PremiumIndian benchmark indices slumped for third straight day on Wednesday after giving up initial gains. While banks and IT lagged, FMCG and pharma held on to their gains. Stocks in Asia ended mixed on Wednesday as trader struggled to recover some of the losses suffered at the start of the week.
Indian benchmark share indices slumped for the third straight day on Wednesday with benchmark Sensex ending 372 points lower at 53,514.15 dragged by selling in heavyweights, Reliance Industries and HDFC twins. The 30-stock index hit a high of 54,211.22 and a low of 53,455.26 intraday. The Nifty50 also erased all initial gains and slipped in afternoon trade to end 0.6% lower at 15,966.65 amid volatile trading.
Midcap and Smallcap indices managed to eke out minor gains, outperforming the benchmarks. Among sectors, banks, financials and IT were the biggest losers, while pharma, metal and FMCG ended with solid gains.
IndusInd Bank, Bharti Airtel, HDFC twins and Reliance were the biggest laggards among the 14 stocks that ended in the red on Sensex. HUL, Asian Paints and Sun Pharma were the prominent gainers.
Meanwhile, the Indian rupee ended a tad lower at 79.63 against the US dollar.
Half of 2022 is over, where we have seen some wild swings in the metals sector. Aluminum, the light metal has declined by 8.36% (YTD as of 12th July) on the MCX and 16.10% on the LME.
The escalation of geopolitical tensions between Russia and Ukraine crippled the supply chain causing aluminum prices to reach record highs in March on the LME and the MCX.
However, at present, the tables have turned, as the metal prices have corrected drastically and the base metals pack has been under constant pressure.
In June itself aluminium prices have declined by about 9% on the MCX and over 10% on the LME. Prices have fallen to their lowest levels in seven months as a result of prolonged Covid-19-induced lockdowns in Chinese cities of Shanghai and Beijing, central banks around the world gear up for a sharp rise in interest rate, and a slowing global economy acted as the major triggers which lead to the downfall.
We expect HCLT to report a healthy revenue driven by consistent transformation deal wins, increasing focus on ER&D services and rising share of Mode 2 business. However, the pace of growth would taper down to low double digit in FY24E. The sector may not remain immune to worsening macros. We believe that management is ambitious on margin guidance and would lower its guidance going forward. In view of rising concern on recession in US and global slowdown in FY24E, we expect cut in valuation multiple of IT companies in the range of 10-20%, closer to historical averages. As current valuation captures majority of the positives, with limited upside, we downgrade HCLT to HOLD from BUY with a revised TP of Rs1,000 (vs. earlier Rs1,351), valuing stock at a revised P/E multiple of 17x on FY24E earnings.
Outlook and Valuation
At CMP, HCLT trades at 18x/15.8x on FY23E/FY24E EPS. We believe that IT Services would not remain immune to worsening global macros in terms of rising inflation, economic slowdown, currency headwinds and likely cut on spending. Additionally, we expect FY23E margins to get impacted because of higher attrition, sub-contracting cost in new geographies and lower utilisation due to accelerated hiring over next 1-2 quarters. Favorable currency, better pricing along with scale would nullify the impact to some extent but its not sufficient to cover the cost escalation. We forecast EBIT margin to contract 147bps to 17.5% in FY23E, while it would improve by 100bps to 18.5% in FY24E. Revenue growth would taper down to low double digit in FY24E, while QoQ decline in order book, clear margin pressure and lower pricing power ahead would lead to valuation multiple contraction close to its historical averages. Therefore, we cut our valuation multiple from 22x to 17x for HCLT and downgrade the stock to HOLD from BUY with revised TP of Rs1,000, considering limited upside potential.
Asian stocks were mixed Wednesday as trader struggled to recover some of the losses suffered at the start of the week, while oil bounced from a rout, though recession alarms continue to ring loud. The euro clawed its way back slightly after hitting parity with the dollar for the first time in two decades, though it remains under pressure from growing concerns about an energy crisis across the eurozone. Nikkei 225 closed 0.5% higher; Hang Seng Index fell 0.2%. Shanghai - Composite rose 0.1%.
HCLT reported largely in-line revenue of USD 3025 mn, +2.7% QoQ CC (PLe: 2.9%, Cons: 2.4%), +1.1% QoQ USD (PLe: 1%, Cons: 0.8%). Growth was led by Products (5.1% QoQ CC), followed by ER&D (3.7% QoQ CC). IT services growth was muted at 2% QoQ CC, as productivity benefits to be provided to clients kicked-in. EBIT margin declined by 100bps QoQ to 17% led by 180bps QoQ decline in IT services margin, due to higher talent costs amidst elevated levels and deal transition costs. Management has retained its margin guidance of 18-20% for FY23, but given headwinds from wage hikes spread across Q2 and Q3, we model EBIT margin at 17.5%/18% for FY23/24.
We cut EPS estimates by 5%/2.6% for FY23/24 due to cut in margin estimates. We continue to value HCLT on 17x FY24 EPS to arrive at TP of Rs. 982 (earlier: Rs. 1007). HCLT is currently trading at 19x/16x on FY23/24E EPS of INR 49.8/57.7 respectively with Revenue/EPS CAGR of 9.3%/7.6% over FY22-24E. Maintain ‘HOLD’.
--Sequential services (IT+ERD) revenue growth led by select few verticals: IT services growth was led by Technology services (10.9% QoQ CC), TMT (4.3% QoQ CC) and Life Sciences & Healthcare (2.7% QoQ CC). Whereas other verticals - BFSI (0.8% QoQ CC) and Public Services (-0.2% QoQ CC) were flattish, Manufacturing declined 0.5% QoQ CC and Retail & CPG declined 1.4% QoQ CC. Growth was healthy in US (2.8% QoQ CC) and soft in Europe (1.6% QoQ CC).
--Margins for FY23 likely to be below the guided range: EBIT margin came at 17%, -100bps QoQ (PLe: 17.1%, Cons: 17.6%) led by 180bps QoQ decline in IT Services and 40bps QoQ drop in ERD segment. Margin was partially offset by increase of 340bps QoQ in Product business. Margin walk – 1) 100bps impact from higher outsourcing costs, 2) 150bps impact from retention and employee addition costs, 3) 35 bps from travel and visa costs partially offset by exchange gains of 40bps and weak seasonality was offset by operating efficiency.
--Other concall takeaways: 1) Management retained revenue guidance of 12-14% YoY CC due to healthy new deal TCV ($2 bn, 23.4% YoY, -9% QoQ), close to record high pipeline and near term strength in demand, 2) Fresher addition target of 30K for FY23 intact, added ~6K freshers in Q1 and targets to add ~10K in Q2, 3) Attrition inched up to 23.8% (190bps QoQ) and is expected to taper off from Q3, 4) DSO increased to 65 days (vs 61 in Q1) led by delay in payments by certain clients, which are expected to be recovered in Q2, 5) Declared dividend of Rs. 10/share.
During the pandemic and lockdowns, the IT and broader technology sectors, were in spotlight and boomed big time. This was due to the increasing importance of working from home.
However, things have changed quickly… and how!
The IT sector, one of the strongest sectors in the country, is now under pressure due to recent global crisis and fears of a recession. Read on to know more
US inflation is expected to hit a new 40-year high in June, at 8.8% according to Bloomberg consensus. The high inflation is propelled by soaring prices of gas, food and housing. Any number higher than 8.8% might trigger a further sell off in risk assets.
However, recent fall in commodity prices should reflect in consumer prices this month and possibly in August. So far in July, the average gas prices are down to $4.65 a gallon from $5.01 a month ago. This should possibly reduce inflationary pressure going forward if commodity prices ease further.
Having said that, Fed is expected to raise fed fund rate by 75bps in the coming FOMC meeting irrespecttive of the outcome, as inflation continues to be elevated well above the Fed's 2% target.
The Directorate of Revenue Intelligence (DRI) conductes searches on mobile company Oppo India and unearthed customs duty evasion of nearly ₹4389 core. Searches were conducted by DRI at the office premises of Oppo India and residences of its key management employees, which led to the recovery of incriminating evidence indicating wilful mis-declaration in the description of certain items imported by Oppo India for use in the manufacture of mobile phones, DRI said.
The construction industry in India is expected to witness a healthy revenue growth in the medium term as the impact of a sharp increase in prices of major commodities seems to tapering, ratings agency Icra has said in its recent report.
The report, however, cautioned that growth would depend a lot on sustainability of recent cool off in commodity prices as higher prices in the past of commodities such as bitumen and steel and increased competition shaved off operating profits of companies by about 100-200 basis points.
The Delhi High Court on Wednesday lifted a freeze on smartphone maker Vivo's bank accounts imposed by the country's financial crime agency and ordering the Chinese company to provide a bank guarantee of $119 million, a lawyer for the company told Reuters.
In a filing, Vivo India had said it would not be able to pay statutory dues and salaries, listing 10 affected bank accounts and saying it needed to make monthly payments of ₹28.26 billion. ($355 million).
The Indian rupee hit a record low for a third straight session on Wednesday as foreign investors continued to dump riskier assets ahead of U.S. inflation data that could determine the pace of tightening in the world's largest economy.
The partially convertible rupee was trading at 79.66/67 per dollar compared to its previous close of 79.5975. The unit touched a life low of 79.6675.
Things seem to be falling in place for Maruti Suzuki India Ltd. The automaker is a key beneficiary of weakening of JPY/EUR against USD. “Maruti has total 26% direct and indirect foreign currency exposure (primarily in JPY and EUR) towards sourcing of components. The USD/INR leg for both these payables is a natural hedge against the USD exports (about 15-20% of sales)," said JM Financial’s analysts in a report on 12 July.
Gold prices held their ground near the lowest levels in more than nine months on Wednesday, as investors cautiously awaited U.S. inflation data for cues on the road ahead for the Federal Reserve's monetary policy stance.
Spot gold was steady at $1,725.83 per ounce, after dropping to its lowest since late-September at $1,722.30 earlier in the session. U.S. gold futures dipped 0.2% to $1,722.00.
Weak operating margin but near to medium term outlook remains strong
Overall, the sequential revenue growth was inline with expectation; but the EBIT margin came much below estimates. The revenue growth is led by the Services segment (IT Services and ER&D), that continues to maintain growth momentum. The P&P Segment is expected to grow at mid single digit YoY. We expect revenue growth to be more predictable and robust going ahead as IT services contribution rises in revenue mix. Deal booking remains strong and that offers strong growth visibility for FY23. We maintain BUY Rating on the stock with revised target price of ₹1,140/share at 18x on FY24E.
The company’s newly commissioned facility at Dabaspet, Karnataka, has received GMP certificate from UK MHRA. The facility was inspected by MHRA from 18 Apr 2022 to 20 Apr 2022. The facility has capabilities of manufacturing and testing specialized dosage forms like Orodispersible Films and Transdermal systems.
The total number of active case load currently stands at 1,32,457 in the country.
Total revenue rose by 35.7 per cent to ₹133.5 crore in the quarter under review from ₹98.4 crore in the first quarter ended Jun 2021.
The World Health Organization's chief has warned that fresh waves of Covid-19 infections show the pandemic is "nowhere near over". "New waves of the virus demonstrate again that Covid-19 is nowhere near over," Tedros Adhanom Ghebreyesus told a news conference, adding: "As the virus pushes at us, we must push back."
Indian pharmaceutical company Bajaj Healthcare Ltd said on Wednesday it was entering the highly-regulated opiate processing business after winning two tenders from the government, sending its shares to a near three-month peak.
The orders, to supply opium-derived alkaloids and active pharmaceutical ingredients (API) to the government, give a private player access to the state-controlled opiates market for the first time, Bajaj Healthcare said in a regulatory filing.
The company reported net profit of ₹57.13 crore in the April-June quarter against a loss of ₹28.93 crore in the year ago period. Consolidated net sales for the quarter rose to ₹250.27 against ₹75.87 crore a year ago.
HCL Technologies Ltd is the second IT company which reported it's June quarter earnings on Tuesday, post market hours. But there is hardly any good news for IT investors who were already disappointed with Q1FY23 result of Tata Consultancy Services Ltd announced last week.
In fact there are worrying some similarities between the two. (Read here)
After the decent rally seen during the last week, this week so far has been more of consolidation for the benchmark with some profit booking seen at higher levels. The major culprit for this has been the weak global cues along with the non-participation of heavy-weight counters. Last week, we broke above a congestion zone when we closed above the 15940 - 16000 zone and technically prices tend to retest breakout levels before resuming the up move. Hence, we remain buoyant and expect buying to emerge from lower levels where 15940 - 16000 will act as a sacrosanct point. Having said that, one should not be complacent as we are not completely out of the woods and should keep an eye on global development as well. On the flip side, we can see 16200 - 16250 is now acting as immediate resistance. Hence, one should ideally look to buy at lower levels and book profits around the resistance levels.
Despite the weakness in the benchmark, the market breadth seemed positive as many individual counters gave splendid moves. This is exactly what we highlighted in our previous outlook to focus on apt themes that will give outperforming opportunities and we reiterate one should continue with the same however they need to be very fussy in their selection.
The IT service provider posted a net profit of ₹3,283 crore in the June quarter, up 2.4% from a year ago, but below Bloomberg consensus estimates of ₹3,322 crore. The company’s net profit was down 8.6% quarter-to-quarter, while revenue increased 3.8% in the same period. June quarter revenue rose 17% from a year ago to ₹23,464 crore.
The rupee slipped by 14 paise to close at a new record low of 79.59 against the US dollar on Tuesday. A strong greenback overseas and persistent foreign fund outflows continued its effect on investor sentiment.
Two of India’s top audit regulators have buried their differences over a proposal to relax the statutory audit requirement of small businesses, following a change of guard at the helm of both institutions.
Last September, the Institute of Chartered Accountants of India (ICAI) opposed a consultation paper from the National Financial Reporting Authority (NFRA) proposing to ease the statutory audit requirement for small businesses. While ICAI is India’s accounting rule maker and self-regulator of auditors, NFRA is the audit watchdog set up by the government.(Full story)
Gold prices steadied near a more than nine-month low on Wednesday, as cautious investors awaited monthly U.S. inflation data for cues on the road ahead for the Federal Reserve's monetary policy. Spot gold was up 0.1% at $1,727.89 per ounce, after dropping to its lowest level since late-September at $1,722.30 earlier. U.S. gold futures were flat at $1,725.30.
JK Tyre (CMP Rs115)
In view of the strong products basket, regular price hikes, likely revival in replacement demand, healthy export potential and margin expansion in India as well as Mexico operations, we reiterate BUY rating on JKT with a 1-Year Target Price of Rs150, valuing the stock at 8.5x FY24E EPS. .
Intraday Picks
AMBUJA CEMENT (previous close: ₹371) BUY
For today’s trade, long position can be initiated in the range of ₹367- 370 for the target of Rs. 379 with a strict stop loss of ₹363.
BERGER PAINT (previous close: ₹580) BUY
For today’s trade, long position can be initiated in the range of ₹570- 580 for the target of Rs. 605 with a strict stop loss of ₹565.
PETRONET (previous close: ₹216) SELL
For today’s trade, long position can be initiated in the range of Rs502- 498 for the target of Rs514 with a strict stop loss of Rs494.
HCL Tech, Axis Bank, Shilpa Medicare, Mindtree, Delta Corp are among Stocks to Watch for today
HCL Technologies Ltd has maintained its 12-14% revenue growth guidance in constant currency for FY23 on the back of strong demand for digital transformation in key markets. The company also left its earnings before interest and taxes margin guidance unchanged at 18-20%.
The Noida-based information technology (IT) services company posted net profit of ₹3,283 crore in the June quarter, up 2.4% from a year ago, but below Bloomberg consensus estimates of ₹3,322 crore. However, the company’s net profit was down 8.6% quarter-to-quarter, while revenue increased 3.8% in the same period. June quarter revenue rose 17% from a year ago to ₹23,464 crore,
Factory output in May jumped 19.6% from a year ago thanks to last year’s depressed base because of pandemic curbs, official data released on Tuesday showed.
The Index of Industrial Production (IIP) stood at 137.7 in May, while the indices for mining, manufacturing and electricity stood at 120.1, 134.5 and 199.9, respectively, growing 10.9%, 20.6% and 23.5%.
Retail inflation held above the top end of the central bank’s tolerance limit for the sixth straight month in June, a development that may prompt it to raise interest rates further to cool prices.
Consumer price inflation in June remained little changed at 7.01% from 7.04% in the previous month despite a raft of government measures, including export curbs on food items and excise duty cuts on fuels, to drive down prices.
Oil steadied after sliding below $100 a barrel on Tuesday as escalating fears about an economic slowdown rippled across markets. West Texas Intermediate plunged about 8% in the previous session to close at the lowest level in three months.
Stocks in Asia edged up Wednesday and oil held losses in cautious trading shaped by a dimming economic outlook and the countdown to US data that may show inflation hit a fresh four-decade high.
MSCI Inc.’s regional share gauge made modest gains amid a climb in Japan and mixed performance in China and Hong Kong. US futures wavered and European contracts retreated after a near-1% Wall Street drop led by tech and energy.
Wall Street ended in negative territory overnight ahead of US inflation reading on Wednesday. Dow Jones ended 0.62 per cent lower, tech heavy Nasdaq lost 0.95 per cent while S&P 500 shed 0.92 per cent on Tuesday session.
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