Infosys: HOLD

Upcoming events & guidance upgrade hold the key Weak Q4FY11, muted guidance (esp. on margins) and ongoing management restructuring (namely the exit of Mr. Mohandas Pai) lead us to downgrade our FY12E EPS est. by ~7% to ~Rs 140; introduce FY13E EPS est. at ~Rs 170. We now assign a lower target FY12E P/E of 20x (lower than 5yr median at 21x vs. 24x earlier; implied PEG at ~1x).

Revenue guidance positive: Client additions of 34 (incl. 7 Fortune 500 clients), closure of 4 transformational deals (>USD 30 mn) & 6 large deals (42 in last 8 qtrs) indicate demand buoyancy. Thus, resulting in a 18-20% YoY revenue growth guidance in USD terms. While Q1FY12 QoQ topline guidance is lower at ~1% to ~2%, the implied QoQ topline growth (in USD terms) for the remaining qtrs at 5.5% to 5.9% appears strong.

EPS guidance is lower: At 8-10% YoY growth even in USD terms builds-in ~300bps margin decline on account of 1) currency volatility (~1%), 2) lower utilization assumption, & 3) wage inflation (~10-12% offshore and ~2-3% onsite). We believe upsides exist from (1) utilization rates given current low base (Q4FY11 utz ex-trainees at ~75%) as volumes improve in 9mFY12, (2) Insurance vertical returns to QoQ growth and Telecom vertical at least shows some traction (where management indicated improvement in deal pipeline in Q4). We are not banking on any pricing change from Q4FY11 which can surface given strong demand & uptick in discretionary spend. Q4FY11 is an aberration: due to 1) ~6% QoQ decline in Top 6-10 clients (Q4 rev share: ~10%), & 2) continued weakness in Telecom & Insurance (Q4 aggregate rev share: ~19%). From FY03 till date, ex year of Lehman debacle, Infosys has reported a positive vol. growth in Q4.

Outlook: While Q1FY12E absorbs margin pressure from wage hikes/ visa costs, from Q2 onwards we expect 2-3 qtrs of consistent QoQ growth in EPS. In the interim, we would monitor two critical events to review our call 1) TCS results on 21 April 2011 & 2) Infosys board meet on 30 April 2011 on finalization of its leadership succession, post retirement of Mr. N. R. Narayana Murthy as Chairman of the Board in August 2011.

Management changes

We believe the value addition and contribution of Mr. Mohandas Pai to Infosys is best exemplified from the statement of Mr. Narayan Murthy. We produce these words of appreciation in the current report to highlight this organization restructuring at this current juncture: "Mohan has been an early adopter and a keen anchor builder of Infosys. It is difficult to imagine Infosys without Mohan’s passion, commitment, joie-de-vivre and intellect. We all know that he is taking this painful decision, since he has much bigger projects in the horizon - nation building. The Board and every Infoscion thank Mr. Mohandas Pai for his wonderful contribution and wish him great success in his future endeavors."

Our revised TP of Rs 2,803 implies a 6% downside. Downgrade to HOLD.

SUZLON

Post REpower Acquisition, debt overhang reduces

100% buy-out in REpower: Suzlon has acquired ~4.7% in REpower, thereby increasing its stake to 95.2%. It has initiated the process to squeeze-out minorities (i.e. acquire bal. stake) and regulatory approvals may take 6-8 months. The required ~ Rs 8 - 8.2 bn would be financed by promoters debt (Rs 1.5 bn) & FCCBs of USD 175 mn.

Synergies – short & long term: Post acquisition of 100% stake, Suzlon would have access to REpower’s balance sheet (Dec’10 cash of ~Rs 18 bn), which will aid Suzlon to meet its financial commitments. On operational front, REpower’s gross margins are ~10% lower than Suzlon, which we believe can be improved through increased sourcing from low-cost sources in Asia.

Levers available for FY13 Debt repayment: Current FCCBs and promoter loans adds ~8% to the existing debt of Rs 121 bn. Principal repayment for FY13 includes term/acq. loan of ~ Rs 7 bn & FCCBs of ~Rs 17 bn (Rs 25 bn incl. YTM; conversion price is ~Rs 94). To finance this, Suzlon will have to rely on divestures of subs (26% in Hansen - Rs 7 bn at CMP) and operating cash flows (esp collection of Rs 10 bn receivables in USA) OR potentially use REpower’s balance sheet.

Suzlon Wind biz: For FY12, management expects volumes of 2.3-2.8 GW, (incl 1.6-1.8 GW from India). For FY13, while India could be ~ 2 GW, overall visibility depends on order wins in Brazil, China, S Africa etc.

Maintain HOLD with Target Price  of Rs 60

19th April, 2011

The markets opened on a flat note and moved higher touching the highest point by the mid morning trade but corrected sharply thereafter and slipped into the negative zone by the afternoon session. The markets continued to trade lower and ended the day on a weak note. All the Sectoral indices ended in the red with IT & Realty being the major losers while PSU & FMCG saw minimal losses. Among the Sensex stocks Hero Honda (1.80%), HUL (1.65%) were amongst the gainers while DLF (4.69%), TCS (3.43%) and Jaiprakash Asso. (3.13%) were the major losers. The Sensex lost 296 points or 1.53% to close at 19,091 while Nifty lost 95 points or 1.64% to close at 5,729.

Total traded turnover stood at Rs 2,00,853 cr.In equities FIIs were net sellers (Rs 982 cr) while DIIs were net buyers (Rs 661 cr) respectively. On the derivatives side, FIIs were net sellers in Index Futures (Rs 56 cr), Stock Futures (Rs 183 cr) while they were net buyers in Index Options (Rs 926 cr) .

The US markets ended negative as stocks corrected after S & P revised its outlook on the U S credit rating downward to negative and concerns China's monetary tightening may slower the pace of global economic growth. The Dow Jones lost 140 points or 1.14% to close at 12,202 while NASDAQ lost 29 points or 1.06% to close at 2,735.

The Asian markets are trading lower. Nikkei is trading lower by 1.49% while Hang Seng is currently trading lower by 1.53%.

The markets closed on a weak note. FIIs were net sellers in the cash segment while DIIs bought. The markets may open on a negative note tracking weak global cues, after ratings agency Standard & Poor's lowered its outlook on U.S. Adopt a cautious approach.

The trend deciding level for the day is 5785; If NIFTY trades above this level then we may witness a further rally up to 5815-5843-5860 levels. However, if NIFTY spot trades below 5785 levels then we may see some profit booking to initiate in market, it may correct up to 5700-5665-5640.

NALCO : SELL

EPS downgrade on higher coal costs: Largely due to the recent 30% price increase by Coal India effective Feb-11. NALCO sources ~90% of its coal requirement from Coal India.

Valuations: EPS estimates for FY11 and FY12 to Rs 4.3 (vs. Rs 5.5) and Rs 6.2 (vs. Rs 8.3) respectively to factor in higher cost of production, particularly power. Maintain SELL with target price of Rs 76. Target price implies a downside of 22% from CMP of Rs 98.