ensuing quarters

n    Since it will likely offset the raw material cost pressure, we do not anticipate any significant impact on earnings

n    Hence, we maintain our earnings estimates for FY11/12

Valuation

The stock is trading at 27x FY12E EPS of Rs 10.5. We maintain our HOLD rating on the stock with a target price of Rs 275/share.

BHEL expectations for FY11E (Flash results)

BHEL is expected to announce flash results for FY11E - our expectations are as follows

n    For FY11E, we expect net revenue growth at 21% to Rs399 bn – led by healthy order backlog and satisfactory progress in key orders

n    We expect healthy net profit growth at 26% to Rs54.1 bn – led by margin improvement of 100 bps yoy to 17.9%.

n    This implies revenue growth of 20% yoy to Rs162 bn and net profit growth of 15% yoy to Rs22 bn in Q4FY11E.

Auto – March 2011 volume update

Maruti Suzuki India Ltd (MSIL) – exceeds expectations

n    Total sales for March 2011 increased by 28.2% YoY to 121,952 units.

n    Domestic sales grew by 38.8% YoY to 110,424 units.

n    Export declined by 26% YoY to 11,528 units.

n    Growth driven by strong performance in A2 (43% YoY) and A3 (33% YoY) segments leading to improved product mix

Mahindra & Mahindra (M&M) – strong show across segments

n    Total sales increased by 19.2% YoY to 55,473 units.

n    Passenger UV surprised positively with 16300 units while pickup segment reported 15% YoY and 16% MoM growth aided by Maximmo

n    Total tractors sales also maintained strong momentum recording 22.8%  YoY to 19,848 units.

Tata Motors Ltd (TML) –MHCV posts strong numbers

n    Total sales increased by 10.9% YoY to 83,363 units.

n    Strong M&HCVs volumes at 23,337 up 12% YoY and 32% MoM.

n    LCVs sales increased by 17.7% YoY to 26,416 units.

n    Car (ex-Nano) volumes declined by 25% MoM to 14,134 units while Nano at 8,707 units supported overall volumes

n    Export sales was also strong recording 44.5% YoY to 5,932 units

Eicher Motors – Superb numbers

n    Strong overall volume growth reporting 33% YoY to 16,492 units

n    Heavy duty vehicles sales increased by 64.7% YoY and 36.2% MoM to 929 units

n    LCV/MCV truck and bus segment also recording strong growth of 23.4% YoY and 48.2% YoY to 3,392 units and 744 units respectively

TVS Motor Ltd (TVSL) – Marginally above expectations

n    Total sales increased by 28.2% YoY to 191,208 units

n    Motorcycle sales increased by 24.2% YoY to 79,642 units.

n    Scooters/Mopeds increased by 29.7% YoY to 107,139 units.

n    Total domestic sales increased by 27.2% YoY to 164,229 units.

n    Export sales increased by 34.4% YoY to 26,979 units.

Wipro-Inorganic push to close growth gap to peers

In a late evening announcement on Friday, April 1’2011, Wipro has announced that it intends to acquire the Global Oil and Gas IT practise of Science Applications International Corporation in an all cash transaction worth U$ 150 mn ( to be completely funded through internal accruals). As part of the asset purchase, Wipro would take on board 1,450 employees spread across North America, Europe, India and the Middle East with ~450 employees working out of India. Per discussions with the company, the IT arm of SAIC recorded revenues of ~U$ 188 mn and has low double digit EBITDA margins.  We expect this acquisition to help Wipro to close revenue growth gap to peers Infosys and TCS after the revenue underperformance in FY10 and FY11. In our view, the acquisition in margin dilutive (Wipro’ IT services EBITDA margins at ~25.5%) and marginally earnings accretive.

Acquisition to help close revenue growth gap to peers Infosys and TCS

In our view , this acquisition will help Wipro to cut revenue growth  gap to peers in FY12 ( note that street including us continue to build in 25%+ YoY revenue growth for Infosys and TCS vis-a-vis 20-21% YoY revenue growth for Wipro) after the revenue growth underperformance in FY10 and FY11. 

Cross sell opportunities given little client overlap

Wipro lead peers Infosys and TCS in term of business from the Energy and Utilities vertical and this acquisition would provide further fillip to the lead (refer table below).  Per discussion with the company management, the acquired entity counts 6 Fortune 500 names amongst it’ client roster with top 10 customers accounting ~90% of revenues and little client overlap currently . In our view, this acquisition would provide Wipro with cross sell opportunities given Wipro’ wider service portfolio and little client overlap.

Marginally earning accretive per rough cut calculations

As per our rough cut calculations (attached below), the acquisition would be revenue accretive (3.6% of Wipro’s FY11 revenue base) and marginally earnings accretive.  We view the acquisition more of a step to close the growth gap with peers Infosys and TCS. We currently have a REDUCE rating on Wipro with a price target of Rs 440 and would wait for more progress on client mining at Wipro before taking a more constructive view on the stock.

Lanco Infratech – ATE order on Amarkantak II

Event - Appellate Tribunal for Electricity’s interim order directs Lanco to Sell Amarkantak unit II’s (300MW) at least 65% power to HPGCL at regulated tariffs with a cap of Rs2.34/unit

Lanco has been selling the Amarkantak Unit II power (300MW) in the UI market since February 2010 (commissioning). The plant has not been commercialized pending dispute with Haryana Power Genco/PTC. Lanco had signed a PPA for the aforementioned power plant with PTC in 2005 as cost plus with tariff cap of Rs2.34/unit. Subsequently with the commissioning in February 2010, Lanco had disputed the PPA taking recourse to force majeure clause. The dispute has been pending with Appellate Tribunal for Electricity (ATE). Media articles suggest ATE has ordered Lanco to supply at least 65% of the power to HPGCL on PPA terms. Also the regulatory commission of Haryana had maintained that Lanco has to supply the power to HPGCL and asked the western regional load Despatch centre to make the payment from UI pool to HPGCL and not to Lanco.

Impact

We have already taken this project at regulated PPA rates and is only 2% of our NPV of Rs56/Share. Thus no impact on our earnings/NPV for the stock. However, if one considers a merchant tariff of Rs3.5/unit (consensus estimate), the difference in NPV is around Rs2/Share. We expect Lanco to move to Supreme Court.

We maintain our underperformance view on private power utilities and prefer regulated utilities. However, within private, we relatively prefer Lanco over other private utilities based on (1) valuation comfort (implied Merchant rate of Rs2.8/unit, lowest) and (2) 5000MW of fuel pass through PPAs.

n        Research Update Included

Aurobindo Management Meet Update; Long term story intact – Maintain Buy; Target: Rs 265

n    USFDA Import Alert ban on Unit VI (Cephs - Oral and Injectable) to hurt US$80mn in revenues over the medium term 

n    Short term US growth impacted, however, long-term growth drivers remain intact

n    60 ANDA filings from Unit VII are the key growth drivers for US for the next 2 years

n    On account of USFDA ban on Unit VI and higher tax rates, revise earning estimates downwards by 10% for FY12E to Rs20.4 (earlier 22.6). Maintain Buy with a target of Rs265

Phoenix Mills Initiating Coverage; Retailing @ Discount; BUY; Target: Rs 231

n    Phoenix Mills (PML) offers a unique blend of stability & upside triggers, with cash generation from High Street Phoenix (HSP) and valuation upsides from ‘Market City’ (MC) projects

n    HSP’s valuations at 77% of CMP, largely mitigate downward price risk. HSP is expected to generate FCF of Rs1.3bn in FY12E with marginal committed cash outflows

n    Pre-leased MOUs across its MC projects give comfort on; 1) Debt servicing ability of the project SPVs and  2) Potential valuation upsides as occupancy picks up

n    Our SOTP TP of Rs231 translates into 1.9x FY12E book value. Revenue visibility and improved financials justify proximity to peak P/BV of 2.1x since mid-2008 crisis

n        Technical Comments

Nifty

After a lackluster Friday, Nifty ended the day almost on a flat note forming an Inside Bar on the daily chart. An inside bar is a bar which is completely within the range of the preceding bar and is a sign of indecision/consolidation. Hence, one should wait for a break below 5778, which is the lower end of the preceding bar, before entering a fresh short trade. Unless that happens, we stick to our original bullish view of 5950 and above that 6000.