With Infosys due to announce its December quarter results on 11th January, Espirito Santo Securities has revised down its estimates of EPS by 3% and 6% for FY13 and FY14 respectively. The stock is still rated as a buy
In a recent research report released by Espirito Santo Securities (ESS), the brokerage has pegged the Indian information technology (IT) bellwether as a BUY despite factoring in near-term negatives. ESS has cut Infosys’ estimates by 3% and 6% for FY13 and FY14, respectively. The numbers may not seem much, but for a stature like Infosys, it sends negative vibes not just for the company but for the IT industry, as well. One of the chief reasons for the downgrade is “ramp-downs” (i.e. cost cutting) from existing clients and expected economic difficulty in FY14. The ESS reported said, “While Infosys has been winning large deals, it is also witnessing ramp-downs in the existing business which is the key risk to our call.” Infosys will be announcing its third quarterly results on 11 January 2013. The outcome of this is likely to set the tone for the rest of the quarter. However, if ESS prognosis is to be believed, it doesn’t look too good.
For a quite a while, in the last few quarters, the company has disappointed on nearly every front and caused the company to cautionary forecasts in its investor meets. Even though the company has won deals, these are not Infosys’ focus. According to ESS, Infosys has won as many as 10 “large deals” with total contract value (TCV) of over $1.4 billion, with most of these infrastructure-led deals. However, infrastructure isn’t the best place to be, as far as the near-term is concerned as government impasse on infrastructure execution continues and is likely to continue well into the general elections next year. This could put pressure on this vertical. However, to counter this it is reported, according to ESS, that “strong license sales for SAP and Oracle could drive services growth for Infosys”. This is expected to drive sales for the next two quarters.
Read previous reports on Infosys here.
According to ESS, the company has also been trying to move up the value chain but with no benefits as economic growth continues to be a challenge. This has forced the company to be on the back-foot and revise contract terms and adopt a more flexible approach to pricing in order to retain its existing clientele. According to the report, relative market share in remote infrastructure management (RIM) has increased from 2% to 11% in Q2FY13 and as much as 68% of incremental revenues accrue from this vertical. There could be potential demand as the world increasingly adopts the internet as the de facto standard for communication and management and blur the lines between physical-on-location infrastructure management and doing the same thing online, including virtualization which is a much sought after technology.
However, ESS has also mentioned that two of Infosys’s key verticals—BFSI and Telecom—will continue to face pressure. It said, “These verticals may not grow in FY14 as it is facing client specific issues”. As much as 44% of the business arises from these two key verticals. With the way the global economy is headed, things don’t look too rosy for the global financial sector despite several reassuring steps taken by Central Banks and governments world over.
Infosys will now have a leadership problem to ponder over when SD Shibulal retires in March 2015. Why? Because it will be the first time in Infosys history that a non-Infocion will take over the helm. This will make investors cautious at first although Infosys does have a reputed leadership team.
ESS has opined that Infosys is worth Rs2,650 per share, which was revised down from Rs2,800. Despite significant headwinds, it has pegged the stock as a BUY from a valuation perspective.
Yesterday we had said that unless the Nifty closes decisively above 6,055, the trend will be down. Indeed, we may see a sharper decline ahead. We got that decline today. The downtrend may persist for a few more days
Domestic indices which were trading in a narrow range in the morning session moved into the negative zone in the noon session. Yesterday we had said that unless the Nifty closes decisively above 6,055, the trend will be down. Indeed, we may see a sharper decline ahead. We got that decline today. The downtrend may persist for a few more days. The National Stock Exchange (NSE) saw volume of 95.64 crore shares while the advance decline ratio was 567:895.
The Sensex opened 28 points higher at 19,770 while the Nifty opened five points higher at 6,006. The indices soon hit their respective days high at 19,824 and 6,020.
But with beginning of the noon session, the Nifty went into the red amid tension between India and Pakistan following the brutal killing of two Indian soldiers by Pakistani troops along the Line of Control in Poonch district of Jammu and Kashmir on Tuesday. The Sensex and the Nifty hit a six-day low (including today). The Sensex hit a low of 19,627 while the Nifty hit a low of 5,958. The Sensex closed at 19,667 (76 points lower, down by 0.38%) while the Nifty closed at 5,972 (30 points lower, down by 0.50%)
India cut its forecast for fuel demand in the current fiscal year by nearly 1% to 155.6 million tonnes, government data showed, due to a slowdown in economic activity.
Ratings agency Crisil today said a revival in consumption will push up the country's gross domestic product (GDP) growth rate to 6.7% in FY14, from 5.5% estimated for the current fiscal (FY13). According to the agency the improvement in the farm sector, lower interest rates and higher government spending will drive the consumption demand. Crisil also said it expects fiscal deficit to fall to 5.5% in 2013-14 from the 5.8% it estimates for FY13.
After reaffirming its ‘negative’ outlook on the country’s sovereign credit rating, the global ratings agency Fitch has warned that China's "investment-driven growth model" faces increasingly serious constraints due to heavy debt financing by local governments. The agency announced yesterday a currency sovereign rating of AA- for China, on a negative outlook, while it kept its stable outlook of A+ for the country's foreign debt holdings.
The market now awaits the December 2012 results by the Indian companies.
Among the broader indices, the BSE Mid-cap index fell 0.48% and the BSE Small-cap index fell 0.25%.
The sectoral gainers were led by BSE Auto (up 0.74%); BSE Oil & Gas (up 0.50%); BSE PSU index (up 0.17%) and BSE Healthcare (up 0.04%). BSE Fast Moving Consumer Goods (down 1.26%); BSE Consumer Durables (down 1.21%); BSE Metal (down 1.18%); BSE Capital Goods (down 1.01%) and BSE Power (down 0.83%) were the main losers.
11 of the 30 stocks on the Sensex closed in the positive. The chief gainers were Tata Motors (up 3.98%); GAIL (up 1.62%); SBI (up 1.13%); Coal India (up 1.01%); Sun Pharma (up 0.94%). The key losers were BHEL (down 2.69%); Tata Steel (down 2.54%); Bajaj Auto (down 1.96%); ITC (down 1.93%); TCS (down 1.74%).
The top two A Group gainers on the BSE were—Suzlon Energy (up 7.05%) and Havells India (up 4.94%).
The top two A Group losers on the BSE were—Bhushan Steel (down 7.46%) and Pipavav Defence (down 4.97%).
The top two B Group gainers on the BSE were—Chemfab Alklies (up 19.95%) and Satra Properties (up 18.63%).
The top two B Group losers on the BSE were—Arshiya International (down 19.97%) and C. Mahendra Exports (down 19.97%).
Out of the 50 stocks listed on the Nifty, 14 stocks settled in the positive. The major gainers were Tata Motors (up 4.09%); GAIL (up 1.66%); Coal India (up 1.50%); ONGC (up 1.43%); Bharti Airtel (up 1.24%). The top losers were BHEL (down 2.91%); Tata Steel (down 2.69%); Ambuja Cements (down 2.67%); ITC (down 2.43%) and UltraTech Cement (down 2.19%).
The Asian indices had mixed outcomes of almost flat closing for the day with most of them ending with a positive bias. The highest gainer among the Asian indices was Nikkei 225 (rose 0.67%) while Jakarta Composite fell the most (0.79%). At the time of writing, the European indices were trading higher and the US stock futures exhibited a similar trend.
Back home, foreign institutional investors were net buyers of shares totaling Rs848.95 crore on Tuesday while domestic institutional investors were net sellers of shares amounting Rs518.30 crore.
UK-based GlaxoSmithKline has received SEBI’s approval for its over Rs 5,200 crore open offer for Indian subsidiary GlaxoSmithKline Consumer Healthcare. The UK parent had made an offer to acquire up to 13,389,410 shares, representing 31.8% of the total outstanding shares of the GlaxoSmithKline Consumer Healthcare. The company would buy the shares at Rs 3,900 apiece taking the potential total value of the transaction to around Rs 5,220 crore. GlaxoSmithKline Consumer rose 0.19% to close at Rs 3,865 on the NSE.
Yes Bank has launched an online remittance platform for non-resident Indians, called “Yes Remit”. The service will cater to NRIs in the Gulf countries, United Kingdom and Euro zone. The facility allows NRIs to send money into an account with Yes Bank or any other bank account in India. The service is being offered jointly with Times of Money. Yes Bank closed 0.96% higher at Rs 504.45 on the NSE.
Auto component companies with a technological edge, global scale advantage or an identified and exploitable niche have better prospects in the current market, says Espirito Santo Securities. It has recommended Balkrishna Industries, Bosch and Motherson Sumi
Auto sales in developed markets are slowly recovering and the worst appears to be over in Europe, with emerging markets still holding up. So, the outlook for auto component exports is improving in India. Further, it is expected that demand from the replacement market will only increase over time. These are the observations of analysts at Espirito Santo Securities on the auto component industry.
Espirito Santo expects that auto component companies with a technological edge, global scale advantage or an identified and exploitable niche have better prospects in the current market. The analysts highlight the following stocks as its picks to play these three themes: Balkrishna Industries, Bosch, and Motherson Sumi.
The global landscape for OEMs (original equipment manufacturers) is becoming increasingly competitive leading them to set up manufacturing facilities in emerging markets like India to take advantage of lower costs. Along with the domestic market, these facilities will also cater to the export market. For instance global OEMs like General Motors, Volkswagen and Ford have manufacturing facilities in India to cater to Indian as well as overseas markets. Hence this is another source of incremental demand for the auto component sector.
The current sluggishness is a cyclical blip in a structural boom, says the brokerage. India has recently crossed the $3,500 per capita income (PPP) consumption threshold, and the exports and replacement market will only support the growth.
On the improving prospects of exports, Espirito Santo observes that as the Indian component players achieve scale and experience they are improving on quality and reducing defect rates which will give growing confidence to US, German and other top auto players to increase imports of parts from India.
According to Espirito Santo, technological edge and a consistent track record of innovation are important in establishing and maintaining a competitive advantage in auto components. However, in the Indian context most firms are just moving up the curve to become globally competitive, and hence innovation and technology will not be the key driver, with the exception of the global firms such as Bosch and Wabco, whose Indian listed entities benefit from the technological edge at the parent level. Bosch is seen as benefiting from a strong technology based competitive advantage, exploiting a dominant share in changing fuel injection technology in India.
The other category to look out for is companies with adequate critical mass that would be difficult to replace in the categories they are present in, and where size is yielding a cost advantage and operating leverage. Also, as demand of global autos recovers these companies should see operating leverage play out in margins. Motherson Sumi is the pick to play the margin improvement trend as global auto sales recover, says Espirito Santo.
A dominant position in a niche category is another area to focus on in the auto component industry, and according to the Espirito Santo, Balkrishna Industries is a small but relevant player in a niche category of Off Highway Tyres (OHT) with limited competition as: it is too small to be a focus area for large global tyre companies; and it has the cost advantage given low cost of Indian plants. The company can sustain superior profitability given the mix of cost arbitrage, distribution and brand strength. It should also benefit from falling prices of the key raw material natural rubber.
The analysts of Espirito Santo have a ‘buy’ recommendation for the stocks of Bosch, Motherson Sumi and Balkrishna Industries in the Indian stock markets.