Mphasis Ltd
The story of Mphasis largely remains unchanged. Nevertheless, the company has reported a really good quarter. Topline grew by 26% compared to Oct 08 and bottom line grew by 34% as compared to the same period. Since the previous year was just a seven month year, the annual numbers dont offer a sound basis of comparison. Although the annual results have been appended.
Ever since the acquisition by HP, there has been tremendous changes in the company in terms of aligning its cost structures. The operating margins when compared to last year's average show a difference of almost 10%, with current year's margin at 26%. This bout of profitability is also seen on account of new high value contracts which have come their way through generic sales growth as well as most of the contracts which have been gained due to the association with HP.
In terms of geographical segmentation 64% revenues is derived from the US, 20% from EU and APAC and middle east contributes to 16% of revenues. The company added 771 employees this quarter, which is mainly on account of its acquisition of AIG's captive unit in October 09. The effect of the acquisition will only be apparent from Q1 of the forthcoming financial year. Total employee addition this year was 4,721 which takes the count to 33,524. One remarkable thing is that HP, in their conference call have admitted to reducing 19,000 EDS
employees so far. As per their own estimates they are still 6,000 employees shy of rationalizing their cost to offshore the work to low cost destinations. Also HP's influence, like we mentioned earlier, has helped them gain a large proportion of their contracts. This quarter Mphasis won 16 contracts out of which 13 were on account of its HP relation.
On its hedging policies, the company is conservative and has outstanding hedges of $500 Mn @Rs. 49. They have increased their hedging length for the next two years which speaks a lot about the company's confidence in sustaining those amounts of revenues. One of the newest things they have entered into is to sell licensed products for the healthcare industry. Javelina is the newest product launched by a foreign subsidiary which embarks a new line of work for Mphasis.
Currently HP is also one of Mphasis' clients which contributes to 12% of revenues. This business is not a growth business since it caters to HP's internal IT requirement and the parent is consolidating its IT expenses to rationalize its IT spend. Most of the work that it might enjoy would be from independently won contracts.
The current strategy of the company is to focus on getting more and more business within HP and with HP and at the same time explore more low cost destinations outside of India.
Expectations and Assumptions
Its always imperative to identify ones expectations and assumptions while looking at any business and its future prospects. The case with Mphasis is that it has a very influential trigger for growth, being under the shade of its parent. A lot of go-to market business that they get on their own still needs to catch up with the kind of business they get due to its parent's influence. There is a probability that this expectation is already embedded in the price.
Operating costs have been rationalized from mid 70's to ~63%. Since the business is scaleable and a lot of employees have been cut loose in the past year in the industry as a whole, supply side issues tend to be less going ahead. But of a ten year expectation of how this company is destined to perform, there is a greater probability that it can meet some important value triggers like improved sales and maintaining rational operating expenses.
Mphasis operates in several of the same verticals in which most of the Indian IT companies operate. Looking at it from a competitive scenario, it has been the case that as you grow in size and scale, the reach of your contracts increases in terms of the nature of contracts being served. As more variety kicks in the portfolio, there is an improvement in capability and skill (in man hours spent on projects). At the same time, the competition also grows at its own pace, overlapping onto each other's territories. Although we can observe the number of competitors that have an advantage of being a subsidiary of one of the largest tech firms in the world. Synergies from such association coupled with higher
scale are only to be seen as we go ahead.
Valuation
Mphasis trades at 15times (TTM). The argument remains the same and we believe that a lot of growth is still being conservatively looked at. We would like to restate what we said in the last quarter, "From a purely business
perspective, the outlook seems to be brilliant with assured incremental business from the parent & at the same time other growth drivers like improvement in utilization as well as an overall improvement in volumes & business mix. This
attracts an enviable certainty of growth." One risk factor which is not about the business would be, that a lot of people are intently focused on the stock which
might be immensely useful in the short run, but might compromise the 'stock's' performance in the long run because of extreme shifts in expected returns. In that case it would be even better to own more of it, when that happens.
ICICI Bank Ltd
INVESTMENT RATIONALE
ICICI bank reported net profit of Rs. 1061 Crore during Q2FY10 in line with our expectations. During Q2FY10 bank reported a net profit of Rs. 1061 Crore as compared to Rs.1015 Crore in Q2FY09 a increase of 5% (yo-y). Key triggers for bank out performance were higher due to expansion in advances, Boost up in corporate activity and higher fees on distribution of third party financial products, stability of Net Interest Margin,. Net Interest Margin continued to increase from 2.40% in Q2FY09 to 2.50% in Q2FY10.
Key Developments
• Bank has capital Adequacy Ratio (CAR) of 17.7% and Tier I capital at 13.3% at the end of Q2FY10.
• Treasury income stood at Rs. 297 crores compared to loss of 153 crores in Q2FY09.
• Dividend income increased to 102 crores clocking 148% on y-o-y basis compared to 41 crores in Q2FY09.
• Bank has home loans both in its own book as well as in ICICI Home Finance Company, its 100% subsidiary.
• Retail book consists of 45% of the total advances of the bank. Within retail home loans constitute 57% of the book.
• Credit deposit ratio is 75% on the domestic book of the bank as on 30 September 2009.
• Book value per share of the bank by end of Q2FY10 is ~Rs. 460 as on 30 September 2009.
• Net retail NPL contribute to 66% of the total NPL. The unsecured retail exposures contribute to 38% of the total NPL.
• Capital adequacy ratio of ICICI Bank UK is 16.6% and that of ICICI bank Canada is 23.2%.
• The spread in overseas operations is just 50 basis points because of both high cost liability mix and low yield asset book.
• ICICI General continues to maintain market leadership position in the H1FY10 among the private sector players.
Moderate Business Growth
The total business has decline by 4.8% to Rs.3,66,374 crore in Q2FY10 as compared to Rs.3,84,970 Crore during Q2FY09. Advances have decline by 14% to Rs.1,90,860 crore in Q2FY10 as compared to Rs.2,21,985 Crore during Q2FY09 and deposits decline by 11% to Rs 1,97,832 Crore in Q2FY10 as compared to Rs.2,23,402 Crore during Q2FY09. Advances decline on the back of cautious lending in retail loan which now constitute 45% of the banks advances while deposits decline on the back of lower wholesale deposit rates.
Valuations
At current price of Rs 908 the stock is trading at 1.89x FY10E BV of Rs. 480 and 20.63x FY10E EPS of Rs. 44. We believe that ICICI bank core business performance is on the right track to achieve their strategic goal of ~15% RoE in the next three years. The improved market conditions have helped the subsidiaries in increasing their profitability except in life insurance business on y-o-y basis. Excellent execution Capability of the bank in rolling out strategies; 2) Improving asset quality; 3) Excellent liability franchise 4) Embedded value of
subsidiaries.
We recommend a "BUY" on the stock with a 6 month target price of Rs. 1051 giving an upside potential of 20% from current level.
HIND DORR OLIVER
Projected price – Rs.225 plus
Hindustan Dorr Oliver (HDO) is an EPC company primarily focussed on providing engineered solutions, technologies, and EPC installations in liquid-solid separation applications. HDO has, over decades, positioned itself as a dynamic component engineering company, with superior technologies to emerge among leading process equipment and plant engineering companies in India. With engineering skills across the entire spectrum of services, HDO is engaged in research and development of new products, processes and technologies to design, construct, install, erect, and commission systems on complete EPC basis.
Its expertise lies in providing turnkey solutions and Engineering Procurement and Construction (EPC) services in liquid solid separation applications in industries such as mineral processing, fertilizer and chemical and environmental management.
The strong brand equity enjoyed by the parent company (IVRCL) in terms of its track record and presence across infrastructure segments has helped HDOL tap its esteemed client base. The enhanced financial strength has helped HDOL to bid for big ticket size projects which have better yields.
The company has in-house engineering strength and construction division supported by the manufacturing facility at Vatva, Ahmedabad for proprietory equipments. The facility is capable of manufacturing all types of industrial filters for pulp and paper industry, sugar industry, chemical industry and minerals industry. It also fabricates equipments like pressure vessels, heat exchangers etc. for petrochemical refineries and process industries.
The company is currently setting up a manufacturing facility in Chennai for which it has identified land. It is also looking at several other opportunities in coal washeries, iron ore beneficiation, pelletisation plants and nuclear power.
HDOL made a major breakthrough by winning an order worth Rs.441 crore from the Uranium Corporation of India (UCI) for a processing plant in FY'09. It recently received board approval to execute projects relating to nuclear power plants and allied activities. This segment, together with new areas such as equipment for material handling and components for oil and gas space, could be the new driver of revenue going forward.
The current order book of over Rs 1,600 crore can be expected to be executed over the next 18-24 months and around 70% of the orders are from government. This order book is 3x FY'09 revenues of Rs. 513 crore.
BUYING IS ADVISED FOR MEDIUM TERM. LONG TERM INVESTORS WITH 18-24 MONTHS TIME FRAME CAN EXPECT A 100% RETURN.
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