Weekend Highlights – 23rd May, 2015

India ranks 52 in the World Economic Forums 2015 Travel and Tourism Competitiveness Index

Spain leads the World Economic Forums 2015 Travel and Tourism Competitiveness Index. It is the first time the country has ranked top of the biennial report – published under the theme Growing through Shocks – and is a positive sign for the countrys nascent recovery.

The Travel and Tourism Competitiveness Report ranks 141 countries across 14 separate dimensions, revealing how well countries could deliver sustainable economic and societal benefits through their travel and tourism sector. Spains leadership position is helped by a world class ranking in cultural resources (1st globally), its ability to support online searches for entertainment (4th) – a measure of how well the country has adapted to consumption habits brought on by the digital revolution – as well as excellent infrastructure (4th).

Traditional strong travel and tourism destinations such as France, Germany, the United States, the United Kingdom, Switzerland, Australia, Italy, Japan and Canada complete the top 10. Of the large emerging markets, China (17th) and Brazil (28th) made it into the top 30, whereas Russia, South Africa and India ranked 45th, 48th and 52nd, respectively. While this made Brazil and South Africa the best placed in their region, Singapore (11th) came up top in South-East Asia, and the United Arab Emirates (24th) was the highest placed nation in the Middle East and North Africa.

Increase in Service Tax Rate from 12% to 14% with Effect from 1st June, 2015

In the Union Budget, 2015, an increase in the rate of Service Tax from 12% to 14% had been proposed from a date to be notified. The Finance Bill, 2015 has since been enacted and the Central Government has notified 1st June, 2015 as the date from which the rate of 14% would become applicable. The provisions levying Education Cess and Secondary and Higher Education Cess would also cease to have effect from same date i.e. 1st June, 2015, as the same would be subsumed in the service tax rate of 14%. Certain other changes have also been notified with effect from 1st June, 2015. However, the date of giving effect to the provisions relating to imposition of a Swachh Bharat cess on all or any taxable service will be done in due course.

Low demand, not policy, biggest problem for India Inc-CRISIL

CRISIL released Modified Expectations, a report evaluating the economy-related performance of the Narendra Modi-led government as it completes one year in office.

The report assesses India Incs performance in the first nine months of fiscal 2015 using unique metrics of demand, debt and policy. The findings belie some popular narratives. It highlights how the government is putting in place building blocks that will improve Indias crucial potential-growth rate, and explains why it will take longer than expected for the investment cycle to kick-start.

CRISIL analysed the results of 411 companies from the National Stock Exchanges CNX 500 index (excluding those from the BFSI and oil & gas sectors), which together account for 90 per cent of the market capitalisation of the bourse. We compared revenue and operating profit growth with nominal GDP growth (it was 12% in 2014-15), which showed that 69% – or 285 companies out of 411 – underperformed.

Says Prasad Koparkar, Senior Director, CRISIL Research: n++Our findings are telling. For more than half the companies that underperformed, the main obstacle was poor demand. That flies in the face of the refrain that policy is the biggest bottleneck. Policy was only the No. 3 factor according to our study, affecting just 15% of the companies analysed.n++

Modified Expectations blends CRISILs unique expertise in macro-economy, corporate and banking research, and credit ratings to offer a 360-degree view on India. It uses four metrics to evaluate the government: What has worked so far; where are the signs of a pick-up; what hasnt worked so far; and what lies ahead.

The report underlines a host of steps that the government has taken or is taking to address constraints – specifically structural – to growth. This, we believe, will ensure that growth sustains beyond fiscal 2016. But major reforms will remain a tough task given the governments lack of support in Rajya Sabha, and the government will have to show exceptional statecraft to cobble up consensus to pass crucial Bills.

Given this, CRISIL believes growth is on a slow grind up in the short term, and will touch 7.9% in 2015-16 if monsoon is normal; else it would flat-line at 7.4%.

Says Dharmakirti Joshi, Chief Economist, CRISIL: n++The government cant push demand up in the short term because there is no monetary and fiscal silver bullet. We expect private consumption to pick up only gradually this fiscal, which, in turn, will provide some impetus to demand. But it wont be enough to lift extant capacity utilisation to levels where the private corporate investment cycle needs to be kick-started again. A meaningful recovery in capex is not seen till fiscal 2017.n++

In the interim, CRISIL believes the government has to pick up the gauntlet and try to push the investment cycle through public investments. The Union Budget for the current fiscal does propose a more than 50% jump in public spending in infrastructure.

On the legislative side, consensus is necessary to push through legislations on Goods & Services Tax and land – without much dilution. This will test the governments resolve and statecraft, but they are critical building blocks that will raise Indias potential-growth rate.

We also look forward to steps that re-kindle agriculture growth and ameliorate distress in farms. India badly needs durable solutions to improve farm productivity and the government needs to sustainably address distress through crop insurance schemes rather than loan waivers.

The budget for the current fiscal had announced a lot of reforms with far reaching implications for infrastructure, financial sector and taxation. Progress on these will be a key monitorable.

Glaxo Pharmaceuticals – 5QFY2015 Result Review

This article has been authored by Ms. Sarabjit Kour Nangra

Result below expectations, on sales front

Stock up 1.2%

Glaxo Pharmaceuticals (CMP: ₹3,276/ TP: / Upside )

For 5QFY2015, Glaxo pharmaceuticals, posted results below expectations on the top line while the net profit came in higher than expected. On the sales front, the company posted a growth of 2.3% yoy growth to end the period at ₹613cr V/s ₹650cr during the last corresponding period. On the operating front, the gross margins came in at 57.1% V/s 50.9% in 1QCY2014, aiding the OPM to come in at 19.6% V/s 16.3% during the last corresponding period, an yoy expansion of 312ps. Thus, Adj. PAT is expected to come in at ₹107cr V/s ₹96.5cr, a yoy growth of 10.5%. This was against the ₹102cr expected.

We maintain our neutral rating on the stock.

Higher other income and lower tax zoom profitability

This article has been authored by Amarjeet S Maurya

For 4QFY2015, MT Educare’s consolidated top-line grew by a healthy ~16% yoy to ~ ₹51cr, mainly due to healthy growth in government projects segment. For the quarter, the company reported consolidated operating profit of ~Rs9cr, up 4.4% yoy. The operating margin contracted by 193bp yoy to 16.9%, primarily on account of higher other costs (provided free Samsung tablets to MT Educare students). The consolidated net profit grew by ~68% yoy to ~₹5cr due to a higher other income and lower tax rate.

Currently, we have a BUY rating on the stock.

Weekend Highlights – 26th April, 2015

Model Concession Agreement for BOT on Railways

Ministry of Railways has issued Model Concession Agreement for Build, Operate and Transfer (BOT) model. Under this model, project will be bid out through competitive bidding to the private concessionaire who will Design, Build, Finance, Construct and maintain the project. Indian Railways will pay user charges to the concessionaire equal to 50 per cent of the apportioned revenue. The normal concession period will be for 25 years.A minimum of eighty percent of the projected revenue has been guaranteed under this model.

Model Concession Agreement provides for escalation of base tariff linked with Wholesale Price Index (WPI) during the concession period, to take care of the inflationary risk.

Move to increase R&D Expenditure to two percent of GDP

Indias Gross Expenditure on Research and Development (GERD) as percentage of GDP has remained so far less than 1% as compared to the developed and emerging economies despite increase in absolute terms. The Minister for Science & Technology and Earth Sciences, Dr. Harsh Vardhan said India had invested 0.88% of its Gross Domestic Product (GDP) towards Research and Development (R&D), whereas USA and South Korea spent 2.79% and 3.36% respectively during 2011-12. Among BRICS nations, Brazil, Russia and China also spent more than 1% of their GDP on R&D, he added.The Minister said the Science, Technology and Innovation (STI) Policy, 2013 envisages increasing R&D expenditure to 2% of GDP with enhanced participation of private sector through policy and reform processes. In addition, Department of Science and Technology (DST) brought out a White Paper on policy environment for n++Stimulation of investment of private sector into Research & Development in Indian++.

Union Cabinet gives its approval for signing of a shipping agreement between India and Jordan

The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, gave its approval for signing of a shipping agreement between India and Jordan.Recognizing the significant mutual benefit that can be derived from cooperation in the area of shipping between the two countries, it has been decided to sign the agreement with a view to strengthening cooperation and to provide sustained mutual assistance and advice on merchant shipping and other related maritime matters.

Signing of the Agreement will help both countries in encouraging and facilitating development of their maritime relationship and cooperation in the task of enhancing and stimulating steady growth of maritime traffic. The agreement will also help in exchange and training of staff and students from various maritime establishments, exchange of information necessary for accelerating and facilitating flow of commercial goods at sea and at ports, establishment of joint ventures in maritime transportation, shipbuilding and repairs, maritime training, information technology, including development of simulators, port facilities and related activities.

Infosys – 4QFY2015 Result Review

This article has been authored by Ms. Sarabjit Kour Nangra

Results below expectations

Stock down 6.0%

Infosys (CMP: ₹2,123/ TP: ₹2,751/Upside: 30%)

Infosys, posted results below expectations. Company posted a dip of 2.6%qoq in USD revenues to US$2,159mn V/s US$2,236mn, on back of cross currency (CC). On, Constant Currency (CC) terms, the company posted a sales dip of 0.4% qoq. In rupee terms, the revenues come in at ₹13,411cr V/s ₹ 13,746cr, down 2.8% qoq. In terms of market, the USA posted a 0.7% qoq dip, Europe a 6.1% qoq dip and ROW, posted a dip of 5.7% qoq. On CC basis, the USA posted a -0.4% growth qoq, Europe -0.3% growth qoq and ROW, grew by 0.1% qoq on CC basis.

On the operating front, the EBITDA margin’s came in 27.7% V/s 28.0% expected (a dip of 97bps), on account of increase in S&M spends, an 8.7% growth qoq,. Consequently the PAT came in at ₹3,098cr V/s ₹3,184cr expected, down 4.6% qoq. Other key metrics like utilization during the period was, 72.6% (including trainee) V/s 75.7% in 3QFY2015. The attrition rate during the quarter was 18.9% V/s 20.4% in 3QFY2015. The client addition during the period was majorly in US $5-10mn, and one in US $50mn+ and one in US$100mn+ respectively.

During the quarter, announces definitive agreement to acquire Kallidus Inc. (d.b.a Skava) and invest in Airviz. The acquisition of Kallidus Inc. is an all-cash deal for a total consideration of US$120mn including retention bonus and a deferred component. Skava delivers a cloud hosted platform for mobile websites, apps, and other digital shopping experiences across mobile, tablet, desktop, in-store, and all emerging channels to large retail clients worldwide. The platform enables retailers to provide a mobile specific experience to their customers through an agile and flexible environment, enabling personalization and delivering customer analytics across multiple channels. The company also, entered into a definitive agreement for an early-stage investment of US$2mn in Airviz, to acquire a minority share. Airviz is a personal air quality monitoring startup and spinout from Carnegie Mellon University. This investment was made out of the $ 500 million Innovation Fund earmarked for investments in disruptive new technologies. These acquisitions are too small to significantly add anything to the top line of the company.

In terms of guidance, FY2016 revenues are expected to grow between 10%-12% in constant currency terms. Also during the quarter, the Dividend pay-out ratio increased to up to 50% of post-tax profits effective FY2015. Also, 1:1 bonus issue of equity shares and 1:1 stock dividend of American Depositary Shares were done during the period.

We maintain our buy rating on the stock with a target price of ₹2,751.

Views on HDFC Bank

HDFC Bank results in line with estimates

HDFC Bank reported a good set of numbers with profit growth of 20.6% yoy to ₹2806.9cr. Advances growth of 20.6% yoy led to 21.4% yoy growth in Net Interest Income. NIM was stable qoq and yoy at 4.4%. Non-interest income grew by 28.1% yoy, leading to operating income growth of 23.3% yoy. Operating expenses grew 21.4% yoy, leading to pre-provisioning profit growth of 24.9%. On the asset quality front, the bank reported slight improvement, as its reported Gross NPA ratio was 0.9% in the current quarter as against 0.99% in 3QFY2015 and 0.98% in 4QFY2014. At the CMP, the stock is trading at 3.1x FY2017E ABV.
We recommend Buy rating on the stock.

Wipro – Result Review 4QFY2015

This article has been authored by Ms. Sarabjit Kour Nangra

Results below expectations, EBDITA margins expand better than expected
Stock down by 4.4%
Wipro (CMP: ₹579/ TP: ₹753/ Upside: 30%)
Wipro announced its 4QFY2015 results today. The company’s IT services segment posted revenues of US$1,775mn V/s US$1,804mn expected, a dip of 1.2% qoq, mainly on back of the cross currency. On Constant currency, (CC), the company posted a qoq growth of 1.2%, the lower end of the guidance of US$1,771-1,806mn, on current currency realization.

The growth was mainly driven by the Finance Solutions, which grew by 3.7% qoq, while the Retail, Consumer Goods & Transportation, grew by 3.2% qoq on CC basis. The verticals, which remained soft during the quarter, were Energy, Natural Resources & Utilities, which is 16.2% of sales in 4QFY2015, posted a dip of 3.2% qoq on CC basis.

IT services EBIT margins were at 22.2%. At the consolidated level, the company posted revenues of ₹12,142cr V/s ₹11,688cr, a growth of 1.2% qoq. At a consolidated level, Wipro recorded a ~23bp qoq inch up in its EBIT margin to 22.0% V/s 19.5% expected, lead by improved utilization which moved from 70.5% V/s 68.5% in 3QFY2015. The attrition rate IT Services excl BPO and I&ME, came in at 16.5% same as last quarter. Thus, the PAT came in at `2,272cr V/s `2,217cr, a qoq growth of 3.6%.

Overall, the company added 65 new customers during the quarter. Revenues from IT Services business is expected to be in the range of US$1,765mn to US$1,793mn in 1QFY2016. We maintain our buy rating on the stock, with a price target of ₹753.

This article has been authored by Ms. Sarabjit Kour Nangra

Results below expectations, on back of cross currency

Stock down by 5.3% HCL Technologies (CMP: ₹923/ TP:₹ 1,148/ Upside: 24%)

HCL Technologies announced its 3QFY2015 below expectations. The company, posted revenue of US$1,491mn V/s US$1,507mn expected, almost flat with 0% qoq, mainly impacted on back of the cross currency. However, on Constant Currency (CC) basis growth came in at 2.7% qoq, with US posting 0.2% CC qoq growth, Europe posting 4.4% qoq and ROW, which posted 10.6% qoq growth. In rupee terms, the revenue, came in at -0.2% qoq to `8,349cr V/s `9,376cr expected. EBITDA margins came in at 22.5% V/s 25.0% expected a dip of 250 qoq. The utilisation levels dipped to 81.9% V/s 82.9% in 2QFY2015.Thus pat came in at `PAT `1683cr V/s `1,963cr expected a dip of 12.2% qoq. On the business front, strong client addition in the quarter continued: US $50mn + clients up by 1, US$30mn +clients up by 1, US$ 20mn + clients up by 4. The attrition rate during the quarter inched up to 8.3% V/s 6.7% in 2QFY2015.

We maintain our buy rating on the stock with a target price of ₹1,148.

Weekend Highlights 19th April, 2015

Investments in realty sector plummeted 6% in 4 years: ASSOCHAM

Investments attracted by real estate sector from various public and private sources across India have declined by six per cent in past four years i.e. from a level of Rs 15.2 lakh crore as of 2011-12 to about Rs 14.3 lakh crore as of 2014-15, apex industry body ASSOCHAM said today.n++However, there has been a slight increase of just over two per cent year-on-year in the investments attracted by realty sector i.e. from a level of Rs 14 lakh crore in 2013-14 to Rs 14.3 lakh crore in 2014-15,n++ noted the sector-specific survey conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

n++Ownership-wise, private sector accounted for lions share of 85 per cent of the total investments attracted by the real estate sector across India while government/public sources accounted for remaining share of 15 per cent,n++ according to the analysis carried out by the ASSOCHAM Economic Research Bureau (AERB).

n++Real estate projects with about 76 per cent of the total investments attracted by the sector remained non-starter as of the aforesaid period,n++ said Mr D.S. Rawat, secretary general of ASSOCHAM while releasing the findings of the chambers analysis.

n++Maharashtra (21 per cent), Uttar Pradesh (14 per cent), Gujarat (13 per cent), Karnataka (12 per cent) and Haryana (eight per cent) are top five states with highest share in total investments attracted by the real estate sector in India as of 2014-15,n++ further noted the ASSOCHAM analysis.

Clocking a compounded annual growth rate (CAGR) of about 82 per cent, Assam has recorded maximum growth in attracting investments in the real estate sector during 2011-12 and 2014-15 followed by Bihar (19 per cent), Odisha (17 per cent), Uttar Pradesh (16 per cent) and Uttarakhand (12 per cent) amid top five states in this regard.

While Jharkhand (40 per cent), Himachal Pradesh (37 per cent), Madhya Pradesh (29 per cent), Haryana (16 per cent) and Gujarat (seven per cent) have registered maximum fall in real estate investments, according to the ASSOCHAM analysis.

The ASSOCHAM Economic Research Bureau had also conducted a survey to ascertain Implications of Union Budget announcements on real estate sector, and interacted with as many as 100 small and big companies operating in realty sector in top cities of Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Indore, Jaipur, Lucknow, Mumbai and Pune.

Majority (75 per cent) of the total real estate developers interviewed by ASSOCHAM Economic Research Bureau (AERB) at aforesaid centres felt let down by the Union Government for lack of focus on improving demand/supply in the sector.

Highlights of ASSOCHAMs survey conducted primarily vis-n++-vis industrys view on real estate sector-specific budget proposals:

1. Increase in rate of service tax to 14 per cent will make real estate a bit more expensive and impact sales as it would wear down the purchasing power of an average consumer.

Real estate developers are also concerned about increase in service tax on construction and excise duty on input goods, as also increased on petrol and diesel coupled with increase in freight rates on cement will lead to rise in construction costs.

2. The survey indicated that the Union Budget disappointed the realty sector with exclusion of the plan for 100 smart cities, in the country.

3. No additional incentives were announced to promote affordable housing sector which is already facing problems in form of high costs and low margins.

4. Referring to urgent need for speeding up procedural requirements for real estate sector, the industry has pressed for a single window clearance system for various approvals leading to operational efficiencies and cost saving. Respondents also indicated that there is a need for a predictable and stable policy framework.

5. Many developers also said they expected some announcements related to lowering of land cost, measures leading to quick approvals and grant of infrastructure status to the real estate sector.

India-Russia Trade Poised For US$30 Billion In A Decade: PHD Chamber

Trade and economic cooperation between India and Russia witnessed a steady rise over the last decade and hold a scope for manifold expansion in the coming times, say by 2017, their bilateral trade could touch US$10 billion by 2017 before scaling at respective levels of US$20 billion and US$30 billion in 2022 and 2025 against the present estimates of US$6 billion, according to PHD Chamber of Commerce and Industry.The aforesaid assessment of trade prospects between India and Russia by PHD Chamber is being released following its high level delegation visit that left New Delhi for Russia to participate in 7th Spring Summer St. Petersburg, exhibition, which is commencing from 16th of this month and coming to an end by 19th April 2015. The delegation is led by Senior Vice President PHD Chamber Mr. Mahesh Gupta.

According to him, though India and Russia have eventually given new dimensions to bilateral relations in the development of defence, energy, science and technology, however, current level of bilateral trade at US$6bn is not consistent with the potential trade trajectory. Even though the bilateral relations between the two nations have widened their basket, yet India is not among Russias key trade partners.

Indias position in trade with Russias is not strong as compared with EU and USA. Indias share in Russias total trade is 1.2% as compared with 49% of EU and 3.3% of USA.

Russias share in Indias trade is meagre 0.8% as compared with 13% of EU and 8% of USA.

Indias top export items to Russia are pharmaceuticals, electrical machinery, iron & steel, coffee, tea, nuclear reactors, aircraft, vehicles, edible fruit & nuts, among others.

Indias top import items from Russia are precious stones, mineral fuels, fertilisers, copper & articles, iron & steel, rubber products, paper products, salt and inorganic chemicals, among others.

Both the nations have undertaken initiatives to promote bilateral investments, primarily through facilitating Government to Business and Business to Business contacts, said Mr. Gupta.

Scope of expansion for investments exist in hydrocarbons, power, coal, nuclear power, fertilizers, IT, pharmaceuticals, mineral and metallurgy, among others, he said

Russias restrictions on import of food items from EU and USA can be a great opportunity for India to increase its exports of food products to Russia.

Also there are immense opportunities in machinery, electrical and electronic equipments and pharmaceuticals to extend exports to Russia

Currently, Russia imports these items from Western markets. But, these items are among the principle exports of India.

Bottom-up study of three emerging asia economies reveals developing challenges: S&P

An inaugural big data study of three major emerging Asia economies from the ground up has revealed some developing challenges, said Standard & Poors Ratings Services today in a report titled Top-Down And Bottom-Up Views For Three Big Emerging Asia Economies–Do They See Eye To Eye?Using company-level financial data from S&P Capital IQ aggregated by sector, Standard & Poors studied four major sectors in China, India, and Indonesia: consumer discretionary, energy, industrials, and materials, which includes mining.

At the regional level, debt growth has pulled ahead of capital expenditure and earnings growth, which suggests some credit quality deterioration, said Paul Gruenwald, Standard & Poors Asia-Pacific chief economist. The implication is that an increasing amount of debt was needed to sustain a given increase in output. So either debt has to be reined in, or earnings and capital expenditure need to rise.

The consumer discretionary sector at the regional level has relatively favorable credit quality. This is perhaps not too surprising, given that it is a less capital (and debt) intensive sector. But it does suggest that credit quality concerns are not a constraint on rebalancing growth toward consumption, particularly in China, Paul Gruenwald noted.

China appears to have a credit quality issue, according to our study. While the sharp rise in debt post-financial crisis initially led to higher capital expenditure and earnings, those effects have faded. The implication is that credit growth and debt creation need to slow, and the authorities have started to address that, Paul Gruenwald said.

India has a different scenario. Earnings have plateaued but debt has continued to rise, while investment slumped. We believe policy gridlock and administrative red tape have hindered investment. The challenge now is to unlock the earnings potential of existing assets.

Indonesias profile seems most balanced but it is also slowest in growing. Although debt, capital expenditures and earnings are trending together, their growth rates are below nominal GDP, suggesting a need for reforms to boost the capital markets for investment and growth.

An economists view from 35,000 feet is a useful way of identifying and analyzing the big macro trends. But, as we have seen in this study, the bottom-up view yields additional insights and challenges, Paul Gruenwald said.

The resolution it offers leads to a better understanding of the quality and sustainability of growth.

Under Standard & Poors policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating.

Aurobindo Pharma- gets USFDA approval for Cefixime

This article was authored by Ms. Sarabjit Kour Nangra

Aurobindo Pharma- gets USFDA approval for Cefixime: Aurobindo Pharma announced that the company has received final approvals from the US Food & Drug Administration (USFDA) to manufacture and market Cefixime for Oral Suspension USP, 100mg/5mL and 200mg/5mL (ANDA 204835). The product is ready for launch. The approved ANDAs are bioequivalent and therapeutically equivalent to the reference listed drug product (RLD) Suprax® Oral Suspension USP 100mg/5mL and 200mg/5mL respectively of Lupin Pharmaceuticals Inc.

Cefixime for Oral Suspension is indicated for the treatment of adults and pediatric patients six months of age or older, with infections caused by susceptible strains of the designated organisms in urinary tract infections, otitis media, acute exacerbations of chronic bronchitis, uncomplicated gonorrhea (cervical/urethral), pharyngitis and tonsillitis. The product has an estimated market size of US$123mn for the twelve months ending February 2015 according to IMS. The drug already has lot of competition. We maintain our accumulate with a price target of ₹1502.

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