Stock Views on PERSISTENT SYSTEMS, GRASIM INDUSTRIES, NIIT

CITI INVESTMENT RESEARCH AND ANALYSIS  on NIIT

Citi has upgraded NIIT from `Sell/High Risk' to `Buy/Medium Risk'. It has set the target price at Rs 85 based on 15 times estimated earnings per share for September '11. It considers the increase to be fair given the pick up in hiring by the IT industry and improvement in US corporate sentiments. NIIT operates in the growing education segment. Though FY10 was sluggish in terms of revenue growth, some of the key operating metrics showed improvement with: (1) EBITDA margins up by about 240 bps, (2) RoCE increased by over 150 bps, and (3) FCF (free cash flow) positive after being negative in FY09. Citi expects the improvements to continue over FY10-13. Citi has increased the target multiple from 10 to 15. The new multiple is below the average of around 17 of the last threeyear trading band. The reason for lower P/E earlier was that during the downturn, there was revenue uncertainty. However, the environment has improved for the better and the company has managed costs very well during the last two years, resulting in the positive bias.

UBS INVESTMENT RESEARCH  on GRASIM INDUSTRIES

UBS has upgraded Grasim's rating from `Neutral' to `Buy'. It has also removed the short-term `Sell' rating. This was on account of a significant underperformance since the fixing of the record date of the demerger of the cement business (May 14, 2010). Further, its current valuation at $80/tonne ($115-140/tonne for other larger companies) looks compelling. UBS has however not changed its earnings or valuation estimates. It has lowered the price target from the earlier Rs 2,875 per share to Rs 2,300 per share after removing the value of the demerged cement business of Grasim (Samruddhi Cement, which listed last week). We continue to value Grasim on a sum-of-the-parts basis with cement at 6.5 times EV/EBITDA, VSF at 5.5 times EV/EBITDA, and apply a 10% holding company discount to the cement business. We believe the stock is attractive at current valuations despite our near-term cautious outlook on cement prices.

JP MORGAN  on PERSISTENT SYSTEMS

Persistent is a leading player in a niche outsourced product development (OPD) segment of the IT services industry. JP Morgan expects Persistent to show strong (20%+) revenue growth over the next 2-3 years given: 1) Recovery in R&D spends of global software product companies; 2) Investments in the IP (intellectual property)-based model for faster growth; 3) Increased focus on select emerging growth areas (analytics, cloud computing), and 4) Opportunity for mining existing customers. Persistent has 31 customers giving $1 million plus in revenues, mostly from companies having $1 billion plus in revenues and 15% in R&D spends. JP Morgan's March '11 price target of Rs 475 is based on 13 times FY12 estimated EPS, in line with its target multiples for mid-tier companies like Patni and Mphasis and at 10% premium to other mid-caps (Hexaware, Infotech) given better revenue growth and margin profile. The brokerage believes that limited competition and mining of existing clients will drive a healthy 22%/19% revenue and operating profit growth on compounded basis over FY10-FY12. Compounded EPS growth of 10% is lower due to IPO-related equity dilution in late FY10 and increase in tax rates (as STPI exemption expires) in FY12..