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Summary
of Contents
SHAREKHAN SPECIAL
Q4FY2007 Capital Goods earnings
preview
The Working Group
on Power for the 11th Five-Year Plan has envisaged an addition of
around 69,000 megawatt (MW) of power generation capacity during the
plan period (FY2007-12) and an additional capacity of 86,500MW
during the 12th Five-Year Plan. Looking at the current status of the
10th Five-Year Plan's (FY2002-07) capacity addition programme, these
targets looks quite aggressive since the government had planned a
capacity addition of 41,110MW during the 10th Plan period whereas
the actual achievement is likely to be around 25,000MW (only 61% of
the target). Out of this about 17,995MW of capacity had already been
commissioned till December 31, 2006. However the fact that a total
of 31,345MW of capacity is already under construction gives the
panel's plan a lot of credibility.
Looking at the huge power
generation capacity addition programme of the government (totaling
to around 155,000MW in the next ten years), the order flow momentum
for the capital goods companies engaged in the power sector, such as
Bharat Heavy Electricals Ltd (BHEL), Crompton Greaves, Bharat
Bijlee, Indo Tech Transformers, KEI Industries and Genus Overseas,
is expected to be robust. Going by the recently announced
provisional results of BHEL, wherein its order flow for the full
year ended March 2007 registered an increase of 88% to Rs35,633
crore and the order backlog stood at an all-time high of Rs55,000
crore, the time ahead for power ancillary companies appears even
more promising.
STOCK UPDATE
Tata Consultancy Services
Cluster:
Evergreen
Recommendation: Buy
Price target: Rs1,508
Current
market price: Rs1,250
Disappointing
performance
Result
highlights
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Tata
Consultancy Services (TCS) has reported a growth of 5.9% quarter
on quarter (qoq) and 38.2% year on year (yoy) in its consolidated
revenues to Rs5,146.4 crore during Q4FY2007. The sequential
revenue growth was largely driven by a 6.42% growth in the volumes
and a cummulative growth of 1.33% in the billing rates (0.89%) and
employee productivity (0.44%). On the other hand, the appreciation
of the rupee adversely affected the revenue growth by 1.87%
sequentially.
-
The earnings
before interest and tax (EBIT) margin declined by 47 basis points
to 25.6% sequentially, largely due to the adverse impact of the
rupee's appreciation.
-
The other
income stood at Rs89.8 crore and included a one-time extraordinary
income of Rs66.3 crore from the sale of the stake in Sitel.
Excluding the one-time income (adjusted for tax), the consolidated
earnings have grown at a disappointing rate of 1.1% qoq to
Rs1,116.8 crore, which is much lower than the consensus estimate
of around Rs1,185 crore.
-
In terms of
the outlook, the company doesn't give any specific growth
guidance. However, it has indicated that the demand environment
continues to be robust and the gross employee addition would be
higher than 32,462 reported in FY2007 (12,000 campus offers have
been made). The TCS management also expects to maintain the
margins around the level of 25% reported in FY2007, in spite of
the aggressive salary hikes in FY2008 (13-15% for the offshore
employees and 3-5% for the onsite employees).
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The key
operational highlights for Q4 are: an addition of 43 clients; a
healthy sequential growth of 9.3% in revenues from the Top 10
clients; the attrition rate in the information technology service
sector at a comfortable level of 10.6%; closure of two large deals
worth over $50 million each and one deal of $35 million; and a
healthy pipeline of large deals. On the flip side, there has been
a slowdown in the sequential growth of revenues from the banking,
financial services and insurance (BFSI) and manufacturing industry
verticals.
-
Given the
lower than expected performance and the steep appreciation in the
rupee, we have revised down our FY2008 earnings estimate by 0.5%
and have also introduced the FY2009 estimates. We maintain the Buy
call on the stock with a price target of Rs1,508 (around 23x
FY2009 earnings per share).
UTI Bank
Cluster: Emerging Star
Recommendation:
Buy
Price target: Rs575
Current market price: Rs465
Robust growth continues
Result highlights
-
UTI Bank's Q4FY2007 profit after tax (PAT) was
better than our expectations at Rs211.9 crore, up 39.6% year on
year (yoy) compared to our estimate of Rs186.2 crore mainly due to
a higher than expected net income and lower operating expenses
during the quarter.
-
The net interest income (NII) was up by 48.4%
to Rs464.2 crore compared to our estimate of Rs435.9 crore. UTI
Bank's reported net interest margins (NIMs) expanded by 10 basis
points yoy and by 6 basis points quarter on quarter (qoq). However
the same included a one-time cash reserve ratio (CRR) interest of
around Rs22 crore received during the quarter otherwise the NIMs
would have had a downward bias on a quarter-on-quarter (q-o-q)
basis.
-
The non-interest income was up 32% yoy and 8%
qoq to Rs301.1 crore and the fee income growth remained robust at
58.8% yoy and 29% qoq. However the treasury income declined by
34.3% yoy and 46% qoq.
-
The operating expenses grew in line with the
overall business growth; however the provisions were up 56.3% yoy
and 40% qoq mainly due to the increased provisioning requirement
on the standard assets for Rs68.1 crore, which is a one-off
item.
-
Although UTI Bank has grown at a robust pace in
the last couple of years there are no visible signs in the
deterioration of its asset quality yet. The net non-performing
asset (NPA) level (as a percentage of its net customer assets)
improved to 0.61% from 0.68% in Q3FY2007.
-
Currently the bank's capital adequacy ratio
(CAR) is at 11.57% with Tier-I at 6.42%. The bank has also
aggressively raised its hybrid capital and has left itself very
little headroom to grow its balance sheet. The bank plans to come
out with a follow-on offer in FY2008 to boost its CAR. We have
factored in an equity dilution of 3.6 crore shares (12.8%) of the
pre-issue equity capital at an issue price of Rs500 per
share.
-
The bank opened 80 new branches during the
quarter. Its deposits grew by 46.5% to Rs58,785.6 crore of which
savings and current deposits grew by 50.3% and 41.8% respectively.
The current and savings account (CASA) ratio remained stable on a
year-on-year (y-o-y) basis but improved on a q-o-q basis to 40%
from 37.1% reported in Q3FY2007 mainly due to an increase in the
current account deposits, which as a proportion of deposits
increased from 16.6% in Q3FY2007 to 19.2% in Q4FY2007. Advances
reported a strong growth of 65.3% to Rs36,876 crore of which the
retail advances were up by 37.6% to Rs8,928 crore. However on a
q-o-q basis the retail advances have declined by 2.7% mainly due
to a sell down in the personal loan portfolio.
-
The actual PAT for FY2007 was 4% above our
estimates at Rs659 crore and we have upgraded our FY2008 numbers
by 4.8% to Rs851.1 crore mainly on account of lower operating
expenses estimated for FY2008. At the current market price of
Rs465 the stock is quoting at 17.4x its FY2008E earnings per share
(EPS), 8.5x its FY2008E pre-provisioning profits (PPP) and 2.5x
its FY2008E book value (BV). We feel the dilution would be book
value accretive and maintain our Buy recommendation on the stock
with a price target of Rs575.
HCL Technologies
Cluster: Apple Green
Recommendation:
Buy
Price target: Rs410
Current market price: Rs301
Q3FY2007—first cut analysis
Result highlights
-
HCL Technologies has reported a revenue growth
of 7.6% quarter on quarter (qoq) and 39% year on year (yoy) to
Rs1,577.1 crore for the third quarter ended March 2007. This is
the third consecutive quarter of close to double-digit sequential
growth in the revenues (in dollar terms) and far ahead of the
street expectations. The sequential growth was contributed by a
16.4% growth in the business process outsourcing (BPO) revenues.
On the other hand, the infrastructure management service (IMS) and
software services businesses grew at a relatively lower rate of
6.4% and 6.5% respectively, on a sequential basis.
-
The earnings before interest, tax, depreciation
and amortisation (EBITDA) margins improved by 115 basis points to
23.3% on a sequential basis, despite the adverse impact of the
steep appreciation of the rupee (1.6% appreciation in the average
realised exchange rate against the US dollar). The sequential
improvement in the margins was largely aided by the cumulative
impact of better realisations (including non-effort-based gains
from the output-based priced projects), higher utilisation
(especially in the BPO business) and a 70-basis-point saving in
the selling, general and administration (SG&A) cost as a
percentage of sales.
-
In terms of the segments, the EBITDA margins of
all the three business lines improved on a sequential basis. The
BPO business reported a second consecutive quarter of robust
improvement in its margins, up by 360 basis points to 26.5%. The
software services and IMS businesses reported an 85-basis-point
and a 13-basis-point improvement respectively.
-
The earnings grew at a robust rate of 15.9% qoq
and 72.1% yoy to Rs331.8 crore (ahead of our expectations of Rs290
crore and the consensus estimates of a flat or negative growth
sequentially, especially after the higher base resulting from the
robust performance in the previous two quarters). The growth in
the earnings was also aided by the foreign exchange (forex) gains
of Rs41.8 crore on the open forward contracts, up from Rs34.7
crore reported in Q2FY2007.
-
In terms of the operational highlights, the
ramp-up in the large deals is beginning to make a material impact
on the overall performance. Moreover, the company continues to bag
new multi-million, multi-year, multi-services deals and has
announced six new deals in Q3--five in the range of $25-50 million
each and one over $50 million.
-
Given the company's higher-than-expected
performance for the past three consecutive quarters and the
continued traction in the intake of large deals, we would upgrade
our estimates for FY2007 and FY2008 and introduce FY2009 estimates
in the detailed result analysis report. At the current market
price the stock trades at 18x FY2007 and 14.5x FY2008 estimated
earnings. We maintain our Buy recommendation on the stock with a
price target of Rs410.
MUTUAL FUND:
INDUSTRY UPDATE
Equity AUMs rise in line with market
movement
The AUM for equity funds
rose by 1.3% to Rs139,147 crore in March 2007. The rise in the AUM
was more or less in line with the market movement of
1%.
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