Tech Mahindra- Investor Update

This article has been authored by Ms. Sarabjit Kour Nangra.

Tech Mahindra- Investor Update:
Company indicated that in FY2016, organic communication growth which is the main domain of the company (~ 52% of sales in FY2015) could remain subdued due to delayed decision making, though the deal pipeline remains healthy. In the Enterprise business, which registered healthy organic growth in the year gone by. Management’s endeavour will be to grow Enterprise business in line or above Industry in FY2016.

For 1QFY2016, the company has indicated some headwinds and tailwinds, which could see of the risk of marginal decline in both revenue & EBDITA Margins on a sequential basis. Seasonally weak mobility business is expected to be a drag on the on the organic 1QFY2016 revenues and margins. H1B visa costs will be another drag on the margins. Favourable currency movements could help both revenue and Margins. However, the company has indicated that it has renewed focus on improving operational leverages and cost control parameters, however, the impact of the same would be visible only from 3QFY2016 onwards.

The company expects the improved performance, coming in through the 3QFY2016, thus an improved FY2017, both in terms of revenue visibility and profitability. Thus we maintain our numbers and target for FY2017, though FY2016 could be tweaked. Also after factoring in marginal improvement in the margins in FY2017, the stock is attractively valued. We have reduced the FY2016 sales and net profit numbers by 5% and 6% respectively. We maintain our buy with a price target of ₹646.

Views on Tech Mahindra and Circle Health sign 10-year strategic deal

The views of Ms. Sarabjit Kour Nangra (VP Research – IT, Angel Broking)

Tech Mahindra and Circle Health sign 10-year strategic deal:

Tech Mahindra announced that it has been selected by Circle Health after a competitive procurement process to become their chosen technology partner for the next 10 years. The project will be delivered by nth Dimension, a newly formed wholly-owned subsidiary of Tech Mahindra in the United Kingdom. The deal was signed today and is worth a projected £50mn (US $80mn) over the 10 years. The news is positive for the company has it will further augment its Healthcare business. Under the new deal, Tech Mahindra, which gets about 10% of its sales from healthcare clients now will develop technologies for patient care and operational delivery and also reduce costs for the UK firm. We maintain our BUY with a price target of ₹683.

Weekend Highlights 14th March, 2015

IIP rises 2.6% in January 2015
Indias Index of industrial production (IIP) increased 2.6% in January 2015, compared with the revised growth of 3.2% recorded in December 2014. The IIP growth for December 2014 has been scaled up sharply to 3.2% at the first revision compared with 1.7% reported provisionally. An upwards revision to the December 2014 IIP growth figure has been mainly driven by steep revision in the growth of basic metal production to 13.2% from 3.9% earlier. Meanwhile, the growth in October 2014 has also been revised sharply upwards to (-) 2.7% at its second and final revision compared with (-) 4.2% at the first revision as well as released provisionally.The mining sector output declined for the second straight month at 2.8% in January 2015, in addition to 2.1% decline in December 2014. Meanwhile, electricity generation growth further slowed down to 15-months low of 2.7% in January 2015. However, the manufacturing sectors output continued to grow at nearly steady pace for third straight month at 3.3% in January 2015.

The new Road Transport and Safety Bill 2015, aims for Safe Transport System
The new Road Transport and Safety Bill 2015, in place of Motor Vehicle Act 1988, proposes to constitute a National Road Transport and Multimodal Co-ordination Authority and State Transport Authority with an objective and power to plan and develop integrated, safe and sustainable transport systems that contribute to an inclusive, prosperous and environmentally responsible India under Sections 109 to 145 of Chapter-VI. In Section 139 of the proposed bill, the primary objective of State Transport Authority includes the following:-

(1) to ensure, in collaboration with National Transport Authority, other state transport bodies and public entities, urban local bodies and land holding agencies and the traffic police, that the public transport system is planned and operated as part of an integrated transport system which seeks to meet the needs of all transport system users within the state;

(2) to organize and regulate the public transport system in a manner which supports a multi-modal integrated transport system within the state by

(i) increasing the share of public transport trips within the state;

(ii) actively promoting public transport usage;

(iii) improving the environmental performance and minimizing the adverse environmental impacts of the public transport system;

(iv) contributing to social well-being by providing access to livelihood opportunities and supporting social interaction amongst members of the community;

(v) promoting economic prosperity through efficient and reliable movement of public transport users while also supporting the movement of livestock and freight; and

(vi) collaborating with relevant bodies including the Central Government, the State Government, National Transport Authority, State Road Transport Corporations, public and private transport operators, urban local bodies, the National Authority, the State Safety Authority, State Police and other such bodies, in order to improve the efficiency of public transport for public transport users.

Moodys: Lower oil prices to strain net exporters, offer respite to importers
Lower oil prices will reverse the financial performance of oil exporters and importers in 2015, with exporters public finances coming under renewed pressure and importers given some help in reducing their deficits, Moodys Investors Service says in a report.The impact of cheaper energy means oil exporters face worsening fiscal and external balances, with some moving from twin surpluses to twin deficits. Oil importers will gain some breathing space to cut their budget deficits and use savings from lower energy costs to rebuild their financial buffers.

Sustained lower oil prices will reverse fiscal and external metrics for oil exporters and importers, says Steffen Dyck, a Moodys Vice President and co-author of the report. Between 2011 and 2014, high oil prices helped many net oil exporters to record fiscal and current account surpluses, while exporters suffered twin deficits. Cheaper energy means this picture will change in 2015.

Moodys examines the impact of sustained low oil prices — which fell by almost 60% between June 2014 and January 2015 – on four net oil-exporting countries and six net oil-importing sovereigns.

For oil-exporters, the scale of the impact of lower oil revenues varies from country to country. However, all of the sovereigns will have to adjust their spending and investment plans, subduing their economic growth outlook in 2015. Bahrain, Oman and Saudi Arabia are likely to see the biggest deterioration in both fiscal and external metrics this year, moving from large twin surpluses to twin deficits.

Consider stock market investments like a Test match rather than a T20.

The Indian equity markets had a roller coaster ride in January with the Index (NIFTY) almost touching 9000 levels and retracing back on weak corporate earnings coupled with contagion risks associated with a Greece exit and general global deflationary pressures exerted due to weak demand. We were pondering over the past few weeks whether investment decisions in the stock markets are based in a completely objective and rational manner encompassing all necessary information whether technical/Financial or fundamental. I was browsing through various articles on behavioral finance/stock market psychology which analyzes deviations from the aforesaid rational assumptions impacting decision making and pricing of stocks. In volatile times and fluctuations that the markets experience, plenty of individual investment decisions are based on emotions and perceptions and we tend to place undue weight on information which might be irrelevant. There is also the possibility of a missed out feeling if the markets have run up too fast and not able to catch the bus at the ‘Right time’. When there is exuberance and buoyancy in the markets, everyone has a opinion on the markets and the list probably gets drawn down to your local tea/tobacco vendor as well. As a relative measure with the cricket world cup just about to begin, just about everyone in India supposedly knows how a batsman should have played, how the bowler should have bowled or how the fielder should have caught the ball. Just about everyone introspects and conducts a ‘post mortem’ exercise after the match on where the team went right or probably the reasons why we lost. The same set of emotions/preferences as a parallel get played out in the stock markets especially for the investors/traders having a myopic horizon who have all sorts of explanations ready for either their MTM gains or losses.

The point we are trying to drive home are that: Keep a long term structural view on the markets and attempt not to get swayed with short term changes in sentiments/perceptions. Focus on fundamentally strong companies with good managements and effective corporate governance as such companies are bound to deliver compounded returns over a longer time frame. In short consider stock markets investments like a Test match rather than a T20 contest.

The markets structurally are looking forward to the Union Budget and the probabilities of what the Exchequer might deliver in terms of reform processes. Our opinion is that the Government shall continue pursuing the reforms agenda and would not adopt to populist measures to counter the probable measure one assumes that can come from the AAP government in Delhi. The Government in our opinion would address the supply side issues (Land, Power, Unlocking of Capex stock in Infra sector, Water) as well as demand issues to revive consumer discretionary spending. The Budget shall be keenly watched by all market participants for the potential roadmap that the Finance Minister shall draw upon for Fiscal consolidation. In a nutshell, focus areas in terms of sectors would be Infrastructure, Power, Logistics and the Manufacturing sectors with emphasis laid on the ‘Make in India’ campaign.

As we sign off, here’s wishing happy and successful investing to all the readers and hoping that we begin the world cup cricket by convincingly beating our arch rivals

Thanks and regards,
Mayuresh Joshi
VP Institution
Angel Broking

Tech Mahindra-3QFY2015 Result Review

Results mostly in line on sales and EBIT and net profit marginally higher

Stock down 0.8%

Tech Mahindra (CMP: `2,902/ TP: / Upside)

Tech Mahindra announced its 3QFY2015, in line with expectations on the sales and the EBIT front, while net profit was marginally above. The company clocked 2.7% qoq USD revenue growth to end the period at US$924mn V/s US$920mn expected. On constant currency terms (CC), the company posted a 4.9% qoq growth. In INR terms, the consolidated revenues came in at `5752cr V/s `5,702cr expected, up ~4.8% qoq. The growth in terms of verticals was lead by the manufacturing vertical, which constituted 19.7% of sales V/s 17.7% in 2QFY2015. Also, new clients added significant to the growth taking their contribution from 3% in 2QFY2015 to 5% in 3QFY2015.

On the Operating front, the EBITDA margin of Tech Mahindra moved upwards by 17bp qoq to 20.2% V/s 20.4% expected. The company’s utilization rates improved up to 74% in 3QFY2015 from 73% in 2QFY2015, while attrition inched upwards to 19% from 18% in 2QFY2015. Tech Mahindra’s net profit grew by 11.9% qoq to `805cr V/s `766cr expected. The variance is mainly on back of lower than expected tax expenses during the period. In terms of client addition, the company added 1 in the US$50mn+, 2 in the US$20mn+ and 1 in US$10mn+ bracket. Also, the company announced the approval for a 1:1 bonus and sub-division of its equity shares in the ratio of 2:1. We remain neutral on the stock.

ICICI Bank 3QFY15 results

ICICI Bank falls sharply post 3QFY2015 results

ICICI Bank reported mixed set of numbers with PAT growth of 14.1% yoy to Rs2889cr in 3QFY2015, however asset quality deteriorated. NII grew at steady pace at 13.1% yoy with 12.8% yoy growth in advances. Domestic advances grew by 16%.  Bank continues to grow its retail franchise and has seen healthy growth in retail loan book at 26% yoy. NIM improved by 4bp qoq to 3.46% as on 3QFY2015. Non-interest income grew at modest pace at 10.4% with treasury income flat yoy at Rs443cr. Opex grew by 9.5% yoy, resulting in pre-provision profit growth of 13.5%. On the asset quality front, asset quality worsened with Gross NPA ratio increasing by 28bp qoq to 3.4%, whereas Net NPA ratio was at 1.27% as compared to 1.09% in 2QFY2015.  At CMP, the bank’s core banking business (after adjusting Rs 47/share towards value of subsidiaries) is trading at 2.48x FY2016E ABV. We recommend BUY rating on the stock

Result Update Short Note – LG Balakrishnan & Bros

Transmission segment weighs on top-line; consequently bottom-line bears impact as well

For 3QFY2015, LG Balakrishnan & Bros’ top-line and bottom-line growth have come in below our estimates. The top-line grew by a subdued ~4% yoy to ~Rs264cr, mainly due to lower growth in the Transmission segment, which reported a ~3% yoy growth. For the quarter, the company reported an operating profit of ~Rs31cr, up ~4% yoy. Further, the company’s operating margin expanded by 21bp yoy to 3.3%, primarily on account of lower raw material prices. The Net profit de-grew by ~15% yoy to ~Rs15cr due to lower other income (of ~Rs0.6cr as against ~Rs3.5cr in 3QFY2014) and a higher tax rate (up 289bp). Currently, we have Accumulate rating on the stock.

Indoco Remedies-3QFY2015 Result Review

Results marginally better than expected on net profit and OPM front

Stock up 0.6%

Indoco Remedies (CMP: `320/ TP:-/ Upside)

Indoco Remedies posted 3QFY2015 results marginally better than expectations, on the net profit front, while net sales came in at marginally lower. The sales, during the quarter grew at 13.0% yoy, mainly on back of the exports to end the period at `213cr V/s expectation of 216cr. Exports (40% of sales) during the quarter, came in at `83.3cr, registering a growth of 22.9% yoy, while the domestic sales grew by 7.4% yoy. The domestic formulation sales (`122.8cr) during the quarter grew by 6.9% yoy. The regulated market during the quarter grew by 26.7 % at ` 66.3cr as against ` 52.3cr during the same quarter last year. The OPM came higher at 18.3% than expected 17.0% V/s 16.2% in 3QFY2014, an expansion of 210bps yoy. The expansion in the OPM was driven by the 195bps expansion in the gross margins (63.5% in 3QFY2015 V/s 61.6% in 3QFY2014), along with the lower rise in the other expenditure. This along with the lower interest expenditure, which dipped by 29.8% aided the net profit increase by 54.3% yoy to `21.6cr V/s `20cr expected. We remain neutral on the stock.

Coal India – Offer For Sale

Coal India: Attractively priced Offer-for-Sale – Recommend Subscribe

Coal India proposes to sell ~63cr equity shares representing 10% of the total paid-up equity share capital of the company with a OFS floor price of `358 per share. Retail shareholders will get an additional discount of 5%, implying an OFS price of `340.

We expect CIL earnings to grow led by:

1) Strong domestic demand from power, steel and cement

2) Aggressive targets to drive production growth with support from the new Government

3) Huge pricing gap between realisations and landed cost of imported coal

4) Infrastructure and technological enhancements, increase in coal washing capacities helping improve margins.

At the OFS price for retail bidders, the stock is available at a P/E ratio of 10.8x consensus FY2017E EPS, which is attractive. We also believe, post issue, the overhang of the share sale on the price will be over. Hence, we recommend investors to apply for CIL shares in the OFS.

HCL Techonolgies-2QFY2015 Result Review

Results better than expected on sales front

Stock up 8.9%

HCL Technologies (CMP: `1,646/ TP: `1,968/ Upside:19.6%)

HCL Technologies announced numbers 2QFY2015 numbers, ahead of expectations, mainly on the sales front. Company posted revenue of US$1,491mn V/s US$1,443mn expected, up 4.0% qoq. In Constant Currency (CC), terms the revenue grew by 6.2% qoq. In rupee terms, the revenue posted a growth of 6.3% qoq to `9,283cr V/s `8,941cr, expected.

The sales growth was broad based, in terms of geography- the Americas, Europe and ROW grew by 6.0% qoq , 7.2% qoq and 4.3% qoq CC respectively, driven by Engineering and R&D Services which grew qoq CC at 12.6%, Infrastructure Services at 6.2% qoq CC, Business Services at 4.5% qoq CC and Application Services at 3.8% qoq CC. Across verticals it was  led by Lifesciences & Healthcare at 19.3% qoq CC , Retail & CPG at 8.6% qoq CC, Public Services at 7.9% qoq CC, Manufacturing at 7.3% qoq CC, Telecommunications, Media, Publishing & Entertainment at 2.0% qoq CC and Financial Services at 1.6% qoq CC. Overall growth during the quarter was driven by the, new client , which accounted for the 4.9% , while the existing business accounted for 95.1% V/s 3.8% by new client and 96.2% existing business respectively in 1QFY2015.

On Operating front, EBITDA margins came in almost flat at 25.0% V/s 25.1% expected a qoq dip of 10bps. The utilization levels, during the quarter came in at 82.9% V/s 82.7% in 1QFY2015, while attrition rate came in 6.7% in 2QFY2015 V/s 5.9% in 1QFY2015.Thus PAT came in at `1,915cr V/s  `1,912cr, up 2.3% qoq.

In terms, of client addition, the company added 1 additional client in the US$ 50mn+, 2 in the US$ 40mn+, 2 in the US$20mn+ and 6 in the US$10mn+. The major client additional happened in the US$1-5mn bracket. Board recommends issue of Bonus shares in the ratio of 1:1.We maintain our buy rating on the stock with a price target of `1,968.

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