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India Equity Research Reports, IPO and Stock News
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June results - Stay positive, but few compelling catalysts for large-caps
Among smaller names, we continue to like Persistent Systems and Rolta
MindTree on watch - growth continues, margins could bottom out in 1Q
We would not chase Satyam and Tech Mahindra at current prices
Taking stock of the situation
Robust growth, but few significant near-term catalysts
Going into the June 2011 quarter results season, our top picks – TCS and HCL
Tech – are unchanged. However, we note most immediate positives – leading
large-cap q-q growth for both companies, a ~100bps q-q EBITDA margin
expansion for HCL Tech, and some currency gains for all companies – appear to
be reflected in Street estimates.
For Infosys, consensus estimates call for about 5.0% q-q 1Q12 USD revenue
growth (vs 2.6-3.6% guidance), negating chances of significant upside surprises.
Our BUY ratings for Infosys and Wipro remain based on expectations of a pick up
revenue growth from a seasonally strong 2Q12. All these factors suggest to us
possible back-ended stock returns in FY12 and that the 1Q12 results are unlikely
to provide a significant catalyst for the next up move for large-cap stocks.
Smaller BUY-rated names to watch for
Among the smaller names under our coverage, we continue to like Persistent
Systems and Rolta India. Both, in our view, are companies with differentiated
offerings at attractive valuations. Persistent could report upwards of 30% revenue
growth in FY12 (easily the highest in our coverage). The catalyst for the stock
could be improved margins in 2HFY12 once wage hikes are absorbed.
Rolta, to us, has highly relevant in-house IP and is a margin expansion story. The
overhang on the stock seems to be the risk of raising debt to pay off ~USD140m
in FCCBs that mature in June 2012. However, with potentially reduced capex in
FY12E, we expect Rolta will not need to raise more than USD70-80m.
Where news on the margin can improve (or not)
After underperforming the Sensex by about 25% YTD, we believe MindTree is an
interesting name to watch. We believe the company could report 5%+ USD
revenue growth in 1QFY12 (near double-digit growth in IT services) while EBIT
margin could bottom out as wage hikes get factored in (details on page 2).
We would not chase Satyam and Tech Mahindra at current valuations (details on
page 2). While we believe Satyam management has done a commendable job of
turning around the company, we think the share prices of both companies already
reflect significant revenue growth and margin expansion over FY12-13.
MindTree - Where news on the margin can improve
After underperforming the Sensex by about 25% YTD, we believe MindTree is an
interesting name to watch. Despite our 11-20% FY12-13E EPS cuts on our view that
margin pressure will continue, the stock trades at an inexpensive 9.2x FY12E P/E on
our estimates.
We think the company could report a healthy 5%+ q-q USD revenue growth in 1QFY12
and management remains confident of beating the industry average (16-18% as per
NASSCOM) despite a roughly 4% revenue hit from the loss of the Kyocera business.
Moreover, the company is running a stringent margin programme and expects to lift the
EBITDA margin back to 17-18% levels in the next 5-6 quarters, which if achieved,
would be well above ours and Street projections.
The Tech Mahindra-Satyam debate
We would not chase Satyam and Tech Mahindra, especially after their outperformance
vs the Sensex YTD. At current valuations, both stocks trade at close to 11x FY13E P/E
BNPP estimates (ex-contract restructuring fees and Satyam’s contribution for Tech
Mahindra), which we believe is fair. Our calculations show that, assuming a fair multiple
of 11x FY13E P/E (inline with mid-cap peers), Satyam’s share price factors in 19-21%
revenue growth in FY12-13 (compared to 20-25% for larger peers), an EBITDA margin
of 20% (more than double from FY11) by FY13 and about INR7/share of legal liabilities.
This suggests a significant recovery is already in the price.
While a case could be made for some further multiple expansion for both companies
because of better scale from their impending merger (likely next year), it is worth noting
that HCL Tech the closest peer trades at 12.4x FY13E BNPP EPS and even after the
merger, the Tech Mahindra-Satyam combine would have only about USD3.0b in annual
revenue (FY13) which would still be significantly less than that of HCL Tech’s USD5.5b.
This, in our view, should prevent much more upside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
June results - Stay positive, but few compelling catalysts for large-caps
Among smaller names, we continue to like Persistent Systems and Rolta
MindTree on watch - growth continues, margins could bottom out in 1Q
We would not chase Satyam and Tech Mahindra at current prices
Taking stock of the situation
Robust growth, but few significant near-term catalysts
Going into the June 2011 quarter results season, our top picks – TCS and HCL
Tech – are unchanged. However, we note most immediate positives – leading
large-cap q-q growth for both companies, a ~100bps q-q EBITDA margin
expansion for HCL Tech, and some currency gains for all companies – appear to
be reflected in Street estimates.
For Infosys, consensus estimates call for about 5.0% q-q 1Q12 USD revenue
growth (vs 2.6-3.6% guidance), negating chances of significant upside surprises.
Our BUY ratings for Infosys and Wipro remain based on expectations of a pick up
revenue growth from a seasonally strong 2Q12. All these factors suggest to us
possible back-ended stock returns in FY12 and that the 1Q12 results are unlikely
to provide a significant catalyst for the next up move for large-cap stocks.
Smaller BUY-rated names to watch for
Among the smaller names under our coverage, we continue to like Persistent
Systems and Rolta India. Both, in our view, are companies with differentiated
offerings at attractive valuations. Persistent could report upwards of 30% revenue
growth in FY12 (easily the highest in our coverage). The catalyst for the stock
could be improved margins in 2HFY12 once wage hikes are absorbed.
Rolta, to us, has highly relevant in-house IP and is a margin expansion story. The
overhang on the stock seems to be the risk of raising debt to pay off ~USD140m
in FCCBs that mature in June 2012. However, with potentially reduced capex in
FY12E, we expect Rolta will not need to raise more than USD70-80m.
Where news on the margin can improve (or not)
After underperforming the Sensex by about 25% YTD, we believe MindTree is an
interesting name to watch. We believe the company could report 5%+ USD
revenue growth in 1QFY12 (near double-digit growth in IT services) while EBIT
margin could bottom out as wage hikes get factored in (details on page 2).
We would not chase Satyam and Tech Mahindra at current valuations (details on
page 2). While we believe Satyam management has done a commendable job of
turning around the company, we think the share prices of both companies already
reflect significant revenue growth and margin expansion over FY12-13.
MindTree - Where news on the margin can improve
After underperforming the Sensex by about 25% YTD, we believe MindTree is an
interesting name to watch. Despite our 11-20% FY12-13E EPS cuts on our view that
margin pressure will continue, the stock trades at an inexpensive 9.2x FY12E P/E on
our estimates.
We think the company could report a healthy 5%+ q-q USD revenue growth in 1QFY12
and management remains confident of beating the industry average (16-18% as per
NASSCOM) despite a roughly 4% revenue hit from the loss of the Kyocera business.
Moreover, the company is running a stringent margin programme and expects to lift the
EBITDA margin back to 17-18% levels in the next 5-6 quarters, which if achieved,
would be well above ours and Street projections.
The Tech Mahindra-Satyam debate
We would not chase Satyam and Tech Mahindra, especially after their outperformance
vs the Sensex YTD. At current valuations, both stocks trade at close to 11x FY13E P/E
BNPP estimates (ex-contract restructuring fees and Satyam’s contribution for Tech
Mahindra), which we believe is fair. Our calculations show that, assuming a fair multiple
of 11x FY13E P/E (inline with mid-cap peers), Satyam’s share price factors in 19-21%
revenue growth in FY12-13 (compared to 20-25% for larger peers), an EBITDA margin
of 20% (more than double from FY11) by FY13 and about INR7/share of legal liabilities.
This suggests a significant recovery is already in the price.
While a case could be made for some further multiple expansion for both companies
because of better scale from their impending merger (likely next year), it is worth noting
that HCL Tech the closest peer trades at 12.4x FY13E BNPP EPS and even after the
merger, the Tech Mahindra-Satyam combine would have only about USD3.0b in annual
revenue (FY13) which would still be significantly less than that of HCL Tech’s USD5.5b.
This, in our view, should prevent much more upside.
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