India Strategy: Mid-cap List Adding DITV and INFTC ::Morgan Stanley Research,

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Adding DITV and INFTC
We are adding Dish TV and Infotech Enterprise to
our Mid-cap list. Effectively, we are increasing the
number of stocks in our mid-cap list to 12 from 10.
Continue to favor stock picking
Our sector calls remain narrow given our view that
this is a stock-pickers’ market. We reiterate our
preference for domestic over global cyclicals.
Consumer Discretionary is our favored rate-sensitive
sector. We continue to choose mid-caps over large
caps given the valuation gap. Top avoids remain
Materials and SOE Banks.
Mid-cap List: Adding DITV and INFTC
Why are we adding Dish TV to our mid-cap list?
• Amongst the biggest gainers from ongoing digitization in India - We
expect DTIL to grow its gross subscriber base at a healthy CAGR of
18.9% from F2012-14 to reach 19.8mn by F2014. Also, if the
government were to diligently enforce the digitization rollout, there
could be a potential upside to our growth assumptions.
• We expect the valuation to see upside based on improving ARPU
and cost trends, which will drive margin expansion for DTIL.
– Competitive pressures have led to tepid ARPU growth over the
last six months for DTIL. We expect other DTH players to shift
their focus toward profitability at the same time we expect
greater consumer willingness to pay for digital content. This is
expected to drive ARPU growth. We expect ARPU CAGR of
12% over F2012-14.
– We expect DTIL's cost structure to be rationalized as it is spread
over an increasing subscriber base. Programming cost as a % of
revenue is expected to drop to 30% in F2014 from 35% in F2011
and 32% in F2012e.
– We expect an EBITDA CAGR of 45% from F2012-14e.
• Currently, the stock trades at an EV/EBITDA of 8.3x based on our
F2013 estimates.
Why are we adding Infotech Enterprise to our mid-cap list?
• Risk-reward remains favorable: Infotech stock is currently trading at
8.6x F2013e EPS, ~20% discount to its 8-10 year historical average.
This may reflect concerns that USD revenue growth would slow
down significantly to 14-15% yoy in F2013e (vs. 25% in F2012e)
based on consensus estimates. We expect Infotech to continue to
deliver strong USD revenue growth of ~19% in F2013, helped by
stable 2012 budgets for its clients, expectations of price increases in
the current environment, and ramp up of new accounts. Overall, we
expect Infotech to grow revenues and earnings at a CAGR of 20%
over F2012-14.
• Infotech stock has risen ~36% YTD (vs. the 15% gain in the Sensex).
However, over the last year, the stock is still underperforming
Sensex and its other mid-cap peers. The stock is up 17% (vs. ~8%
for the Sensex) since announcing its F3Q12 results (January 18,
2012) as concerns about margins eased after it reported strongerthan-
expected margin improvement. We believe Infotech stock has
further upside potential and should continue to outperform once
revenue growth concerns ease for the company over the coming
quarters.
• Improved volume growth, robust hiring in 4Q (strongest in the last
few quarters) and a stable hiring outlook for F2013 are the key
catalysts that should help ease concerns on revenue growth, in our
view.
Focus List and Sector Model Portfolio Performance
• Year to date, our sector model portfolio has outperformed the MSCI
India index by 13bp and our Focus List has outperformed the BSE
Sensex by 375bp. Our mid-cap list has outperformed BSE Midcap by
104bp.
• We are not making changes to our sector model portfolio. We are
Overweight Consumer Discretionary and Technology and
Underweight Financials, Industrials, Materials and Telecoms. We are
Neutral on Consumer Staples, Energy, Healthcare and Utilities.