Stock Recommendations by various Brokerages

Buy McDowell for target Rs 850: Anand Rathi

McDowell has made a possible double bottom at Rs 700 in past two days. The stock crashed from Rs 1,269 four days before it reached a low of Rs 700. Thus, there is a possibility of good pullback with volume, according to Anand Rathi Securities. 

The brokerage advises buying in cash around Rs 760-744 levels with stop loss at Rs 850 for the said target.

Motilal Oswal maintains 'buy' on TCS for Rs 547

Motilal Oswal Securities has maintained 'buy' on Tata Consultancy Services for a target price of Rs 547. The brokerage believes that the Citigroup Global Services deal offers TCS long term revenue visibility with an opportunity to enhance margins and build platformbased services for small and mid-sized banks, offering much needed non-linearity to its BPO business. Maintain Buy. 

TCS recently announced the acquisition of Citi's stake (96%) in Citigroup Global Services, the India based captive BPO arm of Citibank for an all cash consideration of $505 million including goodwill of $350 million. The agreement includes a contract worth $2.5 billion (take or pay basis) with TCS for providing IT services to Citi over 9.5 years. 

The deal is expected to make TCS a strategic vendor for Citi. This will enable additional volumes from Citigroup as well as from any acquired companies in case of a vendor consolidation exercise. Citibank is currently a $150 million plus account for TCS and will increase to $450 million by FY10 post-acquisition. 

At CY08E revenues of $278 million, the deal values CGSL at 1.8 times revenues. Motilal believes that the deal is fairly valued (TCS trades at 2 times FY09 revenues). The deal also provides a high degree of revenue visibility over the long term. Amidst ongoing volatility in this segment, Motilal sees this as a positive. 

TCS generated a post tax yield of 3.9 per cent (pre-tax of 5.9%) on its cash and equivalent. CGSL had PAT margins of 20 per cent in FY07 and 12 per cent in FY06. Assuming PAT margin of 15 per cent for CY08, CGSL will derive PAT of $42 million in CY08, implying an earnings yield of 8.3 per cent and hence making the acquisition EPS accretive for FY10 by 1.5 per cent to Rs 70. Motilal Oswal will upgrade the estimates after the consummation of the deal. 

TCS management highlighted that Citigroup would increase offshoring business despite the financial crisis and that TCS will play a major role in the ongoing cost-rationalization exercise of Citi. CGSL has more than 12,000 employees in India with expected revenue of $278 million in CY08 (4% of TCS revenues). TCS derives $375 million from its BPO business and has 10,000 employees globally. 

Management has guided for an EBIT margin of 20 per cent in 2 years, in line with the current EBIT margins of CGSL and will aim to raise this to level of TCS' margins (currently at 23.5%). Margin expansion will accrue due to increased offshoring as well as bringing in process efficiencies.

Motilal maintains 'buy' on Infosys for target Rs 1,227

Motilal Oswal Securities has maintained 'buy' rating on Infosys Technologies for a target price of Rs 1,227. It believes that Infosys' move of revising dollar revenue growth guidance for FY09 downwards by 6 per cent is primarily a reflection of uncertain macro environment and not due to any impact on its existing business. 

This is corroborated by the fact that the company has stuck to its hiring and flat pricing guidance. The cross-currency movements coupled with worsening macro environment may not have been foreseen by the management earlier. 

The brokerage is positive on frontline IT companies having scale, balance sheet strength and transformational capabilities (multi-services and technology consulting), despite risk to near-term growth driven by unprecedented macro uncertainties. 

Motilal Oswal has revised the target price to Rs1,679 (15 times FY10E earnings), upside of 37 per cent, due to earnings growth deceleration to 17 per cent over FY08-10 and the prevailing uncertainties. 

Infosys reported in-line revenue growth of 5.3 per cent QoQ and 18.9 per cent YoY to $1,216 million for 2QFY09 as against the brokerage's expectation of $1,220 million. In rupee terms, revenue growth was better than expected at Rs 54.2 billion, up 11.6 per cent QoQ and 32 per cent YoY. EBITDA margin expanded 260 basis points QoQ to 33.1 per cent, in line with Motilal Oswal's estimate of 32.9 per cent. The company hiked wages in 1QFY09 and the dollar has appreciated against the rupee in 2QFY09. Infosys has utilized the currency advantage to invest in SGA, which as a percentage of sales, expanded 74bp QoQ to 13.5 per cent. 

Adjusted PAT grew 12.7 per cent QoQ and 30.2 per cent YoY to Rs 14.3 billion. PAT was marginally below brokerage's estimate due to higher than expected forex loss of Rs 1.26 billion. IT Services volume growth of 6.5 per cent QoQ was better than our estimate of 5.2 per cent, while pricing growth was flat at 0.6 per cent QoQ onsite and 0.1 per cent QoQ offshore . Blended pricing growth was marginally negative due to a change in effort mix. 

Infosys has guided revenue of $4.72b- 4.81b for FY09 v/s its earlier guidance of $4.97b-5.05b, implying 13-15 per cent growth now as against 19-21 per cent growth earlier. The downward revision of 6pp in dollar revenue growth is on account of weak demand environment (3pp) and cross currency issues (3pp). The company's new EPS guidance for FY09 is $2.24, down 5.1 per cent as compared to the previous guidance of $2.32-2.36. The implied EPS growth in dollar terms is 10.3 per cent v/s 14-16 per cent earlier. 

The rupee revenue guidance for FY09 has been changed only marginally to Rs 213b-217b from Rs 213b-216b, implying a growth of 28-30 per cent. The company has maintained its EPS guidance for the year at Rs 101.06 (the higher end), implying a growth of 24 per cent. Rupee guidance numbers are largely unchanged due to change in exchange rate assumption to Rs 46.97 per dollar from Rs 43.04 per dollar (9% depreciation). 

Motilal Oswal has revised FY09 dollar revenue growth estimate downwards from 20.6 per cent to 15.1 per cent, taking cognizance of the uncertain global environment. Motilal Oswal's $ growth assumption is in line with company's guided growth. Motilal Oswal believes that operating margins will be stable with a negative bias for 2HFY09. 

The company has hired 17,299 employees in 1HFY09, which is 69 per cent of its total guided gross hires for the year. Given the company's guidance of flat revenues in 2HFY09, Motilal Oswal expect higher bench and a consequent pressure on utilization and margins. The company could take other measures like improving effort mix, client mix, etc to manage the impact on margins. 

Motilal Oswal rupee estimates reflect muted downward revision due to the brokerages new Rs/US$ assumption. Motilal Oswal has revised FY09 revenue estimate to Rs 216.9 billion from Rs 216.6 billion and FY10 revenue estimate from Rs 250.9 billion to Rs 238.9 billion assuming an average Rs 45.2 per dollar for FY09 and Rs 44 per dollar for FY10 against our earlier estimate of Rs 43 per dollar for FY09 and Rs 42 per dollar for FY10. Motilal Oswal cut FY09 EPS estimate by 2 per cent to Rs 101.8 and FY10 EPS estimate by 5 per cent to Rs 111.9.

Edelweiss maintains 'buy' recommendation on Opto Circuits RESEARCH: EDELWEISS  RATING: BUY  CMP: RS 165  Edelweiss maintains ‘buy’ recommendation on Opto Circuits. The company cancelled the proposed $100-million acquisition of an European company as the demanded price was not justifiable from an economic value perspective.  Over the past few years, Opto has created strategic and shareholder-value by focusing on inorganic opportunity for growth, be it in the Advanced Micronic Devices acquisition in ’01, Palco Labs and the thermometer division of HUL in ’02, Mediaid in ’03, EuroCor in ’05, or the recent Criticare Systems acquisition in ’08. This shows the management’s focus on value creation.  After the recent correction in stock price, the valuations offer a good buying opportunity. Opto has traded at a premium to the market due to high growth, healthy margins and upside from potential acquisitions. But with the recent market fall and overhang of large ownership by FIIs, the stock price has corrected more-than-warranted , making it attractive. BNP Paribas maintains 'buy' rating on Shiv-Vani Oil & Gas RESEARCH: BNP PARIBAS  RATING: BUY  CMP: RS 393  BNP Paribas maintains ‘buy’ rating on Shiv-Vani Oil & Gas, while reducing the target price from Rs 800 to Rs 522 on higher borrowing costs and multiple contractions. The company’s global peers trade at a forward P/E of 10.5x, compared to Shiv-Vani’s 8.4x (based on FY10 EPS estimates).  Global peers are likely to expand at 23% from FY08-FY 10, while Shiv-Vani is set to grow 58%. BNP Paribas believes oil service companies will continue to see strength in their core businesses, despite weak sentiment surrounding crude. Shiv-Vani’s receivables rose by 158% to Rs 276 crore, which comprised 48% of its FY08 revenue. Since over 85% of Shiv-Vani’s revenue comes from ONGC, this raises concerns on the company’s working capital management. BNP Paribas believes Shiv-Vani will need to raise cash to fund its working capital needs in the near term and hence, will see an increase in its cost of borrowing.