Indian markets are expected to open flat taking cues from mixed opening in the Asian markets today and positive closing in the global markets yesterday. The Indian markets ended lower yesterday as IT major Infosys cut its full-year revenue guidance and HDFC reported a below estimated PAT growth of 10%. Also, decent IIP data of November, which stood at 5.9% yoy, reduced hopes of a CRR cut this month.
Globally, most of the US and European markets ended modestly higher yesterday as investors held out hopes that Europe would muddle through its debt troubles. Meanwhile, data from the US economy illustrated that the retail sales for December 2011 grew lower than expected at 0.1% yoy (Bloomberg estimate – 0.3%) and initial jobless claims rose to 399,000 in the week ended January 7 (prior – 375,000), which led to weakness in the early trade in the US. The markets now will be closely watching out from the domestic WPI number for December 2011 (Bloomberg estimate – 7.4%).
Markets Today
The trend deciding level for the day is 16,060 / 4,835 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 16,157 – 16,276 / 4,866– 4,900 levels. However, if NIFTY trades below 16,060 / 4,835 levels for the first half-an-hour of trade then it may correct up to 15,941 – 15,844 / 4,800 – 4,769 levels.
Industrial production (IIP) growth picks up in November 2011
Industrial production (IIP) growth rebounded in November, growing by 5.9% yoy, compared to the contraction witnessed in October (revised from -5.1% to -4.7%). Comparing on a yearly basis, IIP growth remained stable (growth of 6.4% in November 2011). Industrial production growth at 5.9% yoy was above the best forecast in Bloomberg’s survey of economists. Median expectation from the survey was of 2.1% growth in industrial production. The 12-month rolling industrial production growth, although has been on a declining trend since November 2010, remained stable mom at 5.3%.
Recovery in manufacturing leads to a bounce-back: The manufacturing sector’s production, which accounts for ~75% of the overall industrial production, grew by 6.6% yoy, after declining by 5.7% yoy in the previous month. In terms of industries, 17 of the 22 industry groups in the manufacturing sector registered positive growth during November 2011. While growth in electricity production continued to be healthy for November (14.6% yoy), the mining sector’s production contracted for the fourth straight month by 4.4% yoy. As per usebased data, recovery in IIP numbers was on account of healthy growth in basic goods (6.3% yoy) and consumer non durables (14.8% yoy). Growth in consumer goods was also healthy at 13.1% yoy during November.
IRB clarifies on aircraft purchase
As per media articles on January 12, 2012, IRB did not disclose the purchase of an aircraft for Rs.107cr in November 2010 in its main annual report (FY2010-11). In response to this, management has clarified that it had adequately disclosed the acquisition of the aircraft in accordance with the applicable regulations.
The aircraft was purchased by IRB’s E&C arm – Modern Road Makers Pvt. Ltd. (MRM) – in October 2010 and was being used by IRB’s executives for monitoring projects. In MRM’s financial statement for FY2010-11, it had presented the aircraft in its fixed asset schedule under ‘plant and machinery’ as a separate line item. Further, IRB's consolidated gross block (annual report FY2010-11) included the cost of the aircraft under the ‘plant and machinery’ head but with no separate mention, unlike MRM’s financial statement. The clarification for the same stated that acquisition of the aircraft formed <2.0% of the consolidated gross block and, hence, did not legally required specific description in consolidated accounts.
IRB’s stock witnessed a sharp fall (8.0%) in early trades following this news item, but it recovered significantly post management’s clarification during the day and closed down by 2.1%. However, in our view, considering the high corporate governance standards expected from IRB, a separate disclosure on the same was required, irrespective of the question of whether such a non-core capex was required or not in such times. However, we would take this instance as a one-off case and continue to maintain our Buy recommendation on the stock with a target price of Rs.182.
CEAT to issue convertible warrants to promoters
According to a press release with BSE, Ceat (CEAT) is considering to allot convertible warrants on a preferential basis to its promoters. We believe this development would improve investor sentiments on the back of promoters’ confidence in the prospects of the company. Earlier, in September 2010, CEAT had issued 1,712,170 convertible warrants on a preferential basis to its promoters; however, they are yet to be converted.
CEAT’s promoters have been steadily increasing their stake in the company to capitalize on the sharp fall in the company’s stock price post the substantial increase in raw-material prices, which had impacted the company’s profitability. Promoters have already hiked their stake from 48.47% in March 2010 to 50.2% as of September 2011. We estimate this stake to further increase to 52.6% upon the conversion of warrants issued in September 2010 (due for conversion in March 2012).
We expect CEAT to report continuous improvement in its operating performance, led by improving utilization at its Halol plant and a gradual decline in rawmaterial prices. Consequently, we estimate CEAT to post an EPS of Rs.20.8 in FY2013E. At Rs.83, CEAT is trading at 4x FY2013 earnings. We maintain our Buy rating on the stock with a target price of Rs.104, valuing it at 5.0x FY2013E earnings. We believe monetization of surplus land at Bhandup will further act as a positive trigger for the stock; however, we have not factored it in our target price.
Result Review
Infosys
For 3QFY2012, Infosys reported revenue of US$1,806mn, up 3.4% qoq, on the back of modest 3.1% qoq volume growth and 0.8% qoq blended pricing growth. However, cross-currency movement negatively affected the company’s revenue by 1.0% qoq. Volume growth of 3.1% qoq was driven by 1.4% and 3.8% qoq growth in onsite and offshore volumes, respectively. In INR terms, revenue came in at Rs.9,298cr, registering whopping 14.8% qoq growth; INR revenue was aided by steep INR depreciation qoq against the USD in 3QFY2012. The company’s EBITDA and EBIT margins improved by 265bp and 302bp qoq to 33.7% and 31.2%, respectively, largely gaining from INR depreciation.
Management has reduced its FY2012 USD revenue growth guidance to 16.4% yoy to US$7,029mn-7,033mn from 17.1-191% yoy, mainly on account of delays in decision making from the clients’ side. In addition, management has given tepid revenue guidance of almost flat qoq at US$1,806mn-1,1810mn for 4QFY2012. We believe this clearly indicates challenging visibility in business volumes and management’s future expectation. Hence, we have assumed moderation in demand going forward in FY2013 and have built in a revenue CQGR of 3.0% over 4QFY2012-4QFY2013 vis-à-vis 4.1% in 9MFY2012, owing to the expected deferment in IT spending. We recommend a Buy rating on the stock with target price of Rs.3,047.
HDFC
For 3QFY2012, HDFC’s standalone net profit grew by 10.1% yoy, which was below our estimates mainly because of lower gains from investments compared to 3QFY2011. Removing gains from sale of investments, HDFC’s operating income increased by healthy 18.2% yoy.
Loan growth remains healthy: For 3QFY2012, HDFC’s loan book grew by healthy 21.2% yoy and 4.1% qoq to Rs.132,208cr. Approvals in 3QFY2012 stood atRs.19,883cr (up 21.2% yoy), while disbursements stood at Rs.16,078cr (up 18.8.0% yoy). The spread on loans over the cost of borrowings stood at 2.27% for 9MFY2012 compared to 2.29% for 1HFY2011. For 3QFY2012, other income increased marginally by 1.3% yoy to Rs.304cr. While growth in dividend income (97.5% yoy) and profits from deployment in MFs (74.6%) was strong, it was negated by the dip in treasury income (decline of 47.4% yoy). HDFC’s asset quality continued to be stable during 3QFY2012, with gross NPA ratio falling by 3bp yoy to 0.82%. On a six-month overdue basis, gross NPA ratio stood at 0.53%. Gross NPAs increased by 19.6% yoy to Rs.1,109cr. HDFC continued to maintain a 100% provision-coverage ratio for 3QFY2012, similar to the last quarter.
Outlook and valuation: At the CMP, HDFC’s core business (after adjusting Rs.215/share towards value of the subsidiaries) is trading at 4.4x FY2013E ABV ofRs.106.7 (including subsidiaries, the stock is trading at 4.3x FY2013E ABV of Rs.158.9). We expect HDFC to post a healthy PAT CAGR of 15.7% over FY2011–13E.However, considering that the stock is currently trading at 4.5x one-year forward P/ABV (only slightly lower than its median of 4.6x over the last five years) and at a 56.5% premium to the Sensex in P/E terms (compared to an average of 37.5% over the last five years), we consider the stock to be fully valued and, hence, recommend Neutral on the stock.
Economic and Political News
- Government approves Rs.5,388cr road projects in three states
- Food inflation in the negative zone for the second consecutive week
- 'Proactive' steps to boost industry on cards, says Finance Minister
- U.S. urges countries to reduce Iran oil imports
Corporate News
- LIC to invest Rs.1.9 lakh cr in FY2012
- Mahindra announces rejig of top management
- NMDC floats new SPV company for Chhattisgarh plant
- Suzlon's subsidiary wins order in U.S. for wind turbines
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