Mr. Dinesh Thakkar (Chairman & Managing Director, Angel Broking) on ThirdBi-Monthly Monetary Policy:
“The status quo maintained by the RBI in terms of key policy rates was on expected lines. The RBI has however stated that it would continue to maintain accommodative policy stance in the coming months on expectations of moderation in inflation. The RBI reduced its inflation forecast for Q4FY2016 downwards by 0.2%.
The cumulative monsoon rainfall so far has been near normal. Also, higher reservoir positions bode well for the Kharif sowing which has increased by 8.7% compared to the year-ago period. These developments along with the contingency food management by the government are expected to check any shock to food inflation due to adverse weather conditions. In addition, the low increase in MSP and rural wages, modest global commodity as well as crude oil prices and still-weak domestic demand conditions are expected to check inflationary pressures in the coming months. In our view, the CPI would remain modest at 5.5% in the last quarter of FY16. With the CPI falling within the RBI’s target range, we believe that there could be around 50 bps reduction in the policy rates in the second half of the current fiscal.”
Results below expectations
Stock down 5.2%
Lupin (CMP: ₹1,824/ TP: /Upside )
For 1QFY2016, the company announced numbers lower than expected. On sales front the company posted a dip of 6.4% yoy to end the period at ₹3074cr V/s ₹3600cr expected. Overall, the formulation ( ₹2748.6cr) posted a sales dip of 8.0% and API ( ₹325.7cr) an 11% yoy growth. The formulation sales dipped, on back of US (₹1109.6cr) posted a 26% yoy dip, on back of few launches and base impact. Another export destination Japan ( ₹323.1cr), posted a yoy dip of 5.0%, mainly on back of currency. Sales in JPY terms grew 6% to JPY 6,178mn during the quarter from JPY 5,823mn. Lupin’s sale to Europe (₹85.6cr) and India (₹885.1cr) posted a yoy growth of 21% and 16% respectively. ROW (₹182.6cr) posted a strong growth of 44% in 1QFY2016.
On the operating front, the gross margins came in at 68.0% V/s 65.5% expected and V/s 67.9% in a corresponding period. However, EBITDA margins came in at 24.2% V/s 27.0% expected V/s 32.2% in 1QFY2015. This was mainly on back of lower sales and the R&D expenditure, which rose by 28.4% yoy to end the period at 10.2% in 1QFY2016 V/s 7.4% in 1QFY2015. The other income during the quarter rose to ₹151.1cr V/s 85.1cr in 1QFY2015, also the Tax as % of PBT rose by 33.3% V/s 39.0% in 1QFY2015.Consequently; the PAT, came in at ₹525.5cr V/s ₹749cr expected and ₹624cr in 1QFY2015, a expected a yoy de-growth of 16.0%. We are neutral on the stock, given the valuations.
Road laid for a sustainable drive….
Recent order inflows provide revenue growth visibility: KNR Constructions (KNR) is a specialist Roads & Highways EPC player. Over the last 4 months, KNR has reported ₹2,591cr of order wins (excludes ₹555cr of Chittagong order win), which is significantly higher than ₹950cr of order inflows in FY2015. Management has guided for another ₹750cr of order wins for remaining part of FY2016E. These order wins from the road vertical, take the 1QFY2016 unexecuted order book to ₹3,356cr. This would result in order book / last twelve month (LTM) sales ratio at 1QFY2016 to be at 3.8x, which is higher than order book / LTM ratio of 1.2x at 4QFY2015-end. With award momentum in road vertical to continue, we expect KNR to report 5.4x growth in its order book to ₹5,450cr by FY2017E. Taking into account its past execution track record and average execution cycle of 24-36 months, we expect KNR to report strong top-line growth over FY2015-17E.
Valuation: Improved order book outlook, strong earnings growth potential, and comfortable Balance Sheet, strengthen our view that KNR would continue to trade at rich valuations. The announcement of recent order wins, have supported the KNR’s stock price run up, which is up 30% in last 3 months. On valuing the standalone entity at 14.0x our FY2017E EPS of ₹37, and adding up free cash flow to equity shareholders value for its Kerala based BOT project, we arrive at FY2017E sumof-the-parts (SoTP) based price target of ₹582/share, implying that the KNR stock is close to its fair value. We initiate coverage on KNR Constructions with a Neutral rating, given that all the positives have been captured in the stock price.
Infosys signs multi-year agreement with Deutsche Bank: Infosys announced that it has signed a multi-year agreement with Deutsche Bank. Under the terms of the deal, Infosys will provide services like development, application maintenance, digital and mobility, package implementation and testing services across the Deutsche Bank Group. This is sync with many orders announced by the company so far and as further enhanced the order pipeline of the IT company. With strong order inflow the company, can beat its earlier guidance.Given the prospects and the valuations, we maintain our buy on the stock with a price target of ₹1315.
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.
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.
|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 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