IT Services - Sector Update - INR affects quarter, but demand environment strengthens :: Centrum

INR affects quarter, but demand environment strengthens



Given the improved demand environment (per multiple indicators) and
with INR appreciation worries receding, we think several Tier-1 firms
warrant re-rating. We expect strong growth in TCS, HCLT and TechM this
quarter but expect the commentary to be positive across all Tier-1
firms. We think that sustained demand improvement will be visible
towards 1HCY15. We expect a fairly immediate re-rating for HCLT and
Wipro while Infosys’ re-rating will be contingent on large deal wins
(we expect it in 1HCY15). Among mid-caps we favour Cyient and NIIT
Ltd, expecting client-specific issues to continue to weigh on eClerx.

$ Rupee woes earlier overdone, rerating across sector large-caps:
Considering the sharp de-rating that happened to the IT Sector
post-election results in India, a rebound could have been expected in
several names. We think the improved demand environment in the US, and
likely stable currency from here on warrant a rerating across most of
our Tier-1 universe barring TCS which already trades at a steep
premium. We argue for rerating of HCLT, Wipro and TechM, with Infosys’
being contingent on large deal wins (USD200Mn+).

$ Margins to be hit this quarter due to rupee appreciation and wage
hikes: In addition to the impact of lower INR realizations, margins
for TCS, Infosys, Cyient and eClerx will also be impacted this quarter
due to salary hikes. Wage hikes for Wipro will be effective for only
one month this quarter while for HCLT, only for part of the workforce.
Despite the margin-hit this quarter and the unfavourable margin
comparisons YoY and QoQ for most firms, we think valuations have
bottomed out considering the strong demand environment.

$ Demand environment firming up per multiple sources: From our
analysis of long-term CIO-spending (vide note dated Oct-07-2013), a
pickup in other areas including IT strategy consulting precedes
spending on IT Services. As per Accenture’s recent commentary,
management consulting is seeing traction, a good leading indicator for
IT Services spending. Our channel checks indicate that ticket sizes of
discretionary spends on new projects in cloud and digital have risen
to USD5-10Mn YoY from USD 1-3Mn.

$ Recommendation and key risks: We maintain BUY on Wipro, HCLT,
Infosys and Cyient and HOLD on TCS, TechM and eClerx, as also BUY on
NIIT Ltd with a TP of Rs70 (Rs55 earlier). We have changed our target
multiple for HCLT to 16x from 14x considering its continued leadership
in large infrastructure deals and improving traction in application
services. We also increase target multiples for Wipro and TechM to 15x
and 14x respectively in view of continued improvements to their
service portfolios and key contract wins. Key risks: (1) currency
volatility and (2) Regulatory changes such as the US Immigration Bill.



Thanks & Regards

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Power and Gas Utilities - Sector Update - Most stocks rallying more on hope vs actual beneficiaries :: Centrum

Most stocks rallying more on hope vs actual beneficiaries



Power and Oil & gas sector stocks are upbeat and rallying on reforms
post formation of a stable government in May-14. We believe it is
essential to segregate stocks rallying on hope and actual
beneficiaries as the former will fizzle out once fundamentals catch
up. The stock rally does not seem to be taking cognizance of subdued
earnings in an optimistic scenario and rich valuations while being
overly hopeful of reforms which will impact only a few companies.

$ Sector outlook – Power: We are enthused by a spate of structural
reforms initiated and implemented since FY12 in the power sector with
thrust on increasing power generation capacity. We are thus not
optimistic on power generation besides speedy MoEF approval for
stranded projects, but believe the next leg of reforms would kick-in
in transmission and distribution, rationalisation in logistics cost
linked to coal transportation, improvement in rail infrastructure,
speedy auctions in coal blocks, etc. The impact of the next leg of
reforms is seen to have a Neutral impact on NTPC, PTC India and Tata
Power within our coverage universe and hence the rally in stock by
+30% since May-14 is certainly based on hope as there is no case for
multiple re-rating considering the optimism already built-in by us and
the harsh regulatory environment prevailing.

$ Sector outlook – Oil & Gas: A stable central government is positive
for ONGC (NR), OIL India (NR), GAIL and OMCs (NR). Our positive bias
for upstream and downstream sectors is based on the extension of
reforms on diesel price de-regulation, tax rationalization, imminent
increase in domestic gas prices and a stable rupee leading to lower
under-recoveries. However, certainty on ‘net’ benefits to the
companies will be essential for ‘further rerating’ of the sector and
PSU stocks. A play on RIL and Cairn India would be purely tactical,
whereas we re-rate our PT on GSPL on the back of favourable PNGRB
tariff order in the making. A sharp +22% rise in share price of
Petronet LNG and expensive valuations prompt us to downgrade it to
SELL.

$ Budget expectations: Key budget expectations include extension of
tax holiday, redefining of ‘mineral oil’ to include gas and CBM and
hence avail of tax holiday benefits, exemption of customs duty on coal
and LNG, clarity on GST roll-out with re-instatement of fiscal
benefits currently availed, assigning declared good status on RLNG,
enhancing ECB limit, 100% refinancing of loan with ECB, issue of power
sector  bonds and prompting LIC to subscribe to these bonds and seek
MAT exemption for companies under tax holiday.

$ Recommendation and key risks: Expensive valuations prompt us to
downgrade Petronet LNG to Sell with a revised PT of Rs145 (Rs130
earlier) and also downgrade NTPC to Sell with a revised PT of Rs125
(Rs120 earlier). The revision in PT is led by rolling-forward of
valuation to Jun-16. We have revised our PT on GAIL and GSPL upwards
to factor-in moderation in subsidy and favourable PNGRB tariff order
on the anvil. We retain BUY on MRPL, SELL on PTC India and Tata Power.
Key risks to our thesis are (1) regulatory changes; and (2) changes in
estimated volumes and realizations.



Thanks & Regards

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Building Materials - Sector Update - Cement upturn to continue, paints fully valued :: Centrum

Cement upturn to continue, paints fully valued



We expect cement sector to continue the growth trajectory led by the
government’s thrust on infrastructure development. The slowing pace of
capacity addition will also lead to improvement in effective
utilization rate of the industry offering improved pricing power to
manufactures. In the Cement space, our top pick continues to be
UltraTech Cement followed by Grasim Industries and ACC. We believe
other building materials (tiles and paints) will continue their growth
momentum in tandem with improvement in economic activities. However,
post recent run-up in the stocks in the Paints sector, we believe
further room for upside is limited and downgrade rating to Hold on
Asian Paints and Berger Paints.

$ Cement sector to benefit from infrastructure push and improvement in
utilization rate: We expect cement demand to improve going forward led
by our belief that there would be better policy actions in the
infrastructure space including faster clearances of new projects and
quick re-start of stalled projects. We expect the pace of capacity
addition to slow down post FY15E leading to improvement in utilization
rate for the sector. Post the decline in industry utilization rate to
72.9% in FY15E against 73.4% in FY14; we expect gradual improvement to
75%/78.9% in FY16E/FY17E. With improvement in economic activities and
better GDP growth, we expect growth momentum to continue for Paints
and Tiles industry.

$ Higher opex to lead to contraction in margins for cement companies;
Paints and Tiles to post better numbers in Q1FY15E: Cement prices
remained firm during Q1FY15E (~2.4% QoQ increase) which would result
in sequential improvement in realization for our coverage universe.
Sales volume is expected to increase 8.4% YoY led by 20.1%/10.4%/16%
YoY increase in sales volume of Shree Cement/UltraTech/JK Cement.
However, we expect average operating margin to contract by 119bps YoY
to 18.4% in Q1FY15E led by increase in operating costs (raw materials
and freight). We expect better numbers from Paints and Tile companies
led by higher volume and prices.

$ Budget expectations for the sector:  We do not expect major
announcements in the Union Budget for the sector though the cement
industry is seeking lower excise duty. We expect the status quo to be
maintained on excise duty. However, the building materials sector will
be an indirect beneficiary of infrastructure development (100 new
smart cities, development of freight corridors and national highways).

$ Outlook & top picks: We remain largely positive on the sector as we
believe earnings will improve going forward led by better demand from
the government’s thrust on infrastructure development. However, sharp
run-up in stock prices of Paints and Tiles sector leaves little room
for further upside and we downgrade our rating to Hold on Asian Paints
and Berger Paints. In the cement space, our top pick continues to be
UltraTech followed by Grasim and ACC. In the mid-caps space, we like
JK Cement. We retain Hold on Shree Cement due to expensive valuations
and Sell on India Cements due to lack of upside triggers.



Thanks & Regards

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