10/04/2013

Buy Wipro Ltd For Target Rs.470 

Volume declined QoQ: Wipro's 3QFY13 volumes declined 1% QoQ v/s est of growth of 1.6%; impacted by seasonality and attempt to drive higher productivity. However, pick-up in deal signings partly alleviates concerns.
* PAT higher than estimate: Revenue at USD1,577m and IT Services EBIT margin at 20.2% (after adjusting for ERF) were in line, despite low volumes, due to realization improvement of +3.2% QoQ CC onsite and +3% QoQ CC offshore. However, PAT at INR17.16b beat our est (INR15.95b) on higher other income (INR3.4b v/s est of INR2.3b) and lower tax rate (21.9% v/s est of 23%).
* Guides 0.5-3% QoQ growth for 4QFY13: Prospects of growth revival remain afloat due to [1] better deal closures in 3QFY13 v/s 2QFY13,[2] 1.7x increase in the deal pipeline YoY, 2x increase in the number of large deals in the pipeline YoY. Guidance of 0.5-3% QoQ growth in 4QFY13 is due to low activity levels in 4Q amid budget finalizations, limiting visibility on ramp-ups.
* Current margins should sustain: Wipro's IT Services EBIT margin has stayed in a tight band of 20-21% as lower utilization (at historical lows), and higher SGA have offset currency and productivity tailwinds. We see current margin levels sustainable, given levers of productivity and utilization going forward.
* Upgrading estimates marginally; Buy: Post the 3QFY13 results we have upgraded our EBIT margin est by 20bp/90bp and our EPS est by 2.7%/2.3% for FY14/FY15 to factor in the improved productivity. While uninspiring volume growth has kept the valuation multiple for Wipro in check, we see some traction in revenues, going forward. Wipro's recent announcement of demerger of non-IT business will: [1] improve RoCE by over 3pp, and [2] sharpen focus on IT Services. Maintain Buy.
 Buy ICICI Bank For Target Rs.1,400

Set for the next leap
Expect earnings CAGR of 23%+; Rising RoEs to drive more re-rating
* ICICI Bank (ICICIBC) is expected to deliver EPS CAGR of 23%+ over FY12-15E, on a higher base of 25%+ over FY10-12, driving up the core RoE from ~10% in FY10 to 17%+ in  FY15E. Importantly, the Tier 1 would remain strong at 10%+ at end-FY15.
* With a market share of 4.2% in the domestic loans and largest branch network in the private financials, above industry growth and favorable margins will drive earnings.
* ICICIBC has managed the asset quality well during the last 18 months of pain in the Indian economy. While FY14 will be critical to see the fate of few large exposures, the bank is confident of tiding over this without any dent on its profitability. Recovery in Indian economy / corporate capex will be viewed positive for ICICIBC.
* Valuations for ICICIBC will evolve as it delivers RoE improvement over the next 2 years (to come at the near sector averages). Importantly, it will have scope to further boost its leverage as capital may get boost from return of capital by key subsidiaries.
Subsidiaries transform from being guzzlers to capital providers to parent
ICICIBC has not infused any capital in its subsidiaries for the past three years. Corrective measures and consolidation has led to significant CRAR improvement for ICICI UK and ICICI Canada. Presently, most of the bank's subsidiaries have become self-sufficient. In the medium term, listing of life insurance business [capital support of INR49b (our estimate) under Basel III] and repatriation of capital from international subsidiaries will reduce capital charge ensuring dilution-free growth.
Core operations improve decisively, core RoE to reach 17%+ by FY15E
ICICIBC's risk adjusted margins (RAM) have improved sharply from a low of 1% in FY10 to 2.2% in FY12, led by a 95bp fall in credit cost and 25bp by margins improvement. Despite lower growth in fee income, continuous margin improvement (~50bp over FY12-15) and strong asset quality performance will translate into strong RoA's of ~1.7% and core RoE is expected to improve to 17%+.
Significant improvement in asset quality in challenging times
Even in challenging times, ICICIBC exhibited strong performance in asset quality, with GNPA percentage declining over the past 10 quarters and provision coverage ratio increasing from 53% in FY09 to 79% in 1HFY13. With retail delinquencies at its historic lows credit cost estimates of average 70bp over FY13E-15E, compared to 40bp in FY12, is conservative and factors the higher stress in corporate portfolio
leaving lower downside risk to our estimates.
Structural changes to ensure higher return ratios; valuation attractive
Return ratios are on an upward trajectory and structurally core operations of ICICIBC has improved significantly, which would enable it to sustain the ratios. Further unlocking of value from subsidiaries could lead to re-rating of the stock. ICICIBC trades at near five-year average valuation, which is unwarranted considering expected improvement in growth and RoE. Maintain Buy.
 



 Buy Shalimar Paints Ltd For Target Rs.153.00


Shalimar Paints Ltd has wide range of products in Decorative, Architectural & Industrial segments & also in Architectural Coatings covers both Interior & Exterior segments.
* During the Second quarter ended, the robust growth in the Net Profit of the company and it is rose by 23.75% to Rs. 46.90 million.
* The Company has posted net sales of Rs. 1437.80 million for the quarter ended December 31, 2012 as compared to Rs. 1254.30 million for the quarter ended December 31, 2011.
* Shalimar introducing the Thermal barrier coatings for the purpose of buildings.
* Shalimar approved sub division of the existing equity shares of the face value of Rs.10/- each into 5 equity shares of the face value of  Rs.2/-
* The Company installs tinting systems in various retail outlets across the country with a view to increase the demand for high value  products, especially water-based products.
* The Company has a nationwide distribution  network with 3 Regional Distribution Centers (RDCs) & 55 depots servicing 5,000+ dealers.
* Net Sales and PAT of the company are expected to grow at a CAGR of 16% and 19% over 2011 to 2014E respectively.
Investment Highlights
Results updates- Q3 FY13,
Shalimar Paints Ltd is one of the leading paints manufacturing companies of India, reported its financial results for the quarter ended 30th Dec, 2012. The Third quarter witnesses a healthy increase in overall sales as well as profitability of the company.
The company’s net profit jumps to Rs.46.90 million against Rs.37.90 million in the corresponding quarter ending of previous year, an increase of 23.75%. Revenue for the quarter increase 14.63% to Rs.1437.80 million from Rs.1254.30 million, when compared with the prior year period. Reported earnings per share of the company stood at Rs.2.47 a share during the quarter, registering 75.25% decrease over previous year period due to change in face value from Rs. 10.00 to Rs. 2.00. Profit before interest, depreciation and tax is Rs.117.40 millions as against Rs.97.20 millions in the corresponding period of the previous year.
Outlook and Conclusion
* At the current market price of Rs.136.00, the stock P/E ratio is at 14.87 x FY13E and 12.99 x FY14E respectively.
* Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.9.15 and Rs.10.47 respectively.
* Net Sales and PAT of the company are expected to grow at a CAGR of 16% and 19% over 2011 to 2014E respectively.
* On the basis of EV/EBITDA, the stock trades at 6.87 x for FY13E and 6.03 x for FY14E.
* Price to Book Value of the stock is expected to be at 3.18 x and 2.55 x respectively for FY13E and FY14E.
* We expect that the company surplus scenario is likely to continue for the next years, will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.153.00 for Medium to Long term investment.