04 October 2010
UBS: Indian IT Services:Strong quarter ahead, but priced in
Indian IT Services:Strong quarter ahead, but priced in
Volumes should reflect strong demand growth
We expect Q2 FY11 to be a strong quarter in terms of volume growth for Tier I
vendors in the sector, with broad-based growth across multiple verticals and
geographies. We expect Infosys Technologies (Infosys) to lead with 8% QoQ
volume growth among the Top 3 companies, while Tata Consultancy Services
(TCS) is likely to slow to 6.5% QoQ after a strong Q1 FY11.
Favourable FX rate should ease margin concerns for most companies
We estimate an average depreciation of 2.6%-2.8% in the currency basket for Tier
I vendors, which is likely to boost reported rupee revenue and ease margin
pressure. We estimate Infosys will report a 145bp increase in its operating margin,
while HCL Technologies (HCL Tech) is likely to report a 150bp decline due to
wage hikes during the quarter. We expect operating margins for Wipro and TCS to
remain relatively stable in Q2 FY11.
Infosys guidance upgrade likely, we expect no surprises
Our FY11 EPS estimate for Infosys (Rs123.3) is 5.6% above the high end of
Infosys’ guidance (Rs112.21), and we expect the company to raise its revenue and
EPS guidance by 3%-4% on a full-year basis based on an outperformance in Q2
FY11. We also expect Wipro to guide for strong Q3 FY11 revenue growth.
We remain cautious; upsides look fully factored into current share prices
We believe a strong Q2 FY11 performance is already factored into the share prices.
We think there is potential for downside, mainly due to currency appreciation as
seen over the past one to two weeks. We remain cautious on the sector with
Neutral ratings on TCS and Infosys, and Sell ratings on Wipro and HCL Tech.
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Accenture: A sweet foretaste for Indian IT says IIFL
A c c e n t u r e: A sweet foretaste
• Accenture delivered a strong 4QFY10 with revenues at the topend
of its guidance (US$5.4bn, 5% YoY) and re-emphasised the
robust demand environment. Guidance for FY11 at 7% to 10%
YoY (constant currency) is strong and implies acceleration in
revenue growth.
• Growth in 4QFY10 was diversified and broadbased with all major
verticals registering a 7% to 16% YoY growth (constant
currency). BFSI and products practices performed strongly with
14% and 16% YoY revenue growth (constant currency)
respectively.
• Signs of a pickup in discretionary spending are also evident in its
order book. The more discretionary ‘consulting’ orders were 54%
of its 4QFY10 new bookings.
• Our channel checks indicate that attrition, though still high, has
been on the wane at Indian vendors. Indications of this can be
seen at Accenture, where attrition after increasing from 8% to
17% over the past year has been stable in 4QFY10.
• For Indian vendors, we expect a strong 2QFY11 with 6.5% to
7.5% US$ QoQ revenue growth across the top-tier vendors.
• Also, after nearly four quarters of better EBITDA growth at TCS
(vs Infosys), we expect Infosys to report materially stronger
EBITDA growth (15% QoQ vs 8% at TCS) in 2QFY11 on higher
revenue growth and strong margin expansion.
• Infosys and HCL Tech remain our top picks in Indian IT services.
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Motilal Oswal: INDIAN BANKING: Deposits rates rising; Proactive lending rate hike to protect margins
INDIAN BANKING: Deposits rates rising; Proactive lending rate hike to protect margins
SBI and PNB have increased deposit rates by 25-100bp in certain maturities. At the same time, some banks have announced their base rate as part of a Mandatory Quarterly Review. While SBI has maintained its base rate at 7.5%, others have increased rates by 25-50bp. Our view on change in deposit rate and base rate:
- As deposit growth continues to lag loan growth and inflation moderation takes time, we expect deposits rates to continue to increase in 2HFY11. We expect other PSU and private banks to also increase deposit rates soon.
- Incremental CD ratio is at 100%, leaving enough pricing power with banks to raise lending rates. Banks have already raised PLR by 50bp in 2QFY11 (impacting existing loans), and now they have increased base rate by 50bp (impacting incremental loans).
- In this cycle, banks have been aggressive in hiking lending rates as compared to the earlier cycles, where they did so with a lag of 6-8 months.
- Cost of funds is expected to rise, led by sharp increase in borrowing cost - wholesale rates are up 250bp YTD, retail up 100-150bp YTD. However, early transmission of rising cost to funds will lead to only marginal decline in margins (given time lag between deposit and lending rate hike). We expect NIMs to decline marginally in 2HFY11 vs 1HFY11. However, on a blended basis, FY11 margins for state owned banks are likely to be higher than in FY10, translating in to strong NII growth.
- Banks where there is lower repricing of deposits in FY11, have high CASA growth and the ability to pass on the increased cost of funds will report superior relative performance.
Change in Base Rate over previous quarter (%) Change in PLR YTD (bp) Change in bulk deposit rates (CoD)
Trend in SBI retail term deposit rates (%)
Valuation and view
- Despite strong outperformance, we maintain our positive stance on the sector. Loan growth is the key for strong core operating performance to continue in 2HFY11.
- We prefer selective buying and like banks with a strong core deposit franchise, higher tier-1 capital and high provision coverage ratio.
- We continue to prefer SBI, PNB, BoB and Union Bank in the current environment. Among private banks we like ICICI Bank (improving liability profile) and Yes Bank (ability to pass on cost, 94% of loans linked to PLR). While HDFC Bank enjoys high CASA ratio and high-yielding fixed retail loans, we believe that the stock is fully valued at the current price.
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FII DERIVATIVES STATISTICS FOR 04-Oct-2010
FII DERIVATIVES STATISTICS FOR 04-Oct-2010 | |||||||
BUY | SELL | OPEN INTEREST AT THE END OF THE DAY | |||||
No. of contracts | Amt in Crores | No. of contracts | Amt in Crores | No. of contracts | Amt in Crores | ||
INDEX FUTURES | 51145 | 1576.71 | 79685 | 2469.16 | 519288 | 16072.26 | -892.45 |
INDEX OPTIONS | 163190 | 4926.60 | 120709 | 3661.25 | 1861307 | 57324.01 | 1265.35 |
STOCK FUTURES | 58577 | 1816.23 | 73684 | 2286.69 | 1321425 | 40339.34 | -470.45 |
STOCK OPTIONS | 12507 | 460.86 | 13052 | 472.27 | 18577 | 610.15 | -11.41 |
TOTAL | -108.96 |
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FII & DII trading activity on NSE and BSE as on 04-Oct-2010
FII trading activity on NSE and BSE on Capital Market Segment | |||||||||||||||||||||||||||||||||||
The following is combined FII trading data across NSE and BSE collated on the basis of trades executed by FIIs on 04-Oct-2010. | |||||||||||||||||||||||||||||||||||
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Edelweiss: India Strategy - ride the tiger
— Facing weak domestic demand, US and Europe are looking for weaker currencies to support trade sector
— However, China is reluctant to allow meaningful RMB appreciation (Japan also worried about JPY appreciation). This could lead to trade tensions building up
— For financial markets, it is concerns on growth Vs comfort of liquidity
Economic momentum in India remains on a strong footing
— Robust industrial growth and healthy monsoons to sustain the growth momentum
— Inflation concerns are easing; RBI embarking wait and watch approach
— Credit growth on a recovery path; to further accelerate in H2FY11
However concerns remain
— BoP situation remains a concern, with current account deficit on a widening trend
— Paper issuances an overhang but FII flows to remain supportive
— Valuations vis-à-vis EMs appear higher but pace of earnings revisions also stronger
India on strong footing; growth propelled by consumption and capex
— Consumption expected to be boosted by strong monsoons, easing inflation and rising salaries
— In capex, power continues to be the dominant part with focus now shifting to operational capex such as mining and material handling, transmission towers, etc
Sectors to play
— Consumption: autos, media, airlines, real estate
— Capex: Material handling, earth moving equipment for mining, transmission towers for power evacuation
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Motilal Oswal: INDIAN MONSOON FINAL UPDATE: Rainfall surplus at 2% for season
INDIAN MONSOON FINAL UPDATE: Rainfall surplus at 2% for season as predicted by IMD; all regions in normal range;
Kharif sowing covers 96.3% of normal area
Kharif sowing covers 96.3% of normal area
- India’s south-west monsoon season (Jun-Sep 2010) ended with overall rainfall surplus of 2%, in line with IMD’s prediction.
- Temporally, rainfall improved dramatically mid-July onwards despite a tepid beginning due to delayed impact of La Nina. The same is expected to help winter rains and retention of soil moisture conditionsimproving outlook for Rabi production as well.
- Spatially, all regions ended the season within normal range. Moreover, 14 sub-divisions reported excess rainfall while another 17 recorded normal rainfall. However, five subdivisions of eastern and north-eastern region remained in the deficient category for almost the entire season with parts of these region facing drought-like situation bringing down the prospects of rice production somewhat.
- IMD has declared retreat of south-west monsoon but predicted continued rainfall in various parts of the country. The extended forecast upto October 5 indicates fairly widespread rainfall would occur over Peninsular India while rainfall activity over northeast India would decrease.
- Significantly, Kharif sowing as on September 23, 2010 has covered 96.3% of normal area sown in the season, 6.9% higher (7.7% for area under foodgrain) over the corresponding 2009. Sowing in rice has also picked up with 7.2% higher acreage than 2009 as on September 23, 2010 but it only comprised 88% of normal area.
- The first Advance Estimate of Agricultural Production has placed FY11 Kharif foodgrains production at 115 million tons (mt) which is 11mt higher than FY10, i.e. 10% increase. However, this is lower than the peaks reached in the last decade viz., 117mt in FY04, 121mt in FY08 and 118mt in FY09. Rice production too is set to increase by 5mt (6%) to 80mt.
RAINFALL UPTO SEPTEMBER 30, 2010 (CUMULATIVE SINCE JUNE 1, 2010) | ||
Actual rainfall (mm) | % Departure from LPA | |
Country as a whole | 912.8 | 2% |
North-West India | 688.2 | 12% |
Central India | 1027.9 | 4% |
South Peninsula | 853.6 | 18% |
East and North-East India | 1175.8 | -18% |
Category | No. of Subdivisions | Range (% Dep from LPA) |
Excess | 14 | 21% to 107% |
Normal | 17 | 17% to -17% |
Deficient | 5 | -22% to -41% |
Scanty | 0 | - |
Total Subdivisions | 36 | 107% to -41% |
PROGRESS OF MONSOON IN RECENT PERIOD (CUMULATIVE SINCE JUNE 1, 2010)
Category | 21-Sep | 22-Sep | 23-Sep | 24-Sep | 25-Sep | 26-Sep | 27-Sep | 28-Sep | 29-Sep | 30-Sep |
Excess | 14 | 13 | 13 | 13 | 14 | 13 | 13 | 13 | 13 | 14 |
Normal | 17 | 18 | 18 | 18 | 17 | 18 | 18 | 18 | 18 | 17 |
Deficient | 5 | 5 | 5 | 5 | 5 | 5 | 5 | 5 | 5 | 5 |
Scanty | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Departure from LPA | 4% | 4% | 4% | 4% | 4% | 3% | 3% | 3% | 2% | 2% |
Dispersion in LPA | 113% to -39% | 112% to -39% | 111% to -38% | 110% to -38% | 110% to -38% | 108% to -39% | 108% to -39% | 107% to -40% | 107% to -40% | 107% to -41% |
RAINFALL RECOVERED MID-JULY ONWARDS ON LA NINA CONDITIONS NORMAL RAINFALL IN MOST REGIONS – DEFICIENT EAST AND THE NORTH-EAST
RESULTING IN OVERALL SURPLUS FOR THE SEASON REGION TOO HAVE MOVED INTO NORMAL CATEGORY
ONE OF THE BEST RAINFALL IN RECENT YEARS: DISTRIBUTION OF SUB-DIVISIONS
Category | 29.09.2010 | 30.09.2009 | 30.09.2008 | 30.09.2007 | 30.09.2006 | 30.09.2005 | ||||||
Excess | 30% | (70%) | 9% | (41%) | 28% | (76%) | 32% | (72%) | 22% | (59%) | 21% | (72%) |
Normal | 40% | 32% | 48% | 40% | 37% | 51% | ||||||
Deficient | 28% | (30%) | 51% | (59%) | 23% | (24%) | 24% | (28%) | 38% | (41%) | 26% | (28%) |
Scanty | 2% | 8% | 1% | 4% | 3% | 2% | ||||||
No Rain | 0% | 0% | 0% | 0% | 0% | 0% |
NORMAL/EXCESS RAINFALL IN MOST PLACES EXCEPT GANGETIC PLAIN MONSOON SEASON HAS ENDED IN MOST PLACES
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