Interpreting recent "negative" newsflow in the IT Services space...how really negative is "negative"?: JPMorgan

 The tech earnings season for Indian IT has seen the IT sector brutally fall out of
favor with investors. Several not-so-encouraging, even downright discouraging,
bits of news have emerged in the past few weeks which coalesce to cast a
shadow on CY13E/FY14E industry growth. In this piece, we examine the
principal pieces of news together with our interpretation.
 News item #1. Global tech bellwethers spanning services & software
(Accenture, IBM, Oracle, SAP) have disappointed in their most recent
earnings print. Having parsed through the earnings call of these tech Services
bellwethers one factor seems evident to us: revenues have come up a bit soft
relative to expectations, but order bookings and order backlog trends have been
solid at Accenture and IBM Global/Technology Services, respectively (we’re
not talking pipeline here which has to converted to signings). Notably,
Accenture (OW) had its highest-ever bookings in a single quarter by a distance
and its annual guidance speaks to a 2H (2nd half) rebound. Couple this with the
fact that IBM’s Global Services grew backlog 5% at constant currency with the
major markets up for the first time since the end of 2010. In fact, bookings in
IBM’s Services business were up nearly 50% YoY.
 News item #2. New license sales at the global software majors (Oracle/SAP)
have been patchy. Oracle’s sales force restructuring is underway, so it might
have been a bit of an internal sales issue as well. On its earnings call, this is
what Oracle management specifically said, “Since we've been adding literally
thousands of new sales reps around the world, the problem was largely sales
execution, especially with the new reps as they ran out of runway in Q3.” SAP
explained its license sales miss in Q1 due to weakness in Asia (not a big
geography for the offshore IT Services sector) but has retained its annual
guidance for 2013 implying sequential acceleration.
 In addition, much of the current traction in enterprise solutions/package
implementation for offshore IT Services players does necessarily not accrue
from new license sales but in optimizing and/or optimizing existing
installations. Legacy installations are inefficient which need to be “fixed” or
they need to be upgraded (or they simply might be non-compatible with each
other, in which case, harmonization of multiple ERP systems across
geographies/LOBs is needed). To interpret patchy license sales at global
software majors as having consequences down the road for offshore IT services
companies is not necessarily right, in our view, given that incremental drivers of
this offering for these players don’t necessarily pertain to new license sales.
 News item #3. The proposed immigration bill which impacts the offshore IT
Services industry. Proposed visa reforms have given the Indian IT sector a
binary risk/reward profile. If the currently proposed visa reforms are passed into
law without substantial watering down (especially of the outplacement clause),
then the sector faces business model risk. If visa reform bill gets substantially
diluted, then some stocks could be fundamentally under-valued. But the
overhang on stocks might stay unless language on subsequent drafts is
progressively diluted en route to the final outcome.
 That said, this bill should not affect the behavior of clients over the near-term
(3-6 months) as this is likely to be a time-consuming debate going on till at least
October 2013 (as per Nasscom). So, we don’t think FY14 growth should be at
risk due to this; the consequences of the visa bill (as they currently stand)
substantially play out beyond FY14

FII & DII trading activity on NSE, BSE and MCX-SX 06-06-2013

Category		Buy	Sell	Net
		Value	Value	Value
FII		2088.43	2358.9	-270.47
DII		1033.05	734.9	298.15

 

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FII DERIVATIVES STATISTICS FOR 06-Jun-2013

FII DERIVATIVES STATISTICS FOR 06-Jun-2013
	BUY		SELL		OPEN INTEREST AT THE END OF THE DAY
	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores
INDEX FUTURES	37276	1111.21	75605	2245.99	230624	6888.69	-1134.78
INDEX OPTIONS	501106	14820.89	434839	12922.27	1610129	47796.44	1898.62
STOCK FUTURES	47675	1371.70	51129	1415.71	1007964	28343.92	-44.01
STOCK OPTIONS	30034	815.12	30533	811.38	60304	1561.47	3.74
						Total	723.57

 

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Tata Global Beverages Jolly good show; Buy :: Anand Rathi

Jolly good show; Buy
Key takeaways
Growth momentum sustained. In FY13 Tata Global Beverages (TGB)
reported creditable, 11%, growth in consolidated revenues to `73.5bn, in line
with our estimates. This was largely driven by volume and value growth in
India, where the company’s domestic revenues rose 14% yoy. We estimate
that crucial price hikes effected across international markets in its tea
portfolio (largely Tetley) helped it register 9% growth in international
revenue. Additionally, its coffee operations via its subsidiary Tata Coffee
(TC), also did exceedingly well, reporting a 10% jump in revenue.
In tough operating environment EBIDTA margin up. The consolidated
OPM rose 110bps yoy to 10.5% following the strong performance in India as
well as an encouraging performance in international markets such as Australia.
At `7.7bn, EBIDTA jumped 23% yoy in FY13, due to stringent cost control
and tight inventory management. However, PAT was constrained at `3.7bn,
(up 5% yoy) on account of higher short-term borrowing costs and an
exceptional expense for restructuring international operations. Adjusted PAT
stood at `4bn, a 20% yoy growth.
Our take. Across all parameters results paralleled our estimates. We are
heartened by the value growth following price hikes in the tea portfolio, as
well as stabilised coffee operations after last year’s untoward correction in
prices of Arabica. Despite the backdrop of a recessionary environment in
mature international markets, we believe the company will successfully effect
growth through strategic price increases and volume push while
simultaneously extracting efficiencies from its operational set-up.
We maintain our FY14e and FY15e estimates as well as our price target of
`168, which represents a 17% upside from the ruling price. Risk: Inability to
manage raw material prices and SG&A expenses.

Bajaj Electricals :: Religare Research

E&P business continues to dent profitability
BJE’s Q4FY13 PAT at Rs 6.3mn (↓99% YoY) missed estimates owing to operating losses of Rs 0.5bn in the E&P segment and margin contraction in the Lighting and Consumer segments. Sales growth of 5% YoY was driven by traction in Lighting (up 22% YoY) and Consumer Durables (up 15% YoY). However, EBIT margins for Lighting/Consumer segments declined 150bps/250bps YoY to 8%/7.9%, impacted by clearance of slow/non-moving inventory. Maintain BUY on attractive valuations.
 Provisioning/cost overruns in E&P segment continue to dent profitability: The E&P segment (25% of Q4 revenues) continued to be impacted by provisioning/cost overruns. Segmental operating losses stood at Rs 0.5bn in Q4, higher than losses of Rs 0.27bn/Rs 0.4bn incurred in Q2/Q3.
 Clearance of slow/non-moving inventory impacts margins in Consumer and Lighting segments: As per management, BJE cleared slow-moving or non-moving inventory to the tune of Rs 0.2bn, which impacted operating margins in Lighting/Consumer segments (margins down 150bps/250bps YoY to 8%/7.9%). Margins in these segments were further impacted by a depreciating INR. However, the company has taken price corrections in the months of April and May, the benefits of which should flow in in the current quarter.
 Order book at Rs 10.7bn remains strong: BJE’s current order book position stands at Rs 10.7bn (up 76% YoY) – TLT/high Mast/Special projects accounted for 39%/4%/ 57% of the order book.
 Guidance for FY14E: The management has guided for revenue growth of 18-20% in the Lighting segment, 20-22% in Consumer, and E&P sales of Rs 10bn – overall, sales guidance of Rs 42bn for FY14E. Our target price of Rs 225 assigns a target PE (1-year forward) of 10x. Maintain BUY.

Nestlé India - Q1CY13: Volume concerns persist; margins surprise on the upside :JPMorgan

Nestlé India reported another quarter of subdued domestic revenue growth,
though margins continued to surprise on the upside. Company registered Net
Sales, EBITDA and adjusted PAT growth of 10%, 16% and 8% respectively for
Q1CY13. Volume growth continues to remain subdued given severe impact from
weak consumer sentiment (impacting discretionary spends on packaged foods),
aggressive pricing and portfolio/channel optimization. We remain constructive on
the company’s long term growth potential, but see near term top-line growth
challenges and current valuations at 37x CY13E and 32x CY14E P/E as limiting
upside potential. Volume growth recovery remains the key for stock performance
going forward. We expect volume growth rates to recover gradually in 2013
supported by new capacity commissioning, wider product base, enhanced
distribution reach and a bit more competitive pricing in some of the categories.
RM inflation outlook appears benign and that should help margins to hold out.
 Domestic sales growth subdued at 8%. Domestic sales growth remained
sluggish at 8% during Q1. We believe much of the growth has been led by
higher pricing and improved mix. Volume growth has been affected adversely
by challenging macro, portfolio/channel optimization and aggressive pricing.
Exports sales growth was however strong at 51% contributed largely by exports
to affiliates which rose 98% y/y. Exports to third parties grew by 9% y/y.
Management noted that they expect some volatility to continue throughout 2013
and while some categories are showing positive signals, some may take some
more time.
 Substantial margin improvement: Nestlé India continued to manage RM
inflation with strong pricing and improved channel/product mix leading to a
60bps y/y expansion in gross margins. EBITDA margins were further supported
by moderate increase in other expenses (+6% y/y) adding 80bp to margins.
Overall EBITDA margins expanded 140bp y/y and EBITDA grew 16% y/y.
Other financial income improved largely due to higher average liquidities,
though other operational income declined y/y due to lower realisation of export
incentives.
 Higher depreciation and interest costs weighed on earnings. The company
didn’t draw any new debt for capacity expansion during the quarter with total
debt outstanding at Rs 10.4bn (US$192mn). Depreciation cost increased 56%
y/y (flat q/q) due to significant capacity expansion undertaken over the past
year. Adjusted interest costs were at Rs79Mn (~3.5x y/y, -20% q/q) due to
higher debt y/y (taken for aggressive capex done over CY11/12).

Motivate yourself to save for retirement :: Business Line

You can break your retirement objective into smaller goals that you can achieve every five years.

Most of us are not saving enough for retirement. Income is increasing at a pace that is slower than the rise in price levels. Besides, households are now spending more on discretionary expenses such as vacation and fine dining. The risk of accumulating wealth for retirement is entirely on you. What should you do to save enough for your retirement? In this article, we discuss some measures you can take to motivate yourself into saving more.

POSITIVE EMOTIONS

You derive the benefit of your consumption now, whereas saving for the future does not offer visible benefits today. Nevertheless, saving is important to sustain your living expenses after your retirement. How else will you meet your expenses when your active income stops? We discuss two broad strategies towards self-motivated savings — positive and fear-inducing.

Consider the positive strategies. First, break your retirement goal into meaningful short-term goals. Suppose you plan to retire in 30 years with a wealth of Rs 25 crore. You can break your retirement objective into smaller goals that you can achieve every five years. Remember, the last 10 years of your working life are important. That is also the period when your retirement is within sight. So, you will have a stronger motivation to save; maximise your contribution to your retirement account during this period.

Second, visualise yourself having a lifetime experience during your retirement. You can make wish-boards, sticking pictures of the things that you want to do during your retired life. Looking at the pictures may not get you what you want, but it will prompt you to save today for your retirement. And third, pre-commit to increasing your saving by 3-5 per cent every year. This increase in savings should come from your yearly salary increase; you do not have to cut into your current consumption to increase savings. And if positive motivation is not enough, consider the fear-inducing strategies.

NEGATIVE EMOTIONS

If you are typical individual, you do not like to lose. In fact, psychologists have shown that we prefer to even give up gains to avoid losses! So, if you are averse to losing, remember this: Not saving enough for your retirement will mean that you may lose your existing standard of living when you retire.

For one, your active income will stop and you will have to primarily depend on investment income to pay for your living expenses. For another, you need much more money when you retire to even sustain your current standard of living because of inflation.

If you do not save enough for your retirement, you may become a burden on your children during your old age. To be physically dependent on your children because of medical condition is one thing. But it is quite another to be financially dependent on them for living. And your living expenses during retirement could be high, especially if you suffer from poor health.

And if the above two reasons do not motivate you to save for retirement, try this: Live on two-thirds of your current income for the next 6 months. Why? You will experience the pain from cutting consumption, a situation you will face in your retired years if you do not save enough today. This experience should drive you to contribute enough to your retirement account!

Saving for your retirement is an important step that you should take to secure your lifestyle when your active income stops. We suggest that you talk with individuals who have retired in the recent past to gather their new experience as retirees. Motivate yourself to save. And view this process not as retirement planning, but as your plan to achieve financial freedom — a state where your passive income pays for your lifestyle expenses.

Redington India :: Religare Research

Structural story intact, valuations cheap; maintain Buy
REDI remains one of the best plays on domestic IT consumption in our view. While the company has seen muted FY12/FY13 performance in India, we believe growth rates are closer to bottom as: (1) Blackberry headwinds fade out and (2) benefits from higher UID/government ordering flow in. While margin pressures remain, benefits from lower working capital and an easing interest rate cycle should help maintain overall profitability. Further valuations at 8.5x FY14 P/E are cheap on low expectations. Maintain BUY.
 India – growth rates closer to bottom: REDI’s growth rates in India have dropped from 28% in FY11 to 9% in FY13, in line with the overall slowdown in domestic economy. While the management continues to indicate an uncertain demand environment, we believe growth rates are closer to bottom, as headwinds from Blackberry and low government ordering fade out and tailwinds from Apple iPhone sales gain momentum in 1HFY14.
 MEA and Turkey see healthy growth: FY13 saw REDI deliver a healthy 16% growth in overseas markets, driven largely by opportunistic market share gains, despite weak demand. The company continues to expand into value segments in these markets, which should continue to drive growth outperformance.
 EBIT margins under pressure, but adequate offsets available: We expect EBIT margin pressures to persist through FY14/FY15, given the low growth expectations and a higher mix of Apple and MEA businesses. However, lower working capital (due to higher Apple mix) and an easing interest rate environment should provide adequate offsets at the net profit level and drive a 14% EPS CAGR (FY13-15).
 Valuations cheap: Valuations have moderated to 8.5x FY14 P/E and look cheap, particularly in view of the low growth expectations. We maintain our BUY rating on the stock with a Mar’14 target price of Rs 95 based on 9x forward P/E.

India Cement EV/T metrics might be misleading when utilizations are expected to remain low; Earnings metrics more relevant:: JPMorgan

One common ‘bull’ argument for cement is that stocks are 'cheap' as they are
trading close/below current replacement costs of ~$120-140/T. Historically large
cap stocks have traded at a significant premium to replacement costs, however,
those years were marked by peak utilization rates, M&A and increasing
profitability. With utilizations expected to remain below ~85% for the next few
years, M&A largely absent, and earnings range bound, we believe earnings based
metrics (EV/EBITDA) are more relevant and not replacement costs (EV/T).
Cement stocks DO NOT look cheap on earnings metrics as they do on EV/T.

Where to place stop loss :: Business Line

"Never forget your stop loss" is a refrain that all traders hear right from day one. But it is like one of the lessons that one learns in kindergarten about not keeping your elbow on the table and not talking while eating. Everyone knows it but very few actually follow it.

The term ‘stop loss' is self-explanatory. It is an order that is punched in to the system or conveyed to the broker in order to limit the loss in any trade.

The stop loss level in case of a buy order would be slightly below the buy price, while the stop loss for a sell trade would be slightly above the short selling price.

The minute the stop loss level is hit, the order becomes a market order and the trade is terminated with a minimal loss.

Stop losses are essential for divorcing emotions from trading and are the key component of money and risk management strategies.

Willingness to take small losses with a smile is the hallmark of a good trader. Stop loss orders also come in handy to position traders who do not want to increase their blood pressures by watching the stock market ticker whole day long.

The stop loss order would ensure that the loss is limited in case the markets do a reverse swing. The reason why many dislike punching in stop orders is because prices have a tendency to move up to the stop loss level, trigger it, and then reverse and zoom upward.

This is more common when the stop loss levels are fixed near important technical levels. But these are hazards of the trade and must be borne with a shrug.

How deep should the stop loss be? The stop loss level will vary from one trader to another. It also depends on the trading style. For example, a swing trader would keep a deeper stop loss compared to a day traders.

A widely accepted norm is that the stop loss should typically be 2 per cent of the trading capital. That would mean that the trader would not be risking more than 2 per cent of his capital in one trade.

If a trader were willing to take a 2 per cent loss per trade, it would take fifty bad trades to wipe out his entire capital. So, it is a good idea to keep a monthly stop loss as well as a stop loss per trade. A monthly stop loss of 10 per cent is a good idea. If a loss of over 10 per cent is incurred in one month, it is best to stop trading. A holiday always comes in handy to calm down taut nerves and for re-working trading strategies.

Dr. Reddy's Lab Strong, but in-Line, F4Q13; Staying OW:: Morgan Stanley India

We maintain our OW rating on DRL in view of steady
growth momentum, driven by India, US, and RoW
businesses and reasonable valuations. We believe
that the company’s efforts to focus on complex
generics and bio-similars will help sustain high-teen
P/E multiples. Raise PT to Rs2,288.
Business Outlook – Management refrained from giving
F2014 financial guidance. However, longer term, it is
optimistic about the company’s growth and expects
up-trending margins. Nearer term, it expects non-US
businesses (India, Russia, PSAI, etc.) to retain their
trend-line growth, and US to deliver 1-2 complex
generics p.a. (subject to FDA approval). It expects
F2014 R&D expense to rise to 7-8% of sales, an F2014
tax rate of 22-23%, and capex of Rs5-6bn.
Conference call highlights – US pricing is being hurt
by customer consolidation (largely baked in the quarter)
and incremental competition (such as tacro, lanso –
some effect may still come). Incremental US filings are
focused on differentiated products, including injectables,
delayed release, topical (steroid and non-steroid), and
patches. DRL does not see imminent risk to business
from the proposed government rules in Russia for local
manufacturing (for government-funded products).
Capex is for injectables, bio-similars, and SEZ facilities.
In-line F4Q13 – REDY reported total revenue of
Rs33.4bn, up 26% yoy (17% qoq), largely driven by US,
Russia, and PSAI segments. OPM (ex. one-time
settlement income) expanded 290bp yoy (210bp qoq),
to 18.6%. These factors led to adjusted net profit of
Rs4.4bn, up 29% yoy, 17% qoq, vs. our Rs4.3bn
estimate (reported net profits were Rs5.7bn)
Price target change: Our higher price target is largely
based on a higher target multiple, as visibility improves
and industry valuations rise.

Financial Planning :: Business Line