Subros (PT revised to Rs50); Ratnamani Metals (PT revised to Rs133); IT (Improvement in decision making cycle)

Subros

Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs50
Current market price: Rs41

Price target revised to Rs50
Subros, the market leader in auto air-conditioning business with 42% market share, is likely to benefit from the stupendous volume growth of its key clients?Maruti Suzuki India (Maruti), Tata Motors and Mahindra & Mahindra (M&M). Subros garners about 72% of its top line from Maruti, around 18% from Tata Motors and ~7% from M&M. In the year to date period (April-August 2009), these key clients registered robust growth in their sales volume beating all expectations. Maruti reported a growth of 25.3%, Tata Motors registered a growth of 7% in its passenger car sales and M&M posted a 36% growth in its utility vehicle sales. Apart from exclusive supply contracts for some of the latest launched products such as Maruti?s A-Star and Ritz and M&M?s Xylo, Subros will also start supplying air conditioners to Tata Motors? Nano from January 2010 onwards, which will help further augment its volume growth.

In line with the increase in our estimates, our price target stands revised to Rs50 (based on 10x FY2011 earnings estimate). At the current market price the stock is trading at 8.2x its FY2011E earnings and enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 3.6x. We maintain our Buy recommendation on the stock.

 

Ratnamani Metals and Tubes

Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs133
Current market price: Rs107

Price target revised to Rs133

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      Ratnamani Metals & Tubes (RMTL) has bagged Rs152-crore gas transmission and distribution order from Gas Authority of India. We believe this to be positive for RMTL particularly when viewed against the backdrop of slower inflow since couple of quarters. While the order inflow is positive, the same has been slower than our estimates.
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      In a recent conference call, RMTL?s management highlighted improving order intake from power sector, however orders from oil & gas space are likely to pick up only gradually. The order backlog stands at ~Rs400 crore. Further, RMTL has bid for an order from Bhatinda Refinery.
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      In Q2FY2010, we expect RMTL?s top line to report a de-growth of 20% to Rs203.1 crore. The margins are expected to improve on year-on-year basis on the back of decline in raw material cost. On the back of fall in revenues, we expect the adjusted profits to decline by 8.6% year on year.
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      Incorporating the numbers from annual accounts and slower order intake in July-September quarter, we have revised our revenue and profit estimates. We are revising down our earnings per share (EPS) estimates to Rs17.4 and Rs22.2 for FY2010 and FY2011 respectively. While we are revising down our estimates, we are revising up our price target, as we roll forward our target multiple on the stock. Our price target stands revised to Rs133 (6x FY2011E).
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      The company has been witnessing gradual improvement in its business environment. RMTL?s specialty products consumed in high-growth sectors like power would drive the volumes going forward. Further, meaningful revival in orders from the refinery sector could add to incremental orders. At the current market the stock trades at 4.8x its FY2011 estimates, which we feel is attractive and thereby reiterate a Buy on the stock.

SECTOR UPDATE

Information technology

Improvement in decision making cycle

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      Management of front-line information technology (IT) companies have commented positively on the demand environment. Tata Consultancy Services (TCS)? management has hinted towards some signs of recovery in outsourcing demand especially from the banking, financial services and insurance (BFSI) vertical. It said that the banking and finance industry across the globe is beginning to have a re-look at discretionary spend that was frozen completely after the financial meltdown. This would benefit players such as TCS (43.9%) and Infosys Technologies (Infosys; 33%) that have relatively higher exposure to the BFSI vertical.
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      Improved demand environment has led to improved decision-making cycle and deal closures have started taking place. In fact, front-line IT companies have been benefiting from vendor consolidation scheme. Based on deals reported in the press there has been deal flow of US$2.2 billion for IT vendors in Q2FY2010. Improved decision-making cycle coupled with the pent-up demand bodes well for CY2010 IT budgets. The same also improves the revenue visibility of front-line IT companies.
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      Additionally, there has been increased news flow for wage hike review by front-line IT companies. While, the wage hike review provides confidence for improving the business environment, this can have negative impact on the margins of front-line IT firms. However, we believe, players such as Infosys and TCS with lower utilisation rate will be in better position to manage their margins going forward.
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      In Q2FY2010, front-line IT companies are also expected to benefit from favourable cross currency movement. This is likely to have positive a impact of 1.5-2% on the dollar-term revenues of front-line IT companies in Q2FY2010 enabling the companies to beat their dollar-term revenue guidance.
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      We have fine-tuned our FY2010 and FY2011 earnings estimates marginally for front-line IT companies. Given the improvement in demand environment and increasing deal conversion providing revenue visibility, we are now expanding our target multiple for front-line IT companies. We are upgrading TCS to Buy recommendation on the back of better earnings compounded annual growth rate (CAGR) during FY2009-11 than its peers, the recovery in BFSI vertical, lower utilisation rate providing layer for margin management and healthy deal pipeline. We maintain our Hold recommendation on other front-line IT stocks due to limited upside at current levels.