Stock Views on Infosys, Punj Lloyd, Suzlon Energy

CLSA on INFOSYS

Infosys reported its lowest y-o-y revenue and volume growth in the decade, but its highest margin in six years. The stock has outperformed the markets 16% YTD as the Satyam debacle has shifted investor preference to India’s corporate governance stars, where Infosys enjoys iconic status. With currency providing all of the margin upside in Q3, and like to like pricing down 1.8% q-to-q in December ‘08, volume recovery will come after margin headwinds, the latter beginning in the March ‘09 quarter itself, as per Infosys’ guidance. Six-year high EBITDA margins of 35% were backed by double digit INR/USD depreciation, which negated headwinds from lower utilisation and cross currency effects. CLSA expects pricing to weaken further ahead as more negotiations reach a decisive stage. Every 1% of pricing cuts 70 bps from EBITDA. With cost metrics touching all-time lows in overhead line items, it is debatable if Infosys has any more juice to squeeze out of its operations. CLSA’s call that margins are more and sooner at risk, compared to the recovery hope in volumes, drives the earnings 6% below consensus for FY10. This limits absolute upsides for the stock, and from here to the full year guidance in April.

BNP Paribas on PUNJ LLYOD

The company has disclosed new orders of approximately Rs 1,880 crore in 3QFY09, down 56% y-o-y. Additionally, international orders declined 57% y-o-y. BNP estimates a decline of 22.4% y-o-y for new orders in FY10. There is also further evidence of a global slowdown in the petrochemical industry. Their FY09E and FY10E EPS estimates have declined by 9% and 41%, respectively, due to lower order inflow assumptions. SABIC has terminated its contract with Punj Lloyd (Punj) and is seeking liquidation of the performance bond and advance payment bond for a total of GBP28.5m. Punj may incur additional cash charges of GBP28.5m (Rs 210 crore) if SABIC succeeds in its claims. BNP has not included this claim in the estimates; however, now it includes the provision for a Rs 300-crore loss (before tax) that should have been included in the FY08 results. This loss reduces the FY09E EPS estimate by 55%.

JP Morgan on SUZLON ENERGY

JP Morgan remains `Neutral’ on Suzlon Energy with a March 10 price target of Rs 80. Suzlon’s recent initiatives provide breathing space to tide over the funds crunch:

1) sale of 10% stake in Hansen Transmission - estimated cash inflow of Rs 520 crore;
2) securing a six-month payment window from Martifer for acquiring the latter’s 22.4% stake in REpower; and
3) the sale of a 17.1% stake in SE Forge to IDFC, bringing in Rs 400 crore.

With these measures, Suzlon will end FY09 with net consolidated DER (debt equity ratio) of 0.83x and net debt to EBITDA of 4.3x. In FY10E, Suzlon would end with consolidated DER of 0.81x and net debt to EBITDA of 4.3x. Suzlon has loan repayment of Rs 1,100 crore for the remainder of FY09, Rs 1,000 crore in FY10 and another Rs 1,000 crore in FY11. As operating cash flows may be insufficient for these repayments, Suzlon may have to borrow afresh. October ‘08 OB, at 2,505 MW, is not sufficient to meet FY10 volume estimate of 2,950 MW. Additional orders are necessary to meet FY10 estimates. There have been considerable delays in securing orders due to weak sentiment for renewable energy investments, coupled with a possible quality perception of Suzlon’s products. The key risk is further earnings cuts if strong order flows, necessary to lend credence to FY10 and FY11 earnings estimates, do not materialise. The FY10 estimates have seen a marginal upward revision of 2.6% due to the translation of REpower earnings at a higher Rs/ of Rs 64, compared to Rs 56 used previously.