Inflation at 11.63%, well above consensus estimate
SHAREKHAN SPECIAL
Q1FY2009 IT earnings preview
The top lines of frontline tech stocks are expected to grow in the range of 6.5%-11.1% sequentially in the rupee terms in Q1FY2009. The growth in the top lines is primarily driven by a volume growth of 1%-2%, boosted by ~7% depreciation in the rupee against the US dollar during the quarter. In dollar terms, the sequential growth is expected to remain muted during the quarter.
On the margin front, the margins of frontline IT companies during the first quarter of the fiscal are generally dented by visa cost. For Infosys and Tata Consultancy Services (TCS), the margins in the first quarter of the fiscal are impacted by wage hikes in addition to visa cost. Consequently, the operating profit margins (OPM) of Infosys and TCS in Q1FY2009 are expected to decline by around 185-205 basis points, in spite of the positive impact of the rupee depreciation.
On the net income front, we expect HCL Technologies' net income to decline by 29.6% year on year (yoy), as the company had reported foreign exchange (forex) gains of Rs250 crore in Q1FY2008. Beside this, HCL Technologies and Wipro Technologies had increased their hedge positions in Q4FY2008. Hence, the two companies may report higher forex losses, given the recent depreciation of the rupee.
STOCK UPDATE
ICICI Bank Cluster: Apple Green Recommendation: Buy Price target: Rs1,204 Current market price: Rs601
Annual report review
Key points
Shift of focus: Margins and not volumes is what ICICI Bank seems to be focusing on now. The current account and savings account (CASA) growth will be the key driver for margin expansion going forward. A deceleration in the advances book growth and a near 100% growth in the incremental CASA proves the point.
Asset quality under strain: With seasoning of credit portfolio, the bank has seen an up tick in delinquencies. Rapid growth in unsecured lending (CAGR of 82%) as compared to total advances (CAGR of 24%) over the past three years is likely to put further strain on the asset quality. The rising interest rate scenario may further worsen things for the bank.
Significant off balance sheet exposure: ICICI Bank's contingent liability increased by 105% in FY2008. 90% of this constitutes exposure in currency & interest rate swaps and other derivative instruments. In view of the Reserve Bank of India 's (RBI) latest provisioning guidelines related to these instruments, the bank may have to make additional provisions. Unfavorable market conditions raises concern over the bank's higher exposure to sensitive sectors like real estate and capital markets.
Outlook: The management believes that the road ahead will be challenging considering the worsening global and domestic economic scenario. Despite this, the management is bullish on India's long-term growth prospects and foresees robust growth outlook for the Indian financial sector.
Valuation: At the current market price of Rs601, the stock trades at 13.7x 2009E earnings per share (EPS), 7.1x 2009E pre- provisioning profit per share (PPP) and 1.3x 2009E book value per share (BVPS). At the current valuations, the stock looks attractive considering the bank's strengths. We maintain our Buy recommendation on the stock with a price target of Rs1,204.
SECTOR UPDATE
Pipes
Prices slashed!
Steel pipe and tube manufacturers have agreed to reduce prices of their products and fix a ceiling of Rs48,000 a tonne after a meeting of steel manufacturers with the officials of the steel ministry.
However, the price reductions are only in the retail or over-the-counter (OTC) segment for ERW and seamless pipes. Prices will not be lowered for the industrial segment or tender-based contracts. Since, the exposure of the top pipe companies to the retail or OTC segment is minimal, the development will not have any meaningful impact on the earnings of the top pipe makers.
Furthermore, major steel producers like Steel Authority of India, Rashtriya Ispat, Tata Steel, JSW Steel, JSPL and Ispat have also assured the government that they would discourage direct and indirect exports of hot rolled coils to begin with and subsequently that of cold rolled and galvanised products to increase their availability in the domestic market.
Steel companies have now agreed to not only check hoarding and price hikes at the retail level but also introduce a new system of maximum retail price-based pricing to prevent consumers from getting cheated by retailers.
We maintain our positive outlook on the pipe makers, considering the huge demand for their products both locally and internationally, particularly owing to the rising oil exploration and production activities across the globe. We maintain our Buy call on Jindal Saw and Ratnamani Metals & Tubes with price targets of Rs910 and Rs1,110 respectively.
