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Brokerage Recommendations

Friday, April 27, 2012

Motilal Oswal calls a ‘Buy’ on Wipro
CMP: Rs. 404    Target Rs. 490

Wipro 4QFY12 USD revenue growth at 1.3% CC was at the lower end of the guided band, dragged down by BFSI and Telecom. Moreover, impressive margin performance was eclipsed by: [1] Weak 1Q guidance (-1% to +0.9% QoQ ) driven by weakness in India business and delays in deal closures, [2] Ramp - downs in top client, (quarterly aberration) and [3] concern areas like Investment Bank  and Telecom OEM segments.

Volume growth of 0.8% QoQ (v/s estimate of 0.7%) and revenue at USD1,536m (+2% QoQ) were inline. IT Services EBIT margin at 20.7%, -10bp QoQ (v/s estimate of 19.5%) was above estimate on higher utilization, 1.1% CC QoQ offshore pricing increase and 50bp QoQ offshore revenue mix shift. PAT was INR 14.8b, beat our estimate of INR 14b, on higher other income (INR 1.9b v/s est. of INR 1.2b) and better OPM.

4.55% CQGR over 2Q-4Q would imply 11% growth in FY13 (lower end of NASSCOM’s guidance, assuming Wipro grows at the mid-point of the guided band in 1QFY13). This is a tough ask, given continued sluggishness in Capital Market and Telecom OEM segments. We draw comfort from Wipro’s impressive show in momentum verticals ex - BFSI, greater TCV of deals QoQ and expect the company to post healthy growth on 1Q base that would have absorbed client specific issues and headwinds in the Indian geography.

Levers like low gross utilization, offshore mix, and high subcontracting costs, apart from management-stated focus areas of productivity gains and non-linearity keep us sanguine on Wipro’s profitability v/s peers.

Valuations may be tested further on overhangs from: [1] little comfort in commentary around troubled segments and [2] a high ask rate to meet NASSCOM’s guidance. 15x FY13E earnings implies a price of ~INR 390, which we see as bottom for the stock. Multiple levers to maintain/grow margins keep Wipro in better stead on the profitability front, but growth in revenues will be imperative for the same to materialize. Our revised target price of INR 490 discounts FY14E earnings by 16x, lesser to TCS’ 17x. Buy.

GEPL Capital calls a ‘Buy’ on Ultratech Cement
CMP: Rs. 1436    Target Rs. 1595

Net sales for Q4FY12 grew by 18.8% Y-o-Y to Rs 53,916 mn. This was mainly driven by higher volumes and better realisation.  EBIDTA margins for Q4FY12 stood at 24.5% showing an increase of 61bps on Y-o-Y basis and 317 bps on Q-o-Q basis. Net profit for Q4FY12 grew by 19.3% Y-o-Y to Rs 8,673 mn. The strong growth was attributable to growth in volumes and strong pricing trends especially in North and West.

Result Highlights: Strong realisation coupled with better volumes helped Ultratech report good numbers for Q4FY12: Blended realisation of cement per bag for Q4FY12 stood at Rs 239 / bag showing a growth of 10.2% Y-o-Y. This was mainly on account of strong demand in the regions where Ultratech has a presence (North -22.9%, West-26.3% and East-9.6%). At the same time despatches grew by 7.8% on Y-o-Y basis to 11.26 mn MT.

EBIDTA margins for Q4FY12 stood at 24.5% showing an increase of 61bps on Y-o-Y basis and 317bps on Q-o-Q basis. This was mainly on account of more than proportionate increase in realisation as against an increase in cost of production. On per bag basis the cost of production for Q4FY12 rose by 9.29% Y-o-Y to Rs 181, whereas realisation grew by 10.2% Y-o-Y to Rs 239. The power and fuel costs which accounted for 29% of the total expense rose by 14% Y-o-Y for Q4FY12 on per bag basis, the raw material expense which accounted for 18.75% of total expenditure rose by 12.93% Y-o-Y on per bag basis and the freight costs per bag also rose by 5.71% Y-o-Y for Q4FY12. Net profit for Q4FY12 grew by 19.3% Y-o-Y to Rs 8,673 mn and Net profit margins remained flat at 16.1% Y-o-Y. The strong growth was attributable to growth in volumes and strong pricing trends especially in North and West.

Valuation & viewpoint: We maintain our target of Rs 1,595 arrived based both on EV / MT and EV / EBIDTA on a differential weightage. Owing to the sharp fall seen in the recent past there is an upside of 12%, hence we revise our recommendation from NEUTRAL to ACCUMULATE rating on the stock. The results for the Q4FY12 have been in line with our estimates. Demand for cement is expected to remain good in Q1FY13; however, owing to recent intervention by CCI on cartelisation we don’t expect a strong up tick in cement prices in Q1FY13. We believe that RBI’s move (50bps cut in repo) might trigger demand from housing and industrial segment in the near term.  Also  projects  like  DMIC  (Delhi  Mumbai  industrial corridor) coupled with encouraging data on project implementation under public private  partnership should help cement companies in the long run.

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