IEA-Equity
Strategy

India Equity Analytics

5th March, 2014

Daily Fundamental Report on Indian Equities

EROSMEDIA :"Mov...
EROSMEDIA

"BUY"
5th March' 14

"Moving to Blockbuster"
Initiating Report

Buy

CMP

160

Target Price
Previous Target Pri...
EROSMEDIA
Sales and Sales growth(%)(yoy)
Key Concerns:
1. Piracy is the key concern for the

company. Indian film industry...
EROSMEDIA
Management Guidance:
1.
2.
3.
4.
5.
6

Catalogue monetization will continue to grow strong in the upcoming quart...
Escorts Ltd.

V-

"Buy"
5th Mar' 14

"Volume Growth Remains The Key; Retain Buy……."
Company update

Buy

CMP
Target Price
...
Escorts Ltd.
Key financials :
PARTICULAR

2009A

2010A

2011A

2012A

2014E 18
Months

2015E

2016E

2600
53
2653
160
100
...
Infosys

"BUY"
4th March' 14

"Meritocracy to growth"
Company update

BUY

Focus on meritocracy for client satisfaction as...
Infosys.
Employee cost on sales-%

Employee cost on sales at all time high

(Source: Company/Eastwind)

Total Employee and...
Infosys.
Key facts from Management Interview;
■ Management upgraded its earning guidance for FY14E from 9-10% to 11.5-12%....
Powergrid..
Update

BUY

CMP
Target Price
Previous Target Price
Upside
Change from Previous

95
118
NA
25%
NA

Market Data...
IFGL Refractories Ltd.

V-

"Buy"
3rd Mar' 14

"Strong Fundamentals…..."
Buy
62
80
NA
29%
0%

Result update
CMP
Target Pri...
IFGL Refractories Ltd.
Key financials :
PARTICULAR

2009A

2010A

2011A

2012A

2013A

2014E

2015E

398
2
401
27
20
7
10
...
Private Sector Banks Result Review 3QFY14

Better than expected NII on the back of margin expansion and loan growth
In our...
Private Sector Banks Result Review 3QFY14
Well structure balance sheet growth and high CASA base would help to keep
profit...
IT Industry: 3QFY14 results review
"Clear acceleration in growth"
Price performance of our coverage:

Mix performance and ...
IT Industry: 3QFY14 results review

Companies Specific Earnings Review
Company
TCS
INFY*
WIPRO
HCLTECH#
TECHM
CMC
MINDTREE...
IT Industry: 3QFY14 results review

Operating Metrics across Tier-1 IT space
Sales mix- Geogrpahy wise

Discretionary spen...
IT Industry: 3QFY14 results review

Key Takeaways from Conference Call;
(1) TCS
- Confident of beating NASSCOM's FY15 grow...
IT Industry: 3QFY14 results review

(7) PERSISTENT SYS
- Persistent is confident of doing more than 15% revenue ($) growth...
IT Industry: 3QFY14 results review

Industry Outlook:

For FY15E, NASSCOM expects IT exports
to grow by 13-15% and domesti...
N arnolia Securities Ltd
402, 4th floor 7/ 1, Lord s Sinha Road Kolkata 700071, Ph
033-32011233 Toll Free no : 1-800-345-4...
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India Equity Analytics: Buy stock of Eros Media and Escorts Ltd

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Narnolia Securities Limited recommend BUY for the Eros Media and Escorts Ltd stock with target price of Rs.200 and Rs. 175 respectively.

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India Equity Analytics: Buy stock of Eros Media and Escorts Ltd

  1. 1. IEA-Equity Strategy India Equity Analytics 5th March, 2014 Daily Fundamental Report on Indian Equities EROSMEDIA :"Moving to Blockbuster" "BUY" Edition : 218 5th Mar 2014 Healthy movies pipeline for FY15E; Company is expecting to release more than 8 big budget movies across Hindi and regional languages. Likewise, company is going to release much awaited Rajnikanth’s movie Kochadaiiyaan on 11 April, 2014. Its well positioned to monetize rich content of library ensures annuity and regular set of revenue. .......................................... ( Page :2-4) Escorts Ltd: "Volume Growth Remains The Key;Retain Buy" "BUY" 5th Mar 2014 Going forward, we remain positive on the company’s growth prospects particularly in AMP segment. We expect demand to improve further in FY2014E with the economic recovery. However, we remain cautious with regards to growth in Construction Equipment segment in near-tomedium. Thus, We revise our estimates upwards to factor in the strong CY13 tractor volume performance. We therefore revised our rating on the stock from "Reduce" to "Buy" and advised to our investors to enter at current level with Revised price target of Rs. 175 ........................................................................ ( Page : 5-6) Infosys : "Meritocracy to growth" "BUY" 4th Mar 2014 In the recent webcast, Mr. Narayan Murthy expressed its view regarding senior level exits from the company. In near term, non-performers in Infosys could be asked to leave or may hand over layoff notices. Infosys will retain its revenue acceleration and margin expansion, also operating metrics will turn into greenery from hay. At a CMP of Rs 3793, it trades at 17.4x FY15E earnings. We retain our “BUY” view on the stock with a target price of target price of Rs 3910 . ............................................................... ( Page : 7-9) Powergrid : "BUY" 3th Mar 2014 The stock is trading at 1.7x FY15E BVPS. We estimate to Power grid stock to trade at 1.8x BVPS. Valuation is very reasonable for a business model with RoE (16%), strong growth visibility and minimal operational risks. We valued stock for a 12 month period at a target price of Rs.118.With equity dilution overhang on the stock is removed, so we expect the stock price will drive by purely on its fundamentals, on our estimates we maintain a positive fundamental outlook for Power grid. Also, govt. stake coming down to 58% is a positive, as risk of further equity dilution is reduced . ............................................................ (Page : 10) IFGL Refractories Ltd :"Strong Fundamentals…..." "BUY" 3th Mar 2014 IFGL refractories is the flagship company of SK Bajoria group.Company manufacturing Continuous Casting Refractories and Special grade Refractories which find applications in steel industry. IFGL has grown as an Indian multinational with manufacturing facilities located in Brazil, China, Czech Republic, Germany, India, UK and USA. Krosaki HarimaCorporation Japan ,a subsidiary of world’s second largest steel maker NipponSteel Corporation holding about 15 % stake in IFGL. We expect IFGL will report its best ever performance in this full year. Considering industry’s improving prospects, stabilization of production from its newly built plant at Kandla SEZ and out performance of company in its financials, We don’t expect any scope for deep correction, hence recommending a BUY. ................................................................................... ( Page : 11-12) Private Sector Banks Result Review 3QFY14 3th Mar 2014 Private Banks are trading at significantly lower or reasonable valuation when compare to their historical trend due to possible deterioration in asset quality earnings pressure and political un-clarity. We prefer private banks over PSBs largely due to their capability to report healthy earnings, higher capital adequacy ratio and lower or stable asset quality. Our top picks in sector are HDFC Bank, ICICI Bank, Indusind Bank and DCB. ............................................................................ ( Page : 13-14) IT Industry: 3QFY14 results review : "Clear acceleration in growth" 28th Feb 2014 For IT Industry, 3QFY14 has carried out a quarter of mix set of numbers largely impacted by seasonality and furloughs impact. However, most of companies expressed its sanguine view for industry outlook and demand discretionary environment ahead. Post earnings, almost all companies management have expressed for better earnings outlook in near term . .................................................. ( Page : 15-20) Narnolia Securities Ltd,
  2. 2. EROSMEDIA "BUY" 5th March' 14 "Moving to Blockbuster" Initiating Report Buy CMP 160 Target Price Previous Target Price Upside Change from Previous 200 25% Market Data BSE Code NSE Symbol 533261 EROSMEDIA 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume Nifty 195/107 1467 26241 6298 Stock Performance 1M Absolute Rel. to Nifty 1yr YTD 13.1 8.2 -7.3 -17.4 - Share Holding Pattern-% Promoters FII DII Others Current 74.88 2QFY14 74.88 12.45 1.56 11.11 12.16 1.87 11.09 P/BV-1 year forward 1QFY14 74.88 11.35 2.95 10.82 Healthy movies pipeline for FY15E; Company is expecting to release more than 8 big budget movies across Hindi and regional languages. Likewise, company is going to release much awaited Rajnikanth’s movie Kochadaiiyaan on 11 April, 2014. Apart from this, company is expected to release Dishkiyaaoon, Shadi Ke Side Effect, Action Jackson, Tanu weds Manu season 2, Sarkar3, Chalo China, NH-10, Dekho Magar Pyaar Se, Happy Ending and Rana in FY15E. It has largest Indian content library of films with 1100+ films and digital rights to an additional 700 films. Its well positioned to monetize rich content of library ensures annuity and regular set of revenue. Considering diversified and sustainable Business Model along with well positioned to monetize rich content of its library and block buster success ratio of movies (out of the top 10 grossing films in recent years, 3 are from Eros.) make us positive view on the stock. About Company: Eros International Media (EROS) is one of the largest films coproduction and distribution company in India and overseas, engage with presales of overseas rights, music rights and broadcasting rights. It recovers 35-40% of its costs by selling movie rights to channels, recovers another 35-40% from selling its overseas rights to overseas entities. Similarly, it gets 10-15% of the cost of movies by selling music rights . Robust 3QFY14 Result: Company reported better numbers with sales growth of 17% (YoY) led by huge spurt in catalogue monetization, which increase by approx75% (YoY). Its PAT grew by 41%(YoY). During the quarter, Its EBITDA margin improved by 680bps (YoY) to 31.3% because of reduction in operational expenses and employee expenses. Management expects to see EBITDA margin at 25% in FY14E and FY15E than 2022% range of margin in previous 4 years. Recent initiatives: Eros has struck new deals during the period with MSM Satellite Singapore private ltd for broadcast of films on Sony as well as with Viacom18 media for broadcast films on colours. Recently Eros International media has launched two new movie channels HBO DEFINED and HBO HITS, which will reduce its dependence on highly unpredictable revenue streams going forward. View and Valuation: Management is very excited to invest into different medium like internet and launching channels to generate revenue. Company’s optimistic stance towards maintaining margins, strong movies slate and very low valuation makes attractive. At a CMP of Rs 160, stock trades at 1.1 P/BVx FY15. We initiate “BUY” with a target price of Rs 200. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 3QFY14 432.68 135.6 92.0 31.3% 21.3% 2QFY14 201 51.2 37.0 25.4% 18.4% (QoQ)-% 115.2 165.0 148.8 590bps 290bps 3QFY13 369.3 90.6 65.2 24.5% 17.7% Rs, Crore (YoY)-% 17.2 49.6 41.1 680bps 360bps (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 2
  3. 3. EROSMEDIA Sales and Sales growth(%)(yoy) Key Concerns: 1. Piracy is the key concern for the company. Indian film industry loses approx. Rs.2000 cr. every year due to piracy (source: FICCI-KPMG report 2009). 2. Lower consumer discretionary demand. (Source: Company/Eastwind) 3. Difficult to predict fate of films. Margin-% (Source: Company/Eastwind) Upcoming Movies: Date of Release Q4FY14E 28-Feb-14 21-Mar-14 28-Mar-14 Upcoming movies Director Starcast Shaadi Ke Side Effects Dishkiyaaoon Happy Ending Saket Chaudhary Sanmjit Singh Talwar Raj and DK Farhan Akhtar,Vidya Balan Sunny Deol, Harman Baweja Saif Ali Khan, Ileana D'Cruz Q1FY15 11-Apr-14 6-Jun-14 Kochadaiiyaan Action Jackson Soundarya Ashwin Prabhu Deva Rajnikanth, Deepika Padukone Ajay Devgn, Sonakshi Sinha Q2FY15 12-Sep-14 NH-10 Navdeep singh Anushka sharma,Neil bhoopalam Tanu Weds Manu Season 2 R. Balki Untitled Aankheen 2 Illuminati Untitled Dekh Tamasha Dekh Purani Jeans Chalo china Anand Rai R.Balki Apoorva Lakhia Arif Ali Feroz Abbas Khan Tanushree Basu Shashank Ghosh R.Madhavan,Kangana Ranaut Amitabh Bachchan, Dhanush Abhishek Bachchan Armaan Jain Satish Kaushik and Others Aditya Seal Vinay Pathak, Lara Dutta FY15E (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 3
  4. 4. EROSMEDIA Management Guidance: 1. 2. 3. 4. 5. 6 Catalogue monetization will continue to grow strong in the upcoming quarters. Company will monetize entire portfolio across different platforms Catalogue monetization will increase from 13%-14% to 20-25% of overall revenue in coming 3 to 4 years. Management is looking for more and more free cash flows going forward. Q4 will be very positive and going forward FY15E will also be very positive for the company. Management is very confident about its performance going forward and expects EBITDA margin to be around 25% in FY14E and FY15E. Financials; Rs,cr Sales RM Cost(Operatinal expenses) WIP Employee Cost Other expenses Total expenses EBITDA Depreciation and Amortisation Other Income EBIT Interest PBT Tax Exp PAT Growth-% (YoY) Sales EBITDA PAT Expenses on Sales-% RM Cost Employee Cost Other expenses Tax rate Margin-% EBITDA EBIT PAT Valuation: CMP No of Share NW EPS BVPS RoE-% P/BV P/E FY10 640.88 480.33 0 19.7 27.81 527.84 113.04 4.39 12.62 108.65 9.02 112.25 29.63 82.62 FY11 706.97 495.13 0.84 25.28 29.57 550.82 156.15 3.82 8.95 152.33 9.39 151.89 33.67 118.22 FY12 943.88 665.45 -2.92 22.55 42.96 728.04 215.84 6 19.3 209.84 13.44 215.7 63.14 152.56 FY13 1067.95 765.78 -2.55 27.29 47.47 837.99 229.96 6.45 6.4 223.51 9.22 220.69 61.19 159.5 FY14E 1110.8 766.5 -2.7 29.4 29.4 822.7 288.1 7.7 11.1 280.4 25.4 266.2 77.7 188.5 FY15E 1229.9 860.9 -2.9 36.9 36.9 931.8 298.1 9.2 12.3 288.9 26.0 275.2 80.4 194.8 16.9% 52.8% 72.1% 10.3% 38.1% 43.1% 33.5% 38.2% 29.0% 13.1% 6.5% 4.5% 4.0% 25.3% 18.2% 10.7% 3.5% 3.4% 74.9% 3.1% 4.3% 4.6% 70.0% 3.6% 4.2% 4.8% 70.5% 2.4% 4.6% 6.7% 71.7% 2.6% 4.4% 5.7% 69.0% 2.7% 2.7% 7.0% 70.0% 3.0% 3.0% 6.5% 17.6% 17.0% 12.9% 22.1% 21.5% 16.7% 22.9% 22.2% 16.2% 21.5% 20.9% 14.9% 25.9% 25.2% 17.0% 24.2% 23.5% 15.8% 138.9 9.14 237.55 9.0 26.0 35% 5.3 15.4 138.9 9.14 670.48 12.9 73.4 17.6% 1.9 10.7 181.15 9.17 834.61 16.6 91.0 18.3% 2.0 10.9 180.53 9.19 986.5 17.4 107.3 16.2% 1.7 10.4 160.0 9.2 1158.6 20.5 126.1 16.3% 1.3 7.8 160.0 9.2 1337.0 21.2 145.5 14.6% 1.1 7.5 (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 4
  5. 5. Escorts Ltd. V- "Buy" 5th Mar' 14 "Volume Growth Remains The Key; Retain Buy……." Company update Buy CMP Target Price Previous Target Price Upside Change from Previous 115 175 95 52% 84% Market Data BSE Code NSE Symbol 52wk Range H/L Capital Mkt (Rs Crores) Average Daily Volume Nifty 500495 ESCORTS 48/96 1,402 225,953 6,298 In February month company witnessed a good tractor volume number. In February 2014 company sold 4,627 tractors, growth of 7.5% against 4,305 tractors in February month of 2013. Domestic sales in February 2014 up by 6.8% stood at 4,581 tractors as against 4,288 tractors in February 2013. Export for the month of February 2014 stood at 46 tractors as that of 17 tractors in February 2013. Also during the last 17 months tractor sales grossed at 94553 units as against 86337 units sold during corresponding period of 15 months last year. Going forward management indicated that volume growth is to be in double digit and at arround 14%. The management further indicated that margins should improve from the current level on the back of improvement in the product mix, taking hikes in the prices, controlling inflation, rid of inflation, as well as cutting down on the other costs. Tractor Volume Stock Performance-% Absolute Rel. to Nifty 1M (7.5) (10.9) 1yr 86.6 77.3 YTD 131.4 121.9 Share Holding Pattern-% Promoter's FII's DII's Others's 3QFY14 42.0 9.4 2.1 46.5 2QFY14 1QFY14 42.0 42.0 12.3 12.1 4.7 5.4 41.0 40.6 (Source: Company/Eastwind Research) Outlook An increase in volumes is an indication of healthy demand. The rise in volumes for this quarter can be attributed to a good monsoon. Tractor sales seem to have improved across all players, indicating an overall improvement in demand. We believe that this segment will continue to support the growth of the company. The adverse macroeconomic conditions, however, will see the performance of its construction equipment segment and auto ancillary segment remaining subdued. For these businesses, the firm is looking at premium product positioning and to deliver a better than expected customer experience. In addition, it is looking at the export market as a window of opportunity especially in the auto ancillary business. Valuation The stock is currently trading at 6.5x FY14E EPS with a negative bias in case of construction equipment segment due to adverse macroeconomic conditions . At current price of Rs. 117, the stock is trading at P/E of 7.1 x for FY13E and 6.5 x the FY14E. Escorts could post EPS of Rs. 12.13 for FY14E and Rs. 12.98 for FY15E. An increase in volumes is an indication of healthy demand. Tractor sales revival has enabled the company to register strong result. Escorts’ EBITDA margin and bottom-line exceeded our expectations. Going forward, we remain positive on the company’s growth prospects particularly in AMP segment. Going forward, we remain positive on the company’s growth prospects particularly in AMP segment. We expect demand to improve further in FY2014E with the economic recovery. However, we remain cautious with regards to growth in Construction Equipment segment in near-to-medium. Thus, We revise our estimates upwards to factor in the strong CY13 tractor volume performance. We therefore revised our rating on the stock from "Reduce" to "Buy" and advised to our investors to enter at current level with Revised price target of Rs. 175 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 5
  6. 6. Escorts Ltd. Key financials : PARTICULAR 2009A 2010A 2011A 2012A 2014E 18 Months 2015E 2016E 2600 53 2653 160 100 60 67 86 29 57 11 6.3 1.2 3353 27 3380 220 172 48 18 181 49 132 11 12.5 1.0 4101 56 4157 168 120 48 71 104 -15 119 13 11.3 1.2 4049 48 4098 190 139 50 97 90 19 71 13 6.7 1.2 7424 75 7499 438 346 92 135 285 77 208 13 19.7 1.2 6186 60 6246 402 332 70 65 326 88 238 20 22.6 1.9 7424 72 7496 557 473 84 65 479 129 350 20 33.1 1.9 6.2% 3.2% 2.2% 5.7% 1.1% 4.0% 3.1% 6.6% 5.4% 3.9% 5.8% 0.5% 7.8% 6.3% 4.1% 2.5% 2.9% 15.9% 1.7% 6.7% 5.3% 4.7% 2.2% 1.7% 10.6% 1.9% 4.3% 3.2% 5.9% 3.8% 2.8% 17.3% 1.1% 11.4% 9.4% 6.5% 5.2% 3.8% 19.8% 1.7% 11.6% 9.8% 7.5% 6.4% 4.7% 29.1% 1.7% 14.7% 12.7% 1425 402 1827 9 110 1686 405 2091 11 216 1784 486 2270 11 71 1645 554 2199 11 64 1834 390 2224 11 114 2052 375 2427 11 114 2382 375 2757 11 114 157.1 0.7 1.5 17.5 1.4 1.8 159.6 1.4 9.5 17.3 1.6 2.0 168.9 0.4 1.7 6.3 1.8 2.3 155.8 0.4 1.4 9.5 1.8 2.5 173.6 0.7 2.6 5.8 3.3 4.0 194.3 0.6 5.1 5.1 2.5 3.0 225.5 0.5 7.3 3.4 2.7 3.1 Performance Revenue Other Income Total Income EBITDA EBIT DEPRICIATION INTREST COST PBT TAX Reported PAT Dividend EPS DPS Yeild % EBITDA % PBT % NPM % Earning Yeild % Dividend Yeild % ROE % ROCE% Position Net Worth Total Debt Capital Employed No of Share CMP Valuation Book Value P/B Int/Coverage P/E Net Sales/CE Net Sales/Equity (Source: Company/Eastwind Research) (Figures In crore) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 6
  7. 7. Infosys "BUY" 4th March' 14 "Meritocracy to growth" Company update BUY Focus on meritocracy for client satisfaction as well as margin expansion; CMP Target Price Previous Target Price Upside Change from Previous 3793 3910 3620 3% 8% In the recent webcast, Mr. Narayan Murthy expressed its view regarding senior level exits from the company. In near term, non-performers in Infosys could be asked to leave or may hand over layoff notices. Despite high salaries, some identified employees are not contributing so much to improve productivity and efficiency of operations. Already, the restructuring initiatives has taken place at the top of the pyramid and now shifted to mid level of pyramid. Hence, its pink slip strategy indicates to regain its growth and margin in near term. Considering the strategy to build clients relation, execution of growth oriented policy and combination of reduced onsite costs and higher utilization would be an optimistic growth story despite recent hiccups of top management exit. Key takeaways from recent webcast; Restructuring at middle management: Mr. Murthy has taken initiatives to improve cost efficiency and effective delivery system. The management has rewarded the top performers and has given an opportunity to mediocre performers. Its PIP (performance Improvement Program) followed by exam, and appraisal would dictate the level of efficiency for mediocre, and the situation of involuntary attrition. Market Data BSE Code NSE Symbol 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume Nifty 500209 INFY 3847/2190 217810 1240448 6221 Stock Performance Absolute Rel. to Nifty 1M 4.5 0.8 1yr 30.4 21.6 YTD 53.1 49.4 Share Holding Pattern-% Promoters FII DII Others Current 15.94 40.65 15.35 28.06 1 year forward P/E 2QFY14 1QFY14 15.94 16.04 39.93 39.55 16.16 18.28 27.97 26.13 Cost Rationalization: Company’s employee costs have ballooned very rapidly in the last 2-3 years. For example, on-site compensation was 36% of the overall revenue in FY11 and it went up to 46.3% in FY13, Overall employee cost on sales increased from 52%(FY09) to 56% (FY13). Company has hired a number of employees at higher salaries outside India and employees are not adding efficient growth in productivity. Improving utilization level: Comparing with other peers, its utilization level (excluding trainees) declined from 80% in FY11 to 74% in FY13. Post NRN entry, company had hiked offshore wage at the rate of 8% and overseas at 3%. We expect that company’s management could decide for wage hike across onsite as well as offshore to enhance its utilization rate in near term. View and Valuation: Infosys seems to be on its way to rediscovering its past mojo with revenue momentum kicking, and the NRN invisible hand in play. Further announcement of strategic acquisitions, better utilization of cash balances, better deal win, consistent client traction and revenue momentum would help the company to bridge the gap with rivals such as TCS. On an ongoing basis, Infosys will retain its revenue acceleration and margin expansion, also operating metrics will turn into greenery from hay. Upgradation of earning guidance by management hinted to join the party to enjoy with 12-14% earnings growth for FY14E like other top bellwether. At a CMP of Rs 3793, it trades at 17.4x FY15E earnings. We retain our “BUY” view on the stock with a target price of target price of Rs 3910 . Rs, Crore Financials 3QFY14 2QFY14 3QFY13 (YoY)-% (QoQ)-% Revenue 13026 12965 10424 25.0 0.47 EBITDA 3258.9 2836.9 2677 21.7 14.88 PAT 2874.9 2406.9 2369 21.4 19.44 EBITDA Margin 25.0% 21.9% 310bps 25.7% (70bps) PAT Margin 22.1% 18.6% 350bps 22.7% (60bps) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 7
  8. 8. Infosys. Employee cost on sales-% Employee cost on sales at all time high (Source: Company/Eastwind) Total Employee and additions, Looking to bring in about maximum 6,000 off-campus offers, Infosys will hire up to 16,000 engineers next year. (Source: Company/Eastwind) Headcount Metrics: Its attrition increased to 18% from 17.3%(2QFY14) on LTM basis, however on sequentially basis they have been able to control its attrition. we hope that the further salary hikes across the board will bring down the attrition levels going forward. (Source: Company/Eastwind) Utilization: The Company's Utilization is likely to keep inching up, which could lead to margin expansion for a couple of quarters and that is going to be a huge positive for Infosys as a company. (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 8
  9. 9. Infosys. Key facts from Management Interview; ■ Management upgraded its earning guidance for FY14E from 9-10% to 11.5-12%. This guidnace means the company only has to achieve flat growth in the fourth quarter to meet the projection. ■ With 85% of the company’s revenues coming from clients based in US and Europe, the company should hope the current economic recovery in developed countries would help its revenues. ■They are seeing confidence coming back from client’s metrics. However, they expect [their] budgets only remain stable from last year. Clients are still focused on cost. ■ The Company is looking to bring in about maximum 6,000 off-campus offers starting late January early February, so there is a lot of activity going on that is bringing people in, engaging and developing. Financials Rs in Cr, Sales, INR Employee Cost Other expenses Total Expenses EBITDA Depreciation Other Income EBIT Interest Cost PBT Tax PAT Growth-% Sales EBITDA PAT Margin -% EBITDA EBIT PAT Expenses on Sales-% Employee Cost Other expenses Tax rate Valuation CMP No of Share NW EPS BVPS RoE-% Dividen Payout ratio P/BV P/E FY10 22742 12085 2792 14877 7865 905 982 7942 0 7942 1681 6261 FY11 27501 14856 3677 18533 8968 854 1211 9325 0 9325 2490 6835 FY12 33734 18340 4671 23011 10723 928 1904 11699 0 11699 3367 8332 FY13 40352 22565 6254 28819 11533 1099 2365 12799 0 12799 3370 9429 FY14E 50330 28185 8556 36741 13589 1371 2567 14785 0 14785 3992 10793 FY15E 59631 33691 10734 44425 15206 1624 3578 17160 0 17160 4633 12527 4.8% 9.3% 4.6% 20.9% 14.0% 9.2% 22.7% 19.6% 21.9% 19.6% 7.6% 13.2% 24.7% 17.8% 14.5% 18.5% 11.9% 16.1% 34.6% 34.9% 27.5% 32.6% 33.9% 24.9% 31.8% 34.7% 24.7% 28.6% 31.7% 23.4% 27.0% 29.4% 21.4% 25.5% 28.8% 21.0% 53.1% 12.3% 21.2% 54.0% 13.4% 26.7% 54.4% 13.8% 28.8% 55.9% 15.5% 26.3% 56.0% 17.0% 27.0% 56.5% 18.0% 27.0% 2615 57.4 23049.0 109.1 401.7 27.2% 25.1% 6.5 24.0 2765 57.4 25976.0 119.0 452.4 26.3% 45.9% 6.1 23.2 2865 57.4 31332.0 145.1 545.6 26.6% 24.0% 5.3 19.7 2400 57.4 37994.0 164.2 661.7 24.8% 45.1% 3.6 14.6 3793 57.4 45629.8 188.0 794.7 23.7% 23.0% 4.8 20.2 3793 57.4 54797.5 218.2 954.3 22.9% 19.8% 4.0 17.4 (Source: Company/Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 9
  10. 10. Powergrid.. Update BUY CMP Target Price Previous Target Price Upside Change from Previous 95 118 NA 25% NA Market Data BSE Code NSE Symbol 532898 POWERGRID 1yr 9.5 3.8 YTD 8.1 4.0 Strong Capitalization : Power Grid’s adjusted PAT increased 4.3% YoY to Rs. 1,043 crore in Q3FY14 While asset capitalisation was below estimate Rs. 3050 crore, PGCIL commissioned another Rs. 3450 crore in January 2014 taking overall capitalisation to Rs. 13000 crore YTDFY14. Share Holding Pattern-% Promoters FII DII Others 3QFY14 57.9 25.4 8.6 8.2 Overall revenues increased 9.6% YoY to Rs.3685 crore due to lower than anticipated capitalisation (Rs.3050 crore) in Q3FY14 . Income increased 6.5%, 10.0% and 121.9% YoY in transmission, telecom and consultancy income, respectively. Other income declined 9.7% YoY to Rs.116 crore as cash was deployed across various upcoming projects. Margins declined 336 bps YoY to 87.4% due to 55.7% YoY rise in transmission & other expenses to Rs.333 crore. Tax expenses increased 7.5% YoY to Rs. 399 crore. Q3FY13 included a one-time income of Rs.167 crore as wage revision benefit. Adjusting the same, PAT increased 4.3% YoY to Rs.1,043 crore. The Central Electricity Regulatory Commission (CERC) issued the final tariff regulations for the period FY15-19 – these regulations form the basis of Power Grid’s earnings (regulated returns) from its core transmission business over the next five years.The Key take aways of these Regulations are Normative TAF (NATAF) for incentives lowered; no incentive for TAF >99.75% .Normative O&M charges raised (vs. draft), but still below FY14 levels. Stock Performance-% Absolute Rel. to Nifty 3rd march' 14 116/87 49490 22270 6277 52wk Range H/L Mkt Capital (Rs Crores) Average Daily Volume (Nos.) Nifty 1M 8.2 9.5 "Buy" 2QFY14 1QFY14 57.9 69.4 19.4 14.7 8.8 7.6 13.9 8.3 1 yr Forward P/B Capitalisation of assets remains on track. Till Jan end the company has capitalised Rs 118bn of assets which is 70% of our full year estimate. Since last two months of the year usually account for the bulk of yearly commissioning we are confident that the co. will meet our estimate of Rs 170bn for FY14. Power Grid's Raichur-Solapur line has been connected to national grid. Management Says there were four trippings in the first week. Two were to increase reliability and were done intentionally, and the other two were because of a few glitches. For the last month there has been no tripping. View & Recommendation With equity dilution overhang on the stock is removed, so we expect the stock price will drive by purely on its fundamentals, on our estimates we maintain a positive fundamental outlook for Power grid. Also, govt. stake coming down to 58% is a positive, as risk of further equity dilution is reduced The stock is trading at 1.7x FY15E BVPS. We estimate to Power grid stock to trade at 1.8x BVPS. Valuation is very reasonable for a business model with RoE (16%), strong growth visibility and minimal operational risks. We valued stock for a 12 month period at a target price of Rs.118. Source - Comapany/EastWind Research Financials : Revenue EBIDTA Net Profit EBIDTA% NPM% Q3FY14 3685 3105 988 84 27 Y-o-Y % 9.4 6.0 -8.5 -3.1 -16.3 Q-o-Q % -7.9 -8.4 -16.9 -0.6 -9.8 Q3FY13 3369 2930 1080 87 32 Q2FY14 3999 3389 1189 85 30 (In Crs) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 10
  11. 11. IFGL Refractories Ltd. V- "Buy" 3rd Mar' 14 "Strong Fundamentals…..." Buy 62 80 NA 29% 0% Result update CMP Target Price Previous Target Price Upside Change from Previous Market Data BSE Code NSE Symbol 52wk Range H/L Capital Mkt (Rs Crores) Average Daily Volume Nifty 532133 IFGLREFRAC 24/68 214 6,366 6,277 Stock Performance-% 1M (0.5) (3.6) Absolute Rel. to Nifty 1yr 75.7 68.5 YTD 100.2 89.7 Share Holding Pattern-% Promoters FII DII Others 3QFY14 71.3 0.0 2.2 26.5 1 yr Forward P/B 2QFY14 1QFY14 71.3 71.3 0.0 0.0 2.2 2.2 26.5 26.5 IFGL refractories is the flagship company of SK Bajoria group.Company manufacturing Continuous Casting Refractories and Special grade Refractories which find applications in steel industry. IFGL has grown as an Indian multinational with manufacturing facilities located in Brazil, China, Czech Republic, Germany, India, UK and USA. Krosaki HarimaCorporation Japan ,a subsidiary of world’s second largest steel maker NipponSteel Corporation holding about 15 % stake in IFGL. The company has a lot of subsidiaries with the ones in US and Germany seemingly doing well. For the latest December quarter,on a consolidated basis company reported a Sales of Rs. 195.7 Cr v/s Rs. 168.9 Cr. Net profit improved sharply from Rs. 9.5 Cr to Rs. 14.3 Cr. For 9 Month period EPS is Rs. 13.9 which is more than the full year figure of Rs. 7.3 of last year. We expect IFGL will report its best ever performance in this full year. Considering industry’s improving prospects, stabilization of production from its newly built plant at Kandla SEZ and out performance of company in its financials, We don’t expect any scope for deep correction, hence recommending a BUY. Industry revival to spur growth : Fate of refractory companies closely related with the growth of steel industry. Now steel industry world around showing some earlier signs of revival.As a global player ,IFGL is expected to get immense benefit from this revival.Its technical collaboration and equity participation with one of the world leaders also helping the company to adopt latest technology in manufacturing process. A major portion of company’s income is from exports and the currency valuation of currency is also positive for it. Steel industry in the US and in Europe is coming out of pro-longed recession and demand in India is also expected to pick up on account of major projects getting started. Increase in capital expenditure for capacity expansion by major steel producers both within India and internationally augurs well for the refractory industry Low leverage balance sheet and attractive valuations augurs well : IFGL reported debt equity ratio of 0.35x in Sep FY13, even after the series of acquisitions, and we expect it to gradually reduce over time to 0.28x in FY15E.Company having an uninterrupted dividend paying record for the past four years. Promoters holding more than 70 % stake (NIL pledged) in the company and another 7 % is held by large investors. At a time the steel industry is showing revival, We expect IFGL will report its best ever performance in this full year. Considering industry’s improving prospects, stabilization of production from its newly built plant at Kandla SEZ and out performance of company in its financials, We don’t expect any scope for deep correction, hence recommending a BUY. Valuation : At CMP of INR 62, IFGL is trading at P/E of 3.7x and 3.2x its FY14E and FY15E earnings. Company can post the EPS of Rs 16.8/18.6 in FY14/15E and RoE% of 20.3%/19.2% in FY14/15E . We rate a BUY rating on the stock with an 12 months price target price of Rs 80.0 at 4.1x FY15E earnings. Financials Revenue EBITDA PAT EBITDA Margin PAT Margin 3QFY14 194.7 27.2 14.3 14.0% 7.4% 2QFY14 201.4 29.9 19.1 14.8% 9.7% (Source: Company/ Eastwind Research) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (QoQ)-% -3.3% -8.8% -25.2% (80) bps (230) bps 3QFY13 169.0 18.3 9.5 10.9% 5.1% Rs, Crore (YoY)-% 15.3% 48.5% 50.3% 310 bps 230 bps (Standalone) 11
  12. 12. IFGL Refractories Ltd. Key financials : PARTICULAR 2009A 2010A 2011A 2012A 2013A 2014E 2015E 398 2 401 27 20 7 10 13 7 0 6 2 1.8 0.7 415 3 419 58 50 8 5 49 15 0 34 2 9.7 0.6 471 5 476 43 34 9 6 33 8 0 24 0 7.0 0.0 604 3 607 75 62 13 7 58 18 0 40 1 11.5 0.2 671 4 676 58 45 13 8 41 16 0 25 2 7.3 0.6 772 3 776 106 89 17 7 85 27 0 58 2 16.8 0.6 888 3 891 120 103 17 7 99 31 0 68 2 19.6 0.6 6.9% 1.5% 9.7% 3.7% 5.3% 2.8% 13.9% 8.0% 17.6% 1.1% 24.6% 15.6% 9.1% 5.1% 22.9% 0.0% 15.0% 8.3% 12.3% 6.6% 29.2% 0.5% 19.2% 11.9% 8.7% 3.8% 23.7% 1.9% 11.0% 7.1% 13.7% 7.5% 27.2% 1.0% 20.3% 14.6% 13.5% 7.6% 31.6% 1.0% 19.2% 15.0% 114 100 214 3 18 137 79 216 3 55 161 129 290 3 31 207 127 335 3 39 231 129 360 3 31 287 110 397 3 62 353 100 453 3 62 32.8 0.5 2.1 10.3 39.6 1.4 11.1 5.7 46.6 0.7 5.7 4.4 59.9 0.7 9.1 3.4 66.7 0.5 5.6 4.2 83.0 0.7 12.2 3.7 101.9 0.6 14.1 3.2 Performance Revenue Other Income Total Income EBITDA EBIT Depriciation Intrest Cost PBT TAX Derrivative Loss Reported PAT Dividend EPS DPS Yeild % EBITDA % NPM % Earning Yeild % Dividend Yeild % ROE % ROCE% Position Net Worth Total Debt Capital Employed No of Share CMP Valuation Book Value P/B Int/Coverage P/E (Source: Company/ Eastwind Research) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 12
  13. 13. Private Sector Banks Result Review 3QFY14 Better than expected NII on the back of margin expansion and loan growth In our coverage universe, banks NII grew by 15.7% YoY largely due to stable margin and loan growth. Private sector banks are getting benefit from their high base CASA franchise and low share of high cost wholesale bulk deposit. HDFC Bank, ICICI Bank, Indusind Bank and DCB were continued to report 20%+ NII growth whereas Federal Bank, INGVYSYA Bank, J&K Bank saw some stress in their earnings. Well structure balance sheet led healthy growth at operating profit level Operating expenses in our coverage universe remained stable on sequential basis and on very positive note; they delivered on an average basis growth of 19.8% YoY at operating profit level. This was due to healthy NII growth, stable fee income and controlled operating leverage. We have highlighted above that banks with healthy operating profit would do better going forward as strong performance at operating profit level would be possible only in case of well structure balance sheet growth. Economic growth and stress in asset quality issue would be resolve with the passage of time. Although we have not seen any revival in economy nor improvement in asset quality in near term but private sector banks are trading significant discount as against their historical valuation due to possible fear of deterioration in assets. Profitability increased due to healthy NII growth, controlled CI ratio and stable asset quality Most of banking stocks are trading at lower side of valuation band due to earnings pressure, higher operating leverage and asset quality. In our coverage universe, bank reported profit growth of 16.6% YoY higher than our expectation led by margin Nifty Vs Bank Nifty during Year expansion, controlled operating leverage and stable asset quality. Although we saw some earnings pressure in many large and mid cap banks on which Axis bank’s profitability was boost up by right back of investment depreciation and Yes Bank’s provisions and contingencies was almost down by 100% which inflated profit growth by 21.4% YoY. Asset quality continues to persist and would take time despite of uptick in economy Private sector banks delivered better when compare to PSBs in term of asset quality at sequential basis. Sequentially banks reported stable asset quality with high coverage ratio which provided cushion to their earnings. But in our sense, asset quality pressure continues to persist because economy growth is likely to be tepid and it will take some time for recovery in domestic industrial activity and corporate balance sheet’s leverage to decline. According to S&P, with the uptick in economy, bank will have take some time for revival as banks have to struggle for capital base too for further growth but private banks have adequate capital base and healthy tier1 capital. Outlook of asset quality in system is not positive and it would remain challenge for banks in FY14. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 13
  14. 14. Private Sector Banks Result Review 3QFY14 Well structure balance sheet growth and high CASA base would help to keep profitability up We like those banks which did well at operating profit level, keeping in mind that with slower pace of economy growth and rising interest rate scenario, asset quality pressure would persist. Provision and contingencies are already expected to remain high. Most of bank’s profitability was down owing to higher provisions against loan loss. With the recovery in economy loan growth and asset quality would improve with the passage of time but operating leverage and margin expansion are permanent structure of balance sheet. Banks with strong CASA base and adequate deposits growth that could support loan growth easily without depending upon external fund would do better in going forward. Outlook Private Banks are trading at significantly lower to their historical valuation or reasonable valuation due to their possible earnings pressure and asset quality issue. This is on account of sluggish economic growth and political un-clarity. Some banks in our universe are capable to generate high level of profit, have high capital adequacy ratio and lower level of stress. In our sense these banks would do better in current economy macro situation. Out top picks are HDFC Bank, ICICI Bank, Indusind Bank and DCB. Result Snapshot PRIVATE BANK AXISBANK CUB DCB DHANBANK FEDERALBNK HDFCBANK ICICIBANK INDUSINDBK INGVYSYABANK J&KBANK KARURVYSYA SOUTHBANK YESBANK Total NII 2984 198 94 57 546 4635 4256 730 416 647 305 350 665 15882 3QFY14E PPP Net Profit 2615 1604 135 89 46 36 -8 -119 356 230 3888 2326 4440 2533 647 347 274 167 441 321 153 107 216 141 615 416 13818 8198 NII 2937 190 91 82 548 4477 4044 700 440 682 298 364 672 15525 2QFY14 PPP Net Profit 2750 1362 141 84 40 33 18 -1.85 354 226 3387 1982 3888 2352 588 330 276 176 496 303 157 83 212 127 713 371 13020 7427 NII 2495 163 72 74 497 3799 3499 578 403 594 308 353 584 13419 3QFY13 PPP Net Profit 2311 1296 131 85 32 27 14 4 394 211 3024 1859 3452 2250 472 267 263 162 435 289 212 113 235 128 563 342 11538 7033 YoY Growth NII PPP Net Profit QoQ Growth NII PPP Net Profit 19.6 21.2 13.2 2.8 23.8 4.8 1.6 4.0 -4.9 -4.5 17.8 6.1 30.5 44.9 34.7 3.3 15.9 10.2 -23.6 9.8 -154.4 -9.7 -3084.3 9.1 -31.1 -0.4 -142.3 0.5 6352.4 1.8 22.0 21.6 28.6 28.6 25.1 12.6 3.5 5.2 14.8 14.2 17.3 7.7 26.3 37.2 29.9 4.3 10.1 5.1 3.3 8.9 4.3 1.3 3.3 11.2 -5.4 -5.2 -0.6 -11.1 -4.9 6.0 -0.9 -27.8 -5.5 2.4 -2.6 28.7 -0.7 13.9 18.4 -8.1 9.2 19.8 10.4 21.5 16.6 -3.7 -1.0 2.3 1.8 -13.8 6.1 11.3 12.0 10.4 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 14
  15. 15. IT Industry: 3QFY14 results review "Clear acceleration in growth" Price performance of our coverage: Mix performance and margin sustainability, future outlook appears positive; For IT Industry, 3QFY14 has carried out a quarter of mix set of numbers largely impacted by seasonality and furloughs impact. However, most of companies expressed its sanguine view for industry outlook and demand discretionary environment ahead. The Top-4 companies responded a decent set of performance despite seasonally weak quarter with aggregate revenue of 2.8% in USD term (QoQ). Comparing with street expectation, Infosys and HCL Tech beat the street, while TCS and Wipro reported inline set of numbers. On margin front, they surprised positively with back-to-back quarters of margin improvement led by operational efficiencies and cost rationalization. Post earnings, almost all companies management have expressed for better earnings outlook in near term and they were confident to see stronger FY15E than FY14E on healthy growth prospect and a secular improvement in demand trend. (Source: Eastwind) Index Performance: ▲ 43% (Source: Eastwind) ▲ 9.4% (Source: Eastwind) Key takeaways from 3QFY14 earnings: USD revenue was marginally inline and Positive FY15E outlook: Reported USD revenues were in line or very marginally below our estimate during the seasonally weak quarter across the top tier. A part of this, companies management have given better outlook with margin expansion for FY15E, even NASSCOM aired the earning guidance of 13-15% for FY15E, better than FY14E and FY13. Margin ramped up across the Tier-1 and most of mid cap space: Despite flattish currency benefit, companies have been efficient to maintain its margin because of reinvested higher growth and efficient strategy to improve utilization. With macro improving and positive growth outlook, the operating advantage from investment is likely beginning to play out. SMAC and Digital were subject to discussion: Emerging verticals SMAC (Social, Mobility, Analytics and Cloud) and Digital transformation are expected to bring next generation of growth in IT Industry. A number of IT companies, especially tier-1 IT companies have expressed its priority area and strategy to pan-out growth opportunities on these emerging verticals. Current uptrend in discretionary spend is being driven by the same. Deal Pipeline remains healthy: During the quarter, weak seasonality marginally impacted order inflow. For near term, deal pipeline remains healthy and somehow, Pricing will be marginally under pressure in the traditional IT segment, Application Development and Management segment. While, we do not see any pressure on new emerging segments like SMAC, Digital, Infra, etc. Earning Performance v/s Estimates; INFY HCLTECH TECHM ZENSARTECH TATA ELXSI Outperform TCS WIPRO CMC MINDTREE HEXAWARE NIITTECH PERSISTENT ECLERX Inline KPIT Underperform (Source: Eastwind) Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 15
  16. 16. IT Industry: 3QFY14 results review Companies Specific Earnings Review Company TCS INFY* WIPRO HCLTECH# TECHM CMC MINDTREE HEXAWARE$ NIITTECH KPIT PERSISTENT ZENSARTECH ECLERX TATA ELXSI 3QFY13 16069.9 10424.0 9587.5 6273.8 3523.7 493.0 590.1 507.5 514.4 563.3 333.0 525.5 170.8 156.7 Sales,cr 2QFY14 3QFY14E 20977.2 21606.6 12965.0 13069.1 10990.7 11342.4 7961.0 8160.0 4771.5 4819.2 560.8 566.4 769.5 792.2 621.1 629.2 587.3 593.5 702.8 722.0 432.4 436.1 599.7 590.6 214.6 218.5 190.0 195.5 EBITDA,cr 3QFY14 3QFY13 2QFY14 3QFY14E 3QFY14 21294.0 4660.5 6633.0 6300.3 6686.8 13026.0 2677.0 2837.0 3424.1 3258.9 11327.4 2050.2 2503.8 2552.0 2652.7 8184.0 1416.6 2093.0 2080.8 2125.0 4898.6 756.9 1110.9 1084.3 1136.3 561.0 83.2 88.4 87.8 90.8 790.6 120.4 159.8 153.9 154.1 620.0 109.0 147.7 147.9 139.4 587.3 81.3 88.6 86.1 95.1 677.9 87.9 108.1 115.5 103.5 432.8 82.4 100.8 104.7 104.3 594.1 70.1 102.5 87.5 87.3 219.5 66.8 92.8 90.5 88.8 200.1 16.5 32.4 40.4 43.6 *Infosys (net profit for 2QFY14 includes the one-time visa charge of Rs219 crore). 3QFY13 3549.6 2369.0 1598.1 974.3 455.9 61.1 87.7 66.2 56.6 59.9 49.5 48.7 49.8 8.8 PAT,cr 2QFY14 3QFY14E 3QFY14 4633.3 5096.7 5333.4 2407.0 2695.8 2874.9 1932.0 1984.2 2014.7 1416.0 1472.6 1495.0 718.2 754.1 1009.8 67.3 65.6 70.6 113.0 98.6 114.0 98.7 103.6 103.3 60.4 57.4 52.5 66.7 69.4 60.8 60.8 66.9 64.2 70.6 50.4 50.8 67.2 61.4 62.3 19.9 20.5 21.6 (Source: Company/Eastwind) # HCL Technologies (June year ending). $ Hexaware (Follow Callendar year) Growth and Margin Performance-% Company TCS INFY WIPRO HCLTECH TECHM CMC MINDTREE HEXAWARE NIITTECH KPIT PERSISTENT ZENSARTECH ECLERX TATA ELXSI Growth (QoQ)-% Sales EBITDA PAT 1.5% 0.8% 15.1% 0.5% 14.9% 19.4% 3.1% 5.9% 4.3% 2.8% 1.5% 5.6% 2.7% 2.3% 40.6% 0.0% 2.7% 4.8% 2.7% -3.6% 0.9% -0.2% -5.7% 4.7% 0.0% 7.3% -13.1% -3.5% -4.3% -8.8% 0.1% 3.5% 5.6% -0.9% -14.9% -28.0% 2.3% -4.3% -7.2% 5.3% 34.6% 8.5% Growth (YoY)-% Sales EBITDA PAT 32.5% 43.5% 50.3% 25.0% 21.7% 21.4% 18.1% 29.4% 26.1% 30.4% 50.0% 53.4% 39.0% 50.1% 121.5% 13.8% 9.1% 15.5% 34.0% 28.0% 30.0% 22.2% 27.9% 56.0% 14.2% 17.0% -7.2% 20.3% 17.7% 1.5% 30.0% 26.6% 29.7% 13.1% 24.5% 4.3% 28.5% 32.9% 25.2% 27.7% 164.4% 146.9% Margin-% EBITDA PAT 31.4% 25.0% 25.0% 22.1% 23.4% 17.8% 26.0% 18.3% 23.2% 20.6% 16.2% 12.6% 19.5% 14.4% 22.5% 16.7% 16.2% 8.9% 15.3% 9.0% 24.1% 14.8% 14.7% 8.6% 40.5% 28.4% 21.8% 10.8% Margin Change,(QoQ) EBITDA PAT (20bps) 290bps 310bps 350bps 60bps 20bps (30bps) 50bps (10bps) 560bps 40bps 60bps% (130bps) (30bps) (130bps) 80bps 110bps (130bps) (10bps) (50bps) 80bps 80bps (240bps) (320bps) (280bps) (290bps) 470bps 30bps (Source: Company/Eastwind) Tier-1 ; The top four IT companies delivered a decent performance in a seasonally soft quarter with an aggregate revenue growth of 2.8% QoQ. INFY and HCL Tech beat the street on growth and margin front, while TCS and Wipro reported inline set of numbers. Mid cap/Niche (Tier-2)-TECHM and Persistent outmatch peers; TECHM’s broad based revenue growth and deal signing was robust. Persistent system surprised positively on margin front for the second consecutive quarter led by higher utilization. Apart of this, Zensar Tech also reported good margin ramp up during the quarter. As a backbencher, KPIT, NIITTECH and Hexaware reported flat to below expected numbers. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 16
  17. 17. IT Industry: 3QFY14 results review Operating Metrics across Tier-1 IT space Sales mix- Geogrpahy wise Discretionary spends continue to gain momentum in America and in specific pockets in Europe. (Source: Company/Eastwind) Sales mix- Segment wise During the quarter, manufacturing segment reported attractive growth. Whilea mong service offerings, Infrastructure Management Services (IMS) will be a key growth driver. (Source: Company/Eastwind) Utilization Rate-% Employee Addition; TCS INFY WIPRO HCLTECH Total Employee 290713 158404 146402 88332 Gross Addition 14663 6,682 -814 7593 (Source: Company/Eastwind) Attirition rate-% Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. (Source: Company/Eastwind) 17
  18. 18. IT Industry: 3QFY14 results review Key Takeaways from Conference Call; (1) TCS - Confident of beating NASSCOM's FY15 growth guidance of 13-15%, -FY15E will be better than the current fiscal, -Expect Europe to perform better than the US, -Chasing 20-25 large transformational deals, -Seeing an uptick in discretionary spends, - Lateral hiring 50000-55000 in FY15E, (2) INFOSYS -Management upgraded its earning guidance for FY14E from 9-10% to 11.5-12%. -They are seeing confidence coming back from client’s metrics. -The Company is looking to bring in about maximum 6,000 off-campus offers. (3) WIPRO -4QFY14: Revenues from IT Services business to be in the range of $ 1,712 million to $1,745 million* including the revenues from acquisition. -Expect better FY15E than FY14. -Hiring target for FY15E would be like FY14, will focus on onsite hiring. -Wage hike by 1st June ,2014. (4) HCLTECH: -The company is expecting to catch up more deal from US and Europe because of better demand environment ahead. -The company expects to see margin at a range of 21-22% in near term. -The wage hike is spread over two quarters or rather more than two quarters. Q3 and Q4 margin could be impact be 30bps. (5) TECHM -The Company aspires revenues of USD 5 billion by 2015. This expects to be through organic and inorganic initiatives (looking for USD 0.5 billion to 0.8 billion as acquisition targets) going forward. -Year 2014 would be better year than FY13, demand environment and Order pipeline is looking good. -Despite salary hike in 4Q, margin would be on place. Wage hike in 4Q could impact 200bps in margin front, but management is confident to mitigate. -Expecting utilisation rate to 77% from 75%(3QFY14) in near term. -The tax rate expected to be 26% for the FY'14. (6) CMC -CMC continues to target growth ahead of the overall IT industry; the company expects to grow faster than that in the current financial year. -Expects operating Profit margin at 16 percent for FY14E, -The company expects to maintatin its tax regime at 20-20.5% for coming quarter. For next year tax rate could be stand at a range of 20-21%. -Company’s hiring Plan; a net addition of 400-500 this year. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 18
  19. 19. IT Industry: 3QFY14 results review (7) PERSISTENT SYS - Persistent is confident of doing more than 15% revenue ($) growth forFY14E. -They expect to maintain margin at 24-25% for FY14E. -Expects 20-21% growth in the next year from IP led business, which in turn will help improve margins going forward. -The Company’s focus on newer technologies like cloud, analytics, mobility and digital transformation are gaining traction. -The company is optimistic to see more deals on SMACS and IP led business. (8) NIITTECH -Company expects FY14 to be better than FY13 with respect to both revenue growth and EBIT margin. -Managent is very confident to maintain attrition at 12-13% and utilization at 77-80% in near to medium term. -It expects the growth momentum will sustain with holding the margins going forward. (9) ZENSARTECH - It expects double-digit growth in the Enterprise Services business for the FY15 on the back of healthy pipeline. - It anticipates good growth from the IMS for the FY'15. -Management has expressed its margin at a range of 16-17% (10) ECLERX -The billing rates expected to be flat to slight uptick for the FY15E. -Expect to see similar set of environment in FY 15E than FY14. -On margins, it indicated that it will continue to operate in the mid 30% (30-31%) going forward. -Tax rate is expected to see at 23% mark in FY15E. -It continues to look at inorganic opportunities. - Expects to maintain 51% of payout ratio. (11) MINDTREE -Management expects the strong traction in top 10/20 clients to continue. -Expects 4QFY14E revenue performance to be better than both 4QFY13 revenue performance (+2.8% QoQ) as well as 3QFY14 revenue growth (+2.5% QoQ). -Company expects to maintain operating margins at current levels in the near/medium term (12) KPIT -Management expects to see better revenue growth in 4QFY14E than 3QFY14. -The company is making significant changes in organization structure. -Margins are expected to improve going forward as the one off during the quarter will be absent. -Utilization will also go up as revenue growth is realized on the back two deals won this quarter which have a duration of 12 months. Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. 19
  20. 20. IT Industry: 3QFY14 results review Industry Outlook: For FY15E, NASSCOM expects IT exports to grow by 13-15% and domestic market to grow by 9-12% based on broad feedback loop from companies and captives. We have seen a significant increase in global technology spending this year, creating opportunities for the Indian software services sector to post double-digit growth again in export as well as in the domestic markets. FY15E promises to be bigger and stronger than the last 3 years, which were marked by bloodbath in global markets due to Euro-zone crisis and falling consumer confidence in the US. Demand is set to pick up in sectors like BFSI, healthcare, retail and transportation globally in the year ahead. For FY15E, We expect that strong fundamentals should help to sustain earning momentum in FY15E. Foray into niche verticals and executions of large deal would play an important factor for better earning visibility in near future. There is a window of opportunity for competent large caps and midcaps to displace incumbents and gain some incremental business. In the past 4 quarters, large caps (four companies) have grown at 3.4% CQGR, while midcaps (five companies) at 3.2%which is comparable to larger peers. Concerns: US Immigration Bill to remain an overhang in short-to-medium term, However, hardening of regulatory related to visa approval in USA, Canada and Australia could spoil the party. Even, the approval of Immigration Bill attached with higher visa fee, wage requirements and enhanced audit by US agencies could turn the growth story of Indian IT players adversely. If passed in its current form, the Bill could hurt the margins of the Indian IT export sector, which derives almost 55-60% of its revenues from USA. Our top picks: TCS and HCLT are growing the fastest and with tremendous margin performance. Infy is accelerating growth … While all companies are accelerating its revenue growth and shaping up its margin because of favorable demand and supply environment. Across the tier-1 IT space, TCS, INFY and HCL TECH remain our best picks in order of our preference. These companies are very much optimistic to improve margin as well as operational efficiencies with healthy deal pipeline across emerging verticals as well as traditional IT Space under positive demand scenario. Hence, with strong medium term earnings visibility, better demand environment and optimistic management comments, we maintain our positive stance on (In order of preference) TECHM, PERSISTENT, ZENSARTECH, ECLERX and KPIT under mid cap space. View and valuation: Company TCS INFOSYS HCLTECH WIPRO TECHM CMC NIITTECH KPIT HEXAWARE PERSISTENT eCLERX TATAELXSI ZENSARTECH MINDTREE CMP (26.02.14) 2182.4 3803.85 1572.9 603.35 1821.65 1450.4 446.4 174.9 165.85 1119.25 1341.05 518.65 387.2 1632.7 View Target BUY BUY HOLD NEUTRAL BUY NEUTRAL HOLD BUY NEUTRAL HOLD BUY NEUTRAL BUY NEUTRAL 2510 3910 1560 2130 443 177 1065 1358 440 - Upside % 15.0% 2.8% -0.8% 16.9% -0.8% 1.2% -4.8% 1.3% 13.6% - FY13 71.82 164.2 58.10 25.0 123.97 75.3 36.28 10.8 13.90 46.1 64.25 10.6 40.03 89.7 EPS-Rs FY14E 95.00 188.0 79.36 31.1 155.37 86.0 43.33 12.6 15.04 61.4 71.61 24.0 52.70 100.9 FY15E 109.31 218.2 98.11 33.5 175.50 92.4 54.18 16.8 16.01 79.1 83.65 28.4 68.97 114.9 FY13 30.39 23.16 27.07 24.09 14.69 19.27 12.30 16.19 11.93 24.27 20.87 48.79 9.67 18.20 Narnolia Securities Ltd, Please refer to the Disclaimers at the end of this Report. P/E-x FY14E 22.97 20.24 19.82 19.42 11.72 16.86 10.30 13.85 11.02 18.22 18.73 21.59 7.35 16.18 FY15E 19.97 17.44 16.03 18.01 10.38 15.70 8.24 10.40 10.36 14.15 16.03 18.29 5.61 14.21 FY13 36.4% 24.8% 30.7% 21.7% 34.8% 24.1% 20.0% 20.1% 27.4% 18.1% 43.8% 16.9% 23.2% 28.4% RoE-% FY14E 37.5% 23.7% 31.5% 22.7% 30.7% 22.8% 19.4% 19.3% 24.9% 20.3% 37.9% 29.7% 24.5% 25.6% FY15E 34.4% 22.9% 29.4% 20.8% 26.0% 20.7% 19.6% 20.7% 22.5% 21.4% 34.4% 27.4% 25.2% 23.6% 20
  21. 21. N arnolia Securities Ltd 402, 4th floor 7/ 1, Lord s Sinha Road Kolkata 700071, Ph 033-32011233 Toll Free no : 1-800-345-4000 em ail: research@narnolia.com , w ebsite : w w w .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.

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