Stock Idea - Infosys Technologies

Recommendation: Buy (My Personal Favourite!)

CMP = Rs 1,600

Price target: Rs 2,135

Result highlights:

• Infosys Technologies (Infosys) reported a revenue growth of 4% quarter on quarter (qoq) and of 16.9% year on year (yoy) to Rs 4,271 crore in Q3FY2008. The sequential growth in the revenues was achieved on the back of a volume growth of 4.5% in its consolidated information technology (IT) service business, an increase of 0.8% qoq in its blended realisation and other scale benefits (0.6%). On the other hand, the rupee appreciation of 1.9% qoq adversely affected the growth in the revenues during the quarter.
• The operating profit margin (OPM) improved by 130 basis points sequentially to 32.6% in Q3FY2008. The OPM expanded due to the cumulative impact of an improvement in the blended realisation (up by 80 basis points), savings in overhead cost as a percentage of sales (a gain of 140 basis points) and a surge in the scale benefits (up 60 basis points). On the other hand, the rupee appreciation had a negative effect of around 80 basis points on the OPM.
• However, there were one-time items in Q3 that had a net adverse impact of around $6 million on the OPM: an expense of $26 million related to the settlement for overtime payment to certain employees in California and the write-back of provisions worth $18 million related to excess provisions for insurance charges made earlier. Adjusting for the same, the OPM stood at a healthy level of 33.1% for the quarter.
• The revised guidance for FY2008 is also in line with the expectations. In dollar terms, the revenue growth guidance has been upgraded marginally to 35-35.2% (up from 34.5-35% guided in October 2007). The earnings growth guidance in dollar terms has been upgraded by around 1.5% to $2.02 per share (up from $1.98-1.99 per share in October 2007). In rupee terms, the upward revision in the revenue growth guidance was largely flat at Rs 16,627-16,651 crore (up from Rs 16,588-16,648 crore in October 2007) with an exchange rate assumption of Rs 39.41/USD. Including the tax write-back, the earnings growth guidance in rupee terms has been upgraded to Rs 81.07 per share (up from Rs 79.49-79.88 per share given in October last), which is in line with the consensus estimates.
• For Q4, the management has guided to a sequential growth of 4.8-5.4% in its consolidated revenues and a growth of around 3.5% qoq in the earnings per share (EPS) to Rs 21.38 as compared with the adjusted EPS of Rs 20.66 in Q3FY2008.
• In terms of operational highlights, the company reported a healthy net addition of 8,100 employees in Q3 and raised the guidance for gross employee addition to 31,000 for the full year (it does not include the addition of 1,500 employees from the Philips deal). The revenue growth of 8.6% in the banking and financial services (BFS) segment was also encouraging and the company was able to negotiate higher billing rates from some of its financial service clients during the quarter. It bagged nine large deals (worth over $50 million each) in Q3, including two clients from the financial service vertical. 
• The management re-iterated that there is no material impact of the uncertainties in the USA on the overall demand environment. However, the management indicated that there is a delay in the finalisation of the IT budgets for 2008 by many of the company's clients and it expects better clarity on the same by the end of January or early February. On the positive side, there is an average growth of around 6% in the IT budgets of clients that have already finalised the same for 2008. 
• I have maintained the exchange rate assumption at Rs 39.8 per USD in FY2008 and at Rs 39 per USD for FY2009 and have kept the earnings estimates largely unchanged. However, given the continued uncertainties and the lack of any short-term triggers, I don't expect any re-rating of the tech stocks in the coming months.
• At the current market price the stock trades at 19.8x its FY2008 and 16.5x its FY2009 earnings estimates. I maintain Buy recommendation on the stock with the a revised price target of Rs 2,135.

Stock Idea - Mahindra Lifespace Developers

Recommendation: Buy

CMP = Rs 799

Price target: Rs 1,096

Key points:

• Mahindra Lifespace Developers (MLD) is the only private sector player to have an operational SEZ, the Chennai SEZ, in the country. Leveraging on this rich expertise, the company is planning to develop one more SEZ in Jaipur. For this it has already acquired 2,100 acre of land. It expects to acquire the balance land for the project by FY2008 end.
• MLD also has plans to develop another 3,000-acre multi-product SEZ in Karla and to extend its Chennai SEZ by 1,980 acre. However, it has acquired only 100 acre of land for the Chennai project so far. Hence, we have not considered these two projects in our valuation. Any development on these projects would lead to an upward revision in our valuation. 
• Given the higher revenue contribution from the Chennai SEZ's non-processing area and better realisation for the Jaipur SEZ's processing area, I expect MLD's EBITDA margin to improve to 55.2% by FY2010 from 14.3% in FY2007. Consequently, MLD's earnings would grow at a CAGR of 179.2% over FY2007-10.
• MLD also plans to develop space aggregating 2.7 mn sq ft over the next few years. MLD is also implementing the Tirupur Water Supply and Sewerage project through its subsidiary Mahindra Infrastructure Developers. It is a 30-year BOOT project and is expected to generate an annual income of Rs6-8 crore. 
• Given MLD's operational expertise in SEZ and premium brand in the other verticals, I value the Chennai and Jaipur SEZs and the other planned developments at 1.0x NAV of Rs 1,038 per share. I value the balance land for which its has no development plans in the short to medium term at Rs58 per share, i.e. at a discount to the current market price.
• I would recommend Buy option on MLD with a price target of Rs 1,096 with time frame of 6-7 months.

Coping with the unthinkable with Bettercare.com

The extremely volatile stock markets and roaring prices (of almost everything) would have given you sleep-less nights and deteriorated your health. They say, health is wealth. But in today's fast-paced lifestyle, one does not find time to take good care of one's health. However, proper care is a must for all - those having diseases or not having diseases. Sometimes, you should take precaution not to contract any deadly diseases and that needs expert assistance... It would be really great and helpful if one is aware of how to take better care of someone in a disease situation. This is exactly where today's resource hits bulls-eye! Bettercare.com is the one-stop resource for your needs on "caring" & how to take better care of anyone in almost any disease.

Bettercare.com is a dedicated service for anyone looking for specific answers to crucial questions about taking care of oneself. This site has been designed for easy navigation and operates on colour-coded channels. It provides excellent & scientifically accurate information on how to take good care of oneself, and also allows the user to Search various care homes, nursing homes as per locality or postcode.

It also presents real-time stories of real lives and how they benefited with help from bettercare.com's experts. I especially liked the Discussion & Reviews sections, which presents ongoing talk about safer homes / taking good care of elders, etc. This is a MUST for all those looking for accurate tips on taking good care of oneself and one's beloved. So check out bettercare.com now! This is an advertisement.

Q3FY2008 Banking Earnings Preview

• Last year, the cash reserve ratio (CRR) increased by 50 basis points to 7.5% effective from November 10, 2007, which should erode three to four basis points sequentially from banks' net interest margins (NIMs) during the third quarter of FY2008.
• Banks have discontinued their special deposit schemes and also cut deposit rates marginally. This together with some re-pricing of the bulk deposits at lower rates will restrict the escalation in the deposit costs sequentially. 
• The sequential increase in the incremental credit deposit has been sharp. With the lending rates mostly remaining firm, the yields on advances should provide some fillip to the NIMs on a sequential basis.
• The non-interest income growth is likely to remain strong and be driven by a higher treasury income, as both bond and equity markets performed well during the quarter. 
• The 10-year benchmark government bond yields have declined sequentially by 13 basis points. However, the yields at the shorter end for two-year and three-year bonds have declined by four and eight basis points respectively. Hence, some write-back in the mark-to-market provisions for the large public sector banks like Punjab National Bank (PNB), State Bank of India (SBI) and Canara Bank is expected. 
• Our top picks in the private sector remain Axis Bank and ICICI Bank, while in the PSU space we like State Bank of India, Bank of India and Bank of Baroda. In the non-banking space our pick is HDFC. 

Stock Idea - Jindal Saw

Recommendation: Buy

CMP = Rs 1,178

Price target: Rs 1,302

Key points:

• Jindal Saw, the largest pipe manufacturer in the country, has recently bagged a number of orders aggregating to $250 million. This takes its order book to around $850 million, and the same is executable by January 2009.
• For the quarter ended December 31, 2007, we expect the company to report a 4.2% decline in its net sales, as the US division was operational only till October 2007. I expect the net profits to rise by 19.3% to Rs 71.7 crore as the operating profit margin (OPM) is expected to improve to 13% from 11.4% in the same period last year.
• Improved outlook of the industry has also led to an expansion in the valuation multiples of the entire industry. I have valued the company on the sum-of-the-parts basis. In my opinion, the core business of the company is valued at 13x its CY2009E earnings and the investment value at a 75% discount to its current value.
• At the current market price of Rs 1,178, the stock is trading at 13x its CY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.9x.
• I maintain Buy recommendation on the stock with a revised price target of Rs 1,302.

Stock Idea - Ahmednagar Forgings

Recommendation: Buy (again!!!)

CMP = Rs 240

Price target: Rs 300

Key points:

• Ahmednagar Forgings Ltd (AFL) is making a preferential allotment of 17 lakh shares and 38 lakh warrants to its promoters at a price of Rs 240 to raise Rs 132 crore. The management expects to use the raised fund to buy assets such as forging lines. Some of the assets have already been identified and an announcement in this respect is expected in the next two-three months.
• This preferential allotment will lead to an equity dilution of 16%. The group has a history of frequent and large equity dilutions for acquisitions and expansions. However, the current dilution is aimed at enabling AFL acquire capacities at cheaper valuations and reach its planned capacity of two-three lakh tonne with no major future dilutions. 
• The company continues to have a strong order book. The expanded capacity of 165,000 tonne has become operational from December 2007 onwards.
• We have not incorporated the revenue and profit additions expected due to this dilution in our estimates. The acquisition would be positively accretive to the earnings. Consequently, we maintain our positive outlook on the company considering its strong order book position, capacity expansion plans and margin improvement due to a better product mix. 
• At the current market price of Rs 240, the stock trades at attractive valuations of 8.7x its FY2009E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.5x.
• I maintain strong Buy recommendation on the stock with a price target of Rs 300.

Stock Idea - Tata Chemicals

Recommendation: Buy

CMP = Rs 411

Price target: Rs 535

Key points:

• Tata Chemicals Ltd (TCL), the third largest producer of soda ash in the world, is set to benefit from the upturn in the soda ash cycle. A worldwide shortage of soda ash has pushed its prices up by 60% to $260-300 per tonne in the last six months. Since the supply of soda ash is expected to remain tight, its prices would stay firm going forward.
• TCL has recently added 365,000tpa of capacity at its Kenyan (Magadi) plant, which is the lowest cost producer of soda ash in the world. It is also planning to raise its Magadi capacity by another 365,000tpa to 1.1mmtpa by FY2011. It has also undertaken the debottlenecking of its Mithapur plant to raise the latter's capacity from 0.9mmtpa to 1.2mmtpa by FY2011.
• After the de-bottlenecking of the urea capacity to 1.2mmtpa by September 2008, the normative capacity utilisation would reach 145%. This would generate windfall profits for the company till capacity re-rating takes place in FY2011.
• IMACID JV to benefit from higher prices of phosphoric acid: Higher phosphoric acid prices due to a shortage coupled with a better pricing policy would further improve the profit margins for the IMACID joint venture.
• TCL's investment portfolio of Rs 775 crore (book value) is worth Rs 4,600 crore, which works out to Rs 187 per share. At the current market price of Rs 411, the stock is trading at 13.5x its FY2009E diluted earnings and an EV/EBIDTA of 6.6x. I value TCL's core business at 14.4x its FY2009E diluted earnings and investments at Rs 94.8 per share after discounting 50% of their fair value.
• I recommend Buy on the stock with a price target of Rs 535.