Sharekhan Investor's Eye dated September 15, 2008

 

 

 

Investor's Eye [September 15, 2008] Sharekhan

Summary of Contents SHAREKHAN SPECIAL Monthly economy review For the period August 1–September 15, the BSE Bankex has appreciated by 0.9% compared with a 7.7% decline in the Sensex during the same period. The outperformance by the banking sector was primarily driven by the widespread expectations of reforms in the banking sector as well as the easing of the inflationary pressures (global commodity prices have declined in the past few weeks). However, against the backdrop of tight liquidity conditions, moderating credit growth and a likely strain on the quality of banking assets, the fundamental outlook for the banking sector remains bleak. Hence, we believe that the upside to banking stocks is largely capped in the short term. However, from the perspective of a medium to longer term, the banking stocks look attractive at the current valuations. STOCK UPDATE Crompton Greaves Cluster: Apple Green Recommendation: Buy Price target: Rs367 Current market price: Rs248 MSE Group fits in strategically Crompton Greaves has acquired MSE Power Systems Inc and its subsidiaries, MSE Engineering LLC and MSE West LLC (MSE Group). MSE Group is based out of the USA and is engaged in providing engineering, procurement and construction (EPC) solutions along with commissioning and testing services for medium and high voltage substations and transmission line projects. Crompton Greaves will pay a total enterprise value of USD16 million (approximately Rs73.6 crore) for the acquisitions. SECTOR UPDATE Information Technology Multiple headwinds may play spoilsport Key points Tech companies are facing headwinds from multiple factors. The condition of banking and financial services clients from the USA is only getting worse. The malaise is spreading to the European region, which was initially touted as an important region to offset the likely slowdown in the business from the US geography, with the data from both UK and Germany showing distinct signs of an impending slowdown. This puts a question mark on the possible revival of demand in the latter part of 2008 and even CY2009. The currency headwinds are only adding to the concerns related to global demand environment. Though the rupee depreciation against the US dollar is fundamentally positive for the export-oriented tech sector, the benefits would not follow immediately as most of the companies have significant foreign exchange (forex) forward cover. Moreover, the rupee has appreciated by 4.5-5% against the Euro and the Pound Sterling each (the two currencies accounts for close to 30% of the billing for frontline companies) in the past two months. That is not all. The appreciation of the US dollar against the Euro and the Pound Sterling would adversely impact the financial performance in US GAAP terms. This leads to speculation that some of the frontline tech companies might miss Q2FY2009 US dollar guidance and may have to revise downwards their FY2009 guidance in the US dollar terms. On the brighter side, the depreciation of the rupee against the US dollar will positively impact the margins in Indian GAAP performance. Moreover, the street is still factoring in the exchange rate of Rs42-42.5 for FY2009 and FY2010. Any revision in the exchange rate assumption to Rs45 per dollar would have a positive impact of 4-6% in the earnings estimate for FY2010.  Given the multiple headwinds, tech stocks are likely to under perform in the coming months. The anti-outsourcing rhetoric in the run up to the US presidential elections would also dampen the sentiments. Further, the street would keenly wait and watch the ability of Infosys Technologies (Infosys) and Satyam Computer Services (Satyam Computer) to meet their Q2 guidance. The revision of guidance for FY2009 is also another important event that would provide direction to tech stocks. We had already downgraded Wipro and HCL Technologies to Hold, however we maintain Buy on Infosys, Satyam and Tata Consultancy Services (TCS) with a 12-month perspective, as most of the negatives seem to be priced in the current valuations.    Click here to read report:  Investor's Eye

Regards, The Sharekhan Research Team