India Daily, April 16, 2014
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INDIA DAILY April 16, 2014 India 15-Apr 1-day1-mo 3-mo Sensex 22,485 (0.6) 3.1 6.9 Nifty 6,733 (0.6) 3.5 7.9 Contents Global/Regional indices Daily Alerts Dow Jones 16,263 0.6 1.2 (1.3) Nasdaq Composite 4,034 0.3 (5.0) (4.3) Results FTSE 6,542 (0.6) 0.2 (4.1) Infosys: 4Q weak, guidance positive; valuations comforting Nikkei 14,255 1.8 (0.5) (9.5) Hang Seng 22,686 0.1 5.3 (1.3) Company KOSPI 1,988 (0.2) 3.5 1.6 Zee Entertainment Enterprises: Endgame MediaPro - earlier than we Value traded – India expected Cash (NSE+BSE) 171 175 147 ABB: Positive on specific demand pockets; preparing for eventual demand pick- Derivatives (NSE) 1,610 1,717 1,556 up Deri. open interest 1,610 1,634 1,436 Economy Economy: Inflation metric not too comforting Forex/money market Change, basis points 15-Apr 1-day 1-mo 3-mo Rs/US$ 60.4 1 (64) (97) 10yr govt bond, % 9.3 - 22 35 Net investment (US$mn) 11-Apr MTD CYTD FIIs (69) 677 4,762 MFs 13 (408) (1,638) Top movers Change, % Best performers 15-Apr 1-day 1-mo 3-mo ADE IN Equity 417.6 (4.6) 30.4 67.9 CRG IN Equity 178.3 1.7 20.4 55.9 HDIL IN Equity 75.6 (3.3) 54.2 49.5 HPCL IN Equity 314.2 1.1 10.2 39.0 AL IN Equity 23.6 (2.1) 35.2 38.8 Worst performers GLXO IN Equity 2501.0 (1.4) (4.0) (15.8) INFO IN Equity 3259.8 0.8 (4.0) (12.5) IDEA IN Equity 140.1 (1.9) 2.4 (10.2) BOI IN Equity 220.6 (5.8) 9.2 (7.7) ntpc IN Equity 125.4 0.6 7.1 (5.8) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD Infosys (INFO) Technology APRIL 16, 2014 RESULT Coverage view: Attractive 4Q weak, guidance positive; valuations comforting. Infosys results and guidance Price (`): 3,260 were broadly in line with our estimate. Commentary on demand environment has Target price (`): 3,750 softened a bit, negative in our view. Infosys’ FY2015E underperformance on revenue BSE-30: 22,485 growth to peers is already priced in. We maintain our positive view, based on (1) appropriate assessment of the challenges faced by the company and the confidence that a few right steps have been taken and (2) inexpensive valuations with the stock trading at 15X FY2015E earnings. We broadly retain estimates, target price (`3,750 from `3,800 earlier) and ADD rating. Company data and valuation summary Infosys Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low) 3,850-2,186 EPS (Rs) 186.3 212.1 236.8 Market Cap. (Rs bn) 1,871.9 EPS growth (%) 13.0 13.8 11.7 Shareholding pattern (%) P/E (X) 17.5 15.4 13.8 Promoters 25.1 Sales (Rs bn) 501.3 552.0 612.5 FIIs 45.2 Net profits (Rs bn) 108.7 121.2 135.3 MFs 9.6 EBITDA (Rs bn) 136.3 155.3 175.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 11.8 10.1 8.6 Absolute (4.0) (12.2) 39.4 ROE (%) 26.3 25.2 24.2 Rel. to BSE-30 (6.8) (17.9) 13.1 Div. Yield (%) 2.1 2.4 2.6 Weak but in-line 4QFY14; forex gains boost net income Infosys reported 4QFY14 revenues of US$2,092 mn (-0.4% qoq, +7.9% yoy), in line with our estimate. Revenues were impacted by (1) project cancellations and ramp-down from select retail and manufacturing clients and (2) further offshore shift – onsite volumes declined 1.3% qoq and offshore volumes grew 1.2%. Infosys’ EBIT margin expanded 50 bps to 25.5% (KIE: 25%) aided by (1) benefits of cost-optimization initiatives and (2) 90 bps decline in subcontracting costs, indicating easing of H-1B visas. Net income of `29.9 bn was 5% ahead of our estimates on the back of beat at the EBIT level and higher-than-expected other income. Interpreting ‘weak’ 1HFY15 guidance Infosys guided for 7-9% revenue growth for FY2015, implying 2-3% CQGR. What has worried investors is management commentary on a ‘weak’ 1HFY15. A ‘weak’ 1HFY15 does not imply that growth will be back-ended, instead it implies that the pick-up in 1HFY15 will not be as strong as it has been historically. To put it differently, growth will be even through the course of FY2015E, as opposed to being front-ended. The company still has work to do on revenue growth, especially to stop bleeding/loss of share in large accounts. Sales-effectiveness initiatives of the company are geared towards addressing gaps in overall go-to-market strategy. This will take 12 months to fully show up in results though early signs could be visible towards end-CY2014. The company could underperform peers in the interim, though this is already discounted in the stock price. We retain ADD rating – inexpensive valuations, demand environment to help Confidence of the Street might be low after moderated commentary on demand and margin assessment (management expects flat margins). We, however, keep the faith; our confidence is based on (1) appropriate assessment of the challenges faced by the company. Steps taken by the company up till now are a mixed bag and (2) inexpensive valuations with the stock trading at 15X FY2015E earnings. A steady demand environment also helps fix some of the internal challenges. Our EPS estimates moderate by ~1% for FY2015/16E due to a higher dividend payout ratio. Our target price is fine-tuned to `3,750 from `3,800 earlier. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Infosys Technology Thoughts on high and sticky attrition Infosys’ attrition rate has remained high and sticky despite being a high-emphasis area of the company. Infosys has taken several steps, including (1) compensation revision across all levels, (2) large number of promotions and (3) increase in the fixed component of compensation, among others. We are surprised that attrition rates have remained this high despite personal efforts of NRN to retain talent. We believe that continued high attrition could be on account of change in expectation of performance from employees, lower tolerance level for underperformance and knock on effect of senior and mid-level exits of earlier quarters. We believe that bringing attrition under control is critical if the company has to succeed in the two key areas of its turnaround initiatives, i.e. sales effectiveness and delivery effectiveness. Margin commentary surprisingly muted Infosys indicated that EBIT margin in FY2015 could broadly be in the same range as FY2014 (24.5%). We find this surprising given the lack of any major headwinds. In our view, margin benefits of cost optimization and other operational adjustments like utilization, employee pyramid, etc. will continue into FY2015. We highlight that proportion of employees with 0-3 years of experience increased by 60 bps in 4QFY14, after several quarters of decline (see Exhibit 7). These efforts will be aided further as growth picks up. Margin benefits will indeed be reinvested into enhancing sales and delivery effectiveness, but is unlikely to result in flat margins unless one assumes serious pricing pressure and/or material Rupee appreciation; neither are likely in our view. We retain our 25.4% EBIT margin assumption for FY2015E. Commentary on strength of demand environment moderates Infosys’ commentary on demand was mixed, a noticeable change from the previously optimistic outlook. It highlighted that while overall pipeline was better than earlier, the pace of decision making and translation of budgets into spending was not as expected. It picked out certain verticals like retail & CPG, hi-tech manufacturing, healthcare, etc., which were facing challenges. Hi-tech had instances of cuts in previously finalized budgets, while retail vertical saw project ramp-downs and cancelations due to adverse business environment for the clients. Infosys also indicated that majority of the spending across verticals was in cost optimization and compliance-related projects and that discretionary spending was weak. Greater client scrutiny of projects was leading to delay in decision making and ramp-ups, which were impacting growth for Infosys. Deal wins – decent, but figure not representative of all wins Infosys won four large deals in 4QFY14, with cumulative TCV of US$700 mn. This takes the total TCV of deals won in the last six quarters to ~US$3.2 bn. We highlight that these TCV numbers are not representative since it does not include deal value of many segments like consulting, systems integration and product and platforms. Further, this also does not include signings below US$50 mn in TCV. In addition, expansion of scope of relationship (unless explicitly committed through a large deal) does not get captured either. However, the company did indicate that it was short of its own targets in terms of large deal wins and win rates, which are critical to drive growth in traditional IT services. Dividend payout stepped up and a positive Infosys has revised its dividend payout policy to pay out up to 40% of net income as dividends (including DDT), from 30% earlier, effective from FY2014. The company announced a final dividend of `43/share, taking the total dividend for FY2014 to `63/share, a total payout (pre DDT) of 34% of earnings (see Exhibit 5).