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Friday, September 21, 2012

Dolat Capital calls a ‘Buy’ on Tech Mahindra
CMP: Rs. 898    Target Rs. 1180

Tech Mahindra acquires majority stake in Comviva for 2600mn. View: Tech Mahindra announces acquisition of 51% stake in Mobile platform and VAS Solution company for Rs 2600mn widening its presence in the telecom space and offerings in the booming VAS, MCommerce segment.

The positive news flow continues to reinforces our view of re-rating of the stock considering its strong business aggression organically (Dutch Telecom deal) and inorganically (Comviva and HGS Deal) to boost the revenue growth traction.

We maintain Tech Mahindra as our top pick with a revised TP of Rs 1180 (earlier Rs 1065) valued at 10x (earlier 9x) of its FY14E earnings Deal details: Tech Mahindra bought 51% stake in Comviva for an upfront payment of Rs 1250mn and intent to buy another 29% over next 5 years for another investment of Rs 1350mn based on certain revenue performance driven earn outs; valuing the company at Rs 2450mn. The company has revenues of USD 70mn and OPM of mid teens in CY11.

Its Top 10 clients contribute 85% of revenues with a Cash on the books of Rs 320mn. The existing investors – Bharti, Sequoia, Westbridge and Cisco would continue to hold the residual 20% stake in the company.

Broadens offering: The company has several products and platforms such as Mobile apps, messaging platform, mobile money, mcommerce and loyalty management solutions for Telcos.  VAS contributes 30% of revenues, rest is platform based. 

Widen client presence: Comviva has over 130 customers largely TSPs, OEMs and VAS players spread over 90 countries wherein TechM could do lots of cross/ up sell its offerings from its existing stable.  Lots of clients are overlap but offers significant opportunity to mine into.

Valuation:  The acquisition will boost the revenues by 3.5%/6.5% in FY13/14E and is EPS accretive.  The profitability of the acquired entity is almost inline with the company.  We maintain our BUY rating with a TP of Rs 1180 per share, valued at 10x of FY14E earnings.

Citigroup calls a ‘Buy’ on Coal India
CMP: Rs. 365    Target Rs. 400

Maintain Buy: Coal India’s (CIL) board approved the modified Fuel Supply Agreements (FSAs) with penalties ranging from 1.5-40% in case of a shortfall below 80%; 15% of the quantity to be met via imports on a cost-plus basis. We believe the penalty is not likely to exceed 1.5%; and imports (cost plus or price pooling) will not impact CIL adversely. CIL is insulated from global price trends; with improving volumes (despatches up 5.4% yoy in Apr-Aug12 after two years of muted growth) and odds favouring faster clearances. Buy.

CIL Board approves FSAs : CIL’s board has approved the modified FSAs to supply 80% of the committed quantity – 65% domestic coal and 15% imported coal on a cost-plus basis to power plants commissioned after 31 Mar 09. Changes have been made in the penalty structure and some force majeure clauses. Plants that have already signed FSAs post the Presidential directive (80% trigger; 0.01% penalty after three years) will have to sign the modified FSAs.

Penalty impact minimal: Revised penalty would range from 1.5-40%: 1) 1.5% for supplies between 65-80%; 2) 5-40% for supplies below 65% vs the Board’s decision in Apr 12 to levy zero penalty for the first three years and 0.01% thereafter. Our analysis suggests that if 80% of the power plants (issued Letters of Assurance) sign PPAs, CIL should be able to supply between 65-70% of the committed quantity; attracting a 1.5% penalty (if it does not import). A 1.5% penalty on the price of shortfall impacts PAT by <1%.

No decision on price pooling: CIL’s board has not approved price pooling due to differences amongst the directors according to media reports. The Board has asked CIL to formulate a business model for price pooling. CIL is awaiting responses of the Central Electricity Authority and independent power producers. If pooling is approved, imported coal would not be priced on a cost plus basis.

Provision for Buyback: Separately, at its Annual General Meeting, the shareholders have approved the amendment of the Articles of Association to provide for buy-back of shares by a special resolution.

Valuation: Our TP is derived using a combination of two scenarios: #1 assumes no profit sharing - derived price Rs416; #2 assumes 26% profit sharing in FY14 and beyond (based on our interactions with the Ministry of Mines) - derived price Rs384; with a 50:50 weighting. CIL does not have a long valuation history since it listed in Nov 2010. We arrive at our TP of Rs400 using: (1) a valuation based on DCF+30% premium (Rs504) and (2) 9x FY13 PE based valuation (Rs243); with a 60/40 weighting. The 9x multiple lies at the top end of the current trading range (6-9x) of the Indonesian and Chinese coal producers. At our TP, CIL would trade at 12.3x Sep13PE (excl OBR adj).

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