Mphasis to Outperform

Ahead of the merger with EDS India, Mphasis posted a 10% growth in its consolidated revenue to Rs 337.25 crore in the quarter ended March 2007 over the December 2006 quarter. The growth in revenue was on a 24% rise in revenue from BPO services and 5% gain in IT services.

Operating profit margin (OPM) improved 30 basis points (bps) to 14.3% due to improvement in margin in the BPO operations (320 bps to 27.8%) on increase in offshore billing rate to US$ 10, from US$ 9 in the December 2006 quarter. The contribution of the non-voice revenue rose to 39% from 31% in the sequential quarter. Thus, operating profit (OP) advanced 13% to Rs 48.34 crore. Profit before tax (PBT) was up 26% to Rs 47.75 crore and net profit 27% to Rs 45.56 crore.

As a group, Mphasis follows the strategy of hedging its entire balance sheet. Also, many of its long-term contracts have built-in clauses for re-negotiation of billing rates to factor in the change in the value of the rupee.

Consolidated revenue of Mphasis was 27% higher to Rs 1195.82 crore in the year ended March 2007 over FY 2006 on a strong 30% growth in the IT services to Rs 836.11 crore, with a healthy expansion in the financial services business. On the other hand, the BPO business spurted 21% to Rs 359.71 crore with the increase primarily contributed by telecom clients in India. Net profit was down 20% to Rs 119.88 crore due to poor performance in the initial quarters ahead of the EDS merger talks. As per unaudited numbers, EDS India reported revenue of Rs 570 crore with net profit of Rs 59 crore in FY 2007.

In July 2006, Mphasis approved the merger of EDS India, a wholly-owned subsidiary of Electronic Data Systems Corporation (EDS), US, with itself. The swap ratio of the merger will be 5:4 (5 shares of Mphasis for every four shares of EDS India) and would entail the issue of 44,104,065 shares of the company. Though the legal merger has been delayed and will happen by July 2007, operational integration is already over. Post-merger EDS, US, will hold around 62% stake in Mphasis.

The in-house business from EDS Global is doubling, quarter-on-quarter. There was no business from EDS in Q1 June 2006 of FY 2007. In Q2 September 2006, it was US$ 2 million; Q3 December 2006 US$ 4 million; and in Q4 March 2007 US$ 9 million. The revenue from EDS Global will have a continuous momentum.

The manpower strength including that of EDS India stood at 20,249 employees end March 2007. For calendar year (CY) 2007, Mphasis including EDS has planned to add 8,000-10,000 people. Currently, about 550 employees are doing EDS work.

The Mphasis management had earlier identified four growth drivers: growth in existing Mphasis business, shared services work from EDS, offshore engagements within the existing accounts of EDS, and joint pursuit of large deals. Most of these growth drivers have started kicking in: internal finance & accounting (F&A)- and human resources (HR)-shared services work (employee ramp-up in BPO space in March 2007) as well as a large deal won from a European telecom company by the Mphasis-EDS combine. The management has also indicated the possibility of another large-deal-win from a retail major in the near future. The combine is also pursuing many multi-million multi-year deals.

EDS is playing catch-up with IBM and Accenture – the first in expanding their India headcount aggressively. For EDS’s revitalisation, it is necessary that it expands its offshoring to India fast. Mphasis will be the vehicle through which this will happen. EDS has indicated its intention to take its India headcount to 45,000 by CY 2008 and has set a US $ 1-billion revenue target for Mphasis.

Including EDS India, the FY 2007 EPS of the merged entity works out to Rs 8.6, which is expected to rise to Rs 13.4 in FY 2008. The share trades at Rs 310, giving a P/E of 23 times. With the EDS tag and expected earning growth of 50% for a couple of years, the scrip will outperform the market.

Kotak on BHEL

Sorry the BHEL coverage was left out in the earlier post. Kotak is bullish on the prospects of BHEL and has set a price target of Rs 1,550 on the stock.

While there are likely to be strong order inflows in the next two years Kotak believes that XIIth plan with skew towards private sector and supercritical configuration would pose challenges for BHEL. BHEL may lose market share as well as face pressure on margins because of (a) heightened competition, (b) change in project profile and (c) shift of power generation sector to a competitive tariff based bidding regime. With a market share (57% overall market share) and operating margins (18-19%), Kotak arrives at a value of Rs1,550/share, on DCF based target price to Rs1,550 (from Rs1,350 earlier) as we rollover to March 09 basis.

Buy Wipro and BHEL – Kotak Securities

Kotak Securities has maintained an Outperform rating on Wipro and recommended a BUY with a March 2009 DCF price target of Rs 655. [Not March 2008, its 2009 earnings on Discount Cash Flow Model]

  • FY2008 organic revenue growth will likely be higher than FY2007
  • Jun’ 07 quarter guidance may be conservative, expect further acceleration from Sep’ 07 quarter
  • SEZ ramp ups progressing well, FY2010 tax impact would be the least on Wipro
  • Kotak forecasts an EBIT margin decline of 60bps for Wipro’s Global IT business in FY2008 to 23.8%.

Kotak maintains Outperform rating with an end-March 2009 DCF based target price of Rs655/ share. Kotak assume Re/US$ rate of 42 for FY2008, 42 for FY2009 and 41 for FY2010. Wipro is expected to report an EPS of Rs 24.3, Rs 30.4 and Rs 33.4 for Fy2008, 2009 and 2010

Dalal Street Research Analyst Update:
Indian Rupee is expected to average Rs 41 for FY2008 though Citigroup has pegged it at Rs 40.

Anil Ambani’s RNRL wins Over Mukesh

In a landmark judgement handing over victory to anil Ambani, the High Court of Mumbai said, Reliance Industries (RIL) cannot sell the gas to any third party other than Anil Ambani’s Reliance Natural Resources (RNRL) and NTPC. In an interim order on a petition filed by RNRL, the high court has said that the 81.6 million cubic metres of gas per day (mmscmd) is to be earmarked for RNRL, NTPC or for RIL’s captive use for the next eight years to be pumped from Krishna Godavari basin.

Reports had suggested recently that RNRL had sent a legal notice to the petroleum ministry against the bids invited by Reliance Industries (RIL) for sale of gas and its proposal to enter into gas sales agreements. RNRL has claimed that this violates the interim stay order of the Bombay High Court. Rumors also say that Murli Deora, Petroleum Minister who was close to Sr. Ambani has sided with Mukesh Ambani.

RNRL is the gas trading company of the Anil Dhirubhai Ambani Group and the scrip is up 4.7% on NSE at Rs 35.60. Mukesh’s RIL is down 1.2% at Rs 1,712.

India Nippon + Hotel Leela + Abbott India

Net profit of Indian Nippon Electricals declined 21.34% to Rs 3.98 crore in the quarter ended March 2007 as against Rs 5.06 crore during the previous quarter ended March 2006. Sales declined 4.73% to Rs 36.42 crore in the quarter ended March 2007 as against Rs 38.23 crore during the previous quarter ended March 2006.

For the full year, net profit declined 8.89% to Rs 18.45 crore in the year ended March 2007 as against Rs 20.25 crore during the previous year ended March 2006. Sales rose 15.38% to Rs 166.37 crore in the year ended March 2007 as against Rs 144.19 crore during the previous year ended March 2006.

Net profit of Hotel Leela Venture rose 19.22% to Rs 44.72 crore in the quarter ended March 2007 as against Rs 37.51 crore during the previous quarter ended March 2006. Sales rose 16.46% to Rs 116.74 crore in the quarter ended March 2007 as against Rs 100.24 crore during the previous quarter ended March 2006.

For the full year, net profit rose 72.67% to Rs 126.24 crore in the year ended March 2007 as against Rs 73.11 crore during the previous year ended March 2006. Sales rose 16.49% to Rs 380.86 crore in the year ended March 2007 as against Rs 326.95 crore during the previous year ended March 2006.

Net profit of Abbott India rose 34.66% to Rs 18.30 crore in the quarter ended May 2007 as against Rs 13.59 crore during the previous quarter ended May 2006. Sales rose 18.80% to Rs 154.04 crore in the quarter ended May 2007 as against Rs 129.66 crore during the previous quarter ended May 2006.

Buy – Indian / Taj Hotels from Citigroup

Citigroup Research Analyst Ashish Jagnani in a research report released just a while ago has put a BUY recommendation on Tata group controlled Indian Hotels Company Ltd. Indian Hotels reported an excellent FY2006-07.

Indian Hotels plans to add five hotels to its portfolio in FY08 – two new hotels at Bangalore (ITPL) and Chennai (Mount Road) and three management contracts for hotels in Vijayawada, Trivandrum and Langkawi Malaysia). In addition, the company plans to increase the number of ‘Ginger’ Hotels [Budget Hotel Chain from Taj Group] to 30 by March 2009, up from eight at present.

Citi projects strong earnings growth of 21% for FY08E and consider valuations of 17x FY08 P/E, at par with sector, as attractive with a 12-month target price of Rs187 is based on 22x FY08E P/E, a premium to average sector valuations of 18x.

The stock is currently trading at 17x FY08E P/E, toward the median of its three-year historical range of 15-22x P/E, largely on par with domestic peers, which Citi believe is unwarranted given: 1) IHC’s market leadership and advantage of large room inventory; 2) The company’s premium brand positioning with ‘Taj’; 3) Expectation of strong earnings

Historically, Hotel Stocks have been valued on their earnings potential However, one should also consider the value of the properties they own which most analysts don’t. A Re-rating in this stock is due for a long time now. Punters Target for the Stock is Rs 200.