Weakness persisted on the bourses as the key benchmark indices remained subdued throughout the day on data showing resumption of selling by foreign funds recently and on negative global cues. The market recovered after a weak start triggered by lower Asian shares in the morning trade. However, the market hit a fresh intraday low in mid-morning trade. Intraday volatility was high. The market cut losses in early afternoon trade. Intraday recovery proved short-lived as the market weakened again. Weakness continued in late trade on sustained selling. The Sensex and Nifty closed down by 1.0% and 0.8%, respectively. The mid-cap and small-cap indices registered loss of 0.8% and 0.7%, respectively. Among the front liners, Hero Honda, BHEL, Bharti Airtel and TCS gained 0–4%, while Jaiprakash Associates, Bajaj Auto, M&M, Tata Steel and DLF lost 2–3%. Among mid caps, Glenmark Pharma, MVL, Sun Pharma Advanced Research, Gammon Infra and Wockhardt gained 4–12%, while CMC, Glaxosmithkline Consumer, Essar Ship Ports, M&M finance and Anant Raj lost 5–7%.
Markets Today
The trend deciding level for the day is 18,386/5,509 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,452–18,559/5,531–5,564 levels. However, if NIFTY trades below 18,386/5,509 levels for the first half-an-hour of trade then it may correct up to 18,279–18,213/5,477-5,455 levels.
WPI Inflation eases to 8.66% in April
The wholesale price-based inflation for April 2011 cooled off a bit to 8.66% from an upwardly revised 9.04% for March 2011. The headline inflation number was slightly above the median (8.52%) of Bloomberg’s survey of economists. While primary articles inflation continued to witness moderation for the third straight month, fuel and power inflation rose to the highest in the last nine months at 13.3%. Manufactured products inflation also eased off slightly to 6.2% from 6.5% in March 2011. Primary and manufactured articles inflation spread narrowed further to 5.9% from as high as 13.1% in January 2011, indicating greater pass-through of higher raw-material costs and commodity prices to consumers.
The recent steep hike (Rs.5/litre) in petrol prices is expected to further push up fuel inflation for May, thereby putting pressure on the overall inflation level as well. The Reserve Bank of India expects headline inflation to stay in the range of 9% during 1HFY2012 and ease off thereafter to 6% by the end of FY2012. Taking into account the much better-thanexpected reading of IIP (7.3%) for March 2011 coupled with continued inflationary pressures (especially from energy prices), we expect the Central Bank to continue with its tight monetary stance for a while longer.
L&T bags order worth Rs.3,500cr
Larsen & Toubro (L&T) has bagged an order worth Rs.3,500cr from PPN Power Generating Company, a company whose main promoter is the Apollo Group, for setting up a 3x360MW gas-based power plant at Nagapattinam district, Tamil Nadu. L&T will design, supply, install and commission the entire power project on a turnkey basis. The company will procure advance gas turbines and high-efficiency steam turbines for the plant from Mitsubishi Heavy Industries, Japan. With this order the outstanding order book stands at Rs.1,19,482cr (2.6x FY2011E revenue), providing revenue visibility.
At the CMP of Rs.1,516, the stock is trading at 18.3x FY2013E earnings and 3.1x FY2013E P/BV on a standalone basis. We have used the SOTP methodology to value the company to capture all its business initiatives and investments/stakes in the different businesses. Ascribing separate values to its parent business on a P/E basis and investments in subsidiaries on P/E, P/BV and mcap basis, our target price works out to Rs.2,034, which provides 34.2% upside from current levels. We recommend Buy on the stock.
3i Infotech signs agreement to sell Regulus Group and J&B Software for US$137mn
3i Infotech Financial Software, Inc., a subsidiary of 3i Infotech Ltd., has signed an agreement to sell its US-based global billing and payments unit, consisting of Regulus Group and J&B Software, to an affiliate of Cerberus Capital Management, L.P. for US$137mn. The transaction is expected to close within the next 60 days, subject to customary closing conditions and any regulatory approvals.
3i Infotech acquired Regulus Group in 2008 for a consideration of US$100mn; this deal was valued at 0.7x its CY2007 sales. The company acquired J&B Software for a consideration of US$25.25mn in 2007; this deal was valued at 1x its CY2006 sales.
Both these firms are into the transaction processing business, majorly in the US, which is witnessing heavy ramp down since 1QFY2011 mainly due to a decline in cheque processing volumes rather than client loss. Revenue from the transaction services business of 3i Infotech declined by 10.3% yoy to Rs.819.9cr in FY2011 from Rs.915.5cr in FY2010. Gross margin of this segment also declined by 170bp yoy to 30% in FY2011.
Revenue contribution of Regulus Group and J&B Software in FY2010 was US$156.6mn and US$36.5mn, respectively. So the current deal with Cerberus is valued at 0.8x sales. This divestment reduces the leverage and strengthens the balance sheet of 3i Infotech, taking gross debt-to-equity ratio to 1.38 from 1.85 previously. However, we are concerned about the management’s flip-flop M&A strategy. We await further clarity on the future growth strategy. The stock is currently under review and we may revisit out target price of Rs.55 post interaction with the management.
Result Review
JSW Steel
JSW Steel reported robust set of numbers for 4QFY2011. JSW Steel’s consolidated net sales increased by 32.5% yoy to Rs.7,209cr in 4QFY2011, above our estimate of Rs.6,375cr on account of higher-than-expected rise in realisations. The company’s saleable steel stood at 1.65mn tonnes (+14% yoy) during the quarter. EBITDA increased by 25.8% yoy to Rs.1,662cr; however, EBITDA margin declined by 127bp yoy to 23.1%. Interest expenses declined by 12.9% yoy to Rs.217cr. As a result, net profit increased by 45.2% yoy to Rs.794cr. Prices of iron ore continue to remain firm, while coking coal price contracts for 1QFY2012 have been signed at US$ 330/tonne (+46.7% qoq) by steelmakers. Nevertheless, we believe the decline in the stock price over the last four months has discounted these concerns. Further, we believe JSW Steel is well placed to capitalise on strong domestic demand on the back of its expanded capacity, improving product mix, commissioning of beneficiation plant to lower iron ore cost and recovery in its US operations. Hence, we maintain our Buy recommendation on the stock. Our target price is under review.
Result Preview
State Bank of India
State Bank of India is scheduled to announce its 4QFY2011 results. We expect the bank to report strong NII growth of 36.9% on a yoy basis (marginal growth of 1.7% on a qoq basis). Non-interest income is expected to decline marginally by 0.5% yoy; however, on a qoq basis, it is expected to grow by strong 35.4%. Consequently, the operating income of the bank is expected to grow at healthy 21.9% yoy. Provisioning expenses are expected to increase by 32.7% yoy. Net profit growth is expected to be strong at 66.9% yoy and 10.2% qoq to Rs.3,115cr. At the CMP, the stock is trading at 1.7x FY2013E ABV before adjusting for subsidiaries. We maintain our Buy rating on the stock with a target price of Rs.3,199.
