Analyst Meet Update on Tech Mahindra.

Share Market Update on Tech Mahindra

Tech Mahindra and Mahindra Satyam hosted their annual analyst meet on Friday, June 24, 2011. The essence of the meet was skewed towards how management has improved margins for Satyam from 3% to 13% in two years and how the companies, in a merged scenario, would synergise and are strongly positioned to compete with tier-I Indian IT companies. Along with this, the management and the heads of various SBUs such as telecom, BFSI, manufacturing, enterprise business solution and BPO spoke about the trends and opportunities they foresee.

Mahindra Satyam

In case of Mahindra Satyam, management sounded confident about growth and indicated it to be in line with the industry (NASSCOM estimates for industry growth in FY2012 are at 16–18% yoy). On the margin front as well, management indicated that it will be in line with the industry’s range, i.e., 18–29% within one to two years. The key margin levers for this are 1) strong volume growth, 2) employee pyramid resizing (current fresher ratio, i.e., 0–3 year experienced employees, is at ~23%) and 3) better price realisation majorly by improving the business mix. Management also indicated that it is open to inorganic growth and is looking at potential companies in the BPO and BFSI space.

Tech Mahindra

In case of Tech Mahindra, the company is witnessing a pick-up in the deal pipeline in the telecom vertical on the back of emerging opportunities for work related to the external business of telecom service providers (TSPs), i.e., related to end-consumers. This commentary was kind of contrary to tier-I IT companies because of the fact that these companies are still focused on services related to the internal usage of TSPs, which is kind of sluggish now; whereas, Tech Mahindra is chasing the external part of TSPs, which is upbeat right now.

Merger on the cards but only in FY2013

On the merger of Tech Mahindra and Mahindra Satyam, management indicated that it is in the process of translating its financial records in US GAAP and once it is done it will initiate the process of the merger; the end-to-end merger can latest be around May 2012 or may be later depending on approvals from SEC.

Impact Analysis of Fuel price hike, duty cuts on ONGC.

Impact Analysis of Fuel price hike, duty cuts on ONGC.

Government hikes fuel prices, cuts duties: On June 24, 2011, the Empowered Group of Ministers (EGoM) announced to raise retail fuel prices. As expected, the government not only took price hikes but also surprisingly re-jigged the duty structure. The government hiked diesel price by `3/litre. Prices of cooking fuels, LPG and Kerosene, were also hiked by `50/cylinder and `2/litre, respectively. The resultant price hikes will help reduce under recoveries of OMCs by around `21,000cr. The duty cuts will cost the exchequer a whopping `49,000cr.

Under recoveries to fall, but still remain high: With these measures, we now estimate under recoveries to remain at `97,551cr in FY2012 and `102,484cr in FY2013. We estimate the Indian crude oil basket to remain at around
US$95–105 in FY2012 and FY2013.

No clarity on subsidy-sharing mechanism yet: Although the government has pegged subsidy-sharing burden of 33.0% of under recoveries for 1QFY2012, there is still no clarity on the policy of the subsidy-sharing mechanism. Given that crude price is at around US$100/bbl, we continue to peg FY2012 and FY2013 subsidy sharing for downstream companies at 38.7% of under recoveries.

Outlook and valuation: We anticipate ONGC’s incremental production from marginal fields to more than offset any decline in production from the ageing fields. OVL is also expected to report increased volumes by 2013 at ~12mn tonnes on account of incremental productions from Myanmar, Sakhalin-1 and Venezuela coming on stream. Deregulation of diesel and resolution of the royalty issue with Cairn could be significantly earnings accretive for ONGC. Higher gas price from extant fields and mark-to-market prices from incremental production could accrete earnings further. Significant discoveries in the high-potential Cambay, KG basin and Mahanadi fields (still under appraisal) could further boost valuations. Although there is an FPO overhang on the stock in the near term, we believe increased volumes and net realisation should offset these concerns. We recommend an Accumulate view on the stock with an SOTP-based target price of `325.

Company Update on IRB Infrastructure

Geared for execution + Valuation comfort = Buy

We recently met the management of IRB Infrastructure (IRB) to get more clarity on the recent developments at the NHAI’s front – PMO intervention leading to the increase in overall targets for FY2012; the company’s future bidding strategy – in light of the enhanced number of players in the road segment and with one large project already won; and the reasons for the stock’s underperformance.

NHAI to double project awarding in FY2012: NHAI has begun FY2012 on an aggressive note by awarding projects of ~481kms in April 2011 and targets ~1,326km for May and June. This is in line with NHAI’s revised target of ~11,000kms for FY2012, an increase of whopping 117% over FY2011. IRB being one of the market leaders is expected to gain from the same.

With order inflow target met, timely execution is the key: With the bagging of the Ahmedabad Vadodra project at the beginning of the year, IRB has nearly achieved its yearly target of order inflows. Accordingly, it is now focusing on the execution of projects. Hence, management has guided for aggressive ramp-up of its under-construction portfolio and is aiming at the early completion of these projects. We believe IRB is well placed for this, given the in-place integrated business model (in-house construction arm) and quantum of work in hand (order book: `11,741cr).

Recent fall in the stock leads to undemanding valuations: IRB is one of the few Indian companies that offer investors the opportunity to participate in the inevitable rise in India’s investments in the road sector. However, the stock has declined by 12.2/24.3% over the last three/six months due to concerns over 1) aggressive bidding; 2) rising competition; and 3) increasing interest rates. Though these concerns are legitimate, we believe this huge decline in the stock price is unwarranted. We have outlined the value erosion due to these factors and contemporary loss of market cap and deem that this fall has created an opportunity for long-term investors by bringing the stock to undemanding valuations. Hence, we recommend Buy on the stock with a revised target price of `191 (`215).