Persistent System: Buy Target : Rs. 603 :FinQuest

ersistent Systems Ltd. (PSL) came up with a decent set of numbers for Q4FY13. Revenue
growth was driven by the traditional IT services business while IP revenue was slightly subdued.
The sequential revenue growth was led by pricing despite soft volumes aided by IP revenue.
INR revenue growth affected by appreciation of INR but in $ terms looks decent
Revenues came in at $62.1 mn up 2.2% sequentially but the rupee revenue rose by a modest
0.3% Q-o-Q mainly due to lower realizations of INR/USD (53.8 in Q4FY13 Vs 54.8 Q3FY13).
Revenue growth was led by traditional business (up 3.1% Q-o-Q) while IP revenue declined
1.7% sequentially. Lumpy nature of IP coupled with soft ramp-ups in certain IPs led to a modest
decline in IP revenues resulting in a 70 bps decline in contribution to 17.5%.Coming to mix,
onsite revenues grew 12.7% sequentially led by volume (+2.7%) and pricing (+9.7%) while
offshore growth of 0.5% was driven by pricing (+2.8%) as volumes declined 2.1% Q-o-Q.
Appreciation of INR and higher royalties' impact EBITDA margins: The EBITDA margin in
Q4FY13 came in at 23.6% down 121 bps sequentially and was primarily impacted due to
1.9% appreciation of the rupee in the quarter and higher royalties payments to IBM and HP.
However EBITDA margin benefitted from flattish employee costs sequentially. On the other
hand net profit growth of 4.8% Q-o-Q was better, aided by higher extraordinary income (forex
gains of Rs 66mn & excess provisions written back Rs 44mn).
Utilization dips on employee additions but fresh hiring brings in optimism: The company
added 251 employees as attrition declined from 16% in Q3FY13 to 14.4% in Q4FY13. On the
other hand utilization declined to 72.5% from 77.3% in last quarter. Company plans to hire
600-800 employees in FY14 and has already made 500 offers to fresh graduates who will be
joining in Q2 and Q3. The company plans to hike the wages by at 8.5-9% for FY14.
Recent acquisitions to boost revenue in FY14: The Company's acquisition of Novaquest in
Jan'13 contributed to $1.8mn of revenue in the quarter. Novaquest and its earlier acquisition
Doyenz continues to do well with client addition, though small in size. As part of the Client
Automation business from HP last quarter, PSL has inherited hundreds of customers globally,
some very large. PSL plans to now offer various endpoint and device management capabilities
to these new enterprises and expects the contribution from them to start flowing in the next 2-
3 quarters. Company added 54 new accounts during the quarter with 3 being large.
Management guides for a robust FY14: Management commentary on the product pipeline
was upbeat and expects FY14E growth to be higher than Nasscom guidance of 12-14% primarily
led by new deal wins, acquired IP ramp-ups and cross selling to customers of the acquired IPs.
However, we feel the company could face some pressure on margins due to rising VISA cost
and integration costs of its latest acquisitions. The company has guided for stable margins and
a capex of Rs 1,250 mn for FY14.
Going ahead, PSL is expected to cash in on the rising demand in its key areas of cloud, mobility,
analytics and collaboration. PSL has the benefit of an early mover in this space but however the
deal sizes have been low. We now expect revenue, EPS to grow 17%, 18% in FY14E and 17%,
17% in FY15E, respectively. We expect EBITDA margins to decline 154 bps in FY14E to 24.1%
led by HP related transition costs, partially offset by higher IP revenues. PSL is a mid-cap IT
company having one of the best EBITDA margins amongst its peer set by catering to high end
next gen technologies. On the other hand it has also delivered proforma earnings growth of
~17% over the past 3 years. Due to these reasons we believe PSL should command better
valuations compared to other mid-cap IT companies. We reiterate our Buy rating on the stock
and value the company at a slight premium compared to other midcap IT companies at 11x
FY14 earnings arriving at a target price of Rs 603.

India Cement: Buy Target : INR 110 :FinQuest

Poor realization and high freight expenses impacts profitability
Margins are expected to remain under pressure in FY13 and FY14 as operating
cost increases and as realization falls… But growth in volumes for the
company is expected to help going ahead
Maintain our 'Buy' rating on the stock with price target of Rs 110 as the company is
the cheapest among the frontlines in terms of asset based valuation
South India's largest cement producer India Cement posted disappointing set of numbers during
Q4FY13. Poor cement realizations during the quarter and significant rise in variable costs
resulted in the net profit missing ours as well as consensus estimates by a huge margin. The
revenue rose 7.2% Y-o-Y (10.6% Q-o-Q) to Rs 11.99 bn, while the net profit fell 59.5% Y-o-Y
(0.6% higher Q-o-Q) to Rs 263 mn.
Volumes posts decent growth while realizations remained under pressure-
The company's cement dispatches rose 7.3% Y-o-Y to 2.78 mn tonnes, while the realization
remained under significant pressure. Cement prices in company's major market of Andhra
Pradesh remained under severe pressure during the quarter, while other regions like Tamil
Nadu and Karnataka also witnessed significant price pressure. The company's gross realization
fell 1% Y-o-Y (3.5% Q-o-Q) to Rs 4213 per tonne, while the net realization (after freight expenses)
fell 6.4% Y-o-Y (5% Q-o-Q) to 3225 per tonnes.
Revenue from Shipping and IPL post impressive growth -
The shipping revenue rose 62% Y-o-Y (24% Q-o-Q) to Rs 184 mn, while the IPL revenue rose
50% Y-o-Y to Rs 3 mn. The revenue from the Windmill division stood at Rs 7 mn in Q4FY13.
Continued power holiday in Andhra Pradesh increases the power & fuel expenses-
The company witnessed severe power shortage in Andhra Pradesh, while it was not allowed to
wheel the power it generated in Tamil Nadu for the Andhra Pradesh plant, as per the Tamil
Nadu Pollution control board clearance. In Andhra Pradesh the company faces 12 days power
holiday in a month and in the remaining days four hours power cut. This caused the power
plant in Tamil Nadu to operate at lower capacity utilization, while it had to resort to costlier
grid power for its Andhra Pradesh plant. So the power cost remained elevated. Although the
company has taken various measures to improve the situation by setting up additional captive
power units, the actual fructification would take some time.
Higher freight costs impacts the margins
Recent increase in diesel prices and rail wagon rates caused the company's freight cost to
increase substantially thus impacting the margins significantly. The freight expenses as % of
sales rose nearly 400 bps Y-o-Y (100 bps Q-o-Q) to 22.9%. The EBIDTA margin thus fell 480
bps Y-o-Y (320 bps Q-o-Q) to 14.7% in Q4FY13. The absolute EBIDTA came in at Rs 1.76 bn
(19% lower Y-o-Y, 9.2% lower Q-o-Q).

Shree Cements Ltd -Rating : Sell Target : INR 3800 : FinQuest

Cement business disappoints, while lower depreciation and tax allowance
helps the bottom-line
Power division witnesses healthy growth while cost savings aids margin
expansion
Maintain 'Sell' rating on Shree Cement with a revised target price of Rs 3800
Despite disappointing cement dispatch growth, Shree Cement posted excellent bottom-line growth driven
primarily by decent growth in cement realization, excellent growth in the power business and lower
depreciation and tax outgo during Q3FY13 (Quarter ended March 2013).
The cement volumes fell 4% to 3.22 mn tonnes during the quarter, while the power volumes rose 68% to
722 mn units. But 3.5% Y-o-Y improvement in cement realization helped the total revenue to come in
7% higher Y-o-Y to Rs 14.72 bn. The cement realization during the quarter improved to Rs 3677 per
tonne as compared to Rs 3552 per tonnes during the corresponding quarter of the previous year. Coupled
with improvement in realization, fall in operating costs helped margin expansion by 144 bps to 28.6%
during the quarter under review.
The good news is that the power division is doing exceedingly well, while the cement realization has
improved despite poor demand. But the fact that the cement demand has remained poor despite the
quarter being the peak season for cement consumption in the northern markets where the company
operates is a major concern. The continuation of such scenario may result in steep price correction going
ahead, although the company expects the cement demand and price to increase by 10% and 5%
respectively in the next fiscal. Lower PET Coke prices and sharp fall in coal prices helped the company to
lower its fuel expenses and that in turn helped the EBIDTA margins during Q3FY13 expand 144 bps Y-o-
Y to 28.6%. As a percentage of net adjusted sales the power & fuel expenses contracted 215 bps to
24.1%, while the freight expenses fell 160 bps to 16.3% although the personnel expenses and other
operating expenses increased marginally.
The company has been following accelerated depreciation on certain assets for some time now and that
caused the depreciation allowance this time to be very low. It came in at Rs 1.27 bn (46% lower Y-o-Y),
while the tax expenses also came in 69% lower Y-o-Y at Rs 176 mn thus helping the bottom-line to post
136% gain during the quarter to Rs 2.74 bn.
Shree Cement has been aggressively expanding its cement and power capacity during the past several
years and the stabilization of the same in the days ahead bodes well for the company. We expect the
power business of the company to improve sharply, but the lacklustre growth of the cement segment is a
major concern. We reckon that if the cement demand remains poor the company would witness price fall
in the quarters ahead. We also see cost pressure going ahead driven by higher power & fuel cost and
freight expenses. Thus if cement price falls from these levels we see margin pressure going ahead for the
company's cement business. Although on the power business of the company we are quiet bullish.
Nevertheless we expect Shree Cement to maintain its market leadership position in the northern region
and would rather continue to outgrow the cement industry going ahead. Integrated operations have
enabled the company to post significantly higher operating efficiency than its larger peers in India.
Despite the relative macro strength of Shree Cement, we reckon that the share price
has run ahead of its valuation, hence maintain 'Sell' rating on the stock with a revised
target price of Rs 3800 (considering USD 140 per tonne replacement cost to value
the cement business)
We expect the company to maintain its cost leadership position in the cement industry, as it witnesses
significant ramp-up in its power business. We believe there would be pickup in pre election spending in
several states in the next 12 months while the demand supply mismatch would narrow in favor of demand
as the capacity expansion slows down. At the current price of Rs 4640, the stock is trading at PE and EV/
EBIDTA of 13.8x and 8x FY14E earnings. While we continue to be positive on Shree Cement operational
matrix, we are a bit worried about the cement industry macro at this point as the demand growth continues
to remain weak. We believe Shree Cement has run ahead of its valuation even after considering increased
cement replacement cost of USD 140 per tonne to value its cement business. We maintain our 'Sell'
rating on the stock with a revised one year price target of Rs 3800. We value the cement business at USD
140 per tonnes (in line with current replacement cost of USD 140- 150 per tonne). We value the power
business using discounted cash flow (DCF) approach to arrive at per share value of Rs 544. We estimate
the revenue and EPS for FY13 to come in at Rs 56.96 bn and Rs 277.8 respectively.

Raymond Ltd Q2 FY13 results: FinQuest

Raymond Ltd Q2 FY13 results were above our estimates both on the topline and bottom-line front. In the
quarter, company's net sales increased 13.6% Y-o-Y and 33.1% sequentially to Rs. 11.15 bn, as against
our expectations of Rs. 10.14 bn. In the quarter, the EBIDTA declined 5.3% Y-o-Y, however, increased
414.7% sequentially Rs. 1.59 bn, as against our expectations of Rs. 1.28 bn, primarily on account of
higher than expected margins in the Textile and Branded apparel business of the company. The Adjusted
PAT came in at Rs. 569.5 mn as against our expectations of Rs. 470.6 mn, primarily on account of better
than expected operating performance.

Persistent Systems: Rating : Buy Target : Rs. 388 :FinQuest

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Persistent Systems Ltd. (PSL) is a leading player in the niche Outsourced Product Development
(OPD) market. OPD is a high growth sector which is also highly underpenetrated at the same
time. The company's strong technical expertise and the ability to provide services across the
product life cycle differentiates it from the peers. The contribution of non-linear revenue (IP
sales) stream at ~9% offsets some volatility while cushioning PSL from margin pressures.