- Infosys reported revenue growth of 3.9% QoQ on CC basis, driven by 4.0% QoQ volume growth (higher than TCS’ volume growth of 1.3% QoQ). On a reported basis, the company’s revenues were up by 3.5% QoQ at $2,587 million (vs our estimates of $2,572 million).
- The EBITDA margins improved 84bps QoQ to 27.3% (in-line with our expectations), led by operational efficiencies and absence of wage hike and visa costs, resulting in 4.9%QoQ growth in net profits to Rs3,606 crore in Q2FY2017.
- The company has won six large deals of worth over $1 billion ($809 million in Q1FY2017) during the quarter.
- The company revised down its FY2017 revenue growth guidance to 8% to 9% from the earlier guidance of 10.5-12.0% on account of cancellation of RBS deal, softness in few clients’ IT spends and macro uncertainties. We have been cautious on IT sector due to tough global environment (relating to Brexit and US election) coupled with the ongoing transition phase (investing and adding capabilities for newer technologies in the digital space).
- We have Buy rating on the stock. Currently, the target price of Rs1,150 (will come out with the detailed note post concall).
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HUL – HUL’s parent company Unilever has indicated that the India business is under pressure due to weak consumer demand, rising competitive intensity in mature categories and recent price hikes in some of the categories (including soap) has further put stress on the sales volume, which might lead to muted performance in Q2FY2017 – sentimentally negative for HUL; we have already factored in muted performance for Q2FY2017 (Volume growth to be 3-4%); the performance is expected to improve in H2FY2017 (any correction in the stock price provides good entry opportunity)
As per media flash UPL is in talks with Bayer and Monsanto for acquiring their European assets. UPL has earmarked USD 200 mn for acquisitions in the EU region and expects the official process to start in the next 3-6 months.
ONGC –The company is in the race for USD 2 billion Chevron assets in Bangladesh and the onshore oil production of ONGC is marginally up in H1FY17, after several quarters of decline – positive read thru
Fiber optic – Maharashtra will be investing over Rs 5,000 crore for taking high-speed Internet connectivity to each of the 29,000 villages in the state by 2018. The project is called ‘Mahanet’, is on the lines of the Centre’s ambitious Bharatnet, which aims to take connectivity in a phased manner with the first milestone of having 1 lakh villages by March 2017. This could open additional opportunities for optic fiber companies like sterlite Tech, Finolex cables, Vindhya telelinks etc.
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Cera Sanitaryware: Standalone net profit for Q2FY2017 rises 40.6% YoY to Rs25 crore (announced during market hours)Cera Sanitaryware reported standalone net sales (post excise duty) growth of 12.6% YoY to Rs249 crore for Q2FY2017. The company’s operating margins expanded by 340BPS YoY to 16.6% leading to 41.7% YoY rise in its EBITDA to Rs41 crore. Consequently, the company reported 40.6% YoY rise in its standalone net profit at Rs25 crore for the quarter.
TCS – Q2FY17 Results Update: Missed on revenues, better execution on margins
- Weakest Q2 on revenues front, margins surprise positively: TCS has delivered weakest Q2 on revenues front, with a constant currency growth of 1% (1.3% volume growth) and 0.3% on a reported basis to $4,374 mn. On the other hand, margins performance surprise positively with 94bps improvement in EBIT at 26%, led by operational efficiency and absence of wage hikes and visa expenses. Other income up by 9.2 % qoq to (higher than expectations led by forex gains), net income for the quarter beat estimates, up by 4.3% qoq to Rs6586 crore.
- Operating metrics: BFSI, Retail verticals remain weak, India business drag further: For the quarter BFSI grew by 1.2% qoq on CC basis which was much lower than 4-5% growth delivers in the earlier year in Q2. The softness was owing to slowdown in discretionary spends and lower ramps up in the projects in North Americas, though UK BFSI performance remain better despite Brexit overhang. Retail & CPG vertical down 3.1% qoq on CC basis owing to multiple pockets of weakness across the geographies mainly UK. India business declined by 7.6% qoq, owing to project execution delay of around Rs180 crore (will recoup in Q3FY17). TCS has reported nine large deals wins, same as Q1FY17. One $100 mn client reduced during the quarter to 36 vs 37 in Q1FY17, on account of client divesting part of the business. Gross addition remains strong at 22665 headcounts (net addition of 9440) and attrition level improved to 11.9% vs 12.5% in Q1FY17. Digital revenues grew 30% yoy on CC basis (contributes 16.1% vs 15.9% in Q1FY17).
- Expect better H2 than earlier years: (1) The TCS management acknowledged potential challenges from ‘Brexit’ and also from US election outcome on macro environment, though does not foresee any material impact on micro level on tech spending. (2) Yet to witness any impact from Brexit on BFSI vertical performance and that there is no direct correlation between ‘Brexit’ and the lower–than-expected growth in BFSI in Q1/Q2FY2017 (3) Management remain non-committed on revival in growth in BFSI vertical in Q3FY17, on retail management expect growth concerns is temporary and expect to see revival in the coming quarters. (4) Expect better Q3FY17 than the earlier years (partly attributed to recoup of India business revenues to the tune of Rs180 crore), also expecting better H2 performance on revenues front as compares to earlier years (5) Maintain margin band of 26-28% for FY17 (6) Japan and Latin Americas business witness positive growth.
- Maintain Hold with a price target of Rs 2,450: On account of revenue miss in Q2FY17, we have tweaked our earnings ese fotimatr FY17/18E. Given the Industry transition phase (traditional services under pressure) coupled with macro overhang (relating to Brexit and US election), will restrict stock outperformance in medium term. We continue to maintain our cautious stance on the IT sector and expect further volatility in earnings performance across IT companies. On a longer term basis, we still prefer TCS, owing to its diversified portfolio and head start in the Digital space. In the last 18 months PER multiple has already de-rated from 20x to 16x currently, though lacks of positive triggers and soft earning growth will restrict any material rerating in medium term. We maintain our Hold rating on the stock with a price target (PT) of Rs2,450.
Viewpoint – IndusInd Bank : Strong all-round performance; growth consistency and quality justify premium valuation
- Stellar performance with NII up 33% YoY, PPOP up 27% YoY: IndusInd Bank (IIB) has continued with its strong performance with 30%+ NII growth for a fifth quarter in a row. The bank saw strong loan demand during Q2FY2017, with credit growth at 26.4% YoY (10.4% QoQ), underpinned by 26.9% YoY growth in the high-yielding Consumer Finance segment and 26% YoY growth in the Corporate loan book.
However, the Consumer Finance segment has ~450BPS higher yields compared to the Corporate segment. Therefore, an increase in the overall loan mix for the Consumer Finance segment will be NIM positive for IIB. Going forward, the improving loan book contribution of the Consumer Finance segment should help the bank to sustain margins in a softening yield cycle. IIB relies on the performance of the Commercial Vehicles (CV) market (14.4% of the bank’s overall loan book) and we believe better pick-up in CV demand in H2FY2017 should be positive for IIB’s overall growth.
- Fee income, CASA uptick positive: IIB has been consistently improving its CASA ratio, which jumped 210BPS to 36.5% in Q2FY2017. However, the CASA spike was mainly due to Current Accounts (CA) growth, which grew from 15.7% of total deposits in Q1FY2017 to 18.2% in Q2FY2017. According to IIB, this was a one-time phenomenon due to IPO and Buyback offers during the quarter. However, even on a normalised basis, the bank has been able to maintain its Savings Accounts (SA) well, with 37% YoY growth. Fee income growth of 23% YoY (6% QoQ) slowed a tad compared to the previous quarters, but the management has indicated that it was due to higher base of renewals of corporate loans, which are annual (but not seasonal) in nature.
- Robust asset quality maintained; slippages well controlled: Gross credit cost has been maintained at 15BPS, same as in Q1FY2017. The IIB management has guided for <60BPS credit cost for FY2017E. At 30BPS level in H1FY2017, it appears achievable. However, during the quarter, the 35% YoY growth in Other Operating Expenses resulted in pre-provision operating profit of Rs1,281 crore, up 27.4% YoY. Also, on a cautionary note, the provision declined to Rs213 crore, up 35.5% YoY (down 7% QoQ). IIB had taken full 15% provision for its exposure to Food Corporation of India (FCI) in Q1FY2017, as result of which, the bank saw a QoQ decline in provisions in Q2FY17
- Outlook & valuation: IIB has been outperforming the industry consistently, besides maintaining strong asset quality. The bank’s asset quality trend has been broadly stable, with Gross Non Performing Assets (GNPA) and Net Non Performing Assets (NNPA) at 0.90% and 0.37%, respectively. Credit cost too has been stable at 15BPS, with the provision coverage ratio at 59% – a strong indicator of IIB’s management quality. IIB currently trades at 3.1x FY2018E ABV. We maintain our positive view on the stock and believe that there is 18-20% upside potential in the stock from the current levels.
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