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Buy stocks of Infosys, Yes Bank

In the past 15 days, Indian mutual funds have become a lot more bullish, taking heart from good full-year results. Large caps remained in favour.

Print Edition: May 17, 2007

Infosys

SSKI maintains a buy despite moderate results and guidance:

“Infosys Q4, 2006-7 results were below expectations. Revenues grew 3.2% quarter on quarter (QoQ) to Rs 3,772 crore. Revenues grew by 5.1% QoQ—currency appreciation of 1.8% QoQ resulted in slower rupee-term growth. The gross margins declined 56 basis points (bps) QoQ to 46.4% on account of rupee appreciation and marginal increase in onsite revenues. EBDITA margins declined 100 bps to 31.7%. We believe, the results allayed concerns of issues in key accounts like ABN AMRO and the possibility of US slowdown.

A churn in few accounts doesn’t impact growth since Infosys has enough leeway to compensate for any loss of business from existing clients. The company has guided revenue growth of 28-30% YoY to between $3.95 and $4.02 billion. EPS is expected to increase to Rs 80.29-81.58, which is a 20-22% YoY growth.

We have assumed more conservative currency (Rs 42 to a dollar), which lowers our earnings forecast. At 23.7 times 2007-8 earnings and 19 times 2008-9 earnings, we retain ‘Buy’ with a target of Rs 2,750.”

Yes Bank

Prabhudas Lilladher believes there is aggressive expansion in store:

“Yes Bank is growing its branch network quite aggressively. Out of 60 branch licences, it has set up 29 branches by Q3, 2006-7. It is expected to reach 100-mark by end-2007-8. With growing share of low-cost deposits and bank’s expected entry in retail assets, margins have shown an uptrend and we expect net interest margins (NIMs) to grow to a healthy level of 3.1% by 2008-9.

So far Yes Bank has focused on corporate and SME segment. This segment, in comparison to retail segment has better absorbed the various interest rate hikes without any meaningful slowdown in credit demand or increase in delinquencies. The bank has set up its technology platform to cater to emerging requirements from the industry.

We believe that Yes Bank given its greenfield platform, superior infrastructure and high growth potential offers attractive investment opportunity. Given its strong balance sheet and healthy profitability it could be one of the prime acquisition target as well. We recommend a ‘Buy’ into the stock with a price target of Rs 185, which translates to 3.5 times 2008-9 adjusted book value (ABV).”

iGate Global

Solutions SSKI is downgrading:

“In Q4, 2006-7, iGate Global Solutions (IGS) revenues declined 0.3% quarter on quarter (QoQ) to Rs 210 crore, which was in line with our estimates. Volume growth in IT services was 2.4% sequentially. Offshore billing rate increased marginally by 0.5% QoQ. Higher billing rates coupled with offshorisation and 1.33% savings in selling, general and administrative led to 2.56% improvement in EBITDA margins to 15.3%—higher than our expectations of 14%. The net profit increased 42% QoQ to reach Rs 22.65 crore.

The company has added six clients in the quarter including four Fortune 1000 customers. Two of its clients have been severely impacted by the US non-prime mortgage meltdown. Consequently, revenues from the loan fulfilment processes have been adversely impacted. The stock has risen 12.2% yearto-date (YTD) outperforming the CNX IT index (down 6.3%) and the Nifty (down 2.6%). Owing to expected decline in integrated technology and operations revenue and sharp rupee appreciation we have downgraded earning estimates for 2007-8 and 2008-9 by about 9%. With the expected poor growth in revenues and modest upside to EBITDA margins (1.6% end- 2007-8 compared to end-2006-7), at 15.8 times 2007-8 earnings and 12.1 times 2008-9 earnings, we downgrade the stock to ‘Neutral’.”

Wockhardt

ICICI Securities sees a potential upside in acquisitions:

“In 2005-6, Wockhardt’s performance reported net profits declining 6% to Rs 2.4 billion. However, we estimate Pinewood Labs and Dumex acquisitions to add 11% to 2006-7 earnings. The company has set a revenue target of $1 billion by 2009, of which approximately $300 million would be inorganic growth (implying a 38% CAGR through 2006-9).

Based on acquisitions in 2005-6, aggressive product pipeline for the US market, targeted new launches for the EU market and strong domestic market outlook, this revenue target seems realistic.

Wockhardt has embarked on an aggressive acquisition strategy in Europe. Acquisitions of CP Pharma & esparma GmbH and transferring their manufacturing operations to India so as to take advantage of low production costs led to a turnaround. We are raising 2006-7 EPS estimates by 9%. Potential upside from the drug discovery deal is not ruled out in the next 12-15 months, which could lead to re-rating. The stock is currently trading at an attractive valuation of 2006-7 earnings P/E of 13 times. Our fair value of Rs 560 a share gives a potential upside of 43% in the next 15-18 months. Maintain ‘Buy’.”

PTC

IDBI Capital is bullish about growth prospects in terms of both volumes and margins:

Power Trading Corporation of India (PTC) is the pioneer in developing and implementing the concept of power trading in the country. But looking at the rising margin (from about 3 paise per unit in 2001-2 to about 7 paise per unit in 2005-6) in power trading, the Central Electricity Regulatory Authority (CERC) capped the margin on the interstate power trade to 4 paise per unit in 2006-7. Around 80% of the sales of PTC involve interstate trades. So in the short term we feel that the profitability of the corporation may remain subdued.

However, with improvement of inter-regional transmission network coupled with the coming up of mega power plants in the country, the spot market for power will become deeper. So the volume of traded power will go up in the long run. Also the increase in the number of long-term contracts for trading will go a long way in sustaining the margins for the corporation. Furthermore, its better association with load-dispatching centres and relationships with power generators coupled with a focused approach will help maintain its competitiveness in power trading. We expect a 28% rise in sales to Rs 3,970 crore during 2006-7 over 2005-6. But due to the cap in profit margins, the net profit would dip by 14% to Rs 35 crore. At the current price the PTC stock is now trading at about 26 times to its expected 2006-7 EPS of Rs 2.33. Buy.”

Tata Consultancy Services

Prabhudas Lilladher maintains a buy rating on India’s largest IT company:

“TCS became the first Indian IT company to cross the milestone of $4 billion in revenue. Revenue grew 5.9% QoQ (8% in dollar terms), net profit too grew 5.9% QoQ (9% in dollar terms). Revenue growth was led by good 6.4% volume growth. In 2006-7, its revenue from North America and Europe crossed the $2 billion and $1 billion milestones, respectively. The operating margin climbed 30 bps QoQ, to 28.3%, largely due to better utilisation. Growth was seen in segment like enterprise solutions, package implementation and asset leveraged solutions, which grew by 11% sequentially.

Despite concerns over the slowdown in the US economy and a strengthening rupee, we still believe that Indian IT companies can deliver and sustain their strong financial performances.

We expect TCS’ revenue and earnings to have CAGRs of 31% and 28%, respectively, from 2006-7 to 2008-9. We expect TCS to report, respectively, revenue of Rs 24,768 crore and Rs 32,146 crore; and PAT of Rs 5,400 crore and Rs 6,921 crore. At the CMP (Rs 1,280), TCS is 23.2 times 2007-8 earnings and 18.1 times 2008-9 earnings. We maintain our ‘Buy’, with a target of Rs 1,556 (22 times 2008-9 earnings).”

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