Buy Tanla Solutions; target Rs 533: IL&FS

IL&FS has recommended buy rating on Tanla Solutions with target price of Rs 533.

IL&FS report on Tanla Solutions:

Capitalising on the growing global share of nonvoice mobile telephony

Tanla Solutions (Tanla), an aggregator in the U.K. and Ireland, is expected to post a two-year revenue and EPS CAGR of 45.8% and 42.0% respectively.. This growth would be supported by its increasing market share in these geographies. We initiate coverage on the stock with a ‘BUY’ rating and a target price of Rs 533(33.2% upside), PER of 17.5x and 14.2x FY08E and FY09E earnings.

Key Investment Highlights

Benefiting from the expanding non-voice market in the U.K.:

Tanla is expected to benefit from the growing nonvoice mobile market in the U.K., estimated at GBP 1.6 billion in CY06. The market is expected to grow at 20-25% during the next few years.

Geographical expansion to fuel future growth:

Tanla plans to enter the U.S., Singapore, and Australia by the end of FY08E. This move, we believe, would enable the company in increasing its target market and attracting larger content providers.

Provides end-to-end solutions:

Unlike its competitors, Tanla offers end-to-end solutions to its clients. These solutions include network billing and delivery, application development, and infrastructure management.

Financials:

Tanla is expected to post an EPS of Rs 30.5 and Rs 37.4 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 42.0%.

Valuations:

We have valued Tanla at a PER of 14.2x FY09E earnings. Our valuation is based on the average PER of its competitors who are listed in the U.K. At our target price of Rs 533, the stock would be quoting at FY08E PER of 17.5x and PEG of 0.31x. We initiate coverage with a buy.




Buy SBI; target Rs 1780: Sharekhan Research

The Reserve Bank of India (RBI) has announced that it is going to transfer its 59.7% holding in State Bank of India (SBI) to the government for Rs 35,530 crore on June 29, 2007. The transaction is revenue neutral for the government, as the RBI would declare a special dividend of a similar amount to replace the amount paid by the government for the stake sale.

The SBI management has said that the bank will require to raise Rs15,000 crore of capital in FY2008; of this Rs 6,000 crore is likely to be in the form of equity and the balance as debt.

The current guidelines restrict SBI from diluting the promoter's stake below 55% and this would hinder the bank's capital raising plans. Hence the management is of the view that the follow-on offer would take place after the amendment to the SBI Act, most probably in December 2007.

SBI has plans to consolidate its insurance and asset management businesses into a separate non-banking financial company (NBFC). It also plans to sell a 10% stake in the NBFC to three to four investors and intends to list the arm in FY2009. All these would be significant value drivers going forward. The chairman of the bank has stated that he expects the valuation of the life insurance business to be around Rs 28,700 crore (USD 7 billion) while we have valued the same business at Rs 23,800 crore (USD 5.8 billion). Our valuation is lower considering the roadblocks that the bank is likely to face while unlocking the value in these investments, just as ICICI Bank is facing now.

After providing for the AS-15 impact (Rs 900 crore of extra provision per year from FY2008-12) our earnings estimates for FY2008 and FY2009 have reduced by 4% each. We have also introduced our FY2009 estimates. Based on the current market price of Rs 1,525 the stock is currently trading at 13.9x FY2009E earnings per share (EPS), 1.9x FY2009E stand-alone book value of Rs 813 and 1.4x FY2009E consolidated book value of Rs1,061. The stock has run up 54% in a span of the past three months. Hence in the near term there could be some profit booking and consolidation. However, we believe the bank has entered a sweet spot as a host of policy changes in the banking sector and for SBI could unlock significant value in the stock in the medium term. We maintain our Buy recommendation on the stock with a revised twelve-month price target of Rs 1,780.

Significant capital raising plans undertaken by SBI

SBI plans to raise Rs15,000 crore in FY2008. Of this Rs 6,000 crore is likely to be raised in the form of equity and the balance as debt. The current guidelines restrict the bank from diluting the promoter's stake in it below 55% and would hinder its capital raising plans. Hence the management is of the view that the follow-on offer would take place only after the amendment to the SBI Act, most probably in December 2007. The bank would need Rs 5,000 crore for Basel II compliance. As per the management the associate banks will need around Rs 8,000 crore by 2009. The insurance business would also require significant injection of capital as SBI aims for robust growth for its life insurance venture.

Alternate instruments to be preferred

Currently the holding of foreign institutional investors in the bank has reached the maximum ceiling. In order to get better valuations from the foreign investors the bank has requested the government to consider the issue of nonvoting shares. Again guidelines on the issue of preference shares are awaited. Since SBI's current capital adequacy ratio (CAR) is at 12.3% with Tier-I CAR at 8%, the bank prefers to wait and then decide on the instruments for the capital raising exercise. Some of the mid-sized public sector banks have already reached the 51% government threshold holding limit, hence some developments on alternate capital raising plans are expected which would trigger a re-rating in the public sector banking stocks.

Valuation and view

We have also introduced our FY2009 estimates. Based on the current market price of Rs1,525 the stock is currently trading at 13.9x FY2009E EPS, 1.9x FY2009E stand-alone book value of Rs 813 and 1.4x FY2009E consolidated book value of Rs 1,061. The stock has run up 54% in a span of the past three months. Hence in the near term there could be some profit booking and consolidation. However, we believe the bank has entered a sweet spot as a host of policy changes in the banking sector and for SBI could unlock significant value in the medium term. We maintain our Buy recommendation on the stock with a revised twelvemonth price target of Rs 1,780.





Buy Infosys; target of Rs 2750: Karvy Stock Broking

Karvy Stock Broking has recommended buy rating on Infosys Technologies with target price of Rs 2750.

Karvy Stock Broking report on Infosys Technologies:

Unlikely to take over CapGemini

There is lot of speculation in the market that Infosys might take over Cap Gemini, which we believe is difficult to fathom as Cap Gemini with revenues of USD 10 billion – is 3x the revenue size of Infosys with an employee strength of close to 70,000. The market is speculating the transaction can go through on the premise that the MCap of Capgemini at USD10 billion is one-third of Infosys with a revenue productivity which is 3x of Infosys. So there is lot of speculation that the acquisition could be a strategic fit (for Infosys) in a rupee appreciating environment. Besides the consulting business which accounted for just 3.6% of FY07 revenues reported a loss of Rs 1.1 billion, so the investment community is probably second guessing that acquisition can give unprecedented scale in the consulting business. Besides the acquisition can significantly increase the revenues from Europe which would give a natural hedge against any further USD depreciation.

No doubt the speculation is not without merit as most of the fast growing IT services companies of US acquired consulting companies to strengthen the services’ practice. As a natural progression IT services and solutions’ companies tend to acquire consulting companies, but our reading of Infosys is that it would not undertake an acquisition which would be difficult to integrate with its existing work culture and environment. This speculation would have probably gained currency because the Q1FY08 numbers are likely to be disappointing on account of 6% rupee appreciation against US dollar and 4% rupee appreciation against Pound Sterling. According to our Q1FY08 estimates the company would report a sequential revenue growth of 2.1% and a net profit is likely to decline by 14% sequentially. Have we remove the one-time tax credit of Rs 1.24 billion which it got in Q4FY07, then the sequential decline only by 3 to 3.5%.

Besides there is a strong possibility that the rupee guidance could be revised downwards as the rupee is not showing any weakness, the full year rupee guidance may be revised downwards. We at this point of time are not revising our earnings and price target as we expect the company to do an acquisition in the consulting space which would be a of course much smaller and which can take the consulting company to report serious profit over the next 1 – 2 years. Besides, we are confident that the product revenues could see a dramatic increase in revenue growth, which too an extent can mitigate the pressure of currency on the margins. The company would be getting billing rate increase of close of 1 – 1.5% per quarter which would translate into 5% increase in billing rates and the client acquisition momentum will continue to see the same kind of momentum that we have been witnessing for the past many quarters.

Infosys is in the midst of structural shift in its business model, whereby apart from entering into multi-year long term contracts with its customers and deploying bulk of its resources with it, Infosys is trying out shorter duration larger projects by entering at higher price points as it could give better yields and superior per employee productivity to manage the wage inflation and other input costs. The company is implementing a strategy – to let go clients who are unwilling to raise the billing rates at agreed regular intervals, despite meeting all the performance parameters as a result we are higher churning within its top 10 clients. Over the last 3 quarters the company has managed to increase its billing rates by 5%, which is still a difficulty for many of the tier-1 companies.

No doubt on the back of rupee appreciation the stock has lost over 10% over the last 3 months, we however are not revising our recommendation nor price target. We continue to maintain our BUY rating on the stock with a price target of Rs 2750, as the company could be embarking on little more aggressive and riskier strategies which could the company into a different orbit of growth. The fundamentals of the company are intact and what has made the company’s earnings to grow at a muted pace is the rupee. If there is any reversal, which could be a scenario in the 2H, then the earnings would bounce back. At the current price the stock price is trading at 22xFY08E and 18xFY09E and we continue to maintain our BUY rating on the stock.





Sasken Comm June qtr net profit at Rs 10 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, Sasken Communication Technologies is expected to post June quarter FY08 revenues of Rs 133.7 crore (Rs 1,337 million) versus Rs 135.4 crore (Rs 1,354 million), down 1.2% QoQ.

During the same quarter the company’s net profit is seen down 14.5% at Rs 10 crore (Rs 100 million) versus 11.7 crore (Rs 117 million), QoQ.

Citigroup's report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades





NIIT Q1 net profit seen at Rs 16.1 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, NIIT is expected to post Q1FY08 revenues of Rs 229 crore (Rs 2,290 million) versus Rs 256.6 crore (Rs 2,566 million),down 10.8%, QoQ.

During the same quarter the company’s net profit is seen down 5.9% at Rs 16.1 crore (Rs 161 million) versus 17.1 crore (Rs 171 million), QoQ.

Citigroup's report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades





KPIT Cummins Q1 net profit seen at Rs 12.2 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, KPIT Cummins Infosystems is expected to post Q1FY08 revenues of Rs 129.6 crore (Rs 1,296 million) versus Rs 130.3 crore (Rs 1,303 million), down 0.5% QoQ.

During the same quarter the company’s net profit is seen down 13.6% at Rs 12.2 crore (Rs 122 million) versus 14.1 crore (Rs 141 million), QoQ.

Citigroup's report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades





Hexaware Tech June qtr PAT seen at Rs 32.4 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, Hexaware Technologies is expected to post Q1FY08 revenues of Rs 271.6 crore (Rs 2,716 million) versus Rs 264.4 crore (Rs 2,644 million), up 2.7% QoQ.

During the same quarter the company’s net profit is seen down 7.9% at Rs 32.4 crore (Rs 324 million) versus 35.2 crore (Rs 352 million), QoQ.

Citigroup's report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades





I-Flex Q1 PAT seen up 5.3% at Rs 81.8 cr: Citigroup


Citigroup Research has come out with pre-earnings report on technology sector. According to the report, I-Flex Solutions is expected to post June quarter FY08 revenues of Rs 577.2 crore (Rs 5,772 million) versus Rs 579.4 crore (Rs 5,794 million), down 0.4% QoQ.

During the same quarter the company’s net profit is seen up 5.3% at Rs 81.8 crore (Rs 818 million) versus 77.7 crore (Rs 777 million), QoQ.

Citigroup report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades




HCL Tech June qtr PAT seen at Rs 296.4 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, HCL Technologies is expected to post June quarter FY08 revenues of Rs 1605.8 crore (Rs 16,058 million) versus Rs 1577.1 crore (Rs 15,771 million), up 1.8% QoQ.

During the same quarter the company’s net profit is seen down 1.6% at Rs 296.4 crore (Rs 2,964 million) versus 301.3 crore (Rs 3,013 million), QoQ.

Citigroup report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades.




Patni Computer Q1 net profit seen at Rs 102.3 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, Patni Computer Systems is expected to post Q1FY08 revenues of Rs 672.5 crore (Rs 6,725 million) versus Rs 672.4 crore (Rs 6,724 million), QoQ.

During the same quarter the company’s net profit is seen down 14.8% at Rs 102.3 crore (Rs 1,023 million) versus 120 crore (Rs 1,200 million), QoQ.

Citigroup report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades




Satyam Q1 PAT seen up 2.7% at Rs 403 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, Satyam Computer Services is expected to post Q1FY08 revenues of Rs 1811.5 crore (Rs 18,115 million) versus Rs 1779.2 crore (Rs 17,792 million), up 1.8%, QoQ.

During the same quarter the company’s net profit is seen up 2.4% at Rs 403 crore (Rs 4,030 million) versus 393.6 crore (Rs 3,936 million), QoQ.

Citigroup's report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades





Wipro June qtr net profit seen at Rs 782.2 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, Wipro is expected to post June quarter FY08 revenues of Rs 4167.7 crore (Rs 41,677 million) versus Rs 4334.5 crore (Rs 43,345 million), down 3.8%, QoQ. During the same quarter the company’s net profit is seen down 9.2% at Rs 782.2 crore (Rs 7,822 million) versus 861.4 crore (Rs 8,614 million), QoQ.
Citigroup's report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades.




TCS Q1FY08 net profit seen at Rs 1080.3 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, Tata Consultancy Services is expected to post Q1FY08 revenues of Rs 5209.6 crore (Rs 52,096 million) versus Rs 5146.4 crore (Rs 51,464 million), up 1.2%, QoQ.

During the same quarter the company’s net profit is seen down 7.9% at Rs 1080.3 crore (Rs 10,803 million) versus 1172.8 crore (Rs 11,728 million), QoQ.
Citigroup report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades.




Infosys Q1FY08 net profit seen at Rs 939.4 cr: Citigroup

Citigroup Research has come out with pre-earnings report on technology sector. According to the report, Infosys Technologies is expected to post Q1FY08 revenues of Rs 3821.9 crore (Rs 38219 million) versus Rs 3772 crore (Rs 37720 million), up 1.3% QoQ. During the same quarter the company’s net profit is seen down 17.9% at Rs 939.4 crore (Rs 9394 million) versus 1144 crore (Rs 11440 million), QoQ.
Citigroup report on Technology sector:

Disappointing quarter; Rupee impact

1QFY08 results will witness the impact of sharp rupee appreciation, wage increases (for some companies) and visa costs. We expect this to result in sharp margin decline (~350-400 bps qoq for companies with wage hikes). Our 1Q numbers are based on Rs 41/dollar assumption.

Look beyond 1Q; risk reward favorable

With a ~15% underperformance against the BSE Sensex, we believe that currency-related negatives are largely priced in. Business momentum continues to be strong with pricing on an uptrend; reasonable valuations provide a good entry point for long-term investors.

2Q/3Q best in terms of price performance

Historical data (last 5 years) suggests that 2Q and 3Q are best in terms of stock price performance. We believe this is due to increased confidence in annual guidance post 1Q results and seasonally strong 2Q results and subsequent upgrades.





Buy Bharti Airtel; target Rs 956: ICICI Securities

Bharti Airtel (BAL) continued to outperform the Indian wireless industry, adding 1.9 million wireless subscribers in May ’07 and taking the total subscriber base to 40.7 million and market share to 23% (up from 20.4% in May ’06). Further, BAL’s revenue market share is notably higher across most circles due to the company registering the best ARPU in the industry on account of early-mover advantage. The surge in net-adds in the month was led by expanding geographical footprint and launch of new attractive schemes. While the pressure on the ARPU and ARPM would continue, we believe that BAL would be able to maintain its leadership position despite increasing competition due to expansive network, high usage customers and better quality services. With valuations remaining attractive at FY09E P/E of 21x and EV/EBITDA of 11x, we reiterate BUY on the stock.

Strengthening subscribers’ market share:

BAL has been one of the leading wireless players since its inception. The company has managed to differentiate itself from the competition and leap ahead by pro-actively investing in the business since the onset of the wireless rally at end-CY04. BAL has pulled up its market share from 19% in Q3FY05 to 23% as on date, adding 24% of total net-adds in the period. We believe that the company’s track record of unbeaten performance is here to stay, with BAL maintaining forefront position, riding on its existing lead and further investments in the business.

But revenue share even higher:

BAL was the first operator to attain pan-India presence and is amongst the first three entrants for 16 of total 23 circles, providing access to higher usage customers. This is reflected in the company recording the highest ARPU in the industry and taking the revenue share to 28% as against its subscriber market share of 21% in Q3FY07. In the prevalent cut-throat competition, service quality would be the differentiating factor as against pricing. We expect that BAL’s ‘Airtel’ brand pull, better quality of service and customised offerings would ascertain its leadership going forward.

Robust financial performance and attractive valuations:

Although BAL’s Infotel business (broadband & telephone, long distance and enterprise services) has performed better than the industry, it has underperformed the wireless business, resulting in a decrease in contribution from this segment from 42% in FY04 to 35% in Q4FY07. Despite the slower growth in the Infotel segment, BAL is expected to report 34% revenue CAGR and 33% earnings CAGR through FY07-09E. The stock is currently trading at FY09E P/E of 21x and EV/EBITDA of 11x, close to most large-cap companies with similar growth profile. We reiterate BUY on the stock, with target price of Rs 956.





Sell TVS Motors: Merrill Lynch

Merrill Lynch research is bearish on on TVS Motors and has recommended sell rating on the stock. Given the high degree of uncertainty and weak earnings visibility, research firm believes that valuations are expensive.

Merrill Lynch report on TVS Motors:

Operational performance worsens

TVS Motors’ problematic performance continued in Q4, with margins collapsing to 1.1%. Other income grew 26% to Rs 270 million and depreciation declined 36% on transfer of non-core assets, despite which net profit declined 69% to Rs 90 million. We believe that worse is yet to come, reflecting in our further EPS downgrade.

Outlook weak

Tight financing norms are expected to hurt TVS Motor much more than industry, given its relatively weaker portfolio in motorcycles. We however expect cushioning impact from scooters (recent launch of low priced, 2-stroke Scooty), mopeds (exceptional franchise) as well as exports (expanding presence).

Key product launches yet to come

After upgrade of premium bike Apache, a model for Indonesia in July, TVS Motor will introduce a mid-priced bike (replacing Victor) and three-wheeler in H2 FY08. While all these models offer opportunity to reverse fortunes, we believe that the company will have to significantly improve its past track record of weak execution.

Forecasts slashed

We are lowering forecasts on the back of downward volume revision. We expect TVS Motors' two wheeler sales to decline 9% in FY08E (24% contraction in motorcycles) and register 9% growth in FY09E. In addition, we have factored in incremental sales from Indonesian unit and three wheeler project.

Reiterate Sell

We are possibly close to an operational low, but chances of early recovery seem unlikely. Given the high degree of uncertainty and weak earnings visibility, we believe that valuations are expensive





Ipca Labs an outperformer; target Rs 1013: SSKI

Ipca Labs (Ipca) is a formulation-focused and vertically integrated mid-sized generics company with a multi-pronged and geographically diversified business model. Ipca uses superior API development capabilities to attain global leadership in select APIs and is leveraging it to create strong formulation businesses in high profit branded formulation markets like CIS, Asia and Africa as also generic markets like USA and UK. With very strong product pipelines across geographies, we expect 22% CAGR in earnings over FY07-10. At 12.2x FY08E and 10.1x FY09E earnings, valuations are compelling given the upside possibilities. Initiating coverage with Outperformer and a price target of Rs 1013 (14x FY09E earnings).

Firing on all cylinders:

We expect 22% CAGR in Ipca’s consolidated revenues over FY07-10 driven by 27% CAGR in exports and 16% CAGR in domestic business. More profitable branded formulation exports are expected to register 32% CAGR while generic exports could clock 33% CAGR driven by scale-up in US sales. Ipca’s focus on chronic segments and brand building would drive branded formulations sales in international markets as well in India. Ipca’s ability to generate such strong organic growth momentum clearly reflects the effectiveness of its model.

Expect steady margins:

We estimate Ipca’s operating margin to remain steady at 20- 21% over FY07-10. While we expect margin improvements given faster growth in higher margin international branded formulations and scale-up in regulated market, we have conservatively built in steady gross margins to factor in rupee appreciation.

Attractive business model; Outperformer:

Leveraging its strong presence in chronic segment and brand building focus along with a 500 sales people network across multiple non-regulated markets (excluding India), Ipca is aiming at the USD 77 billion (by 2010) generics opportunity in non-US markets. Further Ipca’s US strategy of leveraging its lowest cost API production capabilities to launch select products and partnering with Ranbaxy would be a winner. At 10.1x FY09E earnings and 26.3% RoCE, Ipca is at sharp discount to peers and deserves to be re-rated.

Investment Argument:

Ipca’s initiatives for building a strong international business have started to pay off, as reflected in the 100% yoy profit growth in FY07 following two soft years. We believe Ipca’s focus on vertical integration and competencies in building successful branded businesses, combined with tight operational control, would continue to drive growth. Ipca has invested significantly in building sales networks in multiple non-regulated markets, which will start paying off handsomely with expanding product portfolios. We are positive on Ipca’s product selection strategy for the US market, which leverages its lowest cost producer status for multiple APIs. Likely deals with innovators for large scale manufacture of off patent APIs has opened yet another growth avenue for Ipca.

Financial Analysis:

We expect 22% CAGR in Ipca’s revenues and profits over FY07-10, driven by continued strong growth across business segments. Topline is expected to be driven by 27% CAGR in exports on the back of continued momentum in international formulations, initiation of US generic sales and strong scale-up in API exports. Domestic business would remain steady (16% CAGR expected). A consistently improving revenue mix, along with scale effect, would drive a 50bp EBITDA improvement over FY07-10. We expect Ipca to maintain strong return ratios (25-26%) over the period. Incremental API supply contracts with innovators and scale-up in malaria tender business will be upside triggers.

Valuations

With its geographically diversified business and strong emphasis on vertical integration as also branded formulations, Ipca is a strong business model to play the global generics opportunity. In our view, Ipca’s judicious investments in API development capabilities and for building sales front end have built a strong platform for sustained steady growth in its exports business. We remain confident of Ipca’s ability to deliver 20-25% CAGR in profit in the medium term. At 12.2x FY08E and 10.1x FY09E earnings, high growth visibility and 25%+ RoCE, Ipca is one of the cheapest stocks in the Indian pharma industry and deserves a higher rating. Initiating coverage with an Outperformer rating and a 12-month price target of Rs 1013 (16.9x FY08E and 14x FY09E earnings).