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PULSE TRACK
Inflation declines further to 7.18% in December 2012 -
The Wholesale Price Index (WPI)-based inflation for December 2012 came at 7.18% lower than the market expectations as well as that of November 2012 (7.24%). The month-on-month (M-o-M) decline in inflation was due to a decline in manufactured goods inflation and the fuel group inflation. Moreover, the inflation rate for October 2012 has been revised downwards to 7.32% from 7.45% (provisional estimate).
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The manufacturing inflation softened to 5.04% compared with 5.41% in November 2012 while the fuel inflation also declined to 9.38% compared with 10.02% in the previous month. However, inflation in the primary articles segment increased by 10.61% year on year (YoY) as compared with 9.42% in November 2012 contributed by higher food inflation of 11.16% (vs 8.50% in November 2012). Inflation in minerals cushioned the rise in the primary articles inflation as it declined to 3.68% from 7.63% in November 2012.
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On an M-o-M basis, the WPI index showed a marginal decline of 0.12% to 168.6. The fuel index and the manufacturing index were flat in December 2012 at 188.9 and 148.0 as compared with 188.8 and 148 in November 2012 respectively. The primary article index decreased by 0.36% MoM as the minerals index declined to 340.8 in December 2012 from 347.1 in November 2012.
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Thanks to the third successive fall, (October-December 2012) inflation has dropped to the lowest level since January 2012. Moreover, the October inflation figure has been revised downwards to 7.32% which indicates the favourable trend in inflation. Further, the core inflation has eased to 4.2%, much to the comfort of the RBI. Going ahead, the market expects the RBI to ease the repo rates by 25-50 basis points in the coming monetary policy review (January 29th). However, the rising current account deficit and pressure on the rupee could turn the RBI cautious on monetary easing.
STOCK UPDATE
Tata Consultancy Services
Recommendation: Hold
Price target: Rs1,450
Current market price: Rs1,334
Price target revised to Rs1,450 Result highlights
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Soft volume growth, impressive margin performance: Tata Consultancy Services (TCS)' performance for Q3FY2013 was in line with our as well as the Street's expectations in terms of the top line growth whereas a better than expected margin performance has led to an outperformance at the net income level. Overall, given the high expectations from TCS, it has managed to meet the Street's expectations on most counts.
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TCS' top line grew by 3.3% quarter on quarter (QoQ) to $2,948 million (in line with our expectation of $2,948 million). The company's volume growth was soft at 1.25% (lowest in the last 15 quarters) on account of seasonal furloughs in the manufacturing and high-technology (hi-tech) industry verticals, coupled with unanticipated furloughs in banking, financial services and insurance (BFSI) vertical during the quarter. On a constant currency basis, the company's revenues were up by 2.65% to $2,926 million and the realisation on constant currency was up by 1.3% QoQ. In rupee terms, the revenues were up by 3.3% QoQ and 14% year on year (YoY) to Rs16,069.9 crore.
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The earnings before interest and tax (EBIT) margin improved by 50 basis points QoQ (better than our expectation of a 30-basis-point decline) to 27.3%. The better than expected margin was on account of solid execution and cost optimisations.
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The net other income was down by 31% QoQ to Rs213.3 crore, on account of foreign exchange (forex) losses to the tune of Rs53.6 crore against Rs105 crore gains in Q2FY2013. The net other income was up by 1.1% QoQ and 23% YoY to Rs3,551.8 crore (better than our expectation of Rs3,417.4 crore).
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During the quarter, the company made a strong gross addition of 17,145 headcounts (gross addition of 49,630), which was close to the hiring target of 50,000 headcounts for FY2013. For Q4FY2013, the company will likely add 9,000-10,000 trainees. The net addition for the quarter was at 9,561 headcounts, information technology (IT) services attrition down to 9.8% from 10.2% in Q2FY2013.
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During the quarter, TCS added 31 new clients and signed seven large deals in the quarter across the verticals (added two clients in the $100 million bracket).
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Valuation and view: In the last several quarters, TCS has been consistently delivering on the Street's expectation. For the quarter gone by, it has managed to meet the Street's expectation despite facing headwinds in a seasonally weak quarter. The bright spot in the performance was the outperformance of the margin, driven by a strong execution. Going forward, the management continues to remain optimistic on the demand momentum and expects FY2014E to be better than FY2013E. At the current market price (CMP) of Rs1,334, the stock trades at 19x FY2013, 16x FY2014 and 15x FY2015E earnings estimates. We broadly maintain our estimate and roll over our target multiple to FY2015E and consequently increase our price target to Rs1,450. We maintain our Hold rating on the stock.
SECTOR UPDATE
Fertilisers
Muted fertiliser consumption Key points -
Decline in consumption of fertiliser: During the month of December 2012, the aggregate sales of the fertilisers (by 15 leading manufacturers) saw a steep decline of 24% as compared with the same period of the last year. The lower fertiliser sales were led mainly by the poor sales of urea and non-urea fertilisers. In December 2012, the production and imports of diammonium phosphate (DAP), nitrogen, phosphorous and potash and muriate of potash (MOP) fertilisers declined drastically due to lower demand and higher prices. The production of urea, DAP and complex fertilisers also declined drastically on back of an uneven rainfall, a lower demand and concerns over the availability of raw materials for non-urea fertilisers.
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YTD fertiliser consumption remains dull: The total fertiliser sales declined by 15% on a year-till-date (YTD) basis as compared with that in the same period of the last year. A steep decline in the demand of the non-urea and urea fertilisers coupled with lower import of DAP and complex fertilisers led to the drop in fertiliser sales on a YTD basis. The sales of DAP and complex fertilisers decreased by 25% and 39% respectively, whereas the sales of urea fertilisers declined by 1% on back of lower demand and shut down of plants.
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Outlook: We maintain our cautious outlook on the non-urea fertiliser manufacturers mainly because of the shift in demand towards urea fertilisers, mainly due to the increasing gap between urea and non-urea fertiliser prices. We expect the demand for fertilisers in the upcoming rabi season to remain largely in line compared with the demand seen in the same period of the previous year due to higher sowing and an increase in the acreage. We prefer pure urea manufacturers like Chambal Fertilisers along with single-super phosphate (SSP) manufacturers like Rama Phosphate and Liberty Phosphate.
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