28 July 2013

Hexaware: Valuation remains compelling Growth and margin comfort improves; reiterate Buy:: Nomura

Valuation remains compelling
Growth and margin comfort
improves; reiterate Buy

Action: Guidance and margins better than expected; reaffirm Buy
HEXW’s strong guidance of: 1) 3.5-5.5% q-q revenue growth in 3QFY13F
(vs. our expectation of 3-4% q-q) and 2) similar growth in 4Q, increases
confidence in our revenue growth estimates. Our margin expectations
have increased by ~200bps across FY13/14F on the margins beat in 2Q,
a stable outlook and INR depreciation. This translates into an improved
EPS growth profile with a CAGR of 10% over FY12-14F (up from 4%
earlier). At ~8x FY14F EPS plus a dividend yield of 5%-plus we find the
stock attractive. Reaffirm Buy. HEXW/IGTE are our top picks in Tier-2 IT.
Catalysts: Large deal wins and growth in line with guidance
2QFY13: Revenues in line but margins significantly ahead
While 2Q revenue growth was largely in line with our expectation at 0.8%
q-q, margin improvement of 440bps q-q was a significant beat (of 120bps
ex of one-offs). Management’s guidance for margins to remain flattish in
3Q (despite headwinds of wage hikes and non-recurrence of provision
reversal benefits accrued in 2Q) and increase in quarterly dividend to
INR1.4 (from INR1.2) in line with the 50% dividend payout guidance were
positives. We expect USD revenue growth of 7%/13% in FY13/14F
(marginally higher than our earlier expectations).
Raise TP to INR130 based on 10x FY14F EPS of INR13.2
We raise our TP to INR130 (from INR110) on: 1) a 14%/12% increase in
EPS estimates for FY13/14F, driven by marginally higher revenue growth
and higher margin expectations; and 2) upgrade in our valuation multiple
to 10x one-year forward EPS (from 9x) on a better EPS growth trajectory

India Consumer Two to Buy and Two Less ::Morgan Stanley Research


India Consumer
Two to Buy and Two Less
Preferred
Stock selection has proved important in the Indian
consumer segment to generate outsized returns. As
macro tailwinds wane, we believe the key is to
remain focused on earnings growth and the
visibility thereof. We expect investors to pay a
premium for operating margin expansion hereon.
Industry fundamentals are deteriorating… The
tailwinds of past 18 months seem to be waning. These
include input costs, competitive intensity, share gains for
large consumer companies in India vs. regional players,
pricing power and product mix improvement. Our F14
bear case for the consumer segment incorporates low
pricing growth amidst sluggish volume growth driving
single-digit revenue growth. This suggests lower-
than-expected margin expansion as gross margin
flexibility is offset by higher ad-spends/promotions.
…ITC (OW) and Dabur (OW) are stocks to own…
where consensus has increased earnings estimates
YTD, albeit marginally. We expect ITC and Dabur to be
key beneficiaries of our stock selection criteria, with
F14e earnings growth likely above the industry average.
Although multiple expansion may be limited hereon,
both stocks should track earnings growth, in our view.
…Titan (UW) and JUBI (EW) are less preferred: YTD,
consensus earnings estimates for Titan have been cut
by 9% and for JUBI by 19% – and both have
underperformed the Sensex by 13-14% YTD. We
remain concerned about revenue growth (sluggish SSG
for F14e), low productivity of new stores added, and
operating margins that may be materially weaker than
consensus estimates (inferior product mix, weak operating
leverage, and increased sales promotions). We believe
that recent sluggish growth trends in the case of JUBI,
and policy changes in the case of Titan, may compel
long-term investors to re-think their investments

Yes Bank- Hit by the macro reversal :: JPMorgan

Yes’ strong 1Q14 (PAT up 38% to Rs4B) is not that important, in our
view; the ability to cope with higher rates is the key issue. Management is
sanguine about margin resilience to higher rates – we think it could come
at the cost of growth. We believe the market overreacted – both on the
permanency of high rates and its impact on Yes’ earnings. At a P/E of 8.3x
FY14E (on consensus, which we think is too conservative) we think it’s too
late to sell, and see this more as an entry opportunity. The caveat is that
the rate environment will stay challenged for weeks and, with no nearterm catalysts, the stock’s short-term volatility could persist for a while.

Magnum Balanced Fund: Invest :Business Line


India Infrastructure, Power and Industrials-- Floating Gems: :: JPMorgan

In this report, we analyze four aspects of stock ownership: free float,
institutional holding, insider transactions and promoter share pledges.
Together, these are good indicators of share performance, in
conjunction with fundamentals, of course.

Choosing your nest :Business Line


India Strategy Continue to Avoid High Beta :: Morgan Stanley Research

– Which investment style is
working? Beta remains the worst factor on which to pick
stocks. This is heartening for bulls, because beta only
performs in maturing bull markets. Through the market
cycles (except for the tail end of bull markets), high-beta
baskets tend to underperform – and rightly so. Beta
drives the hurdle rate of return for a stock, and a higher
beta means an elevated rate, making the task of making
money that much harder.
Market becoming pro-cyclical: Meanwhile, the recent
pick-up seen in growth factors persists partly at the
expense of quality and partly at the cost of ownership
and momentum styles. Thus, the market is paying
greater attention to EPS growth as well as to capex and
financial leverage, unlike the market’s leaning for quality
(high ROE, low capex, high FCF and low financial
gearing) since 2008. ROE and FCF are not generating
the performance they did even as recently as three
months ago. These are early shifts from a pro-defensive
to a pro-cyclical bias, and we expect them to deepen.
However, investors should not confuse these shifts with
buying beta; they should also be distinguished from
value styles. Value continues to be a losing style, as it
has been for the past five years. Low P/E, low P/B and
high yield are still losing money.
Market starting to go counter consensus: Quality
has been the best style over the past five years, followed
by momentum and the consensus view. The market
continues to back trailing winners – indeed, this was
the best-performing style in June. However, counter-
consensus views appear to be gaining precedence in
contrast with the market’s preference for the consensus
opinion over the past several months. Mega cap has
been winning all along, and we have not seen any
perceptible shift in the market’s choice of size.
GARP is our preferred style: Reasonably priced
growth remains our mantra for 2013 – we think quality
factors will continue to lose ground as the economy
troughs and growth becomes more broad based. There
are risks to this forecast, with global risk appetite and
domestic policy action being the most pertinent.