Buy Lupin, PVR, Tech Mahindra: Motilal Oswal

Based on the 3QFY14 performance we have increased our FY14E/15E/16E by 3 percent/1 percent/2 percent. We see sustained momentum in the US generics business and see India growth bouncing back to historical levels.

We expect margin expansion to come from limited competition opportunities in US and turnaround in Japan. We estimate core EPS of INR33.3/INR42.4/INR49.3 for FY14E/15E/16E, i.e. 29 percent EPS CAGR for FY13-16E. The stock trades at 21.8x FY15E and 18.7x FY16E EPS. We maintain Buy with a revised target price of INR1,090 (22x FY16 core earnings + DCF estimate INR6/share from gTrizivir launch).

PVR

We downgrade the EBITDA for FY14E and FY15E by 8 percent and 6 percent respectively. PVRL is a strong long term bet on the multiplex industry, given lower screen density, shift from single screens to multiplex and its leadership position in a movie loving nation. Cinemax's synergies, structural free cash flows as a result of improvement in mix of ‘newer screens/existing screens' will lead to stronger return ratios - RoCE and RoE. The stock is trading at 8.9x and 6.7x FY15E and FY16E EV/EBITDA respectively. We maintain a Buy and value PVRL at 8x FY16E EV/EBITDA and arrive at a target price of INR605.

Tech Mahindra

TECHM's 3QFY14 revenue at USD791m grew 4.4 percent QoQ, beating our estimate of USD782m (+3.1 percent QoQ growth). EBITDA margin at 23.2 percent (-10bp QoQ) was in line, and adjusted for one-offs during the quarter, PAT (excluding restructuring fees) at INR6.42b declined 6.2 percent QoQ, in line with our estimate of INR6.46b. TECHM signed a large deal during the quarter and total TCV of USD220m.

Constant currency revenue growth was 3.4 percent QoQ, contributed by volume growth of 3.3 percent QoQ and realization improvement of 0.1 percent QoQ. Cross currency movements impacted the USD revenue positively by 100bp. In-line EBITDA margin was despite 100bp miss on the gross profit margin (38.7 percent v/s est. of 39.7 percent), due to lower SGA at 15.5 percent v/s estimate of 16.5 percent. Lower GPM was on account of transition costs incurred on commencement of new work.

Despite 250-300bp headwinds to margins from 4Q arising out of wage hikes and discontinuation of restructuring fees, management cited multiple levers to margins that could be deployed to mitigate the impact: [1] lower transition costs v/s 3Q, [2] utilization, [3] employee pyramid, [4] milestone-based payments and [5] continued SGA rationalization.

Success in large deal wins in the last three quarters is an encouraging indicator of TECHM's improving competitive prowess post the integration with Satyam. Also, its expertise in the Telecom vertical has thus far overshadowed the structural concerns in the clients' business, as it continues to increase its share within its top accounts. We expect TECHM to post USD revenue at a CAGR of 15.6 percent over FY13-16E and EPS at a CAGR of 21.9 percent during this period. Maintain Buy with a target price of Rs 2,350.

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