Inflation at 11.89%, well above consensus estimate
IIP growth at 3.8% in May 2008, well below expectations
SHAREKHAN SPECIAL
Q1FY2009 earnings preview
Sensex' earnings growth expected to moderate to 11.6%
Key points
For Q1FY2009, we expect a year-on-year (y-o-y) growth of 11.6% in the earnings of the Sensex companies (ex-oil). The Sensex' earnings growth in this quarter is estimated to be much lower than that witnessed in the previous few quarters. Clearly, there has been moderation in the growth momentum.
The expected 11.6% y-o-y earnings growth would mainly be achieved on the back of a higher growth in the information technology (IT) sector (17%), telecom sector (26.2%), diversified (Reliance Industries and JP Associates) and real estate sector (33%). The sectors that are expected to act as a drag on the Sensex' earnings include pharmaceuticals (primarily due to foreign exchange [forex] losses), cement and automobiles.
The results of banking stocks are eagerly awaited, given the rising concerns over their ability to sustain a healthy growth in face of the toughening macro environment. Some of the other sectors too faced tough challenges during the quarter: Cement (high fuel cost), fast moving consumer goods (FMCG; higher raw material cost) and capital goods (execution delays and margin pressures).
The Q1FY2009 performance assumes greater significance considering the continued deterioration in the country's macro environment, as reflected in double-digit inflation, moderating growth in industrial production, rising working capital cost and increasing fears of an economic slowdown during Q1FY2009.
Though the Sensex companies' earnings growth is estimated to moderate considerably in Q1FY2009, it does not necessarily reflect the full year performance. The growth in Q1 would be dented by certain one-time provisions pertaining to forex related losses and other mark-to-market (MTM) losses. We expect Sensex' earnings per share (EPS) to grow by 18.1% to Rs981 in FY2009. This essentially means that the market is trading at 13.7x FY2009E earnings and 11x FY2009E earnings after adjusting for the embedded value in the Sensex stocks. Consequently, most of the negatives seem to be priced in. However, the continued rally in the crude oil prices is a drag on the market.
Our investment top picks: Bharti Airtel, Larsen and Toubro (L&T), Sun Pharmaceuticals (Sun Pharma), Tata Consultancy Services (TCS) and Maruti Suzuki (Maruti).
Infosys Technologies (Infosys) Q1FY2009 results were largely in line with our estimates.
The revenues for the quarter grew by 6.9% quarter on quarter (qoq) and 28.7% year on year (yoy) to Rs4,854 crore. The revenue growth was boosted by the depreciation of the rupee, which contributed ~5.7% to the sequential growth. In the dollar terms, the revenues grew at a muted rate of 1.1% qoq, driven by a 0.5% growth in the volumes and a 0.2% rise in pricing.
The operating profit margin (OPM) decreased by 207 basis point to 30.5% primarily due to wage hike (220 basis points), rise in visa cost (70 basis points) and decrease in the utilisation rate (150 basis points). However, the positive impact of the rupee depreciation (250 basis points) partially offset the complete cost pressure during the quarter. Consequently, the company's operating profit remained flat at Rs1,479 crore during the quarter.
The net income grew by 4.2% qoq to Rs1,302 crore. The company reported a tax reversal of Rs20 crore in Q4FY2008 and Rs31 crore in Q1FY2009. Adjusting for these items, the company's net income grew by 3.4% qoq to Rs1,271 crore, largely in line with our estimate of Rs1,254 crore.
The growth in the adjusted net income was higher than the operating profit growth, largely due to a lower-than-expected effective tax rate. The company's effective tax rate (after adjusting for the tax reversal) declined to 10.9% in Q1FY2009 compared to 15.8% in Q4FY2008. However, this was partially offset by a lower other income due to forex losses of Rs80 crore compared to forex losses of Rs45 crore in the previous quarter.
In terms of guidance for FY2009, the company has upgraded the guidance in the rupee terms to Rs99.3-101.1 per share from Rs92.3-Rs93.9 announced in the last quarter, on account of revision in the exchange rate. However, the earning guidance in the dollar terms has been kept unchanged at 14.3%-16.3%, which is below the street expectation and a concerning factor.
For Q2FY2009, the company has guided for a revenue growth of 6.1% in the dollar terms, which is slightly below our and street expectations. This means that the company has to grow at a compounded annual growth rate (CQGR) of 6.0% in the next two quarters.
The revenues from the telecom vertical and European region declined sequentially due to reduced business from a top client.
Given the steep depreciation of the rupee, we have revised our exchange rate assumption to Rs42 for FY2009 and to Rs41 for FY2010. Hence, we have revised upwards our earning estimates for FY2009 and FY2010 by 6.4% and 5.3% respectively. At the current market price, the stock is trading at 16.5x FY2009 and 15.0x FY2010 earning estimates. We maintain our Buy recommendation on the stock with a revised price target of Rs2,130.
Bajaj Holdings & Investment Cluster: Apple Green Recommendation: Buy Price target: Rs726 Current market price: Rs471
Price target revised to Rs726
Key points
Bajaj Holdings & Investment Ltd (BHIL) has reported an income of Rs21.64 crore for Q1FY2009 compared with Rs66.87 crore in Q1FY2008. That is a decline of 67.6% in the income year on year (yoy). The equity markets had declined by over 30% in the first half of CY2008 which is reflected in the lower income of the company in Q1FY2009.
The consolidated net profit for the quarter too declined by 50.7% to Rs51.37 crore as compared with Rs104.20 crore in Q1FY2008. The decline in the consolidated earnings is also attributed to the lower than expected performance of the associate companies.
Bajaj Finserv Cluster: Apple Green Recommendation: Buy Price target: Rs687 Current market price: Rs480
Results below expectation
Key points
The consolidated top line of Bajaj Finserv declined by 7.7% to Rs67.1 crore in Q1FY2009 from Rs72.7 crore in Q1FY2008. The company posted a net loss of Rs36.2 crore during the quarter as compared with a net loss of Rs4.8 crore in Q1FY2008. Factors like high upfront costs, decline in investment portfolio and lower volume growth affected the profits of the company in Q1FY2009.
During the quarter, the gross written premiums for Bajaj Allianz Life Insurance increased by 74.0% to Rs1,847 crore. However, the new business premiums grew by just 16% to Rs764 crore, mainly due to the falling demand for unit linked insurance plan (ULIP) products, which are a major growth driver for the company.
Bajaj Allianz General Insurance has reported a steady increase of 28% in its gross written premium to Rs734 crore as compared with Rs574 crore in Q1FY2008. However, the company's net profit declined by 46% to Rs7 crore from Rs13 crore in Q1FY2008.
Bajaj Auto Finance Ltd (BAFL) too has reported lower than expected numbers on account of a 15% decline in disbursements and higher provisioning. For Q1FY2009, BAFL has reported a 21.9% increase in its total income to Rs128.23 crore and a 26.7% decline in its net profit to Rs3.01 crore. Lower than expected profits affected the consolidated profits of Bajaj Finserv.
We value the life insurance business based on its new business-achieved profits and the general insurance business based on its net worth. The growth in the life insurance business is expected to decelerate because of the slowdown in the demand for ULIP products due to uncertain market conditions. The margins are expected to remain under pressure due to increasing costs and declining volumes. Bajaj Finserv also holds a 40.53% stake in BAFL. At the current market price of Rs480, the stock is a good value buy. We put a Buy recommendation on the stock with a price target of Rs687 based on our sum-of-the-parts valuation.
