India Equity Analytics Today: Buy Stock of Hindalco Industries Ltd

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Hindalco Industries Ltd greater comfort on sustainability and visibility of ramp up in UAIL operations, we raise our FY16E volume and consolidated EBITDA by ~2%. Narnolia Securities Limited continue …

Hindalco Industries Ltd greater comfort on sustainability and visibility of ramp up in UAIL operations, we raise our FY16E volume and consolidated EBITDA by ~2%. Narnolia Securities Limited continue to see Hindalco benefiting over next three years from volume growth in Novelis and Indian operations. We recommeded buy stock with targated price of Rs.140 which is a 15% upside addition.

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  • 1. On Mid Quarter Analyst Meet, TCS commented on weak revenue growth momentum for 4QFY14E due to weak seasonality. Growth in 4QFY14E would be lower than the preceding quarter and margin would decline 40-50 basis points on cross currency movement and higher investments. However, sigh of relief was seen on FY15E outlook and comments on overall demand environment. .................................................................. ( Page : 13-15 ) Hindalco Industries Ltd: "BUY" 25th Mar 2014 Sesa Sterlite's 22 days smelting shut will help rival producer Hindalco Industries raise sales.With greater comfort on sustainability and visibility of ramp up in UAIL operations, we raise our FY15E volume and consolidated EBITDA by ~2%. Currently the stock is trading at 0.7x in 1yr Forward P/B and we believe with the changing political climate and improving auto mobile demand the stock will accumulate to 0.8x P/B. Hence at CMP Rs.121.5 we are bullish on the stock to a medium term target price of Rs.140 which is a 15% upside addition. ................................................................ ( Page : 2-4) We cover Persistent System as one of the few companies in the tier-II with potential to grow revenue at a range of 18-20%, specially focused on emerging business and relationship building with marquee clients. Despite better predictability of growth and attractive visibility of its expansion in new emerging verticals, we advice to book profit on the stock because of its premium valuation. ............................................................... (Page : 11-12) "BOOK PROFIT" TCS : " Strong Fundamentals" "BUY" 20th Mar 2014 IEA-Equity Strategy 25th Mar, 2014 Edition : 231 KPIT Tech: "On billion dollar journey" "BUY" 19th Mar 2014 Impressive organic growth despite inorganic thrust (acquired 10 companies in the last 10 yrs), Potential option value from success of its hybrid engine venture Revolo (on trial). KPIT has targeted to reach $1bn sales by 2017. Its differentiated positioning and competitive edge in its focus areas, imperatives to the success of smaller-sized IT vendors impress to investors. ........................................................................ ( Page : 19- 20) HDFC Bank : "HOLD" 20th Mar 2014 Profitability of bank is likely to report better in next few quarters on the back of mobilization of FCNR deposits which would reflect better NII growth for being a low cost carry, RBI allowed banks to use counter cycle buffer for making specific provisions against bad loans, declining share of priority sector lending but still met regulatory requirement and exempted foreign deposits with tenure more than 3 years from SLR, CRR and PSL. Now the economy is witnessing some sign of revival and market sentiment boost up on account of exit poll result. We raised our price target to Rs.760/share which is upper side of our valuation band. .................... ( Page : 16-18) Persistent System : "Persistently innovating.." 21th Mar 2014 PNB : "BUY" 24th Mar 2014 We upgrade PNB from neutral to add rating on account of external factors like better than expected GDP growth and CAD numbers which showing some improvement along with softening inflation numbers. Recently market sentiments are also booted on account of opinion poll result which revealed that BJP led NDA would close to formation of Government in coming general election. We raised our price target to Rs.700 from Rs.600 earlier. ............................................................. ( Page : 8- 10) Jindal steel & Power : Challenging Fundamentals "NEUTRAL" 24th Mar 2014 The Company has embarked on expansion projects of US$9bn in steel and power, backed by resource availability and steady cash flows. Improving free-cash-flows and volumes would be visible from end-FY15. Profitability is geared to iron ore and coal, which, against the present backdrop of improving iron-ore prices and higher coal consumption, would drive a re-rating. The stock quotes at 1.1x FY14e P/B. We initiate our coverage on this stock with a target of Rs.285/share on the basis of improving steel business, and Recommend Neutral. .................................................................. ( Page : 5-7) Narnolia Securities Ltd, India Equity Analytics Daily Fundamental Report on Indian Equities
  • 2. Hindalco Industries Ltd. 122 1- 140 132 15% NA 2- 500440 25497 17848 6284 1M 1yr YTD A. Captive bauxite is only 21km away from the refinery Absolute 24.7 38.1 30.6 B. Low reactive silica content which reduces caustic soda consumption Rel. to Nifty 18.3 21.2 16.1 C. D. 3QFY14 2QFY14 1QFY14 Promoters 37.0 37.0 37.0 FII 26.9 24.9 24.8 DII 13.3 14.4 14.3 Others 22.9 23.7 23.9 Financials : Q3FY14 Y-o-Y % Q-o-Q % Q3FY13 Q2FY14 Net Revenue 7273 5.8 15.4 6872 6305 EBITDA 629 8.1 16.5 582 540 PAT 344 -20.6 -3.7 434 357 EBIDTA % 9% 2.1 1.0 8% 9% NPM % 5% -25.0 -16.5 6% 6% . (In Crs) 2 Expansions ready to deliver… With the change in political climate, we believe there will be demand from domestic aluminium and copper consumer. Currently copper is going through a three month low,we expect it to be better after election. Key reasons for this low cost UAIL plant include: Novelis Business: Copper producer Sesa Sterlite Ltd will shut its smelter for 22 days starting April 26, for maintenance purpose. It produces 30,000 tons of refined copper per month and exports half of that to China. It will help rival producer Hindalco Industries raise sales. And also for Hindalco the copper realization is stable with the previous quarter, so it will be additional sales if orders executes. Ongoing Positive thrusts: The Q3FY14 financial results still do not include Mahan, Utkal and Aditya projects. All three projects have started production under trial run. UAIL’s commercial production started in December 2013. Management guided for FY15E and FY16E volumes of over 1mt and 1.5mt (full capacity), respectively. Integration of Aluminium smelters (a) Newly commissioned aluminium smelters (UP and Odisha) to ramp up volumes going forward and (b) Cost benefit of cheap alumina for its existing smelters with high quality, proximate and captive bauxite mine, whose production is currently running at ~4mtpa run-rate. We are expecting a good amount profit addition from these plants in H1FY15. Source - Comapany/EastWind Research Political sentiment: High trihydrate alumina content (40%) i.e., it is gibbsite form of bauxite with only 2% bohemite (low quality bauxite) Bauxite properties are such that process is carried out at relatively low temperature and pressure leading to savings in energy cost. Novelis’ business has started to improve with the benefit and strong demand from automobiles. However, the pricing pressure is impacting margin. Novelis is one of the world’s leading aluminium rolling and recycling companies supplying premium products in the markets of North America, Europe, Asia and South America. The company is the largest single producer of aluminium rolled products with an estimated share of 14% of the world’s supply. Novelis’ sales volumes are expected to grow at a CAGR of 5.7% in FY13-16E. On the back of increasing share of the automobile segment in the overall sales mix, we expect the EBITDA/ton to improve. Company Update CMP Target Price Previous Target Price Please refer to the Disclaimers at the end of this Report. Stock Performance-% Share Holding Pattern-% 1 yr Forward P/B Nifty Average Daily Volume (Nos.) Upside Change from Previous Market Data BSE Code HINDALCONSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) 137/83 "Buy" 25th March' 14 Narnolia Securities Ltd,
  • 3. 3 Concerns: View & Valuations: Hindalco is a metal major with business interests in copper smelting & aluminium manufacturing domestically. It is also a leading aluminum converter globally through subsidiary Novelis. On the domestic aluminium business front, the company is undergoing an ambitious capacity expansion wherein its aluminium (primary metal) production capacity will increase from 560 KT currently to 1278 KT by FY15E. The planned capacity expansion is backed by corresponding alumina refinery with captive bauxite linkage. Bauxite conveyor expected to start in December 2014. Trading At : Hindalco Industries Ltd. With greater comfort on sustainability and visibility of ramp up in UAIL operations, we raise our FY16E volume and consolidated EBITDA by ~2%. We continue to see Hindalco benefiting over next three years from volume growth in Novelis and Indian operations. Although Hindalco has expanded its aluminium capacity recently, low aluminium prices, sticky costs and delay in commencement of mining from captive blocks have resulted in decline in profitability over the past few quarters. In the near-term, its profitability is likely to be muted due to higher costs at Mahan smelter and low aluminium prices. Currently the stock is trading at 0.7x in 1yr Forward P/B and we believe with the changing political climate and improving aluminium demand the stock will accumulate to 0.8x P/B. Hence at CMP Rs.121.5 we are bullish on the stock to a medium term target price of Rs.140 which is a 15% upside addition. The company has received stage-2 forest clearance for its Mahan coal block subject to certain conditions. The next important step would be signing of liming lease with the state government and subsequent mine development, which is likely to take ~18-24 months. High debt on the books continues to weigh on valuations. About The Company: Source - Comapany/EastWind Research Source - Comapany/EastWind Research Narnolia Securities Ltd,
  • 4. FY11 FY12 FY13 FY14E 72078 80821 80193 81139 431 783 1012 1360 72509 81604 81205 82499 64102 72856 72395 72681 7976 7965 7798 8457 2725 2645 2822 3076 1839 1758 2079 2600 964 786 886 1201 366 211 -20 - 57 -50 16 - 2456 3397 3027 2940 8.5 10.6 8.4 7.8 FY10 FY11 FY12 FY13 191 191 191 191 21346 28824 31179 34597 21545 29023 31911 35330 10763 13736 37127 49857 13236 13956 3731 6442 3901 4138 5289 5691 9742 12980 11052 9613 1016 1077 1377 1610 69235 84376 101402 120590 7876 12272 15429 16435 21124 20133 19871 21490 5801 13131 22798 33831 1983 2035 3774 3170 11275 14096 13246 14332 6544 8000 8017 8952 2195 2556 3296 3770 1134 1164 2159 3257 69235 84376 101402 120590 FY10 FY11 FY12 FY13 1.6 1.4 0.8 0.5 20.5 12.8 17.7 15.8 10.8 11.1 9.9 11.2 16.0 18.0 13.7 12.0 FY10 FY11 FY12 FY13 5542 6929 8534 6852 4944 6226 7602 2978 -5448 -6710 -13220 -13765 428 825 6237 10278 -76 341 619 -510 4 Share in Profit/(Loss) of Associates PAT Expenditure EBITDA Depriciation Interest Cost Tax Minority Interest Long-term loans and advances Inventories Trade receivables Cash and bank balances P/L PERFORMANCE Source - Comapany/EastWind Research ROE% Net Revenue from Operation Other Income Total Income Debtor to Turnover% Creditors to Turnover% CASH FLOWS Source - Comapany/EastWind Research Source - Comapany/EastWind Research Source - Comapany/EastWind Research Net Cash From Operation Cash From Investment Long-term borrowings Cash from Finance Net Cash Flow during year Source - Comapany/EastWind Research Cash from Operation Short-term loans and advances Total Assets RATIOS P/B EPS Long-term provisions Source - Comapany/EastWind Research Tangible assets Capital work-in-progress Trade payables Short-term provisions Total liabilities Intangibles Hindalco Industries Ltd. Source - Comapany/EastWind Research Short-term borrowings B/S PERFORMANCE Share capital Reserve & Surplus Total equity Narnolia Securities Ltd,
  • 5. Jindal steel & Power 265 285 NA 8% NA 532286 24796 11158 6495 1M 1yr YTD Absolute 6.9 -21.7 -27.9 Rel. to Nifty 0.5 -36.3 -37.6 3QFY14 2QFY14 1QFY13 Promoters 59.7 59.1 59.1 FII 21.9 21.3 20.8 DII 4.7 6.2 6.7 Others 13.7 13.3 13.4 Financials : Q3FY14 Y-o-Y % Q-o-Q % Q3FY13 Q2FY14 Revenue 5377 12.0 7.9 4802 4984 EBIDTA 1701 -5.0 16.7 1790 1457 Net Profit 562 -35.2 24.3 867 452 EBIDTA% 32 -15.1 8.2 37 29 NPM% 10 -42.1 15.2 18 9 (In Crs) 5 Market Data Challenging Fundamentals NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) 362/181 The Company has embarked on expansion projects of US$9bn in steel and power, backed by resource availability and steady cash flows. Improving free-cash-flows and volumes would be visible from end-FY15. Profitability is geared to iron ore and coal, which, against the present backdrop of improving iron-ore prices and higher coal consumption, would drive a re-rating. The stock quotes at 1.1x FY14e P/B. We initiate our coverage on this stock with a target of Rs.285/share on the basis of improving steel business, and Recommend Neutral. Please refer to the Disclaimers at the end of this Report. Stock Performance-% Share Holding Pattern-% 1 yr Forward P/B Source - Comapany/EastWind Research Nifty Balance sheet at inflection point: In the past three years, 3bn dollar has been spent on expansion, and a further 6bn will be expended in the next three years. The expansion has been supported by the strong business cash flows. However, the net-debt-to-EBITDA level has hit 3.7x due to delayed cash flows, though the leverage ratio is likely to have peaked. Steel segment improving : Steel sales volumes of Jindal Steel and Power are likely to have improved in 3QFY14, to 0.75m tons. On the changing business and client mix, prices are likely to have been better. Export opportunities in the quarter due to favorable currency could have offset the impact of iron ore realizations and would have improved EBITDA, aided by stable costs. The Shadeed Oman HBI business, iron ore and coking coal mine are likely to have been stable.Management expects the company’s total steel capacity, both in India and overseas, to increase around 8 million ton as compared to current 3 million ton by the end of the fiscal. The consolidated turnover was up by 12% to Rs.5377 Cr against Rs. 4683 Cr in previous year period. Net Profit is after tax for the quarter is Rs. 562Cr (Rs. 867 Cr in Q3FY13). The steel business in volume and value terms grew by 11% and 7% respectively compared to the previous quarter. JSPL achieved a spectacular growth in its export volumes which in volume and value terms grew by 32% and 104% for the same period last year. The Company has received Rail order from DFCC for the prestigious Delhi – Kolkata corridor and export order from Ferrotech Alloys, UK. JSPL’s retail segment has been very successful and the sale during Q3 FY14. Jindal Power Ltd., a subsidiary of JSPL sales grew by 17.7% while PBT and PAT increased by 16.9% and 15.7% respectively in Q3 this year compared to Q3FY13.Net Sales of the company is expected to grow at a CAGR of 6% over 2012 to 2015E respectively. Average Daily Volume (Nos.) BSE Code JINDALSTEL Initial Coverage Neutral Upside Change from Previous CMP Target Price Previous Target Price "Neutral" 24th March' 14 Narnolia Securities Ltd,
  • 6. Coverage : Products • Mining Plants Locations • Jindal Industrial Park (Chhattisgarh) • Raipur Division (Chhattisgarh) • Tamnar (Odisha) • Angul (Odisha) • Zambia • Barbil (Odisha) • Tanzania • Tensa - (Jharkhand) • Patratu (Jharkhand) • Australia 6 Jindal steel & Power • Fabricated Sections • Angels & Channels • TMT Re-bars • Wire Rods • Oman (Middle East) EBIDTA & Margin Debt Structure Stabilizing Power segment: With a steady performance and power sales to Rs.1130 Cr in 3QFY14 (Rs.1068Cr in 3QFY13), the PLF in 3QFY14 would have held at ~100%, helping maintain realizations. Capped realizations and the power-surplus situation would have posed downside risks to earnings. Jindal Steel and Power Limited (JSPL) is one of India’s major steel producers with a significant presence in sectors like Steel, Mining, Power Generation and Infrastructure. With an annual turnover of over US$ 3.6 billion, JSPL is a part of the over US$ 18 billion diversified O. P. Jindal Group. In the recent past, JSPL has expanded its steel, power and mining businesses to various parts of the world particularly in Asia, Africa and Australia. The company has committed investments exceeding US$ 30 billion in the future and has several business initiatives running simultaneously across continents. The company produces economical and efficient steel and power through backward and forward integration. • Rails • Parallel Flange Beams • Plates & Coils • Madagascar Jindal Steel and Power Limited started as a steel manufacturing company, enhanced the company position as a major steel producer and diversified into various other sectors such as: • Petroleum • Cement and Infrastructure.• Power Generation & Trading Global Presence Earning Ratios Earning Ratios Revenue & Growth EBIDTA & Margin • Mozambique • South America Business Areas • Semi-Finished Products • Power • Ferro Chrome • Silico Manganese • Sponge Iron Narnolia Securities Ltd,
  • 7. FY10 FY11 FY12 FY13 11092 13112 18209 19807 60 82 142 136 11152 13194 18351 19943 4197 5078 5311 6151 273 415 591 641 774 1303 5513 7020 5244 6795 11415 13812 5848 6317 6793 5994 997 1151 1386 1539 358 260 360 758 4553 4988 5189 3833 919 1184 1186 922 3573 3754 3965 2910 34 27 22 14 6.3 4.6 2.8 1.5 FY10 FY11 FY12 FY13 93 93 93 93 10324 14017 18018 21159 10417 14110 18111 21252 5330 5549 11180 15402 3274 8428 4569 8247 17 25 34 33 2266 2573 1251 1398 2036 3081 4111 4884 25122 36091 45008 57073 14 20 31 20 9883 14824 16463 19255 7947 10041 92 19230 1090 1527 2181 2421 1431 2773 3580 4524 753 1154 1307 1954 113 480 149 200 3464 4852 6927 8079 25122 36091 45008 57073 FY10 FY11 FY12 FY13 6.3 4.6 2.8 1.5 32.0 28.5 21.6 14.6 52.4 47.9 37.0 30.1 17.8 12.8 11.2 6.1 4.2 1.9 2.3 3.2 #N/A #N/A #N/A #N/A 7 Short-term provisions Interest Cost ROE% P/B Short-term borrowings Long-term provisions Trade payables B/S PERFORMANCE Share capital Reserve & Surplus Total equity Long-term borrowings Trade receivables Short-term loans and advances Total Assets P/B Total liabilities Cash and bank balances Intangibles Tangible assets PBT Net tax expense / (benefit) PAT Weighted Average Cost of Debt % Debt/Equity (debt/debt+networth or EBITDA % ROCE% RATIOS NPM % Capital work-in-progress Long-term loans and advances Inventories Jindal steel & Power P/L PERFORMANCE Cost Of Projects & Contractual Employee benefit Expence Net Revenue from Operation Other Income Total Income Other Expenses Expenditure EBITDA Depriciation Narnolia Securities Ltd,
  • 8. 641 700 600 9 17 1M 1yr YTD Absolute 18.9 -19.7 -19.7 Rel.to Nifty 14.0 -30.2 -30.2 Current 4QFY13 3QFY1 3Promoters 58.9 57.9 57.9 FII 17.5 17.9 18.0 DII 18.5 18.4 19.1 Others 5.1 5.9 5.1 Financials Rs, Cr 2011 2012 2013 2014E 2015E NII 11807 13414 14857 16536 17691 Total Income 15420 17617 19072 20775 21930 PPP 9056 10614 10907 11155 12500 Net Profit 4433 4884 4748 3408 5209 EPS 140.6 144.0 134.3 94.1 143.9 8 PNB Market Data Upside 890/400 BSE Code 532461 NSE Symbol PNB Company update ADD Over the last one month, PNB has outperform Nifty by 14% and Bank Nifty by 5.7% largely on account of external factor like economy and fiscal deficit showing some positive trend, softening of inflation from its peak level. Market sentiment are also boosted by recent opinion poll result which revealed BJP led NDA would come to power and economy would revived. Although we like Bank of Baroda over PNB but former is trading close to our target price. We value PNB at Rs.600 to Rs.775 per share implying 0.6 to 0.75 times of one year forward book depending upon current economy scenario and banks own fundamental. Looking at current fundamental and market sentiments we believe bank would trade in the range of Rs.600 to Rs.700. In the subsequent section we will discuss two positive fronts that bank has witnessed in last quarter result (a) asset quality improvement especially in fresh slippage side, (b) margin expansion. We will discuss the possibility valuation contraction from current level. CMP Target Price Previous Target Price Average Daily Volume 19646 Change from Previous PNB Vs Nifty Share Holding Pattern-% 7.4 cr Nifty 6495 (Source: Company/Eastwind) Stock Performance 52wk Range H/L During the last quarter PNB experienced improvement of asset quality especially in fresh slippage front. Fresh addition in GNPA was declined by 52% sequential to Rs. 1142 cr as against average run rate in last ten quarter was Rs.2124cr. In percentage to gross advances, slippage ratio came down to 1.4% versus 3% in 2Q and 4.7% in 1Q. Cash recoveries were better which drag net NPA to 2.8% from 3.1% in previous quarter. Further bank restructure Rs. 2115 cr in 3QFY14 mainly come from power sector which was offset by similar amount of bond received from SEBs. Bank management has not indicated restructure pipeline in near term which means stable to improving asset quality trend could be seen. Margin expansion on the back of shifting concentration of portfolio mix and CASA growth Mkt Capital (Rs Cr) Please refer to the Disclaimers at the end of this Report. Creation of fresh slippage lower, impaired asset high but showing improvement During the last quarter bank’s margin expanded by 10 bps QoQ despite of moderate loan growth. Bank witnessed 9.7% YoY loan growth led by SME growth of 21.6% and retail segment growth of 17.5%. Retail and SME segment are high yield in nature. Further bank’s low cost deposits CASA increased by 13% in absolute term in which saving account supported with 14% growth current account 7% YoY. But overall deposits declined by 20% led by 33% declined of term deposits which inflated CASA ratio to 38.3% from 27%. Sequentially cost of fund declined by 25 bps while yield on loan declined by 11 bps on account of creation of low deposits franchise and shifting of portfolio. "ADD" 24th March2014 Narnolia Securities Ltd,
  • 9. 9 Management guided stable NIM, more focus on liability rather than asset yield According to bank management, PNB is focusing more on liability side rather than yield. Bank has reduced high cost bulk deposits from Rs.880 bn in Sept.2012 to Rs.220 bn in Dec.2013 and certificate of deposits came down to Rs.110 bn from Rs.240 bn in 3QFY13. Share of low cost deposits improved to 40% which would help bank to maintain NIM at 3.5% according to management. Valuation & View We upgrade PNB from neutral to add rating on account of improving sign of economy led by CAD number and softening of inflation. Recently market sentiments are also boosted up due to exit poll result which revealed that BJP led NDA government would be close to government formation in coming general election. In our valuation matrix, we value in the range of 0.6 times to 0.75 times of F14E book depending upon bank’s fundamental and market sentiment. Looking at current market sentiment and fundamental, we value bank in the range of Rs.600 to Rs.770 per share. We have added rating on the stock with current price target of Rs.700. Current Valuation Range PNB Please refer to the Disclaimers at the end of this Report. Narnolia Securities Ltd,
  • 10. 10 PNB Financial & Assuption Source : Eastwind/ Company Please refer to the Disclaimers at the end of this Report. Narnolia Securities Ltd, Income Statement 2011 2012 2013 2014E 2015E Interest Income 26986 36476 41893 43513 49565 Interest Expense 15179 23062 27037 26977 31875 NII 11807 13414 14857 16536 17691 Change (%) 39.3 13.6 10.8 11.3 7.0 Non Interest Income 3613 4203 4216 4240 4240 Total Income 15420 17617 19072 20775 21930 Change (%) 27.6 14.2 8.3 8.9 5.6 Operating Expenses 6364 7003 8165 9621 9430 Pre Provision Profits 9056 10614 10907 11155 12500 Change (%) 23.6 17.2 2.8 2.3 12.1 Provisions 4622 3577 4386 6253 5059 PBT 4433 7037 6522 4902 7442 PAT 4433 4884 4748 3408 5209 Change (%) 13.5 10.2 -2.8 -28.2 52.8 Balance Sheet Deposits( Rs Cr) 312899 379588 391560 450294 517838 Change (%) 25 21 3 15 15 of which CASA Dep 120325 134129 153344 139752 153766 Change (%) 18 11 14 -9 10 Borrowings( Rs Cr) 31590 37264 39621 47857 44728 Investments( Rs Cr) 95162 122703 129896 143572 149094 Loans( Rs Cr) 242107 293775 308725 339598 356578 Change (%) 30 21 5 10 5 Ratio Avg. Yield on loans 8.7 9.7 10.3 9.6 10.5 Avg. Yield on Investments 6.0 6.4 7.4 7.2 7.8 Avg. Cost of Deposit 4.4 5.6 6.5 6.4 6.6 Avg. Cost of Borrowimgs 4.4 4.5 3.9 4.0 4.1 Valuation Book Value 682 820 924 1000 1107 CMP 1220 926 759 543 543 P/BV 1.8 1.1 0.8 0.5 0.5
  • 11. Persistent System. Footing on Product Business, and working aggressively on new emerging services; 11% Key facts from Management Interview to Media( on 20 th March,2014) 1M 1yr YTD Absolute 1.1 76.8 85.7 Rel. to Nifty 3.4 75.8 82.3 Current 2QFY14 1QFY14 Promoters 38.96 38.96 38.96 FII 18.26 15.28 14.84 DII 18.78 21.23 19.31 Others 24 24.53 26.89 3QFY14 2QFY14 (QoQ)-% 3QFY13 (YoY)-% 432.75 432.37 0.1 332.98 30.0 104.3 100.8 3.5 82.4 26.6 64.2 60.8 5.6 49.5 29.7 24.1% 23.3% 80bps 24.7% (60bps) 14.8% 14.1% 70bps 14.9% (10bps) 11 BSE Code 533179 NSE Symbol PAT (1) Persistent System is setting up a unit related to product and Product services, named it “ Accelerite” to manage efficiently. They are taking some of its IP led products into this Accelerite. We expect that company is able to compete as a product company, which “Accelerite” will in the market. (2) Management expects that the overall trends are looking good on Industry per se and new emerging segment will play a major role for growth. Now, clients are moving into new changes and focusing into new services and solution. (3) For 4QFY14E, muted set of growth could be seen and expecting Intellectual Property (IP) growth this quarter. (4) The business outlook though is very positive in the sense, and they are seeing good opportunities, good pipeline growth and many good interesting deals being signed. (5) Persistent system is expecting to see IP led growth at a range of 18-19% in FY14E and 20%+ in FY15E driven by HPCA without any addition of new IPs. At same point of time, they are also looking to scale strong potential of rCloud after adding new capabilities. Persistent management suggests that deal pipeline are looking strong and seeing good activity and traction in the market across the board. Its focus on some of newer technologies like cloud, analytics and mobility, M2M, digital transformation are gaining a lot of traction because of pickup in demand environment. Because of actively investment in these themes, management is very confident to see healthy growth. View and Valuation: The company’s focus is shifting greater proportion to IP led services and company has marquee clientele in cutting-edge technologies around cloud, mobility, digital and analytics; witnessing faster growth. Considering the company’s premium valuation, we advice “Book Profit” on the stock. At a CMP of Rs 1059, stock trades at 13.4x FY15E earnings. Our view could be change with management guidance, higher currency flactuations and post earnings of coming quarter. Financials Revenue EBITDA We cover Persistent System as one of the few companies in the tier-II with potential to grow revenue at a range of 18-20%, specially focused on emerging business and relationship building with marquee clients. Despite better predictability of growth and attractive visibility of its expansion in new emerging verticals, we advice to book profit on the stock because of its premium valuation. Change from Previous Nifty Share Holding Pattern-% 6483 Stock Performance PERSISTENT 52wk Range H/L 1220/477 Average Daily Volume 12139 Market Data "Persistently innovating.." CMP 1059 Target Price 1070 On recent management Interview, Persistent System announced its new footing of dedicated product business unit “Accelerite” to align its business strategy combined with Products and IP (Intellectual Property) based on SMAC (Social, Mobility, Analytics, Cloud) platform. Company update Book Profit Previous Target Price 960 Upside 1% 1 year forward P/E-x Rs, Crore (Source: Company/Eastwind) Mkt Capital (Rs Crores) Please refer to the Disclaimers at the end of this Report. 4236 EBITDA Margin PAT Margin "Book Profit" 21st Mar' 14 Narnolia Securities Ltd,
  • 12. 12 Persistent System. (Source: Company/Eastwind) Operating Metrics Financials Please refer to the Disclaimers at the end of this Report. Narnolia Securities Ltd, 2QFY12 3QFY12 4QFY13 1QFY13 QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 Top1 16.0% 15.9% 17.2% 17.8% 20.7% 21.1% 21.6% 21.2% 22.5% 19.8% Top 5 38.6% 37.0% 36.6% 33.5% 36.3% 37.3% 36.7% 34.7% 36.4% 36.9% Top 10 49.4% 48.3% 48.8% 45.3% 47.0% 49.4% 47.9% 46.0% 47.3% 46.9% Onsite - Linear 12665 12387 12603 12789 12863 12772 14014 14567 14283 14510 Offshore - Linear 3803 3778 3895 3898 3978 4032 4143 4111 4109 4179 Yeild per Employee(excld- Trainee) 3208 3247 3350 3345 3746 3817 3769 3602 3919 3934 Total Employee 6900 6706 6628 6536 6370 6719 6970 7144 7457 7602 Attrition 17.7% 17.4% 18.3% 18.9% 16.9% 16.0% 14.4% 14.2% 14.0% 13.2% Utilization rate %(xclude IP Led ) 73.8% 74.1% 71.7% 74.1% 75.2% 77.3% 72.5% 70.0% 71.7% 72.9% Billing Rate-USD/ppm Employee Metrics Client Concentration Rs in Cr, FY10 FY11 FY12 FY13 FY14E FY15E Sales 601.16 775.84 1000.3 1294.5 1666.59 2061.72 Employee Cost 368.74 481.62 599.05 719 899.96 1123.64 Cost of technical professionals 0 30.67 41.68 54 91.66 113.39 Other expenses 86.05 105.24 135.2 218 291.65 366.99 Total expenses 454.79 617.53 775.93 990.78 1283.28 1604.02 EBITDA 146.37 158.31 224.37 303.72 383.32 457.70 Depreciation 33.52 42.39 61.1 78 100.55 93.54 Other Income 11.23 34.44 34.44 34.44 55.00 72.16 EBIT 112.85 115.92 163.27 225.44 282.76 364.16 Interest Cost 0 0 0.00 0.03 0.05 0.05 Profit (+)/Loss (-) Before Taxes 124.08 150.36 197.71 259.851 337.71 436.28 Provision for Taxes 9.05 10.62 55.09 75.37 92.03 119.98 Net Profit (+)/Loss (-) 115.03 139.74 142.62 184.481 245.69 316.30 Growth-% (YoY) Sales 1.2% 29.1% 28.9% 29.4% 28.7% 23.7% EBITDA 60.2% 8.2% 41.7% 35.4% 26.2% 19.4% PAT 74.1% 21.5% 2.1% 29.4% 33.2% 28.7% Expenses on Sales-% Employee Cost 61.3% 62.1% 59.9% 55.5% 54.0% 54.5% Other expenses 14.3% 13.6% 13.5% 16.9% 17.5% 17.8% Tax rate 7.3% 7.1% 27.9% 29.0% 27.3% 27.5% Margin-% EBITDA 24.3% 20.4% 22.4% 23.5% 23.0% 22.2% EBIT 18.8% 14.9% 16.3% 17.4% 17.0% 17.7% PAT 19.1% 18.0% 14.3% 14.3% 14.7% 15.3% Valuation: CMP 310 366.7 409.2 541 1059 1059 No of Share 4 4 4 4 4 4 NW 639.0 747.1 840.5 1018.3 1212.5 1477.3 EPS 28.8 34.9 35.7 46.1 61.4 79.1 BVPS 159.7 186.8 210.1 254.6 303.1 369.3 RoE-% 18.0% 18.7% 17.0% 18.1% 20.3% 21.4% P/BV 1.9 2.0 1.9 2.1 3.5 2.9 P/E 10.8 10.5 11.5 11.7 17.2 13.4
  • 13. TCS Key facts from Management Commentary: 1M 1yr YTD Absolute -5.9 29.9 67.2 Rel. to Nifty -13.3 18.8 57.1 Current 2QFY14 1QFY14 Promoters 73.9 73.96 73.96 FII 16.33 16.09 15.67 DII 5.26 5.58 5.90 Others 4.51 4.37 4.47 3QFY14 2QFY14 (QoQ)-% 3QFY13 (YoY)-% 21294 20977.2 1.5 16069.93 32.5 6686.76 6633.0 0.8 4660.49 43.5 5333.43 4633.3 15.1 3549.61 50.3 31.4% 31.6% (20bps) 29.0% 240bps 25.0% 22.1% 290bps 22.1% 290bps 13 Average Daily Volume 1011877 NSE Symbol TCS 52wk Range H/L 2384/1300 Mkt Capital (Rs Crores) 433985 Now, revenue in 4QFY14E could be a bit lighter than what we had expected post 3QFY14 earnings. We are not much surprise on comments on weak revenue as well as ramping down on margin picture for current quarter. We believe that the 1QFY15E, the first seasonally strong quarter of the year, is the stern litmus test of TCS’s confidence for FY15E. (1) For 4QFY14E, revenue would be lower than preceding quarter because of seasonal impacts, and domestic revenue may clock negative growth largely impacted by upcoming general election. However, no pressure would be seen on revenue for FY15E. (2)Margin would decline by 40-50 basis points on cross currency movement and higher investments. However, company is expecting no hiccups on margin for long- term prospect. (3) The company is very optimistic on Europe, US and UK growth could be inline. Latin America will see good growth. Europe will continue to do well, and the US and the UK will be close to industry average. Middle East and APAC could be seen on flattish node. (4) Across vertical, Media and Entertainment has reported better, Telecom remains challenged. While, there could be some ray of growth because of higher penetration in Europe. Market Data BSE Code 532540 Previous Target Price 2360 Upside 23% Change from Previous 6% Mid Quarter's Analyst Meet: Lower than expected growth for 4QFY14E, but still better outlook for FY15E than FY14E, " Strong Fundamentals" CMP 2041 Target Price 2510 Company update Buy On Mid Quarter Analyst Meet, TCS also commented on weak revenue growth momentum for 4QFY14E followed by Infosys due to weak seasonality. Growth in 4QFY14E would be lower than the preceding quarter and margin would decline 40-50 basis points on cross currency movement and higher investments. However, sigh of relief was seen on FY15E outlook and comments on overall demand environment. 1 year forward P/E Rs, Crore (Source: Company/Eastwind) Please refer to the Disclaimers at the end of this Report. (5) Currency will play a small role with marginal impact of cross currency movement and average currency movement. There may be some accounting changes related to recognition of forex gains or losses, but it is not likely to be material. View and Valuation: We continue to remain positive on its demand outlook and margin profile, the management expects for robust deal pipeline going forward and also expects to materialize its emerging space like Digital as well as Cloud, Mobility, Analytics and Big data. We expect, TCS will be star performer in growth sense than other peers. Hence, we are maintaining 17% (revised from 18%) revenue growth in dollar term for FY14E because of improved demand environment, while NASSCOM expects 12-14% for the Industry. At a price of Rs 2041, it is trading at 18x FY15E earnings, We maintain" BUY" view on the stock with a target price of Rs 2510. Financials Revenue EBITDA EBITDA Margin PAT Margin PAT Share Holding Pattern-% Nifty 6524 Stock Performance "BUY" 20th Mar' 14 Narnolia Securities Ltd,
  • 14. 14 Unlike Infosys, TCS comments are based on potential impact from seasonally lower demand in its biggest market (US and Europe) and weak domestic demand environment. On previous comments, management had already quoted regarding demand volatility at home because of upcoming poll. Comparing with its nearest rival Infosys, TCS is not facing largely with any specific issue. Despite a weak commentary on 4QFY14E, management is aggressively confident to report better numbers in FY15E with healthy demand outlook. We are considering following factors for its growth story in FY15E. Healthy Demand Environment: TCS is much confident on healthy demand outlook and expects that FY15E could be better year than FY14E propelled by better discretionary spending in the US. Management suggests that except India, other emerging markets (contributes 18-19% of revenue) continue to see healthy demand. Also, in its FY15 revenue growth models, India (contributes 7% of sales) is the only market which TCS expects to be weak. TCS. Is there any setback? Please refer to the Disclaimers at the end of this Report. No sign of any ramp down: Management suggests that Continental Europe will likely grow ahead of overall company growth in FY15E. On vertical front, smaller verticals such as Energy & Utilities, Transportation and Life sciences & Healthcare might grow ahead of overall company average. While, its mature verticals like BFSI and Retails could grow flattish, Telecom continues to face structural issue. Contracts wins from continental Europe could change the shape of verticals. Still, we are not seeing any project ramp down. New emerging business on demand: A part of legacy business, the emerging opportunities in helping large corporations tap areas such as social media and data analytics are seen as increasingly contributing to the IT sector's next phase of growth. TCS and its Indian competitors are winning a significant share of several 2nd and 3rd generation renewal contracts as western companies look to both cut costs and modernise their IT infrastructure. Sales (USD) and Sales growth-% Considering above growth factors, we are not expecting any major concern with company's growth. The company is also focussed to drive operational improvements in the business and aims to expand reach in non-traditional markets and servicelines. (Source: Company/Eastwind) We expect 1% (QoQ) revenue growth in USD term for 4QFY14E, Narnolia Securities Ltd,
  • 15. 15 TCS. (Source: Company/Eastwind) Financials Please refer to the Disclaimers at the end of this Report. Narnolia Securities Ltd, Rs, Cr FY10 FY11 FY12 FY13 FY14E FY15E Net Sales-USD 6339.0 8187.0 10171.0 11569.0 13531.7 16012.2 Net Sales 30029.0 37325.1 48894.3 62989.5 81731.2 96073.3 Employee Cost 10879.6 13850.5 18571.9 24040.0 30060.7 35547.1 Overseas business expenses 4570.1 5497.7 6800.5 8701.9 11565.0 13930.6 Services rendered by business associates and others 1262.0 1743.7 2391.3 3763.7 4952.9 5764.4 Operation and other expenses 4622.8 5054.3 6694.8 8443.9 10044.8 12009.2 Total Expenses 21334.4 26146.2 34458.5 44949.6 56623.4 67251.3 EBITDA 8694.6 11178.9 14435.8 18040.0 25107.8 28822.0 Depreciation 601.8 686.2 860.9 1016.3 1279.2 1503.7 Amortisation 59.1 49.1 57.1 63.7 57.5 76.7 Other Income 272.0 604.0 428.2 1178.2 1348.6 1921.5 Extra Ordinery Items 0.0 0.0 0.0 0.0 0.0 0.0 EBIT 8033.7 10443.6 13517.9 16960.1 23828.6 27318.3 Interest Cost 16.1 26.5 22.2 48.5 35.9 33.8 PBT 8289.6 11021.2 13923.8 18089.8 25141.3 29206.0 Tax 1197.0 1830.8 3399.9 4014.0 5933.3 7009.4 PAT 7092.7 9190.3 10524.0 14075.7 19208.0 22196.5 PAT (Reported PAT) 7000.6 9068.6 10414.0 13917.4 19208.0 22196.5 Sales-USD 29.2% 24.2% 13.7% 17.0% 18.3% Sales 8.0% 24.3% 31.0% 28.8% 29.8% 17.5% EBITDA 21.3% 28.6% 29.1% 25.0% 39.2% 14.8% PAT 31.8% 29.6% 14.5% 33.7% 36.5% 15.6% EBITDA 29.0% 30.0% 29.5% 28.6% 30.7% 30.0% EBIT 26.8% 28.0% 27.6% 26.9% 29.2% 28.4% PAT 23.6% 24.6% 21.5% 22.3% 23.5% 23.1% Employee Cost 36.2% 37.1% 38.0% 38.2% 36.8% 37.0% Overseas business expenses 15.2% 14.7% 13.9% 13.8% 14.2% 14.5% Services rendered by business associates and others 4.2% 4.7% 4.9% 6.0% 6.1% 6.0% Operation and other expenses 15.4% 13.5% 13.7% 13.4% 12.3% 12.5% Tax rate 14.4% 16.6% 24.4% 22.2% 23.6% 24.0% CMP 780.8 1182.5 1322.0 1563.0 2041.0 2041.0 No of Share 195.7 195.7 195.7 196.0 196.0 196.0 NW 18466.7 24504.8 29579.2 38645.7 49940.0 62991.6 EPS 36.2 47.0 53.8 71.8 98.0 113.2 BVPS 94.4 125.2 151.1 197.2 254.8 321.4 RoE-% 38.4% 37.5% 35.6% 36.4% 38.5% 35.2% Dividen Payout ratio 28.1% 50.8% 37.5% 41.2% 41.2% 41.2% P/BV 8.3 9.4 8.7 7.9 8.0 6.4 P/E 21.5 25.2 24.6 21.8 20.8 18.0 Margin -% Expenses on Sales-% Valuation Growth-%
  • 16. HDFC Bank 741 760 720 3 6 1M 1yr YTD Absolute 11.8 15.1 15.1 Rel.to Nifty 4.7 4.8 4.8 Current 4QFY13 3QFY1 3Promoters 22.7 22.7 22.7 FII 34.9 33.6 34.9 DII 9.3 9.8 6.6 Others 33.1 33.8 34.2 Financials Rs, Cr 2011 2012 2013 2014E 2015E NII 10543 12885 15811 18713 22944 Total Income 14878 18668 22664 26604 30835 PPP 7725 9391 11428 14516 15572 Net Profit 3926 5167 6726 8453 9119 EPS 84.4 22.0 28.7 36.0 38.9 16 Change from Previous HDFC Bank Vs Nifty Share Holding Pattern-% 4.17 lakhs Nifty 6524 Mkt Capital (Rs Cr) Please refer to the Disclaimers at the end of this Report. (Source: Company/Eastwind) Stock Performance In last quarter, HDFC bank has raised FCNR deposits to the tune of $3.4 bn nearly about Rs.21000 cr through RBI special window which carry interest rate of 3.5% while normal deposits rate are in the range of 6.5% to 7%. HDFC Bank raised larger chunk of monies in compare to other banks like SBI and ICICI bank. SBI and ICICI bank raised monies through FCRN deposits to the tune of $2bn each. Further incremental foreign deposits with tenure are more than 3 years are exempted from SLR, CRR and PSL lending. This would help bank to lower cost of fund by 75 bps to 100 bps and hence margin expansion. Bank management guided margin would be in the range of 4.1% to 4.5% going forward. Mounting bad loans have major cause of worry; RBI allowed banks to use 33% of counter cycle, floating provisions for specific provisions Recently RBI allows banks to use 33% of counter cycle provisioning buffer, floating provisions for making specific provisions against impaired accounts which would help bank to make lower provisions and hence boost up earnings. HDFC bank reported very strong asset quality with GNPA and net NPA stood at 1% and 0.3% at the end of December quarter. Bank would use counter cycle buffer, floating provisions for specific provisions and make lower fresh provisions. This would be the result of boosting up profitability. Average Daily Volume Counter cycle provisions and floating provisions are represented as capital reserves that bank need to build up in good times and can only use for contingencies under extra circumstance. This is the first time when central bank allows to use since the reserve were created starting 2010. At the end of quarter all banks reported Rs.1.71 trillion of GNPA, the rise of 39.4% YoY. In a very rough estimate, banking system has nearly about Rs. 2 trillion in bad loans and another Rs.4 trillion loans are being restructured pipeline out of total Rs.82 trillion. Company update HOLD 176874 Raised foreign deposits higher amount in comparison to peers; likely to report better NII for being low cost in nature 750/528 NSE Symbol HDFCBANK 52wk Range H/L CMP Target Price We have raised our price target to Rs.760/share on account of bank’s likely to get benefit from FCNR deposits mobilization that it had recently raised. We value bank in the range of Rs.660 to Rs.760 per share on the back of current fundamental and prevailing economic scenario. Now the economy is witnessing some sign of revival and market sentiment boost up on account of exit poll result. HDFC bank is likely to see earnings boost-up in near term on account of mobilization of FCNR deposits which would reflect better NII for being a low cost carrying in nature, recently RBI allow banks to use 33% of buffer/floating provisions for bad loan and declining of low yielding PSL share in overall lending. Previous Target Price Market Data Upside BSE Code 500180 "HOLD" 20th March.,2014 Narnolia Securities Ltd,
  • 17. 17 Source:Eastwind/Company HDFC BANK Please refer to the Disclaimers at the end of this Report. Share of PSL down sharply; release fund would be deployed in high yield sector Recently share of PSL in HDFC bank came sharply but bank already met PSL target of 40% which means addition fund would be deployed in high yield segment which would reflect in NII growth. According to RBI, bank’s need to spend 40% in net advance in priority sector lending and HDFC bank are among those which have highest share in PSL in private bank category. Additionally fund raised fund through FCNR deposits with tenure more than 3 years are exempted from SLR, CRR and PSL means bank would have higher fund for deploying in sector those are high yield in nature. Valuation & View HDFC bank is expected to report better earnings on the back of (a) likely to get benefit from FCRN deposits mobilization, (b) recent RBI allow bank to use 33% of counter cycle buffer provisions for specific provisions, this would help bank to make lower provisions and hence profitability and (c) share of additional PSL lending would be deployed in high yielding sector. We have raised our price target to Rs.760/share which is upper side of our valuation band. Valuation Band Narnolia Securities Ltd,
  • 18. 18 HDFC BANK Financials Source: Eastwind/ Company Please refer to the Disclaimers at the end of this Report. Narnolia Securities Ltd, P/L 2011 2012 2013 2014E 2015E Interest/discount on advances / bills 15085 21124 26822 32002 40213 Income on investments 4675 6505 7820 9311 10952 Interest on balances with Reserve Bank of India 148 137 282 373 373 Others 20 108 141 65 65 Total Interest Income 19928 27874 35065 41751 51603 Others Income 4335 5784 6853 7891 7891 Total Income 24263 33658 41917 49642 59494 Interest on deposits 8028 12690 16321 20281 24337 Interest on RBI/Inter bank borrowings 1336 2253 2889 4571 4278 Others 20 47 44 44 44 Interest Expended 9385 14990 19254 23038 28659 NII 10543 12885 15811 18713 22944 NII Growth(%) 25.7 22.2 22.7 18.4 22.6 Other Income 4335 5784 6853 7891 7891 Total Income 14878 18668 22664 26604 30835 Total Income Growth(%) 20.3 25.5 21.4 17.4 15.9 Employee 2836 3400 3965 4231 5342 Other Expenses 4317 5878 7271 7857 9921 Operating Expenses 7153 9278 11236 12087 15263 PPP( Rs Cr) 7725 9391 11428 14516 15572 Provisions( Incl tax provision) 3799 4224 4701 1751 6453 Net Profit 3926 5167 6726 8453 9119 Net Profit Growth(%) 33.2 31.6 30.2 25.7 7.9 Key Balance Sheet Data Deposits 208586 246706 296247 355496 426596 Deposits Growth(%) 24.6 18.3 20.1 20 20 Borrowings 14394 23847 33007 50785 47529 Borrowings Growth(%) 11.4 65.7 38.4 54 -6 Loan 159983 195420 239721 299651 365574 Loan Growth(%) 27.1 22.2 22.7 25 22 Investment 70929 97483 111614 114580 156461 Investment Growth(%) 21.0 37.4 14.5 3 37 Eastwind Calculation Yield on Advances 9.4 10.8 11.2 10.7 11.0 Yield on Investments 6.6 6.7 7.0 8.1 7.0 Yield on Funds 7.7 8.9 9.3 10.1 9.9 Cost of deposits 4.3 5.6 6.0 6.5 6.2 Cost of Borrowings 9.4 9.6 8.9 9.0 9.0 Cost of fund 4.2 5.5 5.8 5.7 6.0 Valuation Book Value 545.5 127.5 154.3 189.4 222.3 P/BV 4.3 4.1 4.1 3.5 3.0 P/E 27.8 23.6 21.8 18.7 17.3
  • 19. KPIT Tech. Key Facts from recent Management Interview to media (on 12 th March, 2014) 1M 1yr YTD Absolute -4.7 52.9 - Rel. to Nifty -12 41.9 - Current 2QFY14 1QFY14 Promoters 22.53 22.87 24.25 FII 41.96 36.42 32.79 DII 6.99 11.12 10.93 Others 28.52 29.59 32.03 3QFY14 2QFY14 (QoQ)-% 3QFY13 (YoY)-% 677.93 702.76 (3.5) 567.02 19.6 103.5 108.1 (4.3) 94.1 10.0 66.7 66.7 0.0 48 39.0 15.3% 15.4% (10bps) 16.6% (130bps) 9.8% 9.5% 30bps 8.5% 130bps 19 EBITDA Margin PAT Margin We expect that the company would report better earnings with margin ramp up and signing of larger deals in next couple of quarters. Now, we upgrade our view on the stock from “Neutral” to “Buy” with a price target of Rs 185. At a CMP of Rs 160, stock trades at 9.5x FY15E EPS. Financials Revenue EBITDA PAT SAP revival and Auto Engineering Services shape; a growth driver in near term, Upside BSE Code 532400 Price Performance Rs, Crore Please refer to the Disclaimers at the end of this Report. Incremental revenue by REVOLO and Systime: As per the management comment, its dream project “REVOLO Technology” REVOLO would play a key role to report an incremental growth in FY15E. KPIT’s acquisition Systime from Integrated Enterprise Services (IES) segment would report healthy growth prospects at least over the next couple of years. View and Valuation: Impressive organic growth despite inorganic thrust (acquired 10 companies in the last 10 yrs), Potential option value from success of its hybrid engine venture Revolo (on trial). KPIT has targeted to reach $1bn sales by 2017. Its differentiated positioning and competitive edge in its focus areas, imperatives to the success of smaller- sized IT vendors impress to investors. NSE Symbol KPIT Stock Performance 3103 Average Daily Volume 144511 "On billion dollar journey" CMP 160 Target Price 185 SAP business back to growth trajectory: KPIT’s revenue has been facing growth related issues on account of deficit in SAP business (contributes 24% of sales). Profitability on SAP business was also a challenge for the company. On 3QFY14 revenues from SAP was down by 10% (QoQ). However, on the back of deal signings and visible deal pipeline, SAP should return into growth path in 4QFY14E and FY15E. Considering healthy demand environment in FY15E, We expect that USD revenue growth in SAP could be in double digits. Previous Target Price - Company update Buy 16% Change from Previous - Market Data Expectation of margin improvement: The decline in SAP revenue has impacted the overall margins, and margin was seen almost flat at 15.4% in 2QFY14 and 3QFY14. We expect that profitability from SAP business would support to shape up its margin in next couple of quarters. Even, Utilization rate in SAP has declined to below 90% at onsite and below 70% mark at offshore. This is expected to improve in FY15E. Management expects to see PAT margin at double digit by next couple of quarters. Auto Engineering Services; a growth driver: The global Automotive Industry has witnessed a strong revival. US industry sales in 2013 finished at 15.6 million vehicles, up 7.6% from 2012, and China became the first country in which more than 20-million vehicles were sold in any given year. Considering healthy demand outlook in Auto Industry, KPIT is seeing exports growth above the industry rates, driven by demand for services around safety systems, intelligent driving, hybrid electric cars, fuel efficiency etc. Management expects revenues from Auto Engineering to exceed 30% of the company’s revenues, in the next 3 years, as KPIT expected to achieve the mark of USD1b in revenues. 6517 Mkt Capital (Rs Crores) Share Holding Pattern-% Nifty 52wk Range H/L 189/92 "BUY" 19th Mar' 14 Narnolia Securities Ltd,
  • 20. 20 KPIT Tech Operating Metrics Please refer to the Disclaimers at the end of this Report. Financials (Source: Company/Eastwind) Narnolia Securities Ltd, 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 No. of Customers Added 4 3 4 2 5 6 3 3 No. of Active Customers 169 172 176 178 183 189 192 195 Customers with run rate of >$1Mn 59 65 69 72 78 78 78 78 Top Client – Cummins 19.5% 20.6% 19.7% 19.1% 16.6% 16.8% 16.5% 17.9% Top 5 Clients 33.0% 36.3% 35.2% 36.8% 35.2% 38.6% 38.0% 38.2% Top 10 Clients 42.2% 44.0% 43.7% 45.2% 44.0% 47.3% 46.3% 47.6% DSO 90 75 75 70 75 77 75 76 Total Employee 7719 7873 8111 8286 8321 8456 8816 9136 Onsite Utilization 94.5% 94.7% 94.5% 92.8% 94.3% 94.2% 92.4% 88.1% Offshore Utilization 74.3% 74.1% 74.7% 72.9% 74.1% 73.4% 72.9% 71.3% Client Metrics Client Concentration Employee Metrics Rs, Cr FY10 FY11 FY12 FY13 FY14E FY15E Net Sales-USD 153.76 224.07 306.71 410.46 445.78 535.96 Net Sales 731.64 987.05 1500.00 2238.63 2692.54 3215.75 Employee Cost 265.92 529.95 771.78 1140.79 1378.58 1640.03 Other expenses 304.70 308.82 511.97 762.32 902.00 1061.20 Total Expenses 570.62 838.77 1283.75 1903.11 2280.58 2701.23 EBITDA 161.02 148.28 216.25 335.52 411.96 514.52 Depreciation 30.80 41.12 44.49 47.16 54.42 67.93 Other Income 1.20 6.74 13.82 11.74 12.12 24.12 Extra Ordinery Items -26.45 0.00 10.05 -1.30 -21.05 16.08 EBIT 130.22 107.16 171.76 288.36 357.54 446.59 Interest Cost 2.74 3.78 7.32 13.99 24.31 24.56 PBT 128.68 110.12 178.26 286.11 345.35 446.15 Tax 16.91 15.49 43.67 76.55 96.70 122.69 PAT 111.77 94.63 134.59 209.56 248.65 323.46 Sales-USD -11.7% 45.7% 36.9% 33.8% 8.6% 20.2% Sales-INR -7.8% 34.9% 52.0% 49.2% 20.3% 19.4% EBITDA -12.2% -7.9% 45.8% 55.2% 22.8% 24.9% PAT 169.6% -15.3% 42.2% 55.7% 18.7% 30.1% EBITDA 22.0% 15.0% 14.4% 15.0% 15.3% 16.0% EBIT 17.8% 10.9% 11.5% 12.9% 13.3% 13.9% PAT 15.3% 9.6% 9.0% 9.4% 9.2% 10.1% Employee Cost 36.3% 53.7% 51.5% 51.0% 51.2% 51.0% Other Exp 41.6% 31.3% 34.1% 34.1% 33.5% 33.0% Tax rate 13.1% 14.1% 24.5% 26.8% 28.0% 27.5% CMP 115.00 168.05 122.90 99.0 160.0 160.0 No of Share 7.90 8.70 17.80 19.28 19.28 19.28 NW 387.11 603.19 712.55 1036.23 1269.09 1570.00 EPS 14.15 10.88 7.56 10.87 12.90 16.78 BVPS 49.00 69.33 40.03 53.75 65.82 81.43 RoE-% 28.9% 15.7% 18.9% 20.2% 19.6% 20.6% Dividen Payout ratio 6.4% 6.8% 4.9% 7.9% 6.3% 7.0% P/BV 2.35 2.42 3.07 1.84 2.43 1.96 P/E 8.13 15.45 16.25 9.11 12.41 9.54 Valuation Expenses on Sales-% Margin -% Growth-%
  • 21. Narnolia Securities Ltd 402, 4th floor 7/ 1, Lords Sinha Road Kolkata 700071, Ph 033-32011233 Toll Free no : 1-800-345-4000 email: research@narnolia.com, website : www.narnolia.com Risk Disclosure & Disclaimer: This report/message is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Narnolia Securities Ltd. (Hereinafter referred as NSL) is not soliciting any action based upon it. This report/message is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any from. The report/message is based upon publicly available information, findings of our research wing “East wind” & information that we consider reliable, but we do not represent that it is accurate or complete and we do not provide any express or implied warranty of any kind, and also these are subject to change without notice. The recipients of this report should rely on their own investigations, should use their own judgment for taking any investment decisions keeping in mind that past performance is not necessarily a guide to future performance & that the the value of any investment or income are subject to market and other risks. Further it will be safe to assume that NSL and /or its Group or associate Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise, individually or otherwise in the recommended/mentioned securities/mutual funds/ model funds and other investment products which may be added or disposed including & other mentioned in this report/message.