Stock Recommendations: Wipro, TCS, Satyam, Axis Bank

Trade Recommendation:: Wipro
Price target: Rs525
Current market trading price: Rs453

Price target revised to Rs525

Result highlights

• Wipro’s global information technology (IT) service business grew by 5.4% quarter on quarter (qoq) and by 24.8% year on year (yoy) to Rs3,789.9 crore (under US GAAP) for Q4FY2008. In dollar terms, the revenues grew by 5.4 % qoq to US$959.4 million during the quarter (ahead of the company’s guidance of US$955 million). The revenue growth was driven by a 5.5% sequential growth in the volume. The volume growth was marginally mitigated by a ten-basis-point decline in the blended realisation during the quarter. Revenues from the Infocrossing acquisition also grew by 2.8% qoq to US$61.7 million during the quarter.
• The global IT service division’s operating profit margin (OPM) declined by 20 basis points to 20.5% in Q4FY2008. This was despite the fact that the company had hiked the onsite wages during the quarter (by 3-4% with effect from January 2008), which had an adverse impact of 100 basis points. However, the impact was mitigated by the improvement in the utilisation rate (up 67.2% from 66.7% in Q4FY2007), improved profitability in the business process outsourcing (BPO) service division (driven by higher realisations) and a significant improvement in the margin of the recently acquired Infocrossing (up 450 basis points qoq to 9.0%).
• Wipro’s consolidated revenues grew by 6.9% qoq to Rs5,595.4 crore and net income grew by 6% qoq to Rs875.4 crore during the quarter. The growth rate in the net income was lower than the operating profit growth rate primarily due to other expenses of Rs2.2 crore in Q4FY2008 due to foreign exchange (forex) losses of Rs35 crore. The company’s other income had stood at Rs45.5 crore in Q3FY2008.
• For Q1FY2009, the company has guided revenues of US$988 million for the global IT service division and of US$1060 million for the combined IT service business (global plus India and Asia-Pacific). This implies a sequential growth of 2.9% for the global IT service business and of 2.8% for the consolidated IT service business. The management expects to maintain the margin of the global IT service business in FY2009. It is also positive on the continued uptick in the pricing during the year.
• We have revised our FY2009 earnings estimate upward by 2.7% and also introduced the FY2010 estimate in this note. At the current market price, the stock is trading at 16.6x FY2009 earnings estimate and 15.1x FY2010 earnings estimate. We maintain our Buy recommendation on Wipro with a revised price target of Rs525.

Trade Recommendation:: Axis Bank
Price target: Rs1,150
Current market price: Rs881

Results above expectations

Result highlights

• Axis Bank reported a blockbuster set of numbers for Q4FY2008, beating our and consensus estimates by a significant margin. The PAT (profit after tax) for the quarter came in at Rs361.4 crore indicating a growth of 70.6% yoy (year on year) and 17.8% qoq (quarter on quarter).
• Reported NII (net interest income) was up 88.7% yoy to Rs828.4 crore on the back of a 50.2% y-o-y (year-on-year) increase in the interest earned, while the growth in the interest expense was contained at 31.5% yoy.
• Non-interest income continued to be a major contributor to the bottom line with a 84.8% growth at Rs556.5 crore. The robust growth was supported by a jump in treasury gains and continued strong traction in fee income growth.
• Operating expenses were up 93% yoy to Rs662.1 crore, primarily driven by higher staff expenses (up 107% yoy), while other operating expenses were up 88% yoy.
• Reported provisions registered a 102% y-o-y (year-on-year) increase at Rs164.2 crore, driven by prudent provisions related to potential losses from forex (foreign exchange) derivative transactions.
• PAT was up 70.6% yoy and 17.8% qoq to Rs 361.4 crore, beating our expectation of a Rs304 crore PAT and a consensus estimate of a Rs307.2 crore PAT.
• Asset quality improved further as %GNPA (gross non-performing assets as % of advances) and %NNPA (net non-performing assets as % of advances) improved during the quarter. Capital adequacy remained healthy at 13.73% compared to 11.57% a year ago.
• Axis Bank clarified on the forex derivative issue stating that except for the two customers that have filed lawsuit, the bank is not experiencing troubles in recovering the dues. The bank has provided Rs72 crore for potential default losses from the two aggrieved customers.
• At the current market price of Rs881, Axis Bank trades at 22.2x 2009E EPS (earnings per share), 10.5x 2009E PPP (pre-provisioning profit) and 3.1x 2009E price-adjusted book value. We maintain our Buy recommendation with price target of Rs1,150.

Trade Recommendation:: Satyam Computer Services
Trade Recommendation: Price target: Rs505
Current market trading price: Rs459

Healthy guidance for FY2009

Result highlights

• The consolidate revenues of Satyam Computer Services (Satyam) grew by 10.0% quarter on quarter (qoq) and by 35.8% year on year (yoy) to Rs2,416 crore in Q4FY2008. In dollar terms, the revenues grew by 9.0% qoq to US$613.3 million during the quarter driven by an impressive volume growth of 8.8% sequentially.
• The operating profit margin (OPM) improved by 133 basis points qoq to 22.8% during the quarter primarily due to a better utilisation rate (an improvement of 189 basis points in the offshore utilisation rate to 85.6% and that of 53 basis points in the onshore utilisation rate to 97.3%) and an increase in the billing rates (a 0.63% sequential growth in the onsite billing rate and a 0.51% sequential growth in the offshore billing rate). Consequently, Satyam's operating profit grew by 16.8% qoq to Rs550.6 crore.
• The net income grew by 7.6% qoq to Rs466.8 crore, below our expectation of Rs485.9 crore. The net income was lower primarily due to a lower than expected other income of Rs23 crore following foreign exchange (forex) losses of Rs46 crore in Q4FY2008. For the same quarter the company has reported earnings per share (EPS) of Rs7, which is below its guidance of Rs7.23 announced in the previous quarter.
• For FY2009 the company has guided to a revenue growth of 23.9% to 25.9% in rupee terms; the same is on the higher end of the street expectation. The earnings are expected to grow at 17-19% during the same period, in line with the market expectation. The earnings are expected to grow at a lower rate compared with the top line primarily due to a 50-basis-point decline in the OPM and a 2% equity dilution.
• In Q1FY2009, the revenues and EPS are guided to grow to Rs2,500-2,512.5 crore and Rs7.64-7.68 respectively, implying a sequential growth of 3.5-4.0% in the top line and of 9.7-10.2% in the EPS. The Q1FY2009 guidance given by Satyam is better than that provided by its peers in the last week.
• To fine-tune our earnings estimates and to factor in the revised exchange rate assumption of Rs39.5 for FY2009, we have revised downward our earnings estimate for FY2009 by 0.2%. We have also introduced our earnings estimate for FY2010 in this note and expect the earnings to grow by 7.7% in the next fiscal. At the current market price, the stock is trading at 15.3x FY2009 earnings estimate and 13.8x FY2010 earnings estimate. We maintain our Buy recommendation on the stock with a price target of Rs505.

Trade Recommendation: Tata Consultancy Services
Price target: Under review
Current market price: Rs992

Q4FY2008 results: First-cut analysis

Result highlights

• TCS (Tata Consultancy Services) has reported a growth of 2.9% qoq (quarter on quarter) and 18.4% yoy (year on year) in its consolidated revenues to Rs6,094.7 crore during Q4FY2008. The sequential revenue growth was contributed by volume growth of 4.8% and rupee depreciation of 1.1%. However the revenues during the quarter were adversely impacted by a 1.6% decline in blended realisation and a change in the revenue mix (1.4% due to higher offshore proportion).
• The OPM (operating profit margin) declined by 118 basis points to 25.5% sequentially. The OPM was dented by lower blended realisation (1.6% q-o-q [quarter-on-quarter] decline) and increase in overhead cost as percentage of sales (up 70 basis points to 21.1% of the sales). On the other hand, the favourable offshore-onsite mix partially cushioned the pressure on OPM.
• The other income declined sharply by 25.4% qoq to Rs78.1 crore. Consequently, the net income fell by 5.6% qoq to Rs1,255.9 crore, which was below our expectation of Rs1,377.7 crore. The performance was largely dented by a slowdown in the business from two of its top clients (from the banking and financial services domain).
• The company closed six large deals during the quarter, with two of the deals amounting to over $250 million each. The deal pipeline is also healthy and the management expects the growth to improve in the coming quarter. TCS has set a target of 30,000-35,000 gross addition of employees in FY2009.
• We would review FY2009 earnings and introduce FY2010 estimates in a detailed note. At the current market price, the stock trades at 14.8x FY2009 earnings and we maintain a Buy call on the stock.