Blog Archives
Macquarie-Headwinds Persist, Downgrades To Follow; “I”s Don’t Lie! !!!
Macquarie
Banks, Auto, Steel, Cement, Real Estate, Infra To Get Severely Hit – “I”s Don’t Lie
Indian markets have corrected 8% since we last wrote a month back. We still retain our negative stance on Indian markets, and believe that macro headwinds will continue for some more time. Inflation is unlikely to fall till September as Indian markets digest possible diesel price hikes. Interest rates have another 50bp to go in our view, as the RBI rightly focuses on sacrificing short term growth for longer term health.
Consumption seems to be slowing down a bit and the investment cycle is yet to pick up, reflected in very low demand growth in cement and steel over the last few months. The exports outlook has also deteriorated to some extent, given the slowing pace of recovery in the developed world. In our view, the market needs to consolidate at the current levels before it can move up, but another 7-8% dip can’t be ruled out.
Earnings downgrades – more to come
As highlighted in our last note “Can?t see I to I”, earnings estimates looked extremely high and we had estimated 12-15% growth for FY12 based on our topdown model for the Sensex. We note that consensus earnings have indeed seen downward revision by 2% but are still projecting 17.5% growth. Since lots of cost increases are being reflected from 1Q FY12, we expect the earnings downgrade trend to continue.
We think the reduction due to the lower demand scenario may take a bit longer to get built into the estimates, as most companies are still guiding reasonable numbers.
Valuations – reasonable but not a deep discount
Indian markets are now trading close to the long term average of 14.5x PER; while this is reasonable historically, we have seen the market hit a bottom of 12-13x. The premium to emerging markets still remains at 35% against the 10-yr average of 26%. This premium had expanded as India’s strong domestic demand differentiated it from other economies during the Lehman crisis.
However, the current concerns on a possible slowdown in consumption may lead to marginal reduction here. Among sectors which are above long-term averages are Consumer Staples, Energy, Financials and Utilities while the ones below are Materials, IT, Healthcare and Consumer Discretionary.
Russell Napier: The Bear Market Bottom Will Be S&P 400 !!!
It is no secret that CLSA’s Russell Napier has not been a fan of QE2. As he pointed out in his recent prominent note, “whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines.” He further explained: “A risk to reflation would send equities sharply lower. The failure of QEII will undermine investor faith in a monetary solution. With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside. The Fed will try again with a new package, but investors would do best by waiting to see how it plays out.” Since as of now we still don’t know when and if there even will be a package, here is Napier once again, interviewed by the FT’s Long View, presenting his updated views on the economy. His outlook, which we agree with entirely, is that first we will see another major deflationary shock, following which the Fed, already boxed in a corner, will have two choices: let major financial institutions fail, or proceed to monetize outright. Regardless of which outcome is picked, Napier’s target for the S&P, which just happens to coincide with that of Albert Edwards, is not pleasant for the bulls: 400 (or somewhere in that vicinity). And that will be the true generational buying bottom.
http://video.ft.com/v/946244201001/Long-View-Historian-sees-S-P-fall-to-400
(Full clip after the jump, with the key part starting 7:30 in)
Agile Financial Technologies gets $5.7 mn funding
MUMBAI: Financial services software-maker, Agile Financial Technologies , today said it has got a USD 5.7 million funding from a group of investors led by venture capital fund IDG Ventures.
The series A financing will enable the company to go ahead with its organic and inorganic expansion plans in new markets, a release issued here by the company said.
Details of the transaction, like the stake bought by the new shareholders or the valuation reached, were not revealed. IDG Ventures get two Board seats as a part of the agreement, the release said.
Agile already has a presence in the Middle-East, Africa and Asia and has embarked on its next level of expansion in the space of investment management, lending management, microfinance and insurance.
“We chose to invest in Agile FT given its industry leading team, clear product focus, growing customer base and proven ability to deliver growth far ahead of its peer group of product companies,” IDG’s Founder and Managing Director, T C Meenakshisundaram, said.
Cognizant’s Q1 revenue up 42.9%; Q2 guidance higher than Wipro
CHENNAI: Cognizant Technology Solutions posted better-than-expected first quarter earnings and forecast strong second quarter revenues of $1.45 billion, which will help the multinational overtake India’s third biggest software exporter Wipro in quarterly revenues later this year.
Nasdaq-listed Cognizant said its January to March revenues grew by 43% from the year ago quarter and by 4.6% sequentially on strong demand from its top market US. Cognizant’s net profit for the quarter ending March were $208.3 million up 37.5% from last year.
The company, which counts JP Morgan and several top healthcare firms as its customers, grew revenues and profit in contrast to the disappointing fourth quarter earnings growth reported by Indian rivals Infosys and Wipro. While Infosys, the country’s second biggest software exporter reported 1.1% sequential revenue growth for March quarter, Wipro provided negative forecast for the April quarter.
Wipro’s $1.39-$1.4 billion revenue guidance for the first quarter is less than $1.45 billion Cognizant has forecast to achieve during next quarter, looking to overtake Wipro as the third biggest software exporter from India. However, Wipro’s guidance does not include incremental revenues of around $100 million it would gain from the acquisition of SAIC’s IT practice earlier this year.
Cognizant’s revenue for the first quarter of 2011 rose to $1.37 billion, up 42.9% from $959.7 million in the comparable period. Analysts estimated revenues of $1.37 billion for the quarter.
“We are pleased with yet another quarter of solid growth as we continue to benefit from a strong demand environment,” said Francisco D’Souza, president and chief executive officer of Cognizant.
However, shares of Cognizant were down by around 7% during early trade on Tuesday on the Nasdaq, as investors expressed concerns about rising lending rates in India and the company’s lower-than-expected growth forecast for the year ahead.
An analyst listed two possible factors for this. One, that the reason could be profit-taking, what with the Cognizant stock being one of the star performers of Nasdaq in recent times.
Two, the fact that the company these days is expected to beat street expectations rather than merely meet it. And since, its valuations are stretched, compared to an Infosys, its fall is greater.
Cognizant has been narrowing its lead with Wipro and closing the gap quarter after quarter. From around $ 56 million in Q2FY11, Wipro’s lead had narrowed to $33 million in Q3FY11. Cognizant is expected to announce its March quarter results on May 2. India’s largest software exporter Tata Consultancy Services , which announced a 10% growth in Q4 profit last month, does not give guidance but said it expects demand to be vibrant. It grew revenues by 5% in Q4, while crossing $ 8 billion in annual revenues for FY11.
Cognizant’s revenues from North America, the biggest outsourcing market also went past Infosys’ business from the region. During quarter ended March Infosys had revenues of $1.02 billion from the US, a tad lower than Cognizant’s $1.068 billion during the same period. Cognizant went past Wipro in revenues from North America at the peak of the downturn in June 2009, and today the gap has widened substantially to over $250 million per quarter.
“We remain confident in our strategy of maintaining our non-GAAP operating margins within a targeted range of 19-20% while allowing for strong and consistent investment in new service and delivery capabilities as well as in the best global talent,” said Gordon Coburn, chief financial and operating officer.
Behind Cognizant’s growth is the company’s strategy of chasing more business from fewer, selected customers.
In a year when top outsourcing customers such as Wal Mart, Citi, JP Morgan and BoFA have resumed spending on new projects, tech firms TCS, Infosys, Wipro and Cognizant are scrambling to gain leadership in at least one to two verticals.
While TCS gets over 80% of its revenues from areas of specialisation where it’s either number 1 or number 2. These include BFSI, telecom and manufacturing. Cognizant on other hand, gets 70 per cent of revenues from healthcare and BFSI, the segments where it’s either number one or number two. Infosys gets only 40% of revenues from verticals like BFSI, manufacturing and retail where it is relatively strong and is either number one or two. Wipro gets nearly 10% of its revenues from energy and utilities, the only area where it leads the pack.
With nearly $2 billion in cash, Cognizant added 59 new customers during the quarter, taking the total number of active customers to 714.
At the end of the quarter it had 111,200 employees globally, a net increase of 7,200 during the three months. The company also said attrition (the numbers in BPO and training programmes included) fell sequentially to 15.1%.
Ravindra Khokharia 