23/04/2013
Buy Titan Industries Ltd For Target Rs.338

Titan has reacted by 25% on regulatory concerns: Titan Inds has reacted by 25% due to regulatory concerns regarding Gold and Jewellery industry. These relate to 1) linkage of Gold on lease charge to PLR 2) lowering of credit period to 90 days 3) KYC norms for buying gold and jewellery above Rs50,000 and 4) quantitative restrictions on import of Gold or buying of jewellery. we await clarity on these guidelines, postponement will be positive.
Long-term jewellery demand growth to sustain: Organized sector accounts for just 10% of jewellery market in India. Aggressive expansion plans of regional retail chains will increase the brand awareness which will accelerate consumer shift towards brands and help players like Titan.
Retail space addition, Studded share to increase growth: Tanishq has increased its retail space by 80% since FY11, this  coupled with recent decline in Gold prices will accelerate volume growth. Tanishq is looking to increase studded share to 40% in the coming few years. This will boost profit growth as studded jewellery has 2.5-3x gross margins than Gold.
Watch margins have bottomed out: Watch margins declined 300bps since FY11 due to 1) depreciation of rupee impacting imports and 2) aggressive retail expansion in Helios. Worst seems over as Titan is developing local sources of components and retail expansion will start paying off; we expect 160bps margin expansion in watches over FY13-15.
Eyewear business on track; Titan Eye+ has seen only six store openings and 25% sales growth in 9MFY13 as the model is being readjusted. We expect the growth rates and store openings to accelerate in FY14.
Fastrack to achieve Rs10bn sales: Titan is also entering Helmets after launch of accessories and bags etc. under the Fastrack brand. Fastrack is expected to maintain high double-digit growth with expected sales of Rs10bn across watches, eyewear and  accessories.
Estimate 28% PAT CAGR over FY13-15; BUY: We estimate 23.7% increase in sales and 27% increase in PAT over FY13-15. Net Interest income is expected to rebound in FY15 after being flattish over FY10-14. We are factoring in 70bps increase in Gold lease charge. BUY
 

 Buy Sterlite Industries For Target Rs.148 


Sterlite Industries Q3FY13 results were below
street expectations dragged by poor performance of copper, aluminium and Energy businesses. Net Sales increased by 4.2% YoY (down 3.3% QoQ) to Rs. 107.37 bn, below Consensus of Rs. 110.47 bn due to lower than expected revenue from power and aluminium business. EBITDA margin slipped 74 bps YoY and 109 bps QoQ to 21.7% vs. consensus of 22.8% due to sharp contraction in margin of copper, power and aluminium business due to higher cost of production. Zinc and lead EBITDA margin also contracted due to increase in commodity prices, higher excavation costs & lower byproduct credits. Reported PAT increased by 30% YoY (down 31.6% QoQ) to Rs. 11.91 bn (vs. consensus of Rs. 13.98 bn) due to lower EBITDA and higher interest expenses. In the aluminium business, both BALCO and VAL reported losses to the tune of Rs 8 mn and Rs 266 mn respectively. Energy business incurred a loss of Rs.280 mn due to lower PLF.

Valuation
Sterlite has created a structure of well diversified, low risk organic growth for itself by undertaking expansion activities across all base metals under its portfolio and is stepping into the commercial energy space through merchant power generation. Further, the consolidation of Sesa Goa and Sterlite will create value for all shareholders. At CMP Rs 113 the stock is trading at 4.29x FY13E and 3.91 x FY14E EV/EBITDA. We maintain our buy rating on the stock with SOTP based target price of Rs. 145.
 

Buy Wipro Ltd For Target Rs.369


Wipro’s Q4FY13 results were below PLe/Consensus expectation. Moreover, seasonality and uncertain external environment prompted for a weaker-thanexpected guidance for Q1FY14. The company has started reporting IT Services business seperately. The company expands its client mining horizon. We reiterate “BUY”, with a revised TP (due to adjustment for the split) of Rs410 (from Rs480).
*  Q4FY13 below expectation, guidance factors in seasonality: Wipro reported another quarter of weak revenue growth of 0.5% QoQ (TCS: 3.2%, INFO: 1.4%, HCLT: 3.2%), led by volume growth of 2.5% QoQ (Onsite: 2.4%, Offshore: 2.5%). However, productivity declined by 2.8% QoQ and is weaker by ~2pp compared to peers. Moreover, the company guided for -0.6% to 1.6% QoQ growth which was attributed to seasonality and non-closure of deals in Q4FY13. The management was confident of a positive growth again in Q2FY14.
*  IMS – Leverage the strength: Wipro derives ~10% of revenue from IMS (managing assets); however, lags peers in terms of exploiting growth opportunities in the same. The company has been making proactive investments
in sales effort and also working closely with solution architect for the rebid deals’ opportunity. The management has identified those plausible opportunities over the next 18 months. We expect IMS growth to get stronge.
* Q1FY13 guidance weak due to seasonality, but expect a bounce‐back in Q2FY13: The company has guided for -0.6% to +1.6% QoQ growth. The weak guidance is largely attributed to seasonality in India and ME business. Moreover, there are few large deals’ decisions involving that got pushed to Q1FY14. The company expects to regain the growth momentum in Q2FY14. Q2 and Q3 are seasonally the strongest quarter for the company.
* Valuation & Recommendation – Retain BUY, Revise TP to Rs410: Management’s cautious tone for Q1FY14 was largely attributed to the uncertain environment and seasonality. We expect stable deal funnel, with improved win rate to drive growth in FY14. We reiterate “BUY” rating, with a revised target price of Rs410, 15x FY14E earnings estimate (20% discount to TCS).