MARUTI SUZUKI INDIA
Reviews deal structure in favour of minority shareholders
In a significant positive, Maruti Suzuki (MSIL) has decided to make key amendments to the proposed Gujarat plant deal – Gujarat capex only by depreciation/equity infusion by Suzuki and approval by minority
shareholders, which allays most of our concerns. Hence, we re-instate our valuation multiple to 15x. With concerns abating and MSIL poised to deliver 23% earnings CAGR FY14-16E on healthy product pipeline and margin expansion, we upgrade the stock to ‘BUY’. MSIL modifies Gujarat project deal structure MSIL’s board has reviewed the deal terms so that: 1) entire capex for Suzuki’s Gujarat subsidiary would be funded through depreciation and equity brought in by Suzuki as against earlier plan of post-tax profits to cover part of capex; 2) in case of termination of the agreement, the Gujarat subsidiary would be transferred to MSIL at book value; and finally 3) the deal would be consummated on approval of minority shareholders. New structure allays key concerns Our negative stance on the earlier deal was largely owing to the take-or-pay arrangement (resulting in significant variability of margins for MSIL and assured RoCE for Suzuki), parallel capacity outside MSIL and inefficient use of MSIL’s cash. We believe the new arrangement, in contrast, implies EBIT margins for MSIL at pre-deal levels, other income at levels higher than before, zero RoCE for Suzuki (implying considerably higher RoE for MSIL). Moreover, initial investment by Suzuki can be effectively viewed as an endowment to MSIL – which adds INR99 to MSIL’s share price, if the deal is approved by minority shareholders.
MPHASIS LTDPRICE: RS.381
TARGET PRICE: RS.390
FY14E P/E: 10.4X
M&A activity, buyback / de-listing at significantly higher price, if any, are the risks to our call. Mphasis' operating results were lower than estimates. With revenues falling 3.4% QoQ, margins were also impacted. Shrinking HP revenues as well as flattish direct business revenues impacted overall growth. HP business remains a drag and is expected to de-grow in the foreseeable future. This will keep the overall growth of Mphasis relatively low, we believe. EBIDTA margins were sharply lower QoQ by about 200bps, largely due to the lower revenues and increased sales costs. Pressure on revenue growth and salary hikes may keep margins subdued over the forseeable future. Our FY15E (March end) earnings stand at Rs.36.8. For FY15, we have assumed the rupee to average 61 / USD. Our FY15-based TP stands revised to Rs.390 (Rs.413 earlier). At that level, our FY15E earnings will be discounted by 10.5x. We maintain REDUCE. M&A activity, buy-back offer / de-listing at a significantly higher price, if any, can provide upsides to the stock.
USD revenues down 3.4% QoQ
Mphasis reported about 2% QoQ fall in headline revenues in USD terms (exclud-ing the impact of hedging losses). However, after negating the impact of revenue reversal made in 4QFY13, the fall was at about 3.4% QoQ. The company has entered into a definitive agree-ment to sell a part of its EM (India) business. The HP business continued to suffer with further scale downs as well as seasonal shut-downs during the quarter. We understand that, the shut-downs impacted revenues by about 0.5%, but the balance impact was due to further scale-sown of business.
KOTAK SECURITIES
Economy News
Liquidity constraints, approval delays and the lingering slowdown have forced developers not to take up large infrastructure and road projects on PPP basis, compelling government agencies to award projects as cash-contracts, say industry experts. Import of natural rubber was up by 91% to 18,141 tonnes in February this year on fall in domestic roduction amid strong demand for the commodity. The rubber import stood at 9,497 tonnes in the same month last year, according to the Rubber Board data. Tea exports from India, the world's second-biggest producer, dipped by 13.24 per cent to $695.64 mn during April-February this fiscal due to slowdown in global market. Wholesale inflation fell to a nine-month low of 4.68 per cent in February from 5.05 per cent in the previous month, as prices of food items rose at a lower pace, official data showed on Friday.
Corporate News
Infosys has been selected by Volvo Cars as a strategic supplier to provide application development services for its global operations. This agreement builds on the long-standing relationship between the two companies.
Infosys has been supporting Volvo Cars since 2010 to rationalize and integrate its enterprise systems. (ToI)
Reliance Industries' telecommunications unit, which holds nationwide 4G permits, has agreed to lease mobile phone masts from infrastructure provider Viom Networks, the companies said. Directorate General of Hydrocarbon (DGH) has backed ONGC's demand for appointment of an international expert to assess if RIL was drawing out any of its gas in the KG basin. ONGC says at least three wells drilled by RIL in the eastern offshore KG-D6 block are within "few hundred meters" of its gas fields and it fears the two may be sharing the same pool of reservoir. BP Plc and Niko Resources, the partners of Reliance Industries in the controversial KG D-6 block, may have to join ongoing arbitration proceeding before the government could accept bank guarantees from them and allow these companies to charge higher prices for their share of gas from April 1, a petroleum ministry official said. State Bank of India is all set to bring down its bad assets by offloading about Rs 50 Bn of its total dud assets valued at Rs 677.99 Bn to asset restructuring companies (ARCs) before the end of the current fiscal. (Deccan) Buoyed by nearly 30% rise in exports in 2013-14, Steel Authority of India Ltd aims to more than double the shipments to 1 mn tonnes next fiscal docking special quality products from its expanded capacity. Indian Oil Corp plans to invest Rs 76.5 Bn in setting up a petrochemical complex at its almost complete Paradip refinery in Odisha in the next 3-4 years, a company executive said. A 22-member lenders' consortium led by ICICI Bank has failed to agree on a proposal from ABG Shipyard to recast its Rs 115 Bn loan, a majority of which turned into dud assets on their books, sources said here.
KOTAK INSTITUTIONAL EQUITIES
Infosys(INFO)
Moderate cut in estimates/TP. As a follow-up to our previous report, after Infosys’ senior leadership indicated near-term revenue growth challenges, we cut our revenue growth expectation for FY2015E to 10%. Stock performance over the next 12 months will depend on results of sales effectiveness initiatives. Current valuations at 15X FY2015E EPS are undemanding even in the context of near-term challenges. We cut FY2015-16E earnings by ~2% and TP to `3,800 (from `4,000 earlier). Retain ADD.
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