Siddharth Sedani
Market is likely to prolong a rangebound movement as the approaching RBI's monetary policy and Interim Budget are the two key events that could direct market sentiment. Parliament's Budget session kicked off from January 31, followed by the Interim Budget 2019-20 on February 1.
The Indian macros continue to hold strong with controlled crude oil prices and stable currency.
However, stock specific news kept market sentiment negative. Essel Group stocks like Zee Entertainment, Dish TV and Essel Propack witnessed a sharp fall of 26 percent, 33 percent and 17 percent, respectively on January 25 due to high promoter's pledge and liquidity issues faced by the promoters.
After the Essel group stocks plunge, NBFCs also came under the highlight and faced the heat.
Apart from the Budget, the week ahead will be heavily influenced by Q3 corporate earnings and the direction of foreign fund flows. In addition, monthly automobile sales figures and the Purchasing Managers' Index (PMI) manufacturing data will become other major sentiment drivers.
Investors should focus on companies which can give earning prominence, and have a high margin of safety with high corporate governance standard.
City Union Bank | Rating: Buy | Target: Rs 218
CUB reported 4.41 percent net interest margin (NIM) (up 9bps q/q) in Q3FY19, largely helped by higher pass-through of costs in yields and a higher credit-deposit ratio. We expect NIM to decline from current levels and hold above 4 percent in the medium term.
Stressed assets (GNPA and standard restructured loans) are now 2.9 percent of loans (down 43bps y/y, up 4bps q/q). Management maintains its guidance of a 1.5–2 percent slippage ratio for FY19; we have modelled it at 1.9 percent (of the loan book).
The focus on small-ticket secured lending has helped the bank maintain sound asset quality in the past few years despite the industry being under severe asset-quality stress.
Besides, with 14.8 percent capital adequacy (14.4 percent tier-1), the bank is sufficiently capitalized for high-teen loan growth in the medium term.
The bank's pre-provision operating profit (PPOP) was up 3.5 percent YoY, 3.7 percent YoY. Lower realization from treasury mostly led to flat PPOP growth. Lower credit cost, however, drove a stable, 15.6 percent, return on equity (RoE). We expect the bank to maintain 15 percent + RoE over the medium term.
We are positive about the bank's loan-book growth, largely driven by granular and secured high-yielding MSME loans, agriculture loans, retail loans and loans to traders. Our January 2019 target of Rs 218 is based on the two-stage DDM model. This implies a ~2.9x P/ABV multiple on its FY21e book.
Persistent Systems | Rating: Buy | Target Price: Rs 760
Persistent's Q3 revenue was $120.8m (up 2.2 percent QoQ, down 1.4 percent YoY). Its services business (75 percent of revenue) was up 3.1 percent QoQ, 1.1 percent YoY, showing recovery in the QoQ growth rate.
Its digital business turned around with 6.4 percent Q3 growth QoQ (Q1 down 6 percent, Q2 down 1.7 percent QoQ); Accelerite moved up 8 percent QoQ. IP revenues were the only drag, flat QoQ in a seasonally strong quarter, sliding 8 percent YoY.
Digital accelerated after a lag of two quarters and was led by offshore delivery. PSYS has resolved issues (like visas, subcons) and expects acceleration ahead.
The EBITDA margin touched a new high (19.7 percent, up 234bps YoY), reaching back to pre-IoT levels.
With its strong balance sheet (cash balance: ~$216 million), EBITDA margin is closer to 20 percent, and high cash-flow generation (CFO:NI ~113 percent average of FY17 and FY18), it is one of the best midcap IT stocks.
Revenue is likely to touch $530 million by FY21, helping it morph into a reasonably mid-sized and differentiated IT-services company. The margin story has already played out; therefore margins are now likely to be largely stable.
We retain our FY20e/FY21e EBITDA estimates but cut PAT due to forex losses/higher taxes. We retain a Buy with a revised target of Rs 760 (14x FY21e PE vs 15x earlier).
Larsen & Toubro Technology Services | Rating: Buy | Target: Rs 1,940
L&T Technology Services Limited (LTTS) has reported a growth of 35.9 percent in its revenues at Rs 13,169 million in Q3-FY19 as against Rs 9,691 million in Q3-FY18. The growth of the company was driven across all industry segments viz. transportation, industrial products, telecom, process and, medical devices.
Company’s EBITDA margin stood at 18.4 percent at Rs 2,417 million in Q3-FY19 as against 15.3 percent at Rs 1,485 million in the same quarter previous year, an improvement of 300 basis points.
During the quarter, there has been an EBITDA increase in transportation, telecom and medical devices segments, whereas the margins in industrial products have been constant. This was mainly due to revenue composition tilting towards higher onsite, and higher subcontracting costs.
During the quarter, LTTS has won eight multi-million dollar deals across all industry segments. LTTS has increased its $50 million+ clients by two, $10 million+ clients by four and its $5 million+ clients by 10, YoY.
In terms of guidance, the management has increased its earlier guidance of 21 percent growth in revenues of FY-19 by 300 basis points to 24 percent in $ terms.
For the next financial year FY-20, the management has iterated that the deal pipeline for FY20 looks promising and it expects conversion rate to be better than earlier quarters.
The company also doesn’t see a headwind for any of its verticals or geographies, except one account where the ownership has changed which could impact its growth by 4 percentage points in FY20. The company expects a conclusion of some of the large deals which are in the final stages of discussion, which can mitigate the impact from this one particular account.
We have incorporated latest quarterly numbers for LTTS and have revised our estimates upwards for the company in terms of both revenues and earnings. We continue to remain positive on the company and maintain our Buy rating and a target price of Rs 1,940 per share.
The author is Vice President - Equity Advisory, Anand Rathi Shares and Stock Brokers.
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