economy news corporate news · industrial production rose by 2.4% in may, entering positive...

JULY 13, 2012

Economy News Industrial production rose by 2.4% in May, entering positive territory after

two straight months of decline. .The data for May showed that therecovery in the industrial output was primarily helped by a small recoveryin the manufacturing sector, which grew 2.5% in May after contracting1.25% in the preceding month (ET).

The panel of ministers headed by home minister has decided to allowmobile phone companies to mortgage airwaves This move is likely toallow telecom companies to use spectrum as collateral and raise fundsfrom banks for the upcoming auctions (ET).

Corporate News Telecom tribunal TDSAT has dismissed Reliance Communications plea

to implead sectoral regulator Trai as a party in its petition demandingallocation of additional spectrum by DoT (ET).

Larsen & Toubro has inaugurated its new electrical and automationfacility for switchgear products in Vadodara. Company expects to morethan double the productivity level through this plant (BL).

Kamat Hotels has been negotiating with banks to restructure loansworth more than Rs5 bn as optimistic expansion amid a slowing economypushed it to the verge of default (ET)

PFC Consulting Ltd (PFCCL), a wholly owned subsidiary of the PowerFinance Corporation, is looking for a partner to provide consultancy inproject and design engineering and project management of thermalpower plants (BL).

Land issues are still continuing with NTPC's proposed 1,600 MW super-thermal power project at Katwa in West Bengal. For the last couple ofmonths, the West Bengal Government has been sending repeatedreminders to NTPC to take possession of 575 acres acquired by theGovernment for Rs 1 bn (BL).

Titan Industries Ltd has spun off its third-party premium watch retailingarm into a separate business unit in a bid to put it on an aggressiveexpansion drive. The company, which retails nearly 40 global premium andluxury lifestyle watches under the Helios brand, is looking at doubling thenumber of such stores (BS).

Jindal Steel & Power has raised Rs 35 bn from a consortium of lendersfor a steel project it is setting up in Odisha. The company will use the loanfor setting up a 2-milliontonne coal-to-gas direct reduced iron plant nearAngul in Odisha (ET).

Greaves Cotton, through its subsidiary Greaves Automotive EnginesBusiness, has entered into an agreement with Atul Auto to supply dieselengines for Atul's three-wheeler (BL).

Natco Pharma has started selling copies of global pharma major BristolMyers Squibbs cancer drug Dasatinib, sold under the brand name ofSprycel, in the Indian market, after it got a marketing licence from theUttarakhand government to sell a generic version of the drug (ET).

MTNL, which operates in Delhi and Mumbai, will be the first telecomcompany to introduce Femtocell technology in the country. It has allocatedcapital expenditure of Rs 8 bn in 2012-13 for increasing capacity andcoverage (BS).

Equity% Chg

12 Jul 12 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 17,233 (1.5) 2.1 0.8NIFTY Index 5,235 (1.3) 2.2 0.5BANKEX Index 12,208 (0.9) 4.6 2.7BSET Index 5,384 (5.1) (5.3) (0.4)BSETCG INDEX 10,090 (1.5) 4.5 1.9BSEOIL INDEX 8,027 0.3 3.1 0.6CNXMcap Index 7,451 (0.3) 5.3 (1.7)BSESMCAP INDEX 6,745 (0.7) 6.0 (0.8)

World IndicesDow Jones 12,573 (0.2) 0.6 (2.2)Nasdaq 2,866 (0.8) 1.7 (4.8)FTSE 5,608 (1.0) 2.3 (0.8)NIKKEI 8,720 (1.5) 1.5 (9.6)HANGSENG 19,025 (2.0) 0.2 (7.9)

Value traded (Rs cr)12 Jul 12 % Chg - Day

Cash BSE 2,149 5.2Cash NSE 10,325 2.2Derivatives 132,986 51.8

Net inflows (Rs cr)11 Jul 12 % Chg MTD YTD

FII 251 (60.5) 7,043 49,123Mutual Fund (174) 40.2 (1,459) (7,519)

FII open interest (Rs cr)11 Jul 12 % Chg

FII Index Futures 14,634 1.6FII Index Options 43,795 2.3FII Stock Futures 26,101 (0.4)FII Stock Options 1,820 7.1

Advances / Declines (BSE)12 Jul 12 A B T Total % total

Advances 61 853 251 1,165 40Declines 142 1,264 218 1,624 56Unchanged 0 90 21 111 4

Commodity % Chg

12 Jul 12 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 86.0 (0.1) 4.1 (16.4)Gold (US$/OZ) 1,563.5 (1.0) (2.8) (5.8)Silver (US$/OZ) 27.1 (0.5) (5.9) (14.0)

Debt / forex market12 Jul 12 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 8.3 8.3 8.3 8.5Re/US$ 55.8 55.6 55.8 51.6

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

15,000

16,600

18,200

19,800

Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT July 13, 2012

INFOSYS TECHNOLOGIES LTD

PRICE: RS.2260 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.2360 FY13E P/E: 13.4X

The 1Q results of Infosys came in lower than our estimates. However, thedisappointment came in from average realisations rather than from vol-umes, which surprised positively. Volumes grew by 2.7% (more, if weinclude the impact of a one-time write-off) whereas, average realisationsfell by about 3.7% (3.2% on CC basis). Excluding the impact of one-timewrite off, revenues were almost in line with estimates.

Average realisations fell largely due to mix change and also some pricere-negotiations, which Infosys yielded to. This reflects some flexibilityfrom Infosys on pricing, we opine. Margins fell by 200bps despite therupee depreciation. This was largely due to realization drop and in-creased visa costs. If the mix changes, realisations and margins havescope to improve.

Discontinuation of quarterly guidance (even if it is temporary) and the re-duction in FY13 USD revenue guidance to 'atleast 5%' from '8%-10%growth' earlier, indicates the high degree of uncertainty in the environ-ment. This may keep sentiment subdued in the near term.

The management's focus on high quality revenues has likely had someimpact on the revenue growth. However, we believe this approach willhold the company in good stead over the longer term. Infosys has a TCV(total Contract Value) outstanding of about $387mn already in its Prod-ucts, Platforms & Solutions business, which is encouraging. It continuesto win large deals (4 in 4Q) and has also added 51 clients in 1Q.

We make changes to our FY13 estimates. We have assumed the rupee at53/USD in FY13. We expect the EPS to be Rs.168 (Rs.162 earlier) in FY13.We accord valuations which are at a discount to the average valuationsof previous low-growth phase (FY10), as the recovery is likely to begradual.

We remain structurally positive on the long term prospects of Infosys.The stock is expected to remain range-bound in the short term in theabsence of any triggers and any further fall in price can be utilized tobuy the stock with a medium - to - long term perspective. We maintainACCUMULATE with a PT of Rs.2360 (Rs.2599 earlier).

Recessionary conditions in the developed economies and a sharp appre-ciation in the rupee beyond our estimates are the key risks to our revisedearnings estimates and recommendation.

1QFY13 results - lower than our estimatesInfosys' 1QFY13 results were lower than our estimates.

Quarterly performance

(Rs.mn) 1QFY13 4QFY12 % Chg 1QFY12 % Chg

Turnover 96,160 88,520 8.6 72,500 32.6

Expenditure 69,230 62,050 51,480

EBIT 26,930 26,470 1.7 21,020 28.1

Other Income 4,760 6,520 4,150

PBT 31,690 32,990 -3.9 25,170 25.9

Tax 8,800 9,830 6,990

PAT 22,890 23,160 -1.2 18,180 25.9

PAT after EO items 22,890 23,160 18,180

EPS (Rs) 40.1 40.5 -

EBIT (%) 28.0 29.9 29.0

Net Profit (%) 23.8 26.2 25.1

Source : Company

Summary table

(Rs mn) FY11 FY12 FY13E

Sales 275,011 337,340 393,588Growth % 20.9 22.7 16.7EBITDA 81,020 97,780 112,099EBITDA margin % 29.5 29.0 28.5PBT 93,130 116,820 133,259Net profit 68,230 83,150 96,020EPS (Rs) 119.4 145.5 168.1Growth % 9.6 21.9 15.5CEPS 138.7 169.2 195.6BV (Rs / Share) 477.9 585.7 701.8Dividend / Share (Rs) 40.0 50.0 45.0ROE % 27.1 27.4 26.1ROCE % 37.0 38.5 36.2Net cash (debt) 130,980 205,910 274,175NW capital (Days) 61.0 63.3 60.3P/E (x) 18.9 15.5 13.4P/BV (x) 4.7 3.9 3.2EV/Sales (x) 4.1 3.2 2.6EV/EBITDA (x) 13.9 11.1 9.0

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Dipen [email protected]+91 22 6621 6301



Volumes grew by 2.7% Revenues for the quarter grew by 8.6% in INR terms. In USD terms, they were

lower by about 1.1% to about $1.75bn. The fall in CC terms was about 0.5%.

During the quarter, there was a $15mn reversal of accrued revenues from a cli-ent, which discontinued a transformational project.

As a matter of prudence, the company reversed the revenues despite the clientcontinuing other projects with the company. A part of the reversal impacted therevenues of the company (impact of about 0.4%).

The volume growth was at 2.7%, which was above expectations and also abovethe guidance of the company. If we add back the one-time impact of revenuereversal, the growth was likely higher.

Average realisations down QoQ Average blended realisations on a CC basis were down by about 3.2%. In 4Q,

they were lower by more than 1% QoQ.

The sharp fall in realisations was predominantly on the back of mix change awayfrom consulting/systems integration.

Revenue growth- Services wise

(Rs mn) 1QFY13 4QFY12 QoQ (%) 1QFY12 YoY (%)

Business Operations 61,542 55,502 10.9 46,706 31.8

As a % of revenues 64.0 62.7 62.4

Consul & SI 28,752 27,530 4.4 23,727 21.2

As a % of revenues 29.9 31.1 31.7

Products, PF, Solns 5,866 5,488 6.9 4,341 35.1

As a % of revenues 6.1 6.2 5.8

Total revenues 96,160 88,520 8.6 74,775 28.6

Source : Company

However, the company has indicated that, it has conceded to some pricing pres-sure from clients (though sporadic in nature) during the quarter.

Recent trends are suggesting some increased flexibility from Infosys. The volumegrowth has been above expectations in 1Q and the company has guided to aCQGR of about 3% for the remaining part of FY13.

We believe that, the realisations could have been impacted to some extent bythe reversal of revenues, which was one-off in nature.

Also, going ahead, if there is a reversal of mix change, the realisations may re-ceive a boost, we believe.

Verticalwise, BFSI revenues were flat QoQ in CC terms. The US Government hasrelaxed the deadlines on some of the regulatory / compliance issues, giving moretime to FIs to meet those. This has resulted in immediate scale down in spends,impacting Infosys. The scale downs were in the non-discretionary spends.

Among all, the stress is more in BFSI segment in US, which has now started fol-lowing zero based budgeting and spending on a month-on-month basis.

Manufacturing and Retail /Life sciences reported decent CC growth.

Infosys has been investing heavily in verticals like Life Sciences and Healthcare(investment verticals), which should contribute to growth in the quarters goingahead.

Infosys derives a substantial part of its revenues from discretionary spends andthat also had some impact on the growth.



QoQ Growth in industry segments (Constant Currency terms)

(%) 1QFY13 4QFY12

BFSI -0.4 -5.0

Manufacturing 3.1 2.3

RCL 2.6 -2.9

ECS 0.0 -0.9

Source : Company

Revenues from Europe fell QoQ, largely on the back of revenue reversal and alsodue to scale down in a large account in UK.

QoQ Growth in geographies (Constant Currency terms)

(%) 1QFY13 4QFY12

North America 1.7 -4.1

Europe -7.2 0.8

ROW 2.2 2.5

Source : Company

Large deals continue Infosys continued to win new large deals and had a total of 4 new deals in

1QFY13 (5 in 4Q), out of which, one was of more than $300mn TCV.

The company also won 4 transformational deals during the quarter (7 in 4Q).

With discretionary spends witnessing moderation, the transformational deals flowis expected to slow down.

New deals won based on platforms - TCV of $387mn Infosys has been focusing on products, platforms and solutions (PPS) with a view

to provide better value to customers and convert their capex to opex.

The focus on PPS is also expected to ease the pressure on margins for Infosys inthe medium to long term.

Revenue growth- Services wise

Rs mns 3QFY12 4QFY12 QoQ (%) 4QFY11 YoY (%)

Business Operations 61,542 55,502 10.9 46,706 31.8

As a % of revenues 64.0 62.7 62.4

Consul & SI 28,752 27,530 4.4 23,727 21.2

As a % of revenues 29.9 31.1 31.7

Products, PF, Solns 5,866 5,488 6.9 4,341 35.1

As a % of revenues 6.1 6.2 5.8

Total revenues 96,160 88,520 8.6 74,775 28.6

Source : Company

Revenues from PPS grew by about 7% in INR terms. However, they were likelyflat in USD terms. Infosys currently has 13 platforms and will be launching morein FY13, we understand. In FY12, the company had won 10 clients on these plat-forms in 1Q.

Infosys is also seeing increased traction in Finacle, which won 52 accounts inFY12. The cloud practice is also getting new clients with 150 customers and3000 people in this practice.



On mobility, Infosys has 1200 experts, who service about 60 client engagements.

The company already has contracts totaling to $387mn (total contract value -TCV), which are based on these platforms and which are to be executed overthe next 3 - 5 years.

We see this segment as a critical piece of Infosys' strategy to sustain margins aswell as revenue growth in the future.

Margins down - realisations at play Infosys reported a 190bps fall in EBIT margins, which was a negative surprise, as

it came despite a sharp depreciation of the rupee.

While the rupee depreciation helped to the extent of about 3.8%, realization fallof about 3.7% set-off a large part of the impact.

The company spent on employing more on-site employees and also on visa ex-penses, which impacted margins. There were also higher legal charges duringthe quarter.

Thus, a large part of the negative impact was due to realization change. If thereis a business mix change and realisations improve, margins may be buoyed bythe same, going ahead.

The company added 1157 employees on a net basis but utilization rates fell fromabout 73% to about 71.5%.

The management has indicated that, it will be comfortable with utilization ratesof between 76% - 80%. It has earlier indicated a range of 78% - 82%.

Other income component in line with estimates The other income component came in line with estimates.

The company earned about 9.3% yield on investments but had Rs.340mn offorex related losses.

Infosys has hedges worth $1.1bn as at 1Q end as against $889mn at the end ofthe previous quarter.

Guidance for FY13 lowered once again; quarterly guidance dis-continued Infosys has not given guidance for 2Q, citing increased uncertainty in the short

term. For FY13, it has guided for 'atleast 5% growth' in USD revenues, as com-pared to an 8% - 10% growth guided earlier. EPS in USD terms is expected togrow by about 1% YoY. EBIT margins are expected to contract by about 50bps -100bps over FY12.

The lower projected growth is largely due to the reduction in averagerealisations. Volume growth projection remains largely unchanged at about 9% -10%.

The company has accepted some price reduction requests, which may help thevolume growth going ahead, we believe.

Also, if the business mix changes, the average realisations may improve, pro-vided there are no further pricing cuts. We have assumed 1Q levels of pricing inour FY13 projections.

We understand that, the company has experienced further delays in decisionmaking and in project scale-ups during 1Q. The management has been soundingcaution as far as the macro scene is concerned.

The guidance is lower than what we were expecting.



Financial estimates We have made changes to our FY13 estimates.

Volumes are expected to grow by 10% YoY. We have assumed the rupee toaverage 53 / USD in FY13.

We expect margins to be impacted by the salary hikes and lower assumedrealisations, partly offset by the rupee depreciation. Better utilization levels alsomay restrict the impact.

With tax rates expected to be at about 28% of PBT, PAT is expected to grow byabout 16% YoY. EPS is expected to be at about Rs.168.

Valuations and recommendations We accord valuations which are at a discount to the average valuations of previ-

ous low-growth phase (FY10), as the recovery is likely to be gradual.

Consequently, our target price stands revised to Rs.2360 based on FY13E earn-ings (Rs.2599 earlier).

At our target price, our FY13 earnings will be discounted by 14x.

We note that, significant currency fluctuations may have an impact on our ex-pectations and hence, also the price target.

We remain positive on the medium - to - long term strategy of the company.Management has reiterated its long term commitment to increase the proportionof non-linear revenues.

We concur with the management's view that this is necessary to ensure profit-able growth, while providing more value to customers. Post the recent reorgani-zation, there is greater emphasis on products, platforms and solutions. We re-main optimistic on the company's future prospects, led by a strong managementteam.

However, in the short term, the stock may remain range-bound due to disap-pointment over the FY13 guidance and due to the uncertain macro. ACCUMU-LATE.

Concerns and risks A sharp appreciation in the rupee against various currencies will impact our earn-

ings estimates.

Recessionary conditions in developed economies will likely impact future revenuegrowth and profitability of the company.

We maintain ACCUMULATE onInfosys Technologies with a price

target of Rs.2360

Analyst Holding : 50 shares of Infosys Technologies



TATA CONSULTANCY SERVICES LTD (TCS)PRICE: RS.1235 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.1290 FY13E P/E: 17.9X

TCS' 1QFY13 operating results were largely in line with our expectations.While revenues came in higher than estimates, operating margins werelower. Volume growth at 5.3% (3.3% in 4QFY12) was encouraging andcompares favourably with about 2.7% reported by Infosys.

However, a 1.3% drop in realisations was discomforting. Managementattributed a part of the decline to pricing renegotiations. The companyhas been cautious about pricing and sees low probability of like-to-likeimprovement. EBIT margins were lower QoQ, largely on the back ofhealthy employee additions, higher visa costs and salary increments. Ru-pee depreciation mitigated some of that impact.

On the demand side, the commentary from the management was posi-tive. While the overall macro scene remains uncertain, budget spendshave eased and the spend / budget ratio has improved. It has also notseen any delays in decision making. The company has adequate visibilityinto the client spends and into its own share within those spends, webelieve. The management has maintained its optimism of beatingNASSCOM's target growth rate of 11% - 14% (USD terms) in FY13 in CCterms.

TCS won 8 large deals (6 in 4QFY12) during the quarter. Significant hiringduring the quarter also indicates good visibility for FY13. TCS added 4962employees on a net basis.

We make changes to our earnings estimates, largely on the back of cur-rency fluctuations. FY13 earnings are expected to be Rs.68.8 per share(Rs.63.7 earlier). Accordingly, we change our PT to Rs.1290 based on FY13estimates (Rs.1205 earlier). We have accorded valuations to TCS, whichare at a premium to Infosys. TCS' revenue growth in the past few quar-ters has been better than Infosys and it has been able to restrict impacton margins. The stock has moved up in the past quarter by about 20%.Looking at the limited upside, we recommend ACCUMULATE (BUY ear-lier), while remaining positive on the long term prospects of the com-pany. The stock should be bought at every decline. A sharp appreciationin the rupee against various currencies and a delay in recovery in majoruser economies remain the key risks to our call.

Optimistic on demand The management is relatively more optimistic on future demand and confident

of beating NASSCOM's FY13 revenue growth target of 11-14% in USD terms.The pipeline is healthy, according to the management.

This is in contrast to the muted outlook provided by Infosys.

The management has seen revival in spending decisions since March (after agap of two months) and the deal signings / order bookings have since picked up.

There have been no major project delays. The spend/budget ratio has improvedand the order book is in a relatively better position v/s 4Q end. The deal closuresare also on time. Infosys had indicated that, spending decisions are still not beingmade on time.

Both, discretionary and annuity spends have started seeing traction. The tractionis across verticals and services and the deal signings / order book have improvedQoQ.

RESULT UPDATE

Dipen [email protected]+91 22 6621 6301

Summary table

(Rs mn) FY11 FY12 FY13E

Sales 373,246 488,938 611,584Growth (%) 24.3 31.0 25.1EBITDA 111,893 144,177 179,486EBITDA margin (%) 30.0 29.5 29.3PBT 109,147 139,181 178,359Net profit 86,828 106,383 134,744EPS (Rs) 44.4 54.4 68.8Growth % 26.3 22.5 26.7CEPS 49.0 59.5 75.1BV (Rs / Share) 128.9 155.8 213.3Dividend / Share (Rs) 9.5 25.0 10.0ROE % 37.6 42.0 48.2ROCE % 45.1 52.5 61.2Net cash (debt) 52,823 31,104 101,247NW capital (Days) 80.2 77.0 75.0P/E (x) 27.8 22.7 17.9P/BV (x) 9.6 7.9 5.8EV/Sales (x) 6.3 4.9 3.8EV/EBITDA (x) 21.1 16.5 12.9

Source: Company, Kotak Securities - PrivateClient Research



The new deals have come across geographies and services. Four deals were wonfrom US and two from Europe / UK. Deals also came in from Asia Pacific.

The scale up in existing customers is also picking up and is adequately reflectedin the higher number of $1mn/$5mn/$10mn and larger accounts.

1QFY13 results

(Rs.mn) 1QFY13 4QFY12 QoQ % 1QFY12 YoY %

Turnover 148,687 132,593 12.1 107,970 37.7

Expenditure 105,359 93,476 77,660

EBIDTA 43,328 39,117 10.8 30,310 42.9

Depreciation 2,431 2,398 2,049

EBIT 40,897 36,719 28,261

Other Income 1,754 1,077 2,886

PBT 42,651 37,796 12.8 31,147 36.9

Tax 9,457 8,174 7,063

PAT 33,194 29,622 12.1 24,084 37.8

Minority interest 388 298 281

Adjusted PAT 32,806 29,324 11.9 23,803 37.8

Shares (mns) 1,957 1,957 1,957

EPS (Rs) 16.8 15.0 12.2

EBIDTA (%) 29.1 29.5 28.1

Net Profit (%) 22.3 22.3 22.3

Source : Company

Volumes grew by 5.3% Volumes grew by 5.3% on a sequential basis, which was in line with estimates

and better than Infosys. The growth follows a string of high volume growth ratesin past few quarters.

TCS has been reporting relatively high growth rates in the past few quarters(3.3% in 4QFY12, 3.2% in 3Q, 6.25% in 2Q and 7.4% in 1Q).

The high volume growth reflects the company's ability to mine deeper into exist-ing accounts as well as win new large deals.

The company won 8 (6) large deals (> 100mn deals) including transformationaldeals, during the quarter. The company also got a higher share of wallet, as re-flected in the number of $1mn - $100mn accounts.

In our opinion, TCS continued its significant focus on its large accounts. Consis-tently good execution also helped in improving the run rates.

Pricing was lower by about 130bps. This was a likely due to change in mix andthe like-to-like pricing was stable. However, there were a few instances of pricere-negotiations, which also impacted the average realisations.

The management has indicated that, price increases may be difficult to come bythough no reductions are expected.

The management has indicated that, the US geography is expected to ramp up.Europe has seen revenues grow in 1Q and should start seeing further growthgoing ahead - especially from continental Europe.



Secular growth - across verticals, services, geographies The growth during the quarter has come in across geographies, verticals and

services.

While the growth drivers are different, the underlying aims of clients have beento reduce costs and improve the growth rates.

The management has indicated that, clients are aware of the trying situation andhave already adjusted spends accordingly. Thus, it has not witnessed any majorcancellations of projects from any client across geographies.

All verticals except Energy / Utilities grew at a healthy pace. In CC terms, Retailgrew by 8.3%, Telecom by 7.6% and BFSI by 5.3%.

Vertical - wise growth


Insurance, Banking & Fin ser 63,936 55,954 14.3 46,751 36.8

Manufacturing 11,746 10,475 12.1 8,206 43.1

Telecom 15,315 13,259 15.5 12,633 21.2

Life Sciences & Healthcare 7,880 7,027 12.1 5,614 40.4

Retail 19,627 16,574 18.4 12,525 56.7

Hi-tech 8,921 7,956 12.1 6,262 42.5

Travel / Hospitality 5,501 4,906 12.1 3,995 37.7

Energy&Utilities 5,353 5,039 6.2 4,103 30.5

Media Entertainment 3,271 2,917 12.1 2,375 37.7

Others 7,137 8,486 -15.9 5,506 29.6

Source : Company

Geographically also, all regions except India grew QoQ. US revenues grew on aQoQ basis by 3% in CC terms. Europe revenues were higher QoQ likely on theback of the Friends' Provident deal. Continental Europe is seeing continuedspends and these are expected to compensate for the reduced spends in UK.European clients are looking out for cost efficiencies and growth.

Growth in geographies


North America 79,548 71,070 11.9 57,116 39.3

Europe 14,274 12,994 9.8 10,689 33.5

UK 25,277 20,154 25.4 16,519 53.0

India 10,557 11,270 -6.3 10,041 5.1

A-PAC 11,003 10,210 7.8 7,882 39.6

Latin America 4,907 4,110 19.4 3,347 46.6

MEA 3,122 2,784 12.1 2,375 31.5

Source : Company

Average realizations were lower TCS reported a 1.3% moderation in average realizations, which was due to mix

change and also due to some rate reductions offered to some clients, we under-stand.

The fall follows a 97bps drop of the previous quarter.

Infosys has also indicated that, it has accepted lower rates from some clients andnow TCS is also indicating the same.

This is a discomforting sign and further price movements for all companies needto be watched.



Margins lower than estimates EBIT margins were about 20bps lower on a QoQ basis, despite the rupee depre-

ciation (276bps). Salary increments (200bps impact), higher visa costs and alsohigh employee intake in 4QFY12 and 1QFY13 impacted margins.

Utilisation rates including trainees were up by about 100bps QoQ.

We understand that, the company is comfortable with the absolute number ofpeople on bench, which has increased with the base.

High employee additions TCS added 4962 (11,842 in 4QFY12) employees on a net basis, which was

higher than our estimates.

The company has indicated that, it will likely add close to 50000 employees ona gross basis in FY13. While the number is lower than the additions in FY12, thelow utilization levels on higher employee strength will provide adequate cushionin FY13.

Attrition was also lower at 10.9% on a LTM basis in the IT services business.

Other income The company has other income of Rs.1.75bn. This was largely due to treasury

income.

The tax rate was at 22.2%. For FY13E, we expect the tax rate to be about 24%.

Future prospects We have made changes to our FY13 earnings estimates, largely due to rupee

depreciation.

We expect USD revenues to grow by about 13% in FY13E on the back of highervolumes.

The rupee is expected to be at 53 per USD in FY13. Realisations are expected tobe stable over 1QFY13 levels.

Margins are expected to be almost flat YoY in FY13 largely because of the rupeedepreciation. Salary increments and employee additions may restrict gains.

With tax expected to be at around 24%, PAT is expected to rise by 26.7% toRs.134.7bn. EPS works out to Rs.68.8 (Rs.63.7 earlier).

Valuations The overall macro scene remains uncertain. However, we believe that, the glo-

bal scenario may not deteriorate further. Any further liquidity easing will onlysupport the economies, though temporarily, we believe.

We have largely maintained our valuations for TCS. They are now at a premiumto those of Infosys. TCS' recent revenue growth has been better than Infosys andit has been able to restrict impact on margins.

This leads us to a price target of Rs.1290 based on FY13E earnings. (Rs.1205earlier).

At our target price, our FY13E earnings will be discounted by about 19x. Post therecent run - up in the price, we recommend ACCUMULATE. We recommendbuying at each decline.

Concerns A delay in recovery of major user economies may impact our projections.

A sharp appreciation of rupee beyond our assumed levels may impact our earn-ings estimates for the company.

We recommend ACCUMULATEon TCS with a price target of

Rs.1290



MAY IIP

May IIP growth at 2.4%; 3MMA turns negative after 3 years sug-gesting continued weaknessIIP for the month of May came in higher than street expectation at 2.4% vs. con-traction in Mar (-3.2%) and April (-0.1%). The IIP data for April 2012 was revisedlower to show a negative growth of 0.9% (y-o-y), compared to earlier estimate of0.1% (y-o-y) growth.

Mining sector growth at -0.9% vs. 1.8%

Capital sector goods growth at -7.7% vs. 6.2%

Electricity sector growth at 5.9% vs.10.3%

Basic goods growth at 4.1% vs. 7.5%

Intermediate goods growth at 2.7% vs. 0.1%

Consumer durables goods growth at 9.3% vs. 5.1%

Consumer non-durables goods growth at 0.1% vs. 9.0%

3MMA of IIP fell further to -0.55% vs. 6.97% 3MMA in May 2011. IIP growth inFY12 was just 2.8% vs. 8.2% in FY11, resulting in GDP growth of 6.5% in FY12 vs.8.4% in FY11. If the trend of disappointing IIP performance continues then FY13GDP growth could be much slower than in FY12 and may fall below 6%.

Implication for interest rateThe index is a composite indicator that measures the short term changes in the vol-ume of industrial production. According to the index, the industrial growth for themonth of May is 2.4% YoY. The cumulative growth for the period April-May FY13stands at 0.8%. The three sectors that constitute the index are Mining, Manufactur-ing and Electricity, growth rates of these three sectors for the month are -0.9%,2.5% and 5.9% respectively. As per "use-based" classification there has been nega-tive growth in capital goods at -7.7% and positive growth has been in basic goods4.1%, intermediate goods 2.7%, consumer durables 9.3% and consumer non-durables 0.1%.

RBI's inflation guidance for fiscal at 6.5% has upside risks limiting the scope for eas-ing. These include higher oil prices and suppressed inflation, exchange rate vulner-ability, impact of tax increases, monsoon, higher food inflation and wage pressure.We expect 50 bps reduction in policy rates during FY13, barring external shocks. WPIinflation for June (to be released on Monday) is the last major data before RBI'smonetary policy. Lower core inflation would bode well for the policy. We are notexpecting any changes in monetary policy in next meeting on July 31st.

Components of Industrial ProductionPerformance in Electricity (wt. 10.32%) at 11.2% (from 4.6% last month) was majorsavior, mining sector showed reversal in contraction trend by growing at 1% (wt.14.16%), just 1.6% growth in manufacturing sector was disappointing (wt.75.53%).

Sector Trends:As per Use-based classification, Basic goods grew by 4.1%, de growth of (-) 7.7% inCapital goods and growth of 2.7% in Intermediate goods. The Consumer durablesand Consumer non-durables have recorded growth of 9.3% and 0.1% respectively,with the overall growth in Consumer goods being 4.3%.

(1) IIP reported 900 bps contractions against 1200 bps fall last month (m-o-m). Allthree segments reported improvement in May over April: the largest improve-ment came in the electricity with 6.29%, manufacturing segment at 2.88% (m-o-m); electricity segment saw m-o-m jump of 6.29%.

ECONOMY UPDATE

Jayesh [email protected]+91 22 6652 9172



(2) Under use-based classification, all segments reported m-o-m improvement otherthan consumer goods (-0.27%), basic goods grew by 4.93% (m-o-m), capitalgoods reporting growth of 7.8%, and Intermediate goods recorded growth of3.87% (m-o-m). Durable goods reported growth of 1.15% and non-durable con-sumer goods reported decline of -1.56% m-o-m.

Sector wise only 1/2 of industry groups in manufacturing sector posted positivegrowth (12 out of 22), primarily led by 'communication equipment' has shown thehighest growth of 16.4%, followed by 13.7% in 'machinery' and 12.6% in 'metalproducts'. On the other hand, the industry group 'electric machinery' has shown anegative growth of 28.6% followed by 14.9% in 'furniture' and 6.8% in 'apparel'.

Some of the important items showing high positive growth during the current monthover the same month in previous year include 'mobile phone' (22.8%), 'air condi-tioner' (30.0%), 'carbon steel' (23.5%), 'plastic machinery' (49.6%), 'conductor'(58.1%), 'CR sheets' (30.1%), 'steel structures' (28.5%), 'boilers' (28.8%), 'acid'(23.3%) and 'soft drinks' (25.1%).

Some of the other important items showing high negative growth are: 'cable, rubberinsulated' (-66.6%), 'gems and jewellery' (-23.4%), 'sugar' (-49.8%), 'vitamins' (-62.2%), 'furnace oil' (-30.6%), 'TV sets' (- 25.9%), 'picture tubes' (-87.6%), 'DAP'(-46.9%), 'edible oil' (-42.7%), 'complex fertilizers' (-46.7%) and 'textile machinery'(-30.5%).

Exhibit 1: Performance of Industrial Production (YoY %)

Mining Manufacturing Electricity GeneralMonth 2011 2012 2011 2012 2011 2012 2011 2012

April 1.6% -3.2% 5.7% -1.2% 6.5% 4.6% 5.3% -0.9%

May 1.8% 1.0% 6.3% 1.6% 10.3% 11.2% 6.2% 2.4%June -1.4% 11.1% 8.0% 9.5%

July 0.7% 3.1% 13.1% 3.7%

August -5.5% 3.9% 9.5% 3.4%

September -7.5% 3.1% 9.0% 2.5%

October -5.9% -6.0% 5.6% -5.0%

November -3.5% 6.6% 14.6% 6.0%

December -3.3% 2.8% 9.1% 2.6%

January -2.1% 1.1% 3.2% 1.0%

February 2.3% 4.1% 8.0% 4.3%

March -1.3% -4.0% 2.7% -3.2%

Source: MOSPI and Kotak Securities - Private Client Research

Exhibit 2:Performance of Use Based Industries (YoY %)

Basic goods Capital goods Intermediate goods Consumer goodsMonth 2010 2011 2010 2011 2010 2011 2010 2011

April 7.1% 2.1% 6.6% -19.6% 3.9% -1.6% 3.2% 3.7%

May 7.5% 7.1% 6.2% -13.3% 0.1% 2.2% 7.2% 3.4%

June 7.8% 38.7% 1.6% 3.1%

July 10.0% -13.7% -0.1% 6.3%

August 5.8% 4.0% -1.0% 2.1%

September 5.3% -6.5% -1.4% 5.7%

October 1.3% -26.5% -8.3% 0.0%

November 6.4% -4.7% 1.3% 12.8%

December 5.5% -16.0% -1.5% 10.1%

January 2.0% -2.7% -2.5% 2.5%

February 7.6% 10.4% 0.9% -0.4%

March 0.9% -20.3% -1.7% 1.2%

Source: MOSPI and Kotak Securities - Private Client Research



Exhibit 3: Comparative Performance of IIP

Source: MOSPI

Exhibit 4: Seasonaly Adjusted & MoM Change in IIP

Source: MOSPI

Exhibit 5: Inflation and growth trade-off

Source: MOSPI

‐10%

‐5%

0%

5%

10%

15%

20%

25%

100

110

120

130

140

150

160

170

180

190

200IIP Index [LHS]

3MMA (%) [LHS]

IIP (%) [LHS]

-2000

-1000

0

1000

2000

3000

4000

5000

-10%

-5%

0%

5%

10%

15%

20%

25% MoM Change in IIP (bps) [RHS]

Seasonaly Adjusted IIP (%)

0

20

40

60

80

100

120

140

160

180

-10%

-5%

0%

5%

10%

15%

20%

25%Price Index [RHS] WPI (%) [LHS]WPI % (non food, non fuel) IIP (%) [LHS]



Exhibit 6: Contribution to IIP

Source: MOSPI

Exhibit 7: Sectoral Compenents of IIP

Source: MOSPI

Exhibit 8: Use Based Compenents of IIP

Source: MOSPI

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-6%

-1%

5%

10%

15%

20%

Contri. of Cons. Gds.(%)Contri. of Inter. Gds. (%)Contri. of Capital Gds. (%)Contri. of Basic Gds. (%)IIP [LHS] (%)

-10%

-5%

0%

5%

10%

15%

20%

Seasonaly Adjusted IIP (%) Mining (%)

Manf. (%) Elect. (%)

-30%-20%-10%0%10%20%30%40%50%60%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Basic Gds. (%) Inter. Gds. (%)Cons. Gds. (%) [RHS] Cap. Gds (%) [RHS]



Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

(Rs)

12-Jul Excel Info Kartik Manakchand Rathod B 177,500 25.0

12-Jul Gujarat Medi Trushar Parimalbhai Shah B 21,000 61.5

12-Jul Ifl Promoters Pawan Kumar Singhal Huf B 50,000 6.0

12-Jul Ifl Promoters North India Securities Pvt Ltd S 50,176 6.0

12-Jul Inani Marbles Ajmera Shares Trading Pvt Ltd B 25,000 224.8

12-Jul Invicta Meditek Cnb Finwiz Limited B 30,000 28.5

12-Jul Kilburn Engr Urmila Doshi S 106,484 28.8

12-Jul Marvel Capital Lakhmichand Tirathdas Batra B 25,000 18.6

12-Jul Marvel Capital Mahan Trading Private Limited S 25,000 18.6

12-Jul Mathew Easow Anjana Projects Limited B 231,736 82.0

12-Jul Mathew Easow Vaideeswaran Narayanan Ayyar S 264,000 82.0

12-Jul Networth Stock Indo Websec Ltd B 200,000 22.5

12-Jul Networth Stock Varshaben Shaileshbhai Gadhecha S 200,000 22.5

12-Jul Parichay Invest Munish Rashmikant Patell B 8,800 226.0

12-Jul Parichay Invest Patel Virendrakumar J S 10,000 226.0

12-Jul Pm Telelinnks Vijay Babulal Shah B 60,066 155.9

12-Jul Prabhav Inds Naseen Tradelink Pvt Ltd B 231,102 3.0

12-Jul Sanghvi Forging Vantage Financial Services Pvt Ltd S 65,000 79.3

12-Jul Shreeyash Vijay Jeevan Patel S 29,374 28.6

12-Jul SR Inds Alka Garg B 74,929 4.5

12-Jul SR Inds Avn Corporate Research Pvt Ltd S 78,306 4.5

12-Jul SRS Real Infra BTL Investments And Securities Ltd B 6,603,500 34.2

12-Jul SRS Real Infra Srs Global Securities Ltd S 6,603,500 34.2

Source: BSE

Bulk deals



Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

ONGC 283 1.6 2.6 3.6

Hero MotoCorp 2,063 1.3 0.8 0.3

Jaiprakash Asso 78 2.8 0.8 20.5

Losers

Infosys Ltd 2,264 (8.4) (31.9) 6.8

L&T 1,408 (2.0) (4.9) 1.4

HDFC Bank 580 (1.2) (4.0) 1.9

Source: Bloomberg

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Fundamental Research TeamDipen ShahIT, [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, Cement, Mid [email protected]+91 22 6621 6302

Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Premshankar [email protected]+91 22 6621 6261

Derivatives Research TeamSahaj [email protected]+91 22 6621 6343

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

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