Stock Views on EXIDE INDUSTRIES, MPHASIS, RELIANCE INDUSTRIES

J P MORGAN on MPHASIS

Mphasis reported Q3FY10 results with revenues of 1,280 crore, 7% above estimates although all of the growth was driven by the unexpected price increase in the infrastructure business. EBIT of 275 crore was flat q-o-q in absolute terms. Net profit was up 1.5% q-o-q helped by lower tax rates. Infrastructure services business grew sharply by 34% q-o-q. This was driven by: 1) Fortified acquisition in the last quarter; 2) 17% increase in pricing after a decline of 18% just tweo quarters back. As a result, EBIT margin in this segment improved by 470 bps q-o-q to 39.5%. Given that the ITO business is almost fully driven by HP related work, JP Morgan is surprised by the sharp movements in pricing within a three quarter time period and would wait for further management clarity on this issue. Growth was driven by strength in the BFSI (banking, financial services and insurance), technology and healthcare verticals partly offset by a decline in telecom vertical.

BANK OF AMERICA on EXIDE INDUSTRIES

Bank of America initiates `Buy' rating on Exide Industries with a target price of 180. The investment thesis is premised on three key drivers: 1) robust domestic demand for new vehicles, 2) rising market share in the after-market by replacing unorganised players, and 3) strong demand for power back-up applications. Exide's dominance in the OEM segment (77% share) and strong distribution network should support a revenue CAGR of 22%. Pricing power and an increase in captive lead sourcing should ensure profitability remains above the historical average. In the past, Exide's profitability was closely linked to global lead price volatility. Over the past few years, the company has capitalised on its leadership position by increasing prices to offset lead price movements. Bank of America values Exide on a sum-of-the-parts basis at 180, consisting of a valuation of 160/share for the core battery business, and 20 per share for its 50% stake in the life insurance joint venture.

CITIGROUP  on RELIANCE INDUSTRIES

Citigroup upgrades Reliance Industries' rating to `Buy', while maintaining the target price and estimates. After a 15% YTD underperformance versus the market, Citigroup believes the unexciting refining/petchem outlook is largely priced in and reflected in RIL's valuations that now stand at a 3-year low relative to the Sensex. However, structural changes in the rapidly developing Indian gas market could provide the trigger for stock performance from a 6-9 month perspective. With rising E&P costs and demand for higher prices to exploit new/marginal fields, there exists a case for the benchmark to move higher. Given the government's recent moves, Citigroup believes any willingness on its part to implement higher prices for incremental KG production (possibly over the next six-nine months) could lead to reserve value enhancements and potential earnings upsides (about 3-5%) for RIL, driving stock performance.