[Investors Please Listen] View from Research Desk on February 27, 2009

Mphasis reports Q1FY10 results today. Our expectations

Mphasis will declare its Q1FY10 results during market hours today. We expect Mphasis to report revenues of Rs 8840 mn and operating profits of Rs 1832 mn (EBITDA margins of 20.7%). Net profits are estimated at Rs 1261 mn.  We do not have comparable nos on a quarterly basis or a yearly basis on account of change in accounting year for the company (Co has changed its financial accounting period to Nov-Oct cycle from April-March earlier in inline with HP's policy).  We highlight that Mphasis had reported 1 month numbers for Oct'08 in late November'08 where it had reported operating profit margins of 26.5%.  Though our current estimates for the coming results build in margins at 20.7%, we believe that results could be far ahead of our estimates driven by favorable impact of US$/INR exchange rates as well as lower impact from cross currency movements (contribution from Europe at ~20% of revenues only)

Key things to watch out:

Employee hiring during the quarter: Hiring for Mphasis over the past 3 quarters has remained lower than initial indications with the company deriving the benefits from improving utilization levels over the period. Co has indicated of employee additions of ~3,500 during Nov'08 for the next 2 quarters while we build in a net hiring of 2,600 into our estimates.  Progress of flow of work from HP-EDS channel. Comments on vendor consolidation exercises at client sides.

We estimate Mphasis to report earnings of Rs 24 and Rs 26.2 in FY10 and FY11 respectively. At CMP of Rs 160, Mphasis is trading at 6.6x FY10E earnings. We have a BUY rating on Mphasis with a price target of Rs 240.

Tata Steel (Consolidated) 3QFY09 estimates

We expect Tata Steel (consolidated) to report net sales of Rs209.4bn (yoy down 34.4%, qoq down 52.6%), loss at EBITDA level of Rs2.1bn and net loss of Rs16.1bn. We expect Tata Steel to report forex loss of Rs1.3bn. Key things to watch out for – company's outlook on volume growth, performance improvement program and cost reduction

Cement Sector Dealers Update; Prices firm across markets

We spoke to cement dealer across four regions in India i.e. Southern, Western, Eastern & North Eastern region. The discussions points out to decent demand growth and firm prices scenario across most of the regions. This has encouraged cement companies to cut discount/rebates given by them to dealers. This phenomenon was particularly evident in Eastern & Western regions. Looking at the events like removal of price equalization mechanism in Western India, freezing of discounts in Eastern India and a price hike in Southern India points to a strong demand and firm cement prices scenario in the country.

SEAMEC Ltd. Q4CY2008 Result Update; Results sharply above estimates; BUY; Target: Rs73

Seamec has reported net profit Rs547 mn in Q4CY2008 which is sharply above our expectation on account of higher than expected utilisation of fleet during the quarter. Revenues for the quarter stood at Rs1044 million registering a growth of 369% yoy as Seamec had all of its four vessels full operational during the quarter as compared to just two vessels operating partially in Q4CY2007. Driven by full utilisation of fleet, higher day rate for Seamec Princess and currency appreciation, EBITDA for the quarter stood at Rs612 mn as compared to loss in Q4CY2007.  As per management guidance all of its vessels will be fully available for operation in CY2009. Consequently on expected full utilisation of fleet and currency appreciation we are upgrading our earnings estimates for CY2009 by 20% to Rs24.3 per share. At current levels the stock is trading at undemanding valuations of 2X its CY2009 earnings and P/B of 0.4X. The company has a market cap of USD 34 million and it is already sitting on committed contracts worth 40 million dollars.   We maintain our BUY recommendation with a revised price target of Rs73.

Inflation update; February 14, 2009; Eases to 3.36%

Inflation for the week ended February 14, 2009 eased to a 14- month low at 3.36%, as compared to 3.92% reported in the last week. The prices of primary articles declined to 7.31% for week ended February 14, 2009 as compared to 7.97% for the preceding week, primarily driven by lower prices of food articles like maize, barley, fruits and vegetables. The prices of fuel items decline by 3.98% or the week, as against a fall of 3.03% in the preceding week. The inflation for manufactured products decline to 4.67% for the week, as compare to 4.94% for the preceding week, driven by lower prices of food products, Chemical and chemical products, Basic metals alloys & metals products and Machinery & machine tools. Amongst the manufactured articles, the prices of textile products, Beverages tobacco & tobacco products, and wood & wood products rose the most by 10.18% yoy, 10.08% yoy and 10.05% respectively.

 

Global Cues

Yesterday the US mkts started on a strong note up by about 3.5% on the back of positive cues from Europe. Earlier in the day UK govt announced more than $ 700 bn insurance cover for its banks. As a result, in spite of unprecedented losses by RBS almost all the banks were trading with wide gains. However the US mkts gave up all the initial gains after the budget presented by the US president. The US govt decision to increase marginal tax rate from 35% to 39%, taxes on PE & Venture capitalists & bridging the loopholes that allow rich Americans to pay less in taxes did not go down well with the mkts. It appeared the US was going the socialist way. Also the US budget deficit was at the highest at 12.5% of US GDP pulled down the mkts. Consequently the Dow ended the day with a loss of 90 points.  

Asian mkts are trading mixed with some commodity shares advancing. SGX is trading flat with a loss of 10 points.

Our Markets:

Yesterday our mkts opened on a weak note but as expected later in the day the end of Feb series considerations resulted in some movement in the mkts. In the first half the mkts were flat with low volumes. However in the last hour of trade the mkts witnessed strong up move & finally helped the mkts close near the day's high.

However today we will be starting the new F&O series. In terms of open interest positions mkts will be starting the series on a flat note. We expect the mkts to start the day on a flat note with subdued global cues.

Today mkts will be watching the consolidated numbers from Tisco for Q3 as well as Mphasis will be announcing its Q3 results. Indian GDP numbers for Dec ended quarter will also be announced today. Consensus estimates are expectations of growth of 6.1% after Q1 & Q2 growth of 7.9% & 7.6% respectively.

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