Stock Market Result Update on Mphasis for 3QFY2011

Stock Market Result Update on Mphasis for 3QFY2011 with an Accumulate recommendation and a Target Price of `420 (12 months). 

 

Mphasis reported dismal set of 3QFY2011 results with volume growth of 3.0% qoq - out of which only 1.3% is from normal operations, the rest 1.7% is derived due to several one-off items booked in revenue. At the CMP, the stock is trading at 10.9x FY2013E EPS of `36.4 with a strong cash position of `2,029cr, which warrants limited downside. We recommend an Accumulate rating on the stock.

Quarterly highlights: Mphasis reported revenue of US$290mn, up merely 2.9% qoq. In rupee terms also revenue growth was 2.9% qoq with revenues at `1,294cr. These revenues include one-time revenues of `66.5cr. Also, `34.6cr of revenues were not booked in this quarter due to incomplete documentation. Adjusting for all this, revenues came in at `1,262cr, up merely 1.2% qoq. Mphasis reported 31bp qoq expansion in its EBITDA margin to 19.4%. However, the company did provision reversal of `11.0cr in employee costs and `15.6cr in S&M expenses. Adjusting for these reversals and one offs in revenues, EBITDA margin came in at 15.3% vs. 16.3% in 2QFY2011.

Outlook and valuation: The open billable positions in the application business declined from 1,000 to 825. However for the ITO business, it remained flat at 600. This highlights that growth in ITO remains intact and would continue to be the possible growth driver for the company. Going forward, management expects the direct channel (33% to revenue) and HP non-enterprise solution business (which is currently ~5% of revenue from HP channel) to drive growth, whereas the HP-ES business is expected to remain sluggish. We expect revenue growth will be muted at 2.7% yoy for FY2011E considering that in 1QFY2011 revenue run rate fell by 10% qoq as well as company’s revenue for 2QFY2011 and 3QFY2011 were driven by one-offs. However, the above-mentioned growth drivers are expected to result in the company’s revenue to record a 10% CAGR over FY2011–13E. We recommend Accumulate rating on the stock with a target price of `420, valuing it at 11.5x FY2013E EPS.

Stock Market Result Update on Coal India for 1QFY2012

Stock Market Result Update on Coal India for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, Coal India’s (CIL) net profit came in above our expectations mainly on account of lower-than-expected costs. However, given the rich valuations, we continue to maintain our Neutral view on the stock.

Strong performance led by higher coal prices: CIL’s net sales increased by 21.4% to `14,499cr in 1QFY2012 mainly driven by higher realisations (+15.8% yoy to `1,368/tonne) and supported by increased offtake (+4.9% yoy to 106mn tonnes). Despite fall in coal production, coal sales volumes increased mainly due to inventory liquidation of 10mn tonnes. The increased offtake was aided by higher availability of railways rakes to 168 rakes/day in 1QFY2012 (+9.1% yoy).

Decrease in some costs aid EBITDA growth: Social overhead and other expenses fell by 37.4% and 32.6% yoy to `293cr and `438cr, respectively in 1QFY2012. EBITDA margin expanded by 985bp yoy to 35.3%, mainly driven by higher realisations. Thus, EBITDA grew by 68.5% yoy to `5,116cr. Other income grew by 32.4% yoy to `1,559cr and tax rate declined 197bp yoy to 30.4%. As a result, net income increased by 64.1% yoy to `4,144cr.

Outlook and valuation: We expect CIL’s volume growth to remain muted in the wake of stricter government regulations on mining companies. Also, we believe any further chances of rise in coal prices by CILwill be only in case its wage revisions exceed its estimates. At the CMP, the stock is trading at 11.5x FY2012E and 10.2x FY2013E EV/EBITDA. We believe the current price level fairly discounts the robust business model and steady volume growth over the medium term. Hence, we maintain our Neutral view on the stock.

Stock Market Infrastructure Sector Result Review for 1QFY2012.

Stock Market Infrastructure Sector Result Review for 1QFY2012.

And they all fall down

Top-line growth goes for a toss; worrying sign: Most of C&EPC players (ten companies chosen for this analysis) have witnessed slowest growth on top-line front in 1QFY2012 on yoy basis in recent few quarters. We have mentioned in our earlier notes (read 4QFY2011 review) that sector has done well on top-line front (during those times) but earnings are marred given high interest rates and inflationary pressures. But given the dismal top-line performance this time around we believe that problems on earnings front would accentuate further in times to come. Further, we are not expecting any softening on interest rates and commodity front in next three-six months which will put further pressure on earnings. We believe these are worrying signs – given early monsoons this time, second quarter being seasonally the weakest quarter for C&EPC players and macro headwinds still surrounding the sector – demonstrating that earnings growth for next couple of quarters of these C&EPC players would remain muted.

Valuations are at abysmal levels, but we continue to remain selective: Share prices of C&EPC companies have taken a beating on the bourses after posting poor quarterly performance, bringing the stocks to very attractive levels on the valuations screen. But considering the various headwinds faced by the sector and no respite on the same we believe that stocks would feel the heat for some more time. Further, lack of positive news flow is not helping the sectors performance. Notwithstanding this it should be noted that there is pertinent need of infrastructure in the country and the economy would get derailed from its high growth trajectory if these needs are not met, which is acknowledged by one and all. Hence, we believe that the long term growth story for the sector remains intact. However, we believe that stock specific approach would yield higher returns given the disparity among these companies and changing dynamics affecting them positively/negatively. Hence, in current uncertain times we remain positive on companies having 1) comfortable leverage position (L&T and Sadbhav); 2) strong order book position (L&T, IVRCL and Sadbhav); 3) undemanding valuations (IVRCL) 4)  superior return ratios (L&T and Sadbhav); and 5) less dependence on capital markets for raising equity for funding projects (L&T and Sadbhav). Hence, we maintain L&T, IVRCL and Sadbhav as our top picks in the C&EPC space and recommend IRB in the development space after its recent fall bringing the stock to attractive levels.