The Indian markets are expected to open flattish mirroring the SGX Nifty and Asian stocks which are trading close to their opening levels. Asian stocks rose, with the benchmark index poised to end its six days of losses after data showed China’s economy grew 7.6% in the second quarter from a year earlier.
The US economic jobless claims data release showed that jobless claims fell to 350,000 from the previous week’s revised figure of 376,000. The drop surprised economists, who had expected jobless claims to edge up to 375,000 from the 374,000 originally reported for the previous week. However, traders largely shrugged off this report from the Labor Department as concerns about the outlook for the economy continued to weigh on the markets. The US stock markets eventually ended in the red.
Indian shares tumbled on Thursday, extending the previous session’s losses, as Infosys’ first-quarter earnings and lower FY13 guidance damped investor mood. Negative global cues also weighed on investor sentiment, overshadowing data that showed India’s industrial output rebounded in May from a contraction
The trend deciding level for the day is 17,248 / 5,238 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,314 – 17,396 / 5,259 – 5,282 levels. However, if NIFTY trades below 17,248 / 5,238 levels for the first half-an-hour of trade then it may correct up to 17,166 – 17,099 / 5,215 – 5,194 levels.
IIP comes in at 2.4% yoy for May
Industrial production (IIP) growth came in positive at 2.4% yoy, ahead of estimates of 1.8% yoy, after two months of negative growth (April growth revised downwards from 0.1% yoy to -0.9% yoy). The 12-month rolling industrial production growth, which has been on a declining trend since November 2010 (9.9%), slipped further to 2.1% yoy.
Manufacturing index, which has witnessed continued sluggish growth over the past year, grew in-line with the overall IIP at 2.5% yoy in May. Only 12 out of 22 industry groups in the manufacturing sector registered above zero growth during May 2012. Mining activity contracted by 0.9% during May. In fact, in the last 12 months, mining index has been continually contracting since August 2011, apart from 2.7% yoy growth registered in February 2012. Growth in electricity production was relatively healthy at 5.9% yoy.
As per use-based data, apart from capital goods index, which disappointed once again with a contraction of 7.7% yoy, and consumer non durables index, which was flat yoy, all other indexes managed to report moderate growth figures.
L&T inaugurates switchgear facility at Vadodara
Larsen & Toubro’s (L&T) inaugurated its manufacturing facility for switchgear products at Vadodara, a capacity expansion initiative for its Electrical & Automation (E&A) wing. The E&A wing, one of the market leaders in low voltage switchgear in the country, will manufacture air circuit breakers (ACBs) and moulded case circuit breakers (MCCBs) at this facility. This facility will enable L&T to elevate switchgear manufacturing technology to the next level, and advance further in their goal to upgrade manufacturing capabilities in India. Further, smart mix of labour and automation deployed there would enhance productivity by 2.5 times. The lines are equipped to produce circuit breakers of different frames and several ratings from 16A to 6300A.
At the CMP of Rs.1,410, the stock is trading at PE of 14.1x FY2014E earnings, after adjusting for investments, which is below the historical trading multiple for L&T. We have used the sum-of-the-parts (SOTP) methodology to value the company to capture all its business initiatives and investments/stakes in the different businesses. Ascribing separate values to its parent business on a P/E basis and investments in subsidiaries on P/E, P/BV and mcap basis, our target price works out to Rs.1,553. Owing to the recent surge in stock price we recommend Accumulate on the stock.
TCS (CMP: Rs.1,236 / TP: – / Upside: -)
TCS reported yet another healthy quarterly result. The most remarkable thing was 5.3% qoq volume growth. The dollar revenue grew by 3.0% qoq to US$2,728mn. The EBIT margin of the company declined by 20bp qoq to 27.6%, the negative impact of wage hike got absorbed by benefits from INR depreciation. Bottomline of company grew by ~12% qoq to Rs.3,280crdue to lower than expected forex loss (~Rs.94cr).
TCS, like Infosys, also said that unprecedented currency volatility continued to be a challenge in the short-term, but it continues to see good demand from global companies. Among key deal wins included a US$100mn contract with a leading North American retailer, a multi-million dollar managed services contract by a North American communications solutions provider and a multi-year contract from an Australian financial institution. Overall the results were encouraging with management commentary indicating that the company would be able to grow higher than industry. We are Neutral on TCS as valuations preclude us from taking a more favorable view in terms of good absolute upsides. Still, that said, TCS remains the best relative play in near term and will act as defensive for investors.
Infosys (CMP: Rs.2,265 / TP: Rs.2,530 / Upside: 12%)
For 1QFY2013, Infosys reported yet another disappointing quarterly result, broadly disappointing on all fronts. The dollar revenues declined by 1.1% qoq to US$1,752mn, impacted due to 3.7% qoq decline in pricing. The cross currency movement also impacted the company’s revenue by US$13mn. In addition, the company took a hit of US$15mn as a one-time reversal in a transformation project from a European utilities client. In the constant currency terms also, the company has not been able to meet its dollar revenue guidance of 0-1% qoq growth. Revenue in constant currency (CC) terms came in at US$1,763mn, down 0.4% qoq. One key positive thing was that the company’s volumes grew by 2.7% qoq led by 2.9% offshore volume growth and 2.3% onsite volume growth. In INR terms, revenue came in at Rs.9,616cr, up 8.6% qoq, aided by ~8% qoq INR depreciation against the USD in 1QFY2013.
The company’s EBITDA and EBIT margin declined by 181bp and 190bp qoq to 30.8% and 28.0%, respectively, despite having considerable benefits from ~8% qoq INR depreciation against USD. Operating margins of the company were impacted adversely by ~3.7% qoq decline in revenue productivity and US$15mn of revenue reversal on account of a project cancellation. Management indicated that they expect EBIT margin to go down by 50-100bp in FY2013 which does not factor any wage hike.
The most disappointing thing in Infosys result was revision of FY2013 USD revenue growth guidance downwards to at least 5% from 8-10% earlier, tad lower than our estimate of 6-8% taking into account: a) 1.5% impact due to adverse cross currency movement, b) 3.2% impact due to price decline and c) rest due to impact on overall demand scenario. The management has stopped issuing quarterly guidance citing uncertainly in demand environment which is discomforting. We believe this clearly indicates challenging visibility in business volumes and management’s future expectation. Post 1.1% decline in USD revenue in 1QFY2012, the company requires ~3% ask rate in 2Q-4QFY2013 to achieve 5% growth in FY2013, which at current scenario looks a bit stretched.
At the CMP of Rs.2,265, the stock is trading at 14.0x FY2013E and 13.0x FY2014E EPS. We value the company at 14.5x FY2014E of Rs.174.5 which is significant discounts to its peak valuations as well as to Sensex. We maintain Accumulate rating on the stock with a target price of Rs.2,530 but in the near term though we do not expect Infosys to give considerable absolute upsides.
HDFC Bank (CMP: Rs.580 / TP: – / Upside
HDFC Bank is expected to announce another healthy set of results for 1QFY2013. We expect the bank to report healthy NII growth of 22.1% yoy to Rs.3,476cr. Noninterest income is expected to register growth of 28.6% yoy to Rs.1,440cr, leading to operating income growth of 23.9% yoy. Due to a relatively high increase in operating expenses (expected to increase by 30.7% yoy), pre-provision profit is expected to grow by relatively low 17.4% yoy. Provisioning expenses are expected to decline by 33.4% yoy to Rs.296cr, leading to healthy net profit growth of 30.2% yoy to Rs.1,413cr. At the CMP, the stock is trading at valuations of 3.3x FY2014E P/ABV. We recommend a Neutral rating on the stock.
Economic and Political News
- Cabinet defers 11% stake sale in SAIL
- Monitoring mechanism to be set up for PPP projects
- Cabinet defers Forward Contract Bill
- Cabinet approves a Rs.10,000cr aid for electronics sector
- Infosys will hire 35,000 people, but may not hike salary
- BPCL, Videocon find oil off Brazil Coast
- Vodafone to acquire NZ’s TelstraClear for Rs.3,700cr
- Bosch suspends production at its Bangalore plant for two days
- Greaves Cotton inks pact with Atul Auto