Year: 2007

India’s premier infrastructure lending company – IDFC was upgraded by Morgan Stanley research. They have set a new price target of Rs 200 on the stock. Here is Citi’s exclusive coverage on IDFC.

IDFC is entering a phase where all parts of revenue are doing well – loan growth is strong, spreads are improving and fees are very strong. For F2005-F2007, IDFC has delivered the best core earnings progression among Indian private banks and financial institutions at a 55% CAGR. This trend will continue, resulting in outperformance.

IDFC has launched the first tranche of its proposed US$2 bn project equity fund along with Citi. This will result in a doubling of assets under management in 1-2 months. Moreover, its investments in NSE is performing strongly. SSKI is two-third owned by IDFC is also performing well.

Based on earnings adjusted for recent capital issuance and new fund raising in project equity, consensus is expecting 4% YoY earnings growth in the rest of F2008. The actual numbers are likely to be higher and hence raise F2008 earnings estimates by 5%.

The stock is trading at 24.8x F2009E earnings – in line with private banks. However, private equity (PE) and proprietary investments are not contributing significantly to earnings but provide almost 30% of value. Hence, core valuations are lower at 19x (cheaper than private banks, with better earnings profile) and could rise, given strong earnings growth expectations.

In a separate development, Reliance Capital has launched an exclusive Consumer Finance Loan subsidiary.

Lehman Brothers have just released an equity research report initiating coverage on Indian IT stocks. Here is the overview before we get into the details. The report assumes USD pricing of Rs 36 and is Negative on the IT sector.

• Infosys Technologies [Equal Weight] – 12 Month DCF price Target of Rs 1,793.
• TCS [Underweight] – 12 Month DCF price Target of Rs 914.
• Wipro [Underweight] – 12 Month DCF price Target of Rs 422
• Satyam Computers – [Underweight] – 12 Month DCF price Target of Rs 287

Infosys Technologies:
The macro environment is likely to remain unfavourable due to the appreciating rupee and a possible slowdown in the banking and financial services (BFS) vertical. Lehman estimates a 15.7% EPS CAGR for the next three years (FY07-FY10E) compared with 43.5% in the past three years. Volume growth and price hikes may be impacted negatively due to a cut in discretionary IT spend. The demand environment continues to be good; US dollar revenue CAGR of 35% for the next three years.

Tata Consultancy Services:
A 14% EPS CAGR for the next three years (FY07-FY10E) compared to 35.8% for the past three years. Volume growth and price hikes may be impacted negatively due to cuts in discretionary IT spending. The demand environment continues to be good, because US dollar revenue CAGR of 30.8% for the next three years.

Wipro:
Wipro continues to be hit by relatively slow growth in Telecom equipment manufacturing (TEM) and BPO segments. Lehman projects a 30.6% US dollar revenue CAGR for the company’s Global IT Services and Products business on an organic basis for the next three years compared with 35% for Infosys Technologies (INFY, 2-Equalweight) during the same period. Should result in an EPS CAGR of 15.6% for Wipro in FY07-FY10E.

Wipro has underperformed the most among tier-1 Indian IT stocks in the past five years. This will continue because margins to fall by more than 300bp for the next three years.

Satyam Computers:
Given the deteriorating environment, robust QoQ volume growth as witnessed in the past five quarters and price hikes could be pressured in FY09, in our view. Despite strong volume growth, we estimate an EPS CAGR of 13.4% for the next three years given our expectation of falling margins.