Stock Views on INFOSYS, KEC INTERNATIONAL, TATA SPONGE IRON, SHRIRAM TRANSPORT FINANCE

CITIGROUP on SHRIRAM TRANSPORT FINANCE

Citigroup recommends a 'Buy' rating on Shriram Transport Finance (STFC). The management sees longer-term loan growth at 20-25%, lower than the 30% RoE it believes it can maintain. STFC is launching its equipment financing business in this month, through a 100% subsidiary. The management expects to build this portfolio to about 6,000 crore over the medium term, and the 1,000 crore capital needed for this will be self-funded. This is one of its key growth and value-enhancing measures. The management expects asset quality to show steady signs of improving, with net NPL (non-performing loan) likely to further fall from its 0.44% level. Potentially, there could be some eventbased pressures - about 700 trucks have been impacted by the ban on mining in Karnataka, but remedial measures have already been taken, and management remains optimistic on asset quality direction. While expected IFRS (International Financial Reporting Standards) norms could lead to greater capital requirements for the large off-balance sheet portfolio that STFC manages, management believes the upfront recognition of income that this portfolio would generate under IFRS will more than offset the increased capital requirement.

IIFL on TATA SPONGE IRON

IIFL recommends a 'Buy' rating on Tata Sponge Iron with a price target of 413. Sponge iron prices have commenced their ascent over the last two months led by an uptick in scrap prices globally and rising input costs. Over H12010, the spread between scrap and sponge iron widened to about 5,000/tonne; this is expected to decline going ahead. Following the rise in Chinese domestic steel prices, scrap prices too have moved higher over the last one month. IIFL estimates average sponge iron prices to be about Rs16,500/tonne in FY11 and FY12. Tata Sponge has three sponge iron kilns of 0.13 mtpa each and two waste heat recovery power plants with a combined capacity of 26 MW. Over the last two years, it has sold about 69% (125 million units) of total power produced to the grid. IIFL expects average power realisation of 3.5/unit and revenues of 45.1 crore in FY11 and 49.1 crore in FY12. With steady cash flows, cash per share is to rise from 60.5 in FY10 to 145 in FY12. With raw material linkages already established, TSIL should post profit CAGR of 11% over FY10-12E. At the CMP (current market price), the stock is trading at 2x FY12E EV/EBIDTA and at a FY12E P/B of 0.9x, which is at a steep discount to its peers.

HSBC on KEC INTERNATIONAL

HSBC initiates 'Neutral' rating on KEC International with a target price of 595. KEC International has signed an agreement to acquire 100% stake in SAE Towers, for an enterprise value of $95 million. This proposed acquisition is strategically compelling due to: 1) Deal at attractive price 2) Deal likely to be earnings accretive with about 15% estimated incremental earnings in first 12 months post closure 3) Access to new geographies 4) Synergies arising from technology and process sharing deal likely to be earnings accretive. The management has indicated that the capacity utilisation of SAE Towers is expected to increase from 60% to 100% in the next three to four years given the strong demand expected in American markets. Further, EBITDA margin is expected to be sustainable at about 12-14% with PAT margin at about 7-8%. HSBC estimates the acquisition to be earnings accretive as SAE is likely to provide incremental earnings of about 15% in first 12 months post deal closure. The transaction would provide access to KEC in North and Latin America and would also lead to KEC becoming the largest lattice tower manufacturing company globally. Further it would also help both companies, which are leaders in their respective markets to draw synergies from each other in terms of technology and processes.

CLSA  on INFOSYS

IT spend at Infosys' top clients is on the rise even as an increase in discretionary spend and deal sizes indicates greater confidence in Infosys' clients. US continues to lead this uptick with Europe lagging a tad. That said, Infosys is keenly watching the negative macro data points in the US for potential adverse impact on its order book. Challenges on the supply side are abating and attrition numbers should head down through H2CY10 driving fuller harvesting of the demand. FY12 is unlikely to be an encore of FY09. While acknowledging potential impact to growth in FY12 from another economic slowdown, Infosys' COO highlighted three key differentiators. European trends are looking good in the retail and manufacturing verticals. Banking and capital markets remain the key drivers of overall optimism with useful boosters from retail and healthcare as well. Importantly, Infosys maintained that M&A integration spend in financials has gone down and has been replaced by other discretionary elements. Infosys remains satisfied with the growth in its top clients and also highlighted the increasing revenue per client as a key indicator of Infosys' mining ability as well as greater confidence at the client's end. Infosys does not see any one-off element in FY11 growth and believes current revenue trajectory can sustain in FY12 in absence of a Lehmanlike catastrophic event.