US immigration bill: Some relief for Indian IT sector
Nomura believes the House not taking up the Senate immigration bill is a temporary reprieve for the Indian IT sector as: 1) in a larger comprehensive bill the high skilled visa related provisions could have slid through without much opposition, 2) the Skills Visa Act introduced in the House is likely to be considered
 
On Wednesday, the House Republican leaders in a closed door meeting decided not to put the Senate immigration bill (which has several damaging provisions for the Indian IT sector including ban on outplacement) to vote in the House. This stand is consistent with what the House Speaker had maintained ever since the immigration bill was approved in the Senate, said Nomura Equity Research in its Quick Note on the issue.
 
The House Republican leadership also decided that instead of a comprehensive immigration bill they are more in favour or a series of smaller bills addressing individual topics.
 
The Republicans’ disagreements with the Democrats on this bill are on: 1) border security so as to stop entry of illegal immigrants, and 2) path of citizenship to illegal immigrants, where Republicans themselves are divided, revealed Nomura. 
 
Republicans wants to first fix the problem of illegal immigration by sealing the borders, before any citizenship is granted. Democrats, on the other hand, want to enhance border security but in parallel start the process of citizenship for illegal immigrants while continuing to work on border security.
 
The individual draft bills covering various aspects of immigration are still not ready in the House, but this should become clearer over the next few weeks.
 
Nomura believes the House not taking up the Senate immigration bill is a temporary reprieve for the Indian IT sector as: 1) in a larger comprehensive bill the high skilled visa related provisions (which were damaging for Indian IT) could have slid through without much opposition, 2) the Skills Visa Act introduced in the House is likely to be considered.
 
This bill addresses the US high-skilled immigration program and is less damaging for Indian IT with only H1B and L1 salary increases and no mention of outplacement debarment (most damaging clause for Indian IT which was present in the Senate version), according to the brokerage.
 
The brokerage believes this development pushes the focus back on 1QFY14 results where the key focus would be on whether the rupee depreciation benefits margins. If so, it could offset impacts from a diluted immigration bill passing. Nomura’s view remains contrary to the Street—it does not expect material rupee depreciation benefits and believes the risks of a diluted bill are not getting priced in. Its target prices build in 50% impact of a bill without outplacement debarment passing. Nomura maintains Reduce on Infosys and TCS, and Buy on HCL Technologies, Cognizant Technology Solutions Corporation and Wipro.
 
Statement of the House Republican leadership on the Senate immigration bill:
“Today House Republicans affirmed that rather than take up the flawed legislation rushed through the Senate, House committees will continue their work on a step-by-step, common-sense approach to fixing what has long been a broken system. The American people want our border secured, our laws enforced, and the problems in our immigration system fixed to strengthen our economy. But they don't trust a Democratic-controlled Washington, and they’re alarmed by the president’s ongoing insistence on enacting a single, massive, Obamacare-like bill rather than pursuing a step-by-step, common-sense approach to actually fix the problem. The president has also demonstrated he is willing to unilaterally delay or ignore significant portions of laws he himself has signed, raising concerns among Americans that this administration cannot be trusted to deliver on its promises to secure the border and enforce laws as part of a single, massive bill like the one passed by the Senate.”
 

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Infosys first quarter net up 3.7% to Rs2,374 crore

While, Infosys kept its dollar revenue guidance unchanged at 6%-10% for this fiscal, it revised its rupee revenue guidance upwards to 13%-17% from 6%-10% for the same period

IT major Infosys on Friday reported a 3.7% increase in consolidated net profit to Rs2,374 crore for the first quarter ended 30 June 2013.

 

The Bangalore-based firm had reported a net profit of Rs2,289 crore in the year-ago period, it said in a filing with the exchanges.

 

Consolidated revenue for the reporting quarter was up 17.2% to Rs11,267 crore from Rs9,616 crore in the year-ago period.

 

While, Infosys kept its US dollar revenue guidance unchanged at 6%-10% for this fiscal, it revised its rupee revenue guidance upwards to 13%-17% from 6%-10% for the same period.

 

“Despite facing an uncertain macro environment, changing regulatory regime and a volatile currency environment, we have done well in Q1 and are cautiously optimistic about rest of the year,” Infosys CEO and managing director SD Shibulal said.

 

In US dollar terms, its consolidated net profit rose marginally by 0.5% to $418 million in the April-June quarter this fiscal from $416 million in the same quarter of 2012-13.

 

Its consolidated revenues rose by 13.6% to $1.99 billion against $1.75 billion in the same period last year.

 

“We maintained our margins and continued making investments in the business. We have announced compensation increases for FY’14 effective July, which will affect our margins in the future quarters,” Infosys chief financial officer Rajiv Bansal said.

 

Reacting to the results, shares of the firm on Friday were trading 10.71% higher at Rs2,797.45 apiece in morning trade on the BSE. The stock rose 10.65% to Rs2,797.60 on the NSE.

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“Power Grid Corp is likely to be the sole bright spot, delivering another par performance”

Reported net profit of private IPPs (excluding Reliance Power) would be dented by the significant rupee depreciation against the dollar during the current quarter, says Nomura Equity Research

Nomura Equity Research expects IPPs (including NTPC) and Coal India (CIL) to post a sub-par show in 1QFY14; reported PAT of private independent power producers (IPPs, excluding Reliance Power) would be dented by the significant rupee depreciation against the dollar during the quarter (8.6% on period-end basis, 3.2% on period average basis). Power Grid Corporation is likely to be the sole bright spot, delivering another par performance, believes Nomura.

 

In terms of normalized PAT (i.e. excluding the likely MTM exchange fluctuation losses), Nomura is cautious for all private IPPs in its coverage universe. Amongst private IPPs, its normalized loss forecasts are significantly above consensus for Adani and Lanco Infratech; normalized PAT forecasts for JSW Energy and Reliance Power are around 15% below and in line with consensus, respectively.
 


Nomura believes NTPC would have done well if it sustains normalized PAT at around Rs25 billion (in-line with consensus, up 3% q-o-q, 4% y-o-y), given the likelihood of a 300bps dip in coal-fired plant availability and lower generation. As regards Power Grid, the kicker from Rs40 billion effective incremental capitalization would help post a 22% y-o-y rise in EBITDA and 17% y-o-y rise in normalized PAT. Nomura’s earnings forecast for Power Grid is broadly in line with consensus.

 

Nomura expects Coal India’s earnings to disappoint on the back of a flat topline (higher FSA realization offset by lower e-auction revenues) and higher opex (employee & diesel expenses). At Rs37.6 billion, the brokerage’s normalized net profit forecast is 10% below consensus.

 

Nomura pegs Adani Power’s revenue at Rs23.7 billion (around 8.5 billion kWh sales, Rs2.7/kWh blended realization, Rs4/kWh merchant realization) and normalized EBITDA

(EBITDA excluding fuel creditors-linked MTM exchange fluctuation loss) at Rs5.5 billion (up 50% q-o-q). Including fuel creditors-linked MTM exchange fluctuation loss and assuming 15% effective tax provision, Nomura pegs normalized net loss at Rs7.9 billion (against a consensus net loss forecast of Rs4.4 billion). Together with potential MTM exchange fluctuation loss on derivative instruments, the brokerage expects reported net loss at Rs10.6 billion. Fuel mix at Mundra remains the key swing factor for profitability.

 

Nomura pegs JSW Energy’s 4QFY13 revenue at around Rss23.2 billion assuming blended realization at around Rs4.1/kWh and sales volume of around 5.0bn kWh. It expects a 5%

q-o-q rise in the coal cost (per kWh) resulting in EBITDA at Rs7.9 billion (34.1% margin) and normalized net profit at rs3.3 billion. Including potential MTM exchange fluctuation loss, we expect reported PAT at Rs2.53 billion (down around 20% q-o-q). Nomura’s forecast EBITDA for JSW Energy is marginally below consensus; normalized net profit is 17% below the street’s forecast.

 

Nomura expects Lanco Infratech’s consolidated revenues/EBITDA to drop 13%/14% q-o-q as contribution from the EPC business (solar and non-solar) tumbles due to slowdown in execution on the back of cash constraints. Together with a marginal uptick in interest outgo and assuming an effective 15% tax outgo, the brokerage forecasts normalized net loss at Rs5.3 billion (up 66% q-o-q); including potential MTM forex losses, it pegs reported net loss at Rs9.6 billion. Nomura’s 4QFY13 EBITDA forecast is 17% below consensus while its normalized net loss forecast is 56% above consensus.

 

Nomura believes NTPC’s key operating metrics for the quarter were weak—it estimates Plant Availability (PAF) for coal fired plants at around 85% (compared to 88% in 1QFY13) and coal-fired generation at around 57bn kWh (against 58.9 billion kWh in 1QFY13). Accordingly, the brokerage expects only a marginal uptick in normalized net profit to Rs24.9 billion (up 4% y-o-y, 3% q-o-q); its net profit forecast is in line with consensus.

 

Factoring in 40% RoE and higher proportion of linkage coal consumption at Rosa (1200MW), together with marginal operating loss at Butibori (300MW), Nomura expects Reliance Power’s consolidated EBITDA at around Rs4.1 billion (up 15.4% y-o-y, down 9.6% q-o-q). It expects non-operating income to spike to Rs1.2 billion on account of potential gains on translation of f/x treasury income (given the sharp rupee depreciation during the quarter). Assuming a 15% potential tax incidence, the brokerage expects normalized net profit at Rs2.2 billion (down 2% y-o-y, up 30% q-o-q) and reported PAT at Rs2.2 billion. Nomura’s 1QFY14F normalized earnings forecast is in-line with consensus.

 

Nomura expects a 5.2%/5.9% q-o-q growth in Power Grid’s revenues and EBITDA, driven by around Rs40 billion effective incremental capitalization of transmission assets on a sequential basis. Building in a 10% drop in non-operating income (on the back of a lower cash chest), it expects normalized net profit to be up around 3% q-o-q (up 17% y-o-y) at Rs10.6 billion. Nomura’s 4QFY13F earnings forecast is in-line with consensus.

 

On the back of Coal India’s 115million tonne (mt) offtake, Nomura expects [1] 10% sales via e-auction, and [2] blended realization at Rs1437 per tonne (in-line with ex-incentives realization in 4QFY13). Despite an effective hike in FSA coal prices effective 29th May, lower contribution from e-auction sales is expected to keep revenues flat y-o-y, said the Nomura report. As higher diesel cost and employee expenses take a toll, Nomura pegs EBITDA at Rs36.4 billion (post OB removal adjustment of Rs8.8 billion), implying a 640bps y-o-y drop in margins. This translates to a 16% y-o-y drop in normalized PAT to Rs37.6 billion. Its net profit forecast is 10% below consensus.

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