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Brokerage Recommendations

Friday, June 15, 2012

Motilal Oswal calls a ‘Buy’ on Wipro
CMP: Rs. 395  Target Rs. 490

Key takeaways: While Wipro is not yet unduly concerned about demand, delays in decision cycles continue to hurt. Near-term troubles relate more to the BFSI vertical, where Investment Banking continues to see spending cutbacks and pricing pressure. The company’s growth strategy revolves around focusing on select segments - be it verticals, clients, geographies or services. It has shortlisted 138 clients, with a potential to grow to USD 50m+, as its growth drivers. Wipro will also seek to grow by gaining market share amidst the churn happening among vendors. Wipro’s organization restructuring in terms of workforce realignment is complete, but alignment of capabilities is still underway. We expect Wipro to grow its revenue at a CAGR of 15.3% and EPS at a CAGR of 16% over FY12-14.

The stock trades at 15.5x FY13E earnings. We believe risk-reward is favorable, given multiple levers to drive efficiency and growth, notwithstanding the near-term headwinds. Maintain Buy.

Industry trends and outlook: Continued decision delays; sporadic pricing pressure: The management is not unduly concerned about demand and cited that there are enough deals in the pipeline. However, as decision cycles are delayed by 40-45 days, the low conversion rate is hurting. Strategy: Inch-wide and mile-deep: Wipro’s growth strategy revolves around focusing on select segments - be it verticals, clients, geographies or services; and developing deep expertise in the chosen segments. The company has shortlisted 138 clients, with a potential to grow to USD 50m+, as its growth drivers. Within the momentum verticals, Wipro’s focus is on sub-verticals in each of BFSI, Healthcare, Retail and Energy & Utilities. For example, in Energy & Utilities, the company clearly sees and targets (1) spends happening in “Digital Oilfields”, where through Big Data, analytics are performed on huge amounts of seismic, geological and  spatial data, and (2) investments being  made in Smart Grids in multiple geographies.

Valuation and view: We expect Wipro to grow its revenue at a CAGR of 15.3% and EPS at a CAGR of 16% over FY12-14. The stock trades at 15.5x FY13E earnings. Valuations may be tested in the near term on a high ask rate to meet the mid-point of Nasscom’s guidance. However, valuations at 15x FY13E earnings imply a price of ~INR 390, which we see as the bottom for the stock. We believe risk-reward is favorable at Wipro on multiple levers to drive efficiency and growth. Maintain Buy, with a price target of INR 490.

Angel Broking calls a ‘Buy’ on Maruti Suzuki
CMP: Rs. 1076  Target Rs. 1510

Maruti Suzuki (MSIL) is set to merge its associate company, Suzuki Power Train India Ltd. (SPIL), with itself subject to necessary legal and regulatory approvals. SPIL, a 70:30 JV between Suzuki Motor Corporation (SMC), Japan, and MSIL manufactures and supplies diesel engines and transmission components for vehicles. SPIL currently supplies ~90% of its production to MSIL. For FY2012, SPIL posted net sales of Rs. 4,551cr (13% of MSIL), EBITDA margin of 12.1% and PAT margin of 2.5% (lower due to higher depreciation costs, ~9% of net sales). 

Key highlights of the deal: The merger will be effected through share swap in the ratio of 1:70, one share of MSIL for every 70 shares of SPIL, and there will be no cash outflow from MSIL. As per the deal, MSIL will issue 1.317cr fresh shares to SMC in lieu of SMC’s 70% stake in SPIL. Consequent to the merger, SMC’s shareholding in MSIL will increase to 56.2% from 54.2% currently.  Also, MSIL’s equity will dilute by 4.6% with the issuance of fresh shares. Based on yesterday’s closing price of MSIL’s shares, the deal has been attractively valued at 4.6x EV/EBITDA (FY2012 basis).

Merger to be positive in the long run: We believe the merger of SPIL with MSIL is positive for MSIL given that MSIL itself is setting up a new diesel engine facility in Gurgaon. Further, with increasing trend of dieselization, the integration of SPIL will result in better control over diesel engine sourcing, provide flexibility in production planning and meeting the fluctuations in market demand. Additionally, single management control of diesel engine operations will result in better sourcing, localization and cost-reduction measures.

Outlook and valuation: We retain our estimates for MSIL and do not factor in the effect of merger on MSIL’s financials as we wait for the detailed financials of SPIL. We expect MSIL to be the key beneficiary of reversal in interest rate cycle going ahead and expect EBITDA margin to improve by ~250bp over the next two years, mainly on account of currency hedging, operating leverage and better product mix. At Rs. 1,146, the stock is trading at 11.4x its FY2014E earnings. We recommend a Buy rating on the stock with a target price of Rs. 1,510. A steep increase in excise duty on diesel vehicles poses a key risk to our volume estimates.

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