Despite some near term hiccups, overall trend is positive thanks to improving macro environment in the US
For Indian IT companies prospects for a better FY15F is intact as overall macro trends are positive, despite some near term hiccups. Macro indicators in US suggest a possible acceleration in IT services demand in FY15F with:
(a) client financial performance suggests broad based improvement across industries (except Retail and Oil & Gas) – should reflect in improving demand with a 2-3 quarter lag;
(b) Steady uptrend in US consumer confidence and stability in US CEO confidence index; and
(c) continuing decline in jobless claims and the unemployment rate.
On Indian IT companies, in particular, Nomura says that Tier-1 IT aggregate revenue growth bottomed in September 2012 at 10% year-on-year levels and has since improved to 14-15% year-on-year in second half of 2013. Nomura looks for 16% organic revenue growth in FY15F versus 13.5% in FY14F.
IT companies that provide revenue upside possibility with margin comfort and are available at reasonable valuations are preferred in the stock market, says Nomura in its research note
YTD (year-to-date), the IT sector has marginally out-performed Nifty. Valuations for Tier 1 IT at 18x 1-year forward are at a 10% premium to five-year averages and are not expensive
Finally, on stock recommendations, Nomura’s research note says, “Our pecking order of preference within our Buys is HCL Technologies followed by Tata Consultancy Services (TCS), Tech Mahindra, Cognizant and Infosys. We switch preference to TCS over Cognizant on higher upsides. Wipro is our least preferred stock in Tier 1 IT.”
The tariff orders to compensate for rise in the price of Indonesian coal provide relief to Tata Power and Mundra Power
CERC (Central Electricity Regulatory Commission) has notified the long awaited Compensatory Tariff orders on imported coal based Tata Power and Adani Mundra Power projects. The tariff orders have built a consensus among the stakeholders for providing relief to developers against a sharp rise in Indonesian coal prices (due to change in Indonesian regulations) through a mechanism of ‘Compensatory Tariff 1’, which is outside the purview of PPA (power purchase agreement).
‘Compensatory Tariff’ has been adjusted for
(a) net profit earned in mines;
(b) excess revenue earned by third party sale (if project achieves PAF>80%);
(c) 100 bps haircut on RoE (return on equity); and
(d) saving in fuel cost with lower GCV coal without sacrificing operational efficiency.
However, CARE Research believes that there is no meaningful impact of (b) and (d) conditions as plant has operated at 77% PAF YTDFY14 for Tata Power UMPP and usage of lower GCV coal decreases plant efficiency (SHR) and increases auxiliary consumption.
With this landmark judgement, CERC has managed to do a fine balancing act of preserving project viability for developers without disturbing sanctity of PPA and creating a mechanism for optimising DISCOM (distribution companies) power purchase costs, thereby reducing tariff shock to consumers, says CARE.
Overall, there appears to be a slowdown in inflation across all the sectors except the ‘clothing, bedding and footwear’ industry
The downward trend in retail inflation commenced in December 2013 continues for the month of February 2014 as well, taming down the inflation concerns which loomed large over the economy during this fiscal. According to the data released, retail inflation, as measured by the Consumer Price Index (CPI), stands at 8.1% for February 2014 on a year-on-year basis edging lower than the 8.79% it recorded in January 2014. This is the third consecutive month of the downward trend in CPI inflation, which comes as good news following the upward trajectory inflation maintained in the first half of FY14.
The table below shows the movement of retail of inflation over the last three months:
Overall, there appears to be a slowdown in inflation across all the sectors except the ‘clothing, bedding and footwear’ industry, points out CARE Research.
According to CARE Research the continuous rate hikes by the RBI (Reserve Bank of India) and its resolve in taming down inflation finally seems to be reflecting in the retail inflation. Further, the expectation of a lower WPI (Wholesale Price Index) inflation for February is reiterated given the fall in CPI. Although inflation is on the desired path now, it is expected that RBI will maintain interest rates in the policy announcement in April 2014 to ensure that the decline in inflation continues before the monetary policy looks to promote growth.