Forex gains propel net income; maintain ‘Buy’

HCL Technologies Ltd’s (HCL Tech) Q4FY07 revenue was in line with our estimates at Rs 16.12 billion, a sequential increase of 2.2%. However, due to Rs 2.5 billion forex gain, net profit (before ESOP charges) increased 46.8% sequentially to Rs 4.87 billion. In continuing with its strategy of focusing on large deals, the company signed seven large multi-year deals in Q4FY07. We expect HCL Tech to post a fully diluted EPS (after ESOP charges) of Rs 18.8 and Rs 23.3 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 12.6%. However, we have not taken into account any forex gains or losses going forward. Currently, the stock is quoting at FY08E and FY09E PER (based on post ESOP charged EPS) of 16.8x and 13.5x respectively. We maintain ‘Buy’ rating on the stock; we have set a one-year price target of Rs 368 based on 15x FY09E earnings. Key highlights of Q4FY07 are:

Rupee appreciation impacts revenue growth:

Though HCL Technologies reported 9.2% sequential growth in dollar revenue, rupee appreciation of more than 6% led to 2.2% revenue growth in rupee terms. Software services revenue grew 0.7% to Rs 11.5 billion, revenue from BPO services grew 1.6% to Rs 2.2 billion and infrastructure business grew 10.6% to Rs 2.4 billion. Growth in all the three segments were driven primarily by volume growth.

EBITDA margin declines by 170 bps:

Though HCL Technologies was hit by 300 bps on margins due to rupee appreciation and 120 bps due to higher SG&A, EBITDA margin fell by only 170 bps. This was on account of: a) Higher utilisation, which in turn improved margin by 55 bps b) Higher realisations leading to 140 bps margin expansion Though SG&A (as a percentage of revenue) could decrease going forward, the company guided that it would continue to invest in sales and marketing to tap market potential.

Higher forex gains lead to higher net income:

HCL Tech reported forex gains of Rs 2,504 million in Q4FY07 as against a gain of Rs 418 million in Q3FY07, on account of rupee appreciation. The company currently has a forward cover of USD 1.2 billion.

Large deals signed in Q4FY07:

HCL Technologies signed seven multi–year, multi-million dollar deals in Q4FY07. Though the company hasn’t disclosed the size of the deals, it did mention that the deals were significantly large in size. In the last few quarters, the company signed a number of large deals indicating that its blue ocean strategy is yielding results.

Guidance shows good revenue visibility:

HCL Tech has guided for a revenue growth of around 30% in dollar terms in FY08E. However, what is more significant is that it has guided to hire a total of 25,000 employees (gross) in FY08E, which is 60% of its current employee base.

Forecast:

We estimate HCL Tech to post a fully diluted EPS of Rs 18.8 and Rs 23.3 in FY08E and FY09E respectively, implying a two-year EPS CAGR of 12.6%. However, we have not taken into account forex gains/losses in FY08E and FY09E. It may be noted that the company had a forex gain of Rs 3.3 billion in FY07. If the forex gains are not taken into account in FY07, HCL Technologies EPS is likely to grow at a two year CAGR of 30%, highst among its peers.

Valuation:

Currently, the stock is quoting at FY08E and FY09E PER (based on post ESOP charged EPS) of 16.8x and 13.5x respectively. We believe that the blue ocean strategy of the company is yielding results leading to HCL Technologies growing faster than its peers. We therefore maintain ‘Buy’ rating on the stock, with a price target of Rs 368 based on 15x FY09E earnings. At our target price, the stock would be quoting at FY08E and FY09E PER of 18.3x and 15x respectively.

Sturdy performance despite margin pressures

Welspun India Ltd. reported robust results for Q1FY08 despite various odds arising from rupee appreciation and rising cotton prices. The company’s topline grew by 33%, while PAT grew by 22% YoY during the quarter. Operating margins (excluding a reversal of provision of Rs 180 million) was higher than our expectations. Better realisation in the sheeting fabric, and DEPB benefits enabled Welspun to maintain margins.

Utilisation in sheeting fabrics is expected to rise further with higher volume growth during the latter half of the year and further integration of operation with Christy. The Q1FY08 results indicate Welspun’s ability to deliver on the capex concluded during the last few quarters, with firm margins. The stock is attractively priced at 6.5x our FY08 EPS estimate. We continue to maintain a ‘Buy’ on the stock.

Key highlights during the quarter are:

Strong increase in volume drives topline growth:

Welspun India reported a strong 33% growth in topline during Q1FY08, higher than our estimates. Strong revenue growth of 31% in towel business and 36% growth in sheeting fabric business led to this growth. In the bed linen segment, capacity utilisation rate improved to 60% during the period.

DEPB provides respite from rising rupee:

In order to provide exporters respite from the rising rupee, the government increased DEPB rates by 3% on garment exports. As a result, realisation (inclusive of DEPB benefits) fell only by 1%. EBIDTA margin in sheeting was 13% during the quarter, substantially higher as compared to Q1FY07. The company reversed provisions to the extent of around Rs 180 million provided earlier towards drawback of excise duties. Excluding this, the margin was higher than our expectations at around 18%. With strong volume growth and firm margins, PAT increased by 22% during the quarter.

Turnaround and integration of Christy underway:

Welspun has been able to turnaround Christy substantially, with the latter reporting profit after tax of GBP 11 million. Christy has also regained its lost market share during the quarter. Welspun is currently undertaking the relocation of Christy’s manufacturing facility, which is expected to be completed by September.

Capacity additions expected to be completed by the end of FY08:

Welspun has completed the addition of its yarn capacity and now has an installed base of 1.07 lakh spindles. This would meet around 70% of Welspun’s internal requirements. Bed linen capacity currently stands at 35 mn sq. meters and is being expanded to 45 mn sq. meters by the end of FY08.

Sturdy volume growth coupled with firm margins:

Despite the odds from a appreciating rupee, Welspun to maintain margins on account of its integrated operations, strong client base and DEPB benefits. With strong growth in the sheeting business and its integration with Christy, we expect Welspun to continue the growth momentum. The stock is attractively valued at 6.5x FY08 EPS. Hence, we continue to maintain ‘Buy’ recommendation on the stock.

Rupee appreciation impacts margins

Hindalco Industries Ltd. (HIL) reported steady growth in net revenue during Q1FY08. While higher volumes, both in copper as well as aluminium business led to 9.5% YoY growth in net sales, operating profit margin was impacted due to drop in alumina prices, coupled with rupee appreciation impacting aluminium realisations.

At the current price, HIL is trading at a P/E of 8.6x FY08E. While capex led volume growth will continue going forward, we expect rupee appreciation to have a bearing on average realisations going forward. This apart, expected softening in copper TC/RC margin will have a further bearing on the company’s performance. On consolidated basis, increase in interest burden and marginal profitability of Novelis will lead to a decline in next year’s consolidated EPS. However, following the sharp decline in stock price post the acquisition, we believe the same has been factored in the stock price. Hence, we maintain ‘Accumulate’ rating on the stock.

Key highlights of Q1FY08 results:

High aluminium volumes drive revenue in this business; appreciating rupee is the dampener:

HIL registered 9.5% YoY growth in net sales during Q1FY08. While revenue from the aluminium division was higher by 6.03% YoY, copper division revenue grew by 11.6%. Growth in the aluminium division was driven by an increase in volume. While alumina sales volume was up 11.8% YoY, primary metal sales were up 8.9%. Rolled products too witnessed 9% YoY increase during the quarter.

However, the benefits of volume growth were offset by rupee appreciation and correction in alumina prices. Despite 4% increase in LME aluminium prices, in rupee terms, average aluminium prices were lower by 6%. This was due to a 9.1% appreciation in rupee against the dollar, coupled with a reduction in customs duty on aluminium from 7.7% to 5.7%. On the other hand, spot alumina prices too were lower by 36% YoY at US$352 per tonne. These factors had a bearing on the EBIT margin of the company’s aluminium division, which declined from 43.1% in Q1FY07 to 36.6% in Q1FY08.

Valuation:

At the current price, HIL is trading at a P/E of 8.6x FY08E. While capex led volume growth will continue going forward, we expect rupee appreciation to have a bearing on average realisations going forward. This apart, expected softening in copper TC/RC margin will have a further bearing on the company’s performance. On consolidated basis, increase in interest burden and marginal profitability of Novelis will lead to a decline in next year’s consolidated EPS. However, following the sharp decline in stock price post the acquisition, we believe the same has been factored in the stock price. Hence, we maintain ‘Accumulate’ rating on the stock.

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.

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Religare - Union Bank of India, Tata Motors Q4FY07 Result Update (IISL), Merrill Lynch - Divi's Laboratories,

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ICICI - Indraprastha gas, ILFS - Allcargo, ILFS - I-Flex


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ILFS HCL Tech Q3FY07 Result Update 17 April.


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Results in line, maintain ‘Buy’

HCL Technologies (HCL Tech) Q3FY07 results were in line with our estimates; the company’s revenue and net profit registered a sequential increase of 7.6% and 15.8% to Rs 15.77 billion and Rs 3.3 billion respectively. In continuing with its strategy of focusing on large deals, the company signed six large multi-year deals exceeding USD 25 million.

The company also signed six multi-year deals exceeding USD 50 million in the last few quarters, which have contributed more than 10% to the company’s Q3FY07 revenue.

ILFS Infosys Q4FY07 Result Update (IISL)


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IL&FS - Punjab National Bank

Company background

PNB has a network of 4,525 branches and ranks second in terms of branch network after SBI. The bank has pan-India presence and customer base of more than 18.3mn. PNB has implemented CBS in 2,526 outlets at 668 centers, thereby covering more than 85% of its total business, 80% of its deposits and 90% advances. The bank is inherently strong in the Northern region as compared to other banks.

Expansion in assets with consistently improving RoA

PNB has reported 19% CAGR growth in assets in FY03-06, while its return on assets has gone up from 0.98% in FY03 to 1.14% reported in Q3FY07. This implies that the bank has consistently been able to grow above 18%.

Sustainable net interest margin

PNB reported net interest margin of 4.21% in Q3FY07 as compared to 4% in 3FY06.

This was mainly due to rise in BPLR rate and due to higher CASA share to total deposits. PNB has increased BPLR rate by more than 50bps from 11.75% to 12.25% with effect from February 15, 2007. Yield on advances was 9.11% as on Q3FY07 as compared to 8.38% in Q3FY06.

Valuation

At the CMP of Rs451 the stock trades at 1.56x FY06 adjusted book value of Rs289 and 1.52x FY06 book value of Rs297. We remain positive with the bank’s performance owing to its large network of branches, better net interest margin and adequately derisked investment portfolio.

IL&FS - Gujarat NRE Coke

Industry update

Limited issue of export licenses by China to drive coke prices upward Coke prices were at its peak in May 2004 due to an export curb by China. During this time, China issued export licenses, which fell short of global demand, leading to an increase in export license cost to as high as US$200 per tonne (a little less than half the prevailing coke prices of about US$450-480 per tonne).

The Chinese government has once again restricted issue of export licenses to 10mn tonne. On the other hand, export potential from China is about 15-16mn tonne. Such a move would in turn lead to deficit of coke in the global market. While there are conflicting views regarding the manner in which the Chinese government may react, speculations are rife about the possibility of the Chinese government issuing licenses to the tune of 14mn tonne in total. This will still lead to a shortfall in export licenses during the end of CY07, resulting in sharp increase in coke prices.

Business Overview

Coking coal mines in Australia to feed company’s coke oven batteries: GNCL has its own captive coking coal mines in Australia and its entire requirement for the same is expected to be met through import from these mines. While Gujarat NRE Australia Ltd. (GNAL) has already started shipping coking coal, GNRN too is expected to commence supply of coking coal soon. Coking coal mined from captive mines will be cheaper by around US$25-30 per tonne leading to tremendous savings in cost for the company. Moreover, GNCL’s reliance on coking coal suppliers for timely delivery of raw material will also reduce, thereby partially reducing the overall risk to the company’s business.

Value unlocking of investments in Australia & New Zealand likely: GNCL has made substantial investments in Australia and New Zealand. Of these, GNAL has mining lease of 300mn tonne and started commercial production in July 2005. So far the company has mined 0.4mn tonne and plans to increase its capacity from 1mn tonne in 2007 to 4mn tonne by 2010. GNCL plans to dilute not more than 5% stake in GNAL in 2007 and list it on the Australian Stock Exchange (ASE). Taking a long-term view of coking coal prices of about US$75- 77 per tonne, GNCL has valued GNAL at A$300mn. GNRN is listed on the ASE and has reserves of 96mn tonne and market capitalisation of A$28mn. The company expects to reach coking coal production of 1.5mn tonne by 2010.

Valuation

We expect GNCL to report net profit of Rs2.04bn during FY08E (EPS of Rs8.4). At the current price, GNCL is trading at a P/E and EV/EBIDTA of 5.9x and 6.2x FY08E respectively. GNCL has cash of Rs700mn in its books as on March 2007. The company’s investment in Gujarat NRE Resources NL (GNRN), the listed entity, at the prevailing market price is worth Rs3.5 per GNCL share. Met coke business is highly volatile in nature. Hence, the risk profile of the company’s business is high. However, the current industry dynamics indicate further firming up of coke prices going forward. With the stock price likely to follow international coke price movements we believe that GNCL provides a good trading opportunity and hence recommend a ‘Buy’.

IL&FS Investsmart - Automobile Roadmap

Another year of growth……

Financial year 2006-07 has ended on a reasonably good note for the automobile industry. Though, the last quarter was a tad sluggish due to rise in interest rates, which in turn made product offerings across the board a little costlier. Conditions worsened further during the last two months with softening of sales, especially in two wheelers, triggered by a slowdown in demand.

In FY07, the industry grew at a healthy pace; passenger car sales was up 20.6% YoY, M&HCV was up 32%, LCV 31.2%, while three-wheeler sales soared 25.4%. However,pressure was visible on two-wheeler sales, which grew at 12.04% YoY.

During the first half of 2007, all demand drivers including low interest rates were at play; as it reduced the overall cost of owning a vehicle. In contrast, the second half reflected easing out of demand on the back of firming of interest rates.

Passenger Cars

The passenger car industry recorded growth of 20.6% in FY07. Maruti grew at about 20% in line with the industry and upheld its leadership position with 47% market share. Major contributor to Maruti’s growth was A2 (compact car segment), which grew 27% YoY. The company accounts for 52% market share in this segment. Meanwhile, A4 (executive segment) registered strong growth of 48% YoY, albeit on a small base. This can be attributed to rising disposable income, coupled with improved lifestyle of the urban population in India. A shift in demand pattern from the A1 to A2 segment is evident from the fact that sales in A1 (mini car segment) declined this year and the decline has been sharper in the last few months of the financial year.

In the month of March 2007, a clear slowdown in the growth of passenger cars was visible due to rising interest rates. This can also be attributed to a higher base in the previous year due to an excise cut. Passenger cars grew only 6% in March 2007 in comparison to the same period last year. A1 segment sales declined by 29% YoY. Despite the overall slowdown, A2 and A4 segments continued their strong growth at 19.5% and 71% respectively over the corresponding month last year.

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