29th April, 2011

The markets opened on a positive note but immediately slipped into the red and traded in a tight range for most of the morning session. The markets slipped further in the afternoon session but recovered some of the losses and ended on a weak note amidst volatility. All the Sectoral indices ended in the red with Realty, Metals & IT losing the most while Healthcare ended with minor losses. Among the Sensex stocks ONGC (1.99%) & ICICI Bank (0.92%) were amongst the gainers while RCom (5.13%), Cipla (2.77%) and DLF (2.71%) were among the losers. The Sensex lost 157 points or 0.81% to close at 19,292 while Nifty lost 48 points or 0.83% to close at 5,785.

Total traded turnover stood at Rs 2,42,192 cr. In equities FIIs were net sellers of (Rs 833 cr) while DIIs were net buyers (Rs 533 cr). On the derivatives side, FIIs were net buyers in Index Futures (Rs 191 cr), Index Options (Rs 493 cr) while they were net sellers in Stock Futures (Rs 59 cr) and Stock Options (Rs 15 cr).

The US markets ended positive despite mixed economic news and diverse earnings reported by companies. The Dow Jones gained 72 points or 0.57% to close at 12,763 while NASDAQ gained 3 points or 0.09% to close at 2,873.

The Asian markets are trading mixed. Nikkei is trading higher by 1.63% while Hang Seng is trading lower by 0.28%. Once again the markets closed on a weak note after remaining volatile in the late session. The markets may open on a soft note amidst mixed cues from Asian peers. Adopt a stock specific strategy.

The trend deciding level for the day is 5805, If NIFTY trades above this level then we may witness a further rally up to 5835‐5880‐5905 levels. However, if NIFTY spot trades below 5805 levels then we may see some profit booking to initiate in market, it may correct up to 5755‐5725‐5700.

HCL Technologies : BUY

Back-to-Back Strong Quarters Led by Volumes

HCL Tech reported another quarter of EBITDA improvement (despite one-offs from the Tsunami in Japan) led by robust volume growth, higher utilization rates and a strong market share gain / execution in BFSI. Lower DSO days (down by 4 days QoQ) & curtailment of peak BPO losses are added positives. HCL Tech declared consol. rev of Rs 41.4 bn (~6% QoQ & ~35% YoY), EBITDA of Rs 7.2 bn (~13% QoQ & ~18% YoY), & PAT of Rs 4.7 bn (~17% QoQ & ~36% YoY) in Q3FY11.

Key highlights

• Sales: Software svcs grew 6% QoQ. Revenues from IMS grew 9% QoQ and that from BPO rose 1% QoQ.  Blended volume growth was 4.8% with currency contributing ~1% to drive  5.8% QoQ growth in USD terms. Pricing was stable for the quarter.
• EBITDA: Led by SG&A efficiency & reduced losses in BPO segment.
• PAT: Operating profit offset the impact of higher tax outgo. Market share gains/efficient client mining drove operating performance: This quarter saw a blend of client additions and client mining with: (1) closure of 11 large transformational deals; & (2) healthy upgrades esp. across key client buckets of USD 5 / 10 / 20 / 30 mn. HCL Tech showcased strength across key verticals (BFSI, Mfg, E&U* & Public Sector with aggregate rev share of ~61%) and service offerings (Enterprise Apps, IMS & Custom Apps with aggregate rev share at ~77%).
• While rev momentum is strong, we believe following operating levers would offset headwinds from lateral hiring, currency fluctuations and salary hikes: (1) lower BPO losses – mgmt guided for a reduction in peak qtrly BPO losses from USD 7 mn earlier to USD 6 mn; (2) utilization rates at ~76% in Q3FY11 (ample headroom given peak levels of ~79%); and (3) offshore revenue transition.

Valuations

We have revised our FY12E EPS est. upwards by ~6% & now assign a higher PE of 18x (vs. 17x earlier) and rate the stock as a BUY. CAGR btw FY11-FY13E at topline / EBITDA /PAT levels remains strong at 23% / 25% / 27% resp. We have revised our Target Price upwards to Rs 594 (14% upside from CMP).

Tata Consultancy Services : BUY

Raising the Bar

TCS’ FY11 performance (Rev up ~24% YoY & PAT up ~26% YoY, despite INR appn) exemplifies its strategy of “growth with a margin focus”.  FY12E  to  mark  another  year  of  growth  with  23  units  being carved out that have strong leadership team, profitability focus and rev potential of USD 1 bn each over next few years (TCS’ FY11 topline: USD 8.2 bn). We are mainly enthused by its strong deal pipeline, mgmt confidence on growth, power focus on non-linear initiatives & execution capabilities to manage ~80-84% utz rates.

Q4FY11 marked a perfect finish with broad based growth (vols. in int’l. biz up 3.3% QoQ) despite Q4 seasonality and margin headwinds from higher onsite revs, lower utz rates and ~19,300 employee addns.

Key highlights: Q4FY11

• Sales:  Led by blended volumes (+2.9% QoQ), pricing (+0.8% QoQ in const currency), currency benefit (1.3% QoQ) & onsite shift (0.1% QoQ)
• EBITDA:  Despite decline in utz – currency benefit (58 bps), improved realizations & SG&A efficiency helped to maintain EBITDA % QoQ
• PAT: Higher other income helped offset higher tax Continued improvement in revenue visibility; margin confidence high: Our confidence in rev visibility is further strengthened by: 1) Robust 18% QoQ growth in Enterprise Solns (Q4 rev share at ~11%) – a key indicator of discretionary spend; 2) Strong deal pipeline (closed 7 large transformation deals in Q4 and currently pursuing 20 deals), & 3) Gross hiring target of 60K for FY12E (campus offers at ~37K).
• Positive commentary on pricing & utz (target to maintain utz ex-trainees in the range 80-84% range) is added positive from a margin standpoint. Addl. margin levers include: 1) volumes from verticals / geos like Telecom / Continental Europe that are showing signs of improvement; 2) better offshore rev %; 3) margin increase in GDCs/ EMs (5% rev share); & 4) better trajectory from non-linear offerings (e.g. its SMB platform, iON had 225+ clients in its first quarter of launch).

Valuations

Our FY12E EPS est. remains largely at ~Rs 53; with FY13E EPS est. at ~Rs 62. Our BUY rating with TP of Rs 1,330 at 25x FY12E EPS.

ING Vysya Bank : BUY

Impressive Performance With Strong Set of Nos

ING Vysya Bank’s (ING) PAT grew 91% YoY to Rs 91.3 cr, which was above our estimates. Improvement in NIMs (3.3% in Q4FY11, up 20 bps QoQ); strong growth in CASA balances (34.6% in Q4FY11, up 116 bps QoQ) along with improved asset quality (Gross NPA at 2.3%  in  Q4FY11,  down  36  bps  QoQ)  drove  this  robust  operating performance. Decline in provision expenses (down 96% YoY) provided traction to PAT growth.

Key highlights

• NIMs grew 20 bps to 3.3% in Q4FY11 led by yield on advances improving to 10.69% (up 56 bps QoQ) along with an improvement in CASA ratio. Cost of deposits rose to 6% (up 56 bps QoQ).
• Advances grew 28% YoY to Rs 23,600 cr buoyed by a 43% YoY rise in biz banking. CASA ratio improved to 34.6% (up 120 bps QoQ) with current a/c balance up 25% YoY & savings a/c balance up 23% YoY.
• High staff expenses (up 54% YoY) led to 13% QoQ increase in cost-to-income (C-I) ratio to 67%. ING has fully provided for: (a) the entire Gratuity liability (of Rs 20.74 cr), (b) Additional liability of pension for retired employees (of Rs 28.73 cr), and (c) 1/5th of Pension costs for existing employees (of Rs 18.6 cr). Only Pension cost on existing employees will be repeated going forward.
• Asset Quality improved as gross NPAs and Net NPAs declined by 5% QoQ and 33% QoQ to Rs 550 cr and Rs 90 cr respectively. Provision coverage improved further to 83%.

Maintain BUY, with TP of Rs 434 (24% upside)

ING is expected to witness substantial improvement in C-I ratio as some of the one-off items will not be repeated, which will help ING achieve over 1% RoA in FY12E (vs. 0.9% in FY11). Higher-thanmandated PCR will help in normalizing earnings in bad qtrs. With asset quality issues behind & with opening of new branches, ING’s focus will be on growth which will augur well for return ratios. We have revised our earnings upwards by 7% to factor in improved operational performance. At CMP of Rs 350, ING is trading at 11.5xFY12E EPS of Rs 30 & 1.38xFY12E ABV of Rs 253. BUY rating with an TP at Rs 434.

28th April, 2011

The markets opened on a positive note and witnessed volatility in the morning trade post which they continued to trade sideways till the afternoon session. The markets moved lower in the afternoon session and again witnessed volatility before ending on a weak note.  Among the Sectoral indices PSU & FMCG gained while Realty and Capital Goods were among the losers. In the Sensex kitty ONGC (2.57%), M&M (1.61%) & Maruti Suzuki (1.10%) were amongst the gainers while Wipro (2.86%), Jaiprakash Asso (2.26%) and BHEL(2.30%) were among the losers. The Sensex lost 97 points or 0.49% to close at 19,449 while Nifty lost 35 points or 0.59% to close at 5,834.

Total traded turnover stood at Rs 1,98,744 cr. In equities FIIs were net sellers of (Rs 711 cr) while DIIs were net buyers (Rs 299 cr). On the derivatives side, FIIs were net sellers in Index Futures (Rs 385 cr), Stock Futures (Rs 407cr), Stock Options (Rs 24 cr) while they were net buyers in Index Options (Rs 490 cr).

The US markets ended positive as stocks rallied after Fed renewed it commitment to stimulate growth with low rates and stated that increase in inflation is likely to be temporary. The Dow Jones gained 96 points or 0.76% to close at 12,691 while NASDAQ gained 22 points or 0.78% to close at 2,870.

The Asian markets are trading positive. Nikkei is trading higher by 1.28% while Hang Seng is trading higher by 0.57%.

The markets closed on a weak note after witnessing volatility. The market breadth was negative with declines outnumbering the advances. The markets may open on a positive note tracking global cues and may remain volatile due to F & O expiry today.

The trend deciding level for the day is 5850, If NIFTY trades above this level then we may witness a further rally up to 5875‐5900‐5930 levels. However, if NIFTY spot trades below 5850 levels then we may see some profit booking to initiate in market, it may correct up to 5805‐5775‐5745.