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| Analysts' corner |
| S I Team / Mumbai Apr 20, 2009, 00:16 IST |
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ITC
Reco price: Rs 187
Current market price: Rs 191.55
Target price: Rs 206
Upside: 7.5%
Brokerage: Sharekhan
ITC has increased the price of its Gold Flake brands of cigarettes (Cool Mist, Kings and Lights; 84 mm) by 10 per cent each. These fall under the King category, which accounts for nearly 10 per cent of ITC’s total cigarette volume.
Likewise, ITC should hike the prices of the Long (71-75 mm) and Regular (< 70mm) categories in the near future. In FY10 estimates, the brokerage had already factored in an overall price hike of 6 per cent.
The latest price hike is positive, as it would protect ITC against any increase in the excise duty on cigarettes in the upcoming budget. Besides boosting margins in the short term, it would cushion the impact of a possible steeper price hike that ITC might have to undertake in the event of an excise duty hike.
For Q4 FY09, ITC is expected to register a 10.8 per cent year-on-year (y-o-y) growth in its net sales, driven by a good growth in the cigarette business led by price increases and better revenue mix (upgradation of smokers to filter cigarettes). While OPMs should improve by 106 basis points in Q4, mainly due to decline in other expenses, the key thing to watch for in Q4 results is the performance of non-cigarette FMCG business. The stock trades at 18.2x its FY10E earnings of Rs 10.3. Maintain ‘buy’.
MPHASIS
Reco price: Rs 217
Current market price: Rs 220
Target price: NA
Brokerage: Edelweiss Securities
Mphasis’ current bid pipeline remains healthy. Although, uncertainty remains over large-sized contracts, the mid-sized projects ($2-5 million) continue to be in demand and held up steady compared to large scale projects.
The clients are asking for a reduction in the overall project spends (10-25 per cent) rather than cuts in the headline bill rates, which should put stress on vendors to work out productivity and cost reducing measures for the client. Mphasis is observing vendor consolidation in few of its customers also. However, more clarity will emerge by the end of next quarter (July) once this process is over.
Going forward, factors such as bill rate pressure and reduced visibility on pipeline conversion could result in moderation in growth rates. Mphasis has started taking hedges covering twelve months forward revenues denominated in dollar.
The current outstanding hedge position is $385 million vis-à-vis $255 million in the previous quarter. Though Mphasis is expected to still grow at 20.1 per cent in FY10E (much higher than peers), operating margins are expected to be a concern. At Rs 217, the stock trades at a P/E of 6.4x and 7.3x FY10E and FY11E earnings, respectively. Maintain ‘buy’.
LARSEN & TOUBRO
Reco price: Rs 879
Current market price: Rs 831.50
Target price: Rs 705
Downside: 15.2%
Brokerage: Emkay Global
L&T recorded 24 per cent y-o-y growth in order inflows during FY09 to over Rs 52,000 crore, while its order backlog grew 37 per cent to Rs 74,200 crore. Moderate growth in order inflows is attributed to 46 per cent decline in orders from oil and gas segment – partially offset by 107 per cent rise in inflows for power segment. In terms of revenue guidance, the brokerage has arrived at the expected revenue (standalone) growth guidance of 6-13 per cent for FY10 based on L&T’s order book profile, average order execution period, exposure to vulnerable segments like real estate and process (steel) and expectation of 9 per cent decline in order inflows in FY10.
The latter however, is in sharp contrast to management guidance of 25-35 per cent growth. This lower revenue guidance measured against consensus revenue estimates at 21 per cent, would trigger downward revision in FY10 consensus earnings estimates.
The brokerage’s belief that in absence of incremental positive news flows in L&T owing to ongoing elections is most likely. The stock has outperformed the market with relative return of 25 per cent in last 21 days and there are no further triggers for out-performance.
Further, the risk to downside has heightened with valuations (1-year forward PE is up from 10.4x to 15.8x) factoring the inherent business model and probable surprises in near term. Thus, this is an exit opportunity to re-enter at lower price points with attractive valuations. The brokerage has downgraded the stock to ‘sell’ with the sum-of-the-parts price of Rs 705 purely due to out-performance in short-term.
INFOSYS TECHNOLOGIES
Reco price: Rs 1,371
Current market price: Rs 1,341.3
Target price: Rs 1,200
Downside: 10.5%
Brokerage: India Infoline
While FY10 revenue guidance was in line with estimates, Q1 FY10 guidance came in as a negative surprise. After two quarters of missing guidance, the management seems to be conservative and could be building considerable buffers in its guidance. Pricing has now dropped by 4 per cent (constant currency) and 9 per cent in $ terms and is likely to decline further as competition for new projects heats up.
Margin stability at Infosys has been superior to peers. However, adjusting for currency, margins likely contracted by around 800 basis points (bps) over the past one year. For FY10, management is building in a 300 bps contraction in margins, on no further pricing cuts (margin erosion is primarily on account of drop in utilisation) exposing insufficient nature of margin levers in a negative growth environment. Also, low hedges at Infosys considerably increase the risks of an appreciating currency. Maintain ‘reduce’.
BGR ENERGY SYSTEMS
Reco price: Rs 163
Current market price: Rs 160.65
Target price: Rs 112
Downside: 30.3%
Brokerage: Anand Rathi
BGR Energy plans to transform itself into a fully integrated player into manufacturing as well as EPC. After the Foster-Wheeler tie-up (for boilers), it is now exploring the possibility of a tie-up to manufacture turbines with Hitachi ensuring a de-risking of business through backward integration. Management expects a 50 per cent annualised growth in revenues to Rs 2,000 crore over the next two years.
While margin expansion is possible over the next couple of years due to softening material costs, execution challenges remain. The brokerage expects a 150 bps increase in margins over FY10-11 factoring in the benefit of lower raw material costs. It has retained sales estimate, but has raised profit after tax estimates for FY10 (by 9 per cent) and FY11 (by 10 per cent).
BGR is executing two large EPC projects worth Rs 8,000 crore. Both achieved financial closure in FY09 and are now in the design stage (10 per cent completed by Mar 2009). The credit lines are tied up and foreign exchange risk would be borne by state electricity boards. The brokerage has revised the stock’s target price to Rs 112 (from Rs 102 earlier), which trades at 5x of its FY10E earnings.
Current market price as on April 16, 2009
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