HSBC on TCS

HSBC values TCS at a P/E of 21x the calendarised ‘11 EPS and maintains its 12-month target price of Rs 890. HSBC remains confident of 20% US dollar revenue growth in FY11, with margins little changed. It expects growth in telecom, ERP (enterprise resource planning) and remote/infrastructure management services (RMS) to accelerate in FY11. IT spend in the telecom sector is likely to be driven by strong capex by telecom service providers, while ERP (SAP) market recovery should be led by upgrades and new mega ERP deals. Growth in manufacturing should be driven by a revival in the SAP market and further traction in remote management services. Banking (BFSI) is likely to remain strong as banks continue to spend on new engagement models for customers and offshore to cut costs further. The management is confident of maintaining margins in FY11. HSBC sees margin headwind of 120-150 bps in FY11, assuming a 10% average wage increase for employees with more than three years of experience. Offsetting this margin pressure, the broadening of the employee pyramid and the increase in offshore revenues provide estimated margin benefits of 60+ bps and about 75+ bps respectively. TCS is trading at a modest 9% discount to Infosys on FY11E EPS.

Stock Views on GAIL, HDFC, Ananth Raj Industries

HSBC GLOBAL RESEARCH on ANANT RAJ INDUSTRIES

HSBC Global Research initiates an ‘underweight’ rating on Anant Raj Industries (ARIL) with a target price of Rs 50, which is at a 50% discount to ’09E NAV of Rs 100. ARILs owns residential land parcels in upmarket locations in Delhi, and has four hotel properties near Delhi airport. Its land bank of 61 million square feet has been aggregated at a cheap value of Rs 200 per share. Execution has faltered, despite a healthy balance sheet. With consistent capital raising, ARIL has maintained a healthy balance sheet with marginal debt and has a net cash position of Rs 500 crore. Also, 90% of its land is paid for, so the carrying cost of land on its balance sheet is not a cause for concern. Despite these factors, its execution track record does not inspire confidence. There have been delays on its major projects, and only two projects have been delivered in the past 24 months. ARIL faces the daunting task of increasing the pace of execution in the wake of strong cash availability. However, with the demand outlook getting bleaker, HSBC expects there to be limited room for ARIL to accelerate its project development.


GOLDMAN SACHS on HDFC

GOLDMAN Sachs reiterates ‘buy’ rating on HDFC, but it has cut the 12-month target price to Rs 1,890 from Rs 2,070. Investors have expressed concerns about HDFC’s ability to meet growth expectations due to two reasons: 1) Lending spreads can be narrowed by higher borrowing costs due to tighter credit conditions and HDFC’s reliance on wholesale funding; and 2) Non-performing assets on HDFC’s exposure to property developers can rise due to a marked downturn in the property market. However, Goldman Sachs feels HDFC has sufficient financing flexibility, including the ability to raise deposits and fund growth if conditions warrant. HDFC’s investment appeal rests on three factors: 1) Demonstrated resilience in its earnings through market cycles; 2) The long-term potential for growth in an underpenetrated market, and the strong and long-term sustainable return metrics that HDFC currently enjoys; and 3) A well-capitalised balance sheet that should enable fund growth through internal accruals without requiring additional equity capital over the next 3-5 years. Goldman Sachs values the core mortgage business using the mid-point of Camelot-derived P/BV and its ex-growth value. HDFC currently trades at or below historical P/BV and P/E multiples, making the valuation appear attractive.


BNP PARIBAS on GAIL

BNP Paribas initiates research coverage on Gail, India’s largest gas transmission utility, with a ‘reduce’ rating and a target price of Rs 176 per share. The low estimates factor in a steep decline in profitability of Gail’s petrochemicals, LPG and liquid hydrocarbons segments in the wake of a cyclical downturn. These business segments together accounted for 51.8% of Gail’s FY08 EBITDA. Gas transmission tariffs are likely to fall on new regulation. The Petroleum and Natural Gas Regulatory Board (PNGRB) proposes to use the depreciated asset value of Gail’s existing pipelines to determine tariffs. Starting FY10, BNP Paribas will model tariffs of Gail’s existing pipelines as per PNGRB’s proposals. BNP Paribas uses a sum-of-the-parts approach to arrive at target price of Rs 176 per share. It values the petrochemicals and LPG/LHC business segments at 10-year trough EV/EBITDA multiple of 2.6x, Gail’s unlisted investments at book value, and its investments in listed securities at 30% discount to current market prices.

Stock Views on Bharti Airtel, Jet Airways, Lanco Infra, MTNL

HSBC Global Research on Bharti Airtel

HSBC Global Research has assigned an ‘overweight’ rating to the stock saying the company’s strong balance sheet and infrasharing models will allow it to consolidate its revenue market share leadership further. “We value the core business at 12.5 times FY10 (estimated) EPS (earnings per share) at Rs 660 per share and tower valuations of Rs 183 per share,” said HSBC Global Research in a note to its clients. The research firm is positive on Bharti based on a combination of expected sharp growth in the Indian wireless market, execution of a low-leverage, low-cost business model with a high return on invested capital, and a close alignment of majority and minority shareholder interests. However, it views higher regulatory charges and aggressive international expansion as key downside risks.

Citi investment research on Jet Airways

Citi investment research has changed its rating on the stock to ‘sell/high risk’ from sell/medium risk with a revised target price of Rs 167 from Rs 440. “Jet merits a high risk rating, given the competitive scenario in the domestic market, unstability in its international operations and its highly leveraged balance sheet,” said Citi in a note to its clients. Citi believes that Jet’s operating cash losses will continue into FY10 and expects the company will need to raise fresh funds to refi-nance debt repayment (around $280 million over FY09/10E). “Debt/equity ratios are rendered meaningless given the significantly affected net worth — debt-equity is forecast at seven times end FY10E (including asset revaluation reserves),” said the Citi note. According to Citi, the company will face recurring losses of over Rs 36 billion (earlier Rs 20 billion) over FY09-FY10 due to decelerating passenger traffic and escalating cost pressures (aided by depreciating rupee). It expects the yields to dip by 12% in FY10E as lower fuel prices will be passed on to the customers.

ICICI Securities on Lanco Infra

ICICI Securities has maintained its ‘buy’ rating on the stock. “We believe that the expected commissioning of Amarkantak I (300MW) by end-November 2008 would result in reducing execution risk/discount associated with Lanco’s power portfolio,” said ICICI Securities in a note to its clients. According to ICICI Securities, Lanco’s ongoing litigation with MP SEB to convert Amarkantak I from PPA (power purchase agreement) to merchant is expected to be resolved soon and even 50% conversion will provide upside of Rs 35/share. “Lanco has emerged as the sole bidder for the 1,320 MW coal-based power plant at Rajpura, Punjab. We ex-pect the tariff of the project to be lucrative, providing healthy upside along with Rs 70 billion EPC potential,” said the note. The NAV (net asset value) estimates for Lanco stand at Rs 65 billion or Rs 296 per share, the ICICI note said.

Merrill Lynch on MTNL

Merrill Lynch has maintained its ‘underperform’ rating on the stock with a lowered target price of Rs 65 from Rs 110 earlier, saying it has valued the company’s core telecom business at a 25% discount. “The discount captures the risk of potential large cash outgo towards its assured 3G licences. The stock appears cheap at a price/book of around 0.4 times FY09 and this reflects its low RoE (return on equities) of around 2-3%,” said Merrill Lynch in a note to its clients. Merrill Lynch has cut earnings by 35% for FY09E and 29% for FY10E. “This reflects around 3-5% cut in topline and 4% rise in operating costs. We now forecast MTNL’s EBITDA margin at 11-13% for FY09-10E vs 10% margin in 1H FY09,” the note said.