26/02/2013


Buy GAIL (India) Ltd.

Outlook
Backed by the bleak outlook on gas supplies, likely cut in tariff and no near-term growth triggers, we remain neutral on GAIL. The company is likely to be impacted negatively in FY14/FY15 by higher depreciation and interest expenses, which will offset earnings growth from increased petchem capacities and gas transmission volumes. Consequently, we expect transmission and trading volumes to remain flat for the next one year. With no major near term triggers, we expect GAIL to move sideways in the
near term. At the CMP of Rs 338, the stock is currently trading at 9.0x and 7.9x of its FY14E and FY15E earnings estimates and we maintain HOLD on the stock.
Key Takeaways
• GAIL’s net profit for the third quarter increased by 18% to Rs.1,285 crore against Rs.1,091 crore in the corresponding period previous year. The Gross Margin increased by 19% to Rs.2,156 crore in the third quarter of the current financial year against Rs. 1,816 crore in the corresponding period last year. The PBT increased by 16% to Rs.1,859 crore in the third quarter of the current financial year against Rs.1,598 crore in the corresponding period last year. PAT was up by 18%, while on a nine month basis it was up by 7%.
• GAIL’s Gas trading business registered a robust performance with revenues increasing by 10.6% to Rs 10118.0crore on account of increase in pricing. The volume for the quarter was down by 3.7% yoy to 81.8 mmscmd. Lower gas volumes for domestic sources and limitation on re gas capacity led to the lower volumes. The gas trading margins declined to 3.0% from 3.5% reported in the previous corresponding quarters.
• Natural Gas transmission volumes declined by 12.2% yoy to 104.59 mmscmd as against 119.06 mmscmd in the corresponding quarter last year. However, the revenues stood flat at Rs 990 crore v/s Rs 1087 crore reported in Q3FY12. EBIT of the segment declined by 0.2% yoy to Rs 620 crore v/s Rs 621 crore in Q3FY12.
• LPG transmission business registered negative revenue of Rs 81 crore as against Rs 122 crore in the corresponding period last year. Consequently, the EBIT of the segment declined at Rs 13.3 crore v/s Rs 77.5 crore reported in Q3FY12, impacting overall profitability.
 Buy Tech Mahindra Ltd For Target Rs.1,225


Tech Mahindra Ltd is part of the USD12.5b Mahindra Group. Company is one of India's largest software exporters and serves telecom service  providers, equipment manufacturers, software vendors and systems integrators, having offices in over 13 countries. It employs over 49,000 people and its key clients include British Telecom and AT&T.
Key investment positive
* Deal pipeline is healthier than that in the past couple of quarters and the environment has steadied in comparison to the gloomy outlook in the
recent past. Deal activity is strong in verticals like healthcare, while manufacturing is steady. BFSI is seeing deals around risk, governance
and compliance.
* Satyam's acquisition will help Tech Mahindra to diversify its client base and industry focus. Large deals like those of Bharti and a gradual revival in the telecom vertical will help volume growth. Deals have kept growth coming (outside the BT account) despite challenged IT budgets in the telecom vertical.
* Pent up demand in discretionary spending is reasonably high, which could compound to the improving outlook, potentially driving better
growth in FY14. As of now, a lot of deal activity is around IMS and Enterprise related work.
* We expect TECHM to post USD revenues (ex-Satyam) at a CAGR of 10.3% over FY13E-15E. In line with the company's guidance, we factor a decline in BT revenues for the next two quarters followed by stable revenues there on. TECHM's continued impressive execution on the profitability front keep us sanguine on margins. We upgrade FY14E/15E EBITDA margin estimates by 97bp/142bp. Higher margins drive  1%/5.5% increase in our EPS estimates over FY14E/15E.
Valuation and View:
The stock trades at 10.3x FY14E EPS and 9.0x FY15E EPS. We value TECHM at a 25% discount to our target multiple for HCLT due to: [1] relatively smallerscale, [2] skew of revenues towards telecom vertical and [3] increasing proportion of BPO revenues. Our target price for TECHM is INR1,225, which discounts FY15E EPS by 10.5x
  Buy Wockhardt Ltd.


Outlook
Wockhardt surprised the street with a stellar performance on the back of higher than expected revenues from its US business The company is targeting to file 15-20 ANDAs and launch 15+ products every year in the US market, which would help sustain its growth momentum. Despite contribution of Toprol XL being lowered this quarter EBITDA margins have seen an uptick indicating improvement in base business margins. At the CMP of Rs 1,916, the stock is currently trading at 13.3x and 11.8x of its FY14E and FY15E earnings estimates and we
maintain a BUY rating o n the stock.
Key Takeaways
• For yet another quarter, Wockhardt surprised the street with stellar performance registering a strong growth of 26% in net sales to Rs 1,435 crore v/s Rs 1141 crore registered in the previous corresponding quarter. This was primarily driven by strong EBITDA margins, which improved by 860bps (38% v/s 29.3% QoQ).
• The US business was the primary contributor to the growth. Backed by the key product launches with limited competition like Prevacid, Geodon, Stalevo, Comtan, the US business grew at 45% yoy leading to a 26% growth on a constant currency basis. The company's top EU business (excl France) grew 14% yoy mainly driven by UK operations. France business, however, declined 50% yoy.
• The domestic formulations business recovered from a weak performance of the past few quarters and grew 14% yoy in Q3FY13. On completion of the current restructuring activities, growth is expected to pick up.
• The company is ramping up its market share in niche products like Flonase, Comtan & Staleveo, Lamictal- XR and other new launched products like Plavix, Geodon, Wellbutrin & Precevid
  Buy Gitanjali Gems Limited for Target Rs.642.00






Gitanjali Gems is one of the largest integrated diamond and jewellery manufacturers and retailers in India.
* Gitanjaligifts.com, by Gitanjali Group bagged the prestigious Indian e-Retail Awards 2013 by Franchise India & Retailer Media’s Retailer Technology Awards 2013.
* Gitanjali Gems Ltd has posted a net profit of Rs. 1721.75 million for the quarter ended December 31, 2012 as compared to Rs. 1288.61 million for the quarter ended December 31, 2011.
* Revenue for the quarter of Gitanjali Gems Ltd increased 23.50% to Rs.43549.80 million from Rs.35262.75 million, when compared with the prior year period.
* Gitanjali acquires leading Indian Jewellery Brands Nirvana and Viola.
* Gitanjali is strategically present in the global leading jewellery markets of the world, viz., USA, Japan, China, Mid-East and India.
* Net Sales and PAT of the company are expected to grow at a CAGR of 28% and 31% over 2011 to 2014E respectively.

Investment Highlights
Results updates- Q3 FY13,
Gitanjali Group's operates from sourcing of rough diamond, cutting, polishing and distributing, to jewellery manufacturing, which includes  designing, mould making, wading, casting, spruce grinding, filing, polishing and setting, reported its financial results for the quarter ended 31 Dec, 2012. The Second quarter witnesses a healthy increase in overall sales as well as profitability on account of launch of a unique and innovative Gold & Diamond ATM machine, which is a one stop shop for buying medallions, coins, jewellery etc.
The company’s net profit jumps to Rs.1721.75 million against Rs.1288.61 million in the corresponding quarter ending of previous year, an  increase of 33.61%. Revenue for the quarter rose by 23.50% to Rs.43549.80 million from Rs.35262.75 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.18.70 a share during the quarter, registering at 32.24% increase over previous year period. Profit before interest, depreciation and tax is Rs.2994.94 millions as against Rs.2001.99 millions in the corresponding period of the previous year.

Outlook and Conclusion
* At the current market price of Rs.568.00, the stock P/E ratio is at 8.25 x FY13E and 6.70 x FY14E respectively.
* Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.68.88 and Rs.84.76 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 28% and 31% over 2011 to 2014E respectively.
* On the basis of EV/EBITDA, the stock trades at 4.22 x for FY13E and 3.43 x for FY14E.
* Price to Book Value of the stock is expected to be at 1.40 x and 1.16 x respectively for FY13E and FY14E.
* We recommend ‘BUY’ in this particular scrip with a target price of Rs.642.00 for Medium to Long term investment.
  Buy Cummins India For Target Rs.585


The initial traction in LHP exports has been encouraging and the revised expectations  are that revenues could potentially increase to INR20b pa in the next 4-5 years (v/s the earlier expectation of INR12b).
* The strategy for domestic power generation markets would be: 1) to defend market share in MHP/HHP segments and 2) launch new products in the LHP segment (and the attempt is to increase channel density, broaden retail network etc).
* Cross service charges will be recovered by the parent company from Jan 2013, and while the amount is still under discussion, the impact is likely at INR100-200m/quarter (4-8% of PBT by FY14).
We attended Cummins India's (KKC) analyst meet and also visited the HHP engine manufacturing plant at Kothrud, Pune. The key takeaways are:
* LHP exports show increased traction: The initial traction in LHP exports has been encouraging and the revised expectations are that revenues could potentially increase to INR20b pa in the next 4-5 years (v/s the earlier expectation of INR12b). The key markets are Middle East and South Africa, and India is being established as a global hub for such products. The powergen factory (for Urja Gensets) will be commissioned in April/May 2013. Exports in 3QFY13 were impacted given the ongoing inventory correction and the trend has now  normalized.
* Domestic power generation to be supported by price increases/LHP products:- The strategy for domestic power generation markets would be: 1) to defend market share in MHP/HHP segments and 2) launch new products in the LHP segment (and the attempt is to increase channel density, broaden retail network etc). LHP products could be important growth drivers, going forward.
* Cross service charges at 4-8% of FY14 PBT: Cross service charges will be recovered by the parent company from Jan 2013, and while the amount is still under discussion, the impact is likely at INR100-200m/quarter (4-8% of PBT by FY14). These charges pertain to support like product/marketing/HR related services etc and are separate from technical support, which is being recovered through royalty.
* Margins supported by twin trends of currency movements and declining commodity prices: Margin expansions witnessed in 3QFY13 to 19.1% are largely driven by value engineering, cost rationalization programs etc. However, given the volatility in commodity prices, unfavorable currency movement etc, management stated that EBITDA margin could possibly decline by 50bp, going forward.
* Valuation and view: We model revenue growth of 11%/16%/17% in FY13E/ 14E/15E and EBITDA margin of 18.8%/19.4%/19.5% (FY12 16.9%). On current estimates, KKC trades at 20x FY13E, 17.4x FY14E and 15.3x FY15E. Maintain Buy with a target price of INR585 based on 18x FY15E EPS.