Investment highlights ! Building global competency

TCS is India’s largest IT company, with global ambitions to be among the top 10 global IT players by 2010. The company has a three-pronged strategy to achieve the same – strong delivery capability through Global Network Delivery Model (GNDM), changing business mix (full services play) and inorganic growth through strategic acquisitions.

Ability to win and address large engagements

The strong business model has helped the company win and address large complex global engagements. The company won 12 USD 50 million plus deals in FY07 alone, which supports the large volume player strategy of TCS. Some of the large ongoing projects include Bank of China (USD 100 million, 5-years) and Bank of Pichincha (USD 140million, 7-years). Recently, TCS won a USD 140 million deal (2 year development, 7-8 years maintenance) from BSNL, India’s largest state owned telecom service provider and a USD 35 million multi year outsourcing contract from healthcare major Roche.

Increasing focus on products division

Product services division – TCS Financial Solutions has shown considerable growth (>50% YoY) in the last 2-years driven by strong customer addition across geographies. Management expects a revenue contribution in high single digits within next 3-years driven by growing business traction enhanced by inorganic growth momentum.

Strong demand environment with growth across geographies

TCS has witnessed robust growth across geographies especially established markets (US and Europe – 46% YoY FY07) and emerging markets Middle East Asia (MEA), Latin America and Asia Pacific – 79% YoY FY07). This continued growth has been propelled by leveraging global support capability, changing business mix and acquisition leading to significant customer additions and deal wins

Balance sheet analysis

" Cash and cash equivalents stood at healthy Rs.8,021m which we believe could be further used for acquisitions. " TCS has consistently maintained a strong Return on Net Worth (RoNW) of greater than 50% in the last 3-years. The RoNW stood at 51% as on 30 June, 2007.

Valuation

TCS currently trades at 18.6x and 15.3x FY08E and FY09E earnings which is lower than its closest competitor Infosys. We expect TCS to trade at a premium to its close peers bolstered by strong revenue growth, GNDM, full services play and continued acquisitions. Furthermore, there is strong IT demand environment with IT exports expected to cross US$ 60bn by 2010 and TCS’s global ambitions, we believe a revenue growth of 25%+ is achievable on a long term basis.

This is further supported by healthy pipeline, strong employee metrics, recent large deal wins and a strong domestic presence, which adds value to our recommendation. We assume 26% revenue and 21% EPS CAGR through FY10. Moreover possible inorganic growth and continued large deal wins, add to protracted revenue growth over a long period with sustainable margins. We argue that the stock should trade 20-25% higher than the current level at Rs.1,248/share within 12-months.

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IDBI Capital - Oil Country Tubular Ltd.

Highlight :

Hyderabad based Oil Country Tubular Ltd (OCTL) is set to get benefited from increasing exploration and production activities in the oil and gas sector. The stock has gained more than 170% since second quarter FY07 and more than 20% over last week.

OCTL's wide product range covers Drill Pipe, Production Tubing, Casing, Tool Joints, Couplings, and others, used in oil exploration and production business. ONGC and OIL are the largest domestic customers for OCTL. Exports contribute around 12% of its total revenue.

Increasing demand:

Indian exploration and production industry has tremendous growth scope going forward. Out of the total 3.14m sq. km. of sedimentary basins in India only around 19% has been extensively explored so far. The increasing demand supply gap of exploration and production services has been well reflected in gyrating rig rental charges over last couple of years.

About the company:

Incorporated in 1985, Oil Country Tubular (OCTL) was promoted by United Steel Allied Industries, K Suryanarayana and their associates. The company has installed capacity for processing 50,000MT of Casing Pipes, 10,000MT of Drill Pipes and 15,000MT of Production Tubing. Very low capacity utilization is an indication that the company has the capacity to accept huge orders without major capex. OTCL has a tie-up with Baker Hughes Tubular Services, US that owns 5.6% share in OCTL. It has obtained the API monogram from the American Petroleum Institute, US for its quality products.

OCTL's Oil Field Accessories include Rotary Subs, Lift Plugs and Lift Subs, Cross Overs, Stabilizer Sleeves, Welded Blade Stabilizers & Integral Stabilizers and Cast Steel Lifting Bails.

Services include Tool Joint Hardbanding, Make and Break of Tool Joints, Internal Plastic Coating of Drill Pipe and Tubing, Reconditioning of Drill Pipe, Re-threading of Drill Pipe, Tubing and Casing, and Field Inspection of Tubulars.

Financials and valuation :

The company was contemplating for some expansion couple of months back, but we

learnt that the plan had been rejected, as the management found the financing difficult.

In Q3FY07 OCTL recorded a topline of Rs.758.5m, which is around 77% YoY growth.

The company faced tremendous margin pressure due to increasing raw-material prices.

The operating profit margin slumps by 12.4 percentage points to 7.3%. That along with the increasing interests burden pushes down the Q3FY07 PAT to negative zone. PAT comes down from Rs.24.8m in Q3FY06 to a loss of Rs.6.9m in Q3FY07. The current price is 56.8x the TTM EPS of Rs.0.64.

IDBI Capital - Karnataka Bank (Buzzing Stock)

Updates:

Business Update – Karnataka Bank has achieved a business level of Rs.235bn in FY07 against the targeted Rs.250bn. However, the bank has expressed confidence that it will achieve an incremental business of Rs.50bn in FY08 taking the total business level to Rs.285bn in FY08. Karnataka Bank had earlier in FY07 set itself a business level of Rs.500bn by FY10.

The bank has started offering interest at the rate of 10% for senior citizens on it’s term deposit products of 18 months while it is 9.25% for others for the same maturity. The bank’s PLR is presently at 14%.

Similarly, the interest rates on other products too have been revised from February. While the rates on NRE deposits have been revised downwards, those on loans have been marginally revised upwards.

Network Expansion – The bank is also expanding it’s network fast to gain exposure and presence across the country. Karnataka Bank recently opened it’s 407th branch in Siliguri in West Bengal. It is fully geared up technologically and about 97% of the bank’s business currently is covered under the CBS.

Results and expectations:

Karnataka Bank has posted a YoY increase of 20% in bottomline for the 9MFY07 period. The last quarter may be difficult as the bank’s in general are facing the pressures on their NIM owing to hardening interest rates.

The bank has had a skewed pattern of non-tax provisioning. While it was quite higher at Rs.331m in Q1FY07, there was a write back in Q2FY07 to the tune of Rs.163m and a lower provisioning of just Rs.62m in Q3FY07. Higher provisioning again in the last quarter may affect bank’s profitability. Earnings may also be affected because of higher interest expenses. The Q3FY07 results are reflective of a possible trend. While the NII growth was higher at 12% YoY and 19% YoY in 1Q and Q2FY07, it was down to just 9% YoY in Q3FY07. Considering the fact that the bank has raised rates though only on select products, we would be cautious on the severity of it’s impact and feel it may have a negative bias.

Valuations:

Karnataka Bank has reported an EPS of Rs.12.4 in 9MFY07. Expecting about Rs.3.3 EPS in the last quarter, Karnataka Bank may post an EPS of Rs.15.7 for FY07. This would be a change of 8.1% YoY. Karnataka Bank had posted an EPS of Rs.14.52 in FY06.

Assuming marginally higher change (~10% YoY, inspite of the incremental business growth target of 21% being a bit conservative and discounting for a tougher operating environment), we can expect Karnataka Bank to post an EPS of Rs.17.3 in FY08. The current share price of the bank is 10x the FY08 EPS we have calculated.

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