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 rivalsThanks and regards,
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 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
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.
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: 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.
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.
Results much lower than expected
Stock down by 1.0%
Ranbaxy Labs (CMP: `700/ TP: /Upside )
For 3QFY2015, the company posted a disappointing set of numbers. The revenues came in at `2,587cr V/s `3,570cr expected, posting a yoy de-growth of 9.5%. The sales were impacted by the dip in the US and currency depreciation in Russia and Ukraine. Its key regions like US region, posted sales of `896.3cr V/s `1,018.7cr, a yoy dip of 12.0%, India (`590.9cr) a yoy growth of 2.0%, East Europe & CIS (`372.5cr) – a yoy dip of 18.3%. The region that posted strong growth was, Asia Pacific and LATAM, which posted a yoy growth of 46.0%. On the operating front, the EBIDTA came in at 3.2% V/s 23.8% expected a yoy dip of 475bps. Apart from lower sales which impacted the gross margins which came in at 59.5% V/s 63.4% during the last corresponding period, which along with operating forex loss of `132.6cr, lead the OPM come in 3.2% V/s 7.9% in last corresponding period. This along with the tax expense during the period, which came in at`888.1cr, lead the company report a loss of `1030cr. On Adj. PAT, the company posted a loss of `966cr V/s profit of `112cr, in 4QFY2014, much lower than the `499cr expected. We maintain our neutral rating on the stock.
IPCA Labs- Update: The U.S. Food and Drug Administration (FDA) has banned imports from Indian generic drugmaker Ipca Laboratories Ltd’s plant at Ratlam in Madhya Pradesh due to violations of standard production practices. The company had received a 483 earlier for this plant. Ipca had voluntarily halted shipments to the United States from the plant in July last year after the FDA outlined half a dozen violations including data integrity issues. We are not changing our estimates as we had already pruned the same when company got a 483’s. Thus we maintain our buy recommendation with a price target of `817.