How did the IT sector fare in April-June quarter?

Excerpts from Igate's CEO Phaneesh Murthy on:

The first quarter (April-June FY11) earnings season has come to an end. In Q1FY11, the key takeaways from Q1 for the IT sector are:

- Volume momentum is strong with sequential volume growth of 5-9% quarter-on-quarter by Tier I companies.

- Strong demand outlook on better pipelines.

- More or less stable pricing.

- Positive outlook on enterprise IT spending.

- Signs of discretionary spending looking up.

- The problem vertical remains telecom.

- The manufacturing vertical shows signs of improvement.

- There is good performance from the US region and BFSI (banking, financial services and insurance) vertical.

- Europe continues to be in wait and watch mode. There is a disconnect between the macro and micro situation in Europe.

Concerns:

- The increase in attrition for all companies.

- Increasing probability of wage hikes across the industry.

- Lack of pricing power, and difficulty to pass on cost increases.

- Tier-I companies are better placed to absorb cost pressures.

- The mismatch between growth expectations led to company maintaining lower benches.

Strong lateral hiring led to higher attrition. Another wage hike in FY11 is not anticipated. Growth, was mainly on the back of IT budgets, pent-up demand, and low hiring. "Demand was stronger than expected for IT services.

US Inc is not hiring due to fears from a double-dip recession in Q3 & Q4.

Pricing environment is stable currently.

India's growth story catching the fancy

India's growth story has caught the fancy of many foreign investors around the world. Otherwise what would explain the surge in the Indian stock markets in the past one year. Since it is evident that the developed world will take some time to recover, global investors are looking at other attractive destinations to generate returns. And the scope of growth in India has led many of them to make a beeline for the Indian shores.

Including the billionaire financier George Soros. As per reports, Soros is in late stage talks to buy a 4% stake in the Bombay Stock Exchange (BSE). Soros Fund Management plans to buy Dubai Holding's stake for about US$ 40 m, valuing the bourse at US$ 1 bn. With much of the exciting action having shifted from the West to the East, particularly India and China, Soros sure does want to have a piece of the pie.

SKS Microfinance IPO - Should you subscribe?

SKS Microfinance, India's largest MFI, taps the market for further expansion. The price band for the issue is at Rs.850-985 per share. Book will be remained open till July 30 for QIBs and August 2 for retail & non-institutional investors. Bids can be made for a minimum of 7 equity shares and in multiples of 7 equity shares thereafter. A discount of  Rs.50 per equity share is being offered to applicants in the retail category.

This issue has been graded by CARE as CARE IPO Grade 4 indicating above average fundamentals through its letter dated June 23, 2010.

SKS Microfinace has got 36 anchor investors including some of the big names like Soros, Credit Agricole, Reliance AMC, Birla Sun Life AMC and ICICI Pru Life. The company has secured about Rs 300 crore (USD 64 million) in the process as against allocation of 30 lakh shares at Rs 985 per share.

SKS Microfinance is the largest MFI in India in terms of total value of loans outstanding, number of borrowers (members) and number of branches, according to the October 2009 CRISIL report titled India Top 50 Microfinance Institutions.

The total loans outstanding increased at a CAGR of 162.9% from Rs.78 Cr as of March 31, 2006 to Rs. 142 Cr as of March 31, 2009.

The IPO comprises of a fresh issue and offer for sale for augmenting the capital base to meet the future capital requirements. SKS has expertise in Microfinance and have been focused on lending to poor women in India. It has a superior asset quality. As of March 31, 2010 its net NPAs, was Rs 48.03 million or 0.15% of loans outstanding. It has a scalable operating model and looks to increase its customer base and ticket size in future.

Investment Rationale:

At the lower price band, the stock is priced at 35x trailing FY10 EPS and 6.4x post issue book value. This looks a bit expensive, compared to Global MFIs which are trading in the range of 3.5-4.5x their book value. However, the company has a very robust business model, strong margin profile and return ratios and low NPA’s. Apart from that Government's focus on NREGA can generate the interest for this stock.

Tech Mahindra Q1-FY11 results

Tech Mahindra's Q1-FY11 consolidated net profits came in at Rs.144 Cr as compared to Rs.132 Cr, quarter-on-quarter. Its consolidated net sales were up at Rs. 1,134 Cr as against Rs. 1,113 Cr Q-o-Q. 

The margins are down this quarter due to 3 factors. One is currency, weak Sterling had a major impact. The second is manpower utilization went down to 69%and third factor is higher cost with the lower revenues. 

For the next quarter, certainly with the salary increases coming in, there is going to be pressure on margins. But the flip side of the exit of this quarter is that with the utilisation levels at 69%, they have quite a lot of headroom there as well as the fact that hiring of Freshers company is looking to push up the revenues and therefore leverage the cost. This might mitigate the impact of the salary increases to a large extent.

Q1-FY11 RIL Results Inline with Expectations

Mukesh Ambani group's flagship company Reliance Industries (RIL) has announced its results for the quarter ended June 2010. 

It has reported net profit at Rs.4851 Cr as against Rs.3636 crore, a growth of 33.42% on y-o-y basis.

Net sales jumped 81.65% to Rs 58,228 crore from Rs 32,055 crore. Numbers were in-line with expectations; 

CNBC-TV18 expected net sales at Rs 59,300 crore and net profit at Rs 4820
crore.

*Refining revenues increased 106.81% to Rs 50,531 crore from Rs 24,434 crore and petchem revenue rose 18.8% to Rs 13,903 crore from Rs 11,707 crore (YoY).
*Petchem earning before interest & tax (EBIT) declined to Rs 2,053 crore from Rs 2,109 crore while refining EBIT jumped to Rs 2,035 crore from Rs 1,299 crore.
*Petchem margins were at 14.8% and refining margins at 4%.
*Operating margins stood at 16%.
*Gross refining margin (GRM) came in at USD 7.3 a barrel.

RBI's Optimistic about India

The RBI has revised the repo rate upwards by 0.25%. On the other hand the reverse repo rate (rate at which banks lend to RBI) has been hiked by 0.5%.
This means that the RBI wishes to persuade banks to borrow less from it and instead keep more money with the RBI. 

The obvious impact of this will be in the form of liquidity being sucked out from the banking system. 

One notable factor in this review is the non mention of fiscal deficit. The bumper 3G telecom auctions and fuel price hikes seem to have completely addressed that concern. 

Thus, while the RBI's tone seemed to be far more optimistic on the domestic scenario, inflation stuck out as the grey area.

Hero Honda

Hero Honda reported healthy growth on a high base of last year in the two wheeler pack, with a 16.6% Y-o-Y volume increase in June to 4,26,454 units (3,65,734 units). Bajaj Auto led the pack with stellar growth of 63.3%, owing to a low base and on the back of its key brands, Pulsar and Discover, performing exceedingly well. TVS Motor reported 37.4% Y-o-Y growth due to strong growth registered by all its segments. The recently launched TVS Jive (launched in Tamil Nadu) and TVS Wega supported high volume growth in the motorbike and scooter segments.

Tata Motors

Tata Motors reported robust 49.2% Y-o-Y growth in total volumes, with the passenger vehicles (PV) segment leading with 68.1% Y-o-Y growth during the month. Growth in the PV segment was aided by the 82.1% Y-o-Y increase in the cars category, as Manza continued to register good volumes. The commercial vehicles (CV) space grew by 37.4% on the back of strong growth in the medium and heavy commercial vehicles (M&HCV) segment, which grew by 50.1% Y-o-Y. Exports also boosted the company's performance as it reported 138% Y-o-Y growth partially due to a low base.

Mahindra & Mahindra (M&M)

Mahindra & Mahindra (M&M) reported muted growth of 7.1% Y-o-Y in total sales to 44,152 units (41,243 units) in June, aided by 19.8% Y-o-Y growth in auto volumes. The utility vehicle (UV) segment declined by 3.6% Y-o-Y to 17,010 units (17,653 units) during the month, mainly on account of supply constraints (fuel injection system, casting and tyres) from auto component manufacturers. However, the three-wheeler segment, including the newly launched GIO and Maximmo, posted robust 125% Y-o-Y volume growth to 7,559 units (3,357 units) in June. Domestic tractor sales declined by 13.5% in June, as the company continues to experience supply constraints for casting and tyre components. M&M performed exceptionally well on the exports side, growing nearly 175.7% Y-o-Y on an overall basis.

Maruti Suzuki

Maruti Suzuki (Maruti) recorded strong sales growth of 17.3% Y-o-Y to 88,091 units (75,109 units). This includes 15,279 units of exports, up 14.6% Y-o-Y. In June, Maruti sold 72,812 units in the domestic market, up 17.9% Y-o-Y. Maruti continues to grow at a strong pace in the domestic A3 segment, posting 32.5% growth in June. The A3 segment comprises the popular models SX4 and Dzire. Management is also optimistic about its prospects in the C segment, which grew by 43.9% Y-o-Y. The new launch Eeco also gave a boost to its C segment during the month.

Outlook for the AUTO Sector

Auto sales continued to grow on a fast track in June 2010 on the back of positive consumer sentiment and buoyant economic activity. Tata Motors, Bajaj Auto and TVS Motors continued to perform impressively, recording strong monthly sales during the month. Robust growth across the segment continued with demand surpassing supply in few segments with vendors' capacity being stretched out. This is despite the fact that most auto majors increased their prices, passing on the cost impact to consumers, owing to high commodity prices, changes in emission norms and excise duty hike. Pickup in economic activity kept auto demand strong, albeit it remained more normalised across segments, considering price hikes post the excise duty hike, change in emission norms and spurt in raw material prices.

FII Activity

The growth opportunity that India presents has not lost on the foreign investors as yet. They continue to pour money into the Indian markets. As per latest data, FII investments into India have touched almost Rs 390 bn in 2010 till date. This is nearly half the sum (Rs 830 bn) that they poured into Indian stocks in the whole of 2009.