UTI Bank, TCS, Zensar

UTI Bank
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs725
Current market price: Rs645

Price target revised to Rs725

Result highlights

• UTI Bank's Q1FY2008 profit after tax (PAT) was slightly lower than our expectations of Rs188 crore at Rs175 crore, up 45.2% year on year (yoy). The PAT was lower than expected due to higher than expected operating expenses during the quarter.
• The net interest income (NII) was up by 38.8% to Rs446.8 crore compared with our estimate of Rs471 crore. UTI Bank's reported net interest margin (NIM) expanded by four basis points yoy but declined by 34 basis points quarter on quarter (qoq). A sequential fall in the NIM was expected as the bank had invested in low yielding priority sector securities. However, the sequential increase in the cost of funds has been sharp which has resulted in a lower than expected NII.
• The bank has again reported a robust growth, with assets up by 49% yoy and 8% qoq, driven by a strong advances growth of 60% yoy and 12% qoq. The deposits have grown by 45% yoy and 3.9% qoq with an improvement in the current and savings account (CASA) ratio on a year-on-year (y-o-y) basis.
• The non-interest income was up 70.8% yoy and 13.7% qoq to Rs342.3 crore, much above the expectations of Rs273 crore mainly driven by a higher trading income of Rs70 crore, which grew by 346% yoy and 64% qoq. The core fee income was up 67.6% yoy.
• The operating expenses were up by 76% yoy to Rs421.2 crore mainly driven by higher staff expenses, which reported an 85.6% y-o-y and 66.3% sequential growth.
• Although UTI Bank has grown at a robust pace in the last couple of years, yet there are no alarming signs of any deterioration in its asset quality. The net non-performing asset (NPA) level (as a percentage of its net customer assets) improved to 0.59% from 0.61% in Q4FY2007.
• UTI Bank has announced its plan to come out with a follow-on public offer (FPO) for 7.43 crore equity shares (26.3% of its existing equity base) to raise around $1 billion. We have assumed the FPO price to be Rs600 per share, up from Rs550 assumed earlier (as the minimum or floor price for the FPO has been decided at Rs575 per share). This would help the bank to raise around Rs4,459 crore.
• The NIM normally dips for the bank in the first quarter and then gradually picks up. The fee income, business growth and asset quality remain healthy, hence there is no major concern for the bank on the operational side. The capital raising would allow the bank to grow for the next three years without any further dilution. We feel UTI Bank has excellent growth potential which coupled with its strong management and earnings quality should allow it to trade at a slightly higher than its historical book value (BV) valuation band of 2.5-2.7x, as all the parameters that decide the valuations have improved considerably. At the current market price of Rs645 the stock is quoting at 20x its FY2009E earnings per share (EPS), 8.9x its FY2009E pre-provisioning profits (PPP) and 2.4x its FY2009E BV. We maintain our Buy recommendation on the stock with a revised price target of Rs725 at which level it will trade at 2.74x FY2009E BV.

Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,128

Price target revised to Rs1,425

Result highlights

• Tata Consultancy Services (TCS) has reported a growth of 1.1% quarter on quarter (qoq) and 25.5% year on year (yoy) in its consolidated revenues to Rs5,202.8 crore during Q1FY2008. The sequential revenue growth was largely driven by a 7.6% volume growth in the international business and a 2.2% improvement in the billing rates and employee productivity. On the other hand, the appreciation in the rupee adversely affected the revenue growth by 6.4% on a sequential basis.
• The earnings before interest and tax (EBIT) margin declined by 250 basis points to 23.1% sequentially, largely due to the adverse impact of the rupee's appreciation (an impact of 258 basis points) and wage hikes (an impact of 208 basis points). On the other hand, the improvement of 220 basis points in the billing rates and productivity gains limited the decline in the margins. The operating profit declined by 9% qoq to Rs1, 199.9 crore.
• The other income jumped by 68.9% qoq and 129.8% yoy to Rs151.6 crore. If the one-time income of Rs66.3 crore from the stake sale in SITEL is excluded from the other income of Q4FY2007, the other income has leapfrogged by 545.5% on a sequential basis. The jump in the other income component was aided by the gain of Rs107 crore on the foreign exchange (forex) cover during the quarter.
• The high other income and lower tax rate (due to a write-back of Rs29.3 crore of provision made earlier) enabled the company to report a 3.5% quarter-on-quarter (q-o-q) and a 34% year-on-year (y-o-y) growth in its consolidated earnings (adjusted for one-time items) to Rs1,156.2 crore.
• In terms of the outlook, the company doesn't give any specific growth guidance. However, it re-iterated that the demand environment continues to be robust and the gross employee addition would be higher than 32,462 reported in FY2007 (11,000 gross additions in Q2). The TCS management also expects to maintain the net margins on a full year basis, in spite of the steep appreciation in the rupee and the aggressive salary hikes in FY2008 (12-15% for the offshore employees and around 3% for the onsite employees). The loss at the operating level due to the pressure on the margins is expected to be offset by a higher other income resulting from the gains on the forex cover.
• The key operational highlights of Q1 are: (1) an addition of 54 clients; (2) a healthy mining of the existing client base in terms of a robust jump in the number of clients in all categories over the annual revenue run rate of $1 million; (3) a sequential growth of 4.3% in the revenues from the Top 10 clients (in spite of the adverse impact of the rupee appreciation); (4) the attrition rate in the information technology (IT) service business at a comfortable level of 11%; and (5) the closure of one large deal worth over $100 million and three deals of over $20 million each. On the flip side, there has been a slowdown in the sequential growth of revenues from the manufacturing industry vertical and global consulting practice.
• To factor in the exchange rate assumption of Rs40 for FY2008 and FY2009, we have revised down the FY2008 and FY2009 earnings estimates by 2.5% and 3% respectively. We maintain the Buy call on the stock with a revised price target of Rs1,425 (around 23x FY2009 earning per share [EPS]).
  

Zensar Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs484
Current market price: Rs330

Q1FY2008 results: First-cut analysis

Result highlights

• Zensar Technologies has announced a 9.7% quarter-on-quarter and 36.4% year-on-year growth in its consolidated Q1FY2008 revenue to Rs187.9 crore. The same is slightly lower than our estimates.
• However, the performance was disappointing on the margin front. The operating profit margin (OPM) plummeted by over 450 basis points to 9.7% on a sequential basis. The gross profit margin (GPM) declined by around 300 basis points due to the negative impact of wage hikes and appreciation of the rupee. The sequential increase of 19.8% in the selling, general and administration expenses to Rs34.5 crore further added to the 150-basis-point decline in the margin at the operating level. We suspect that the company could have also been affected by a one-time item related to the integration of the recently acquired ThoughtDigital or the setting up of a development centre in Poland during the quarter. Consequently, the operating profit declined by 25.3% quarter on quarter (qoq) and 8.9% year on year (yoy) to Rs18.2 crore.
• In line with the operating profit, the consolidated earnings also declined by 22% qoq and 8.6% yoy to Rs13.4 crore, which is much lower than our expectations of Rs15.8 crore for the quarter.
• At the current market price the stock trades at 10.1x FY2008 and 7.8x FY2009 earning estimates. We maintain our Buy call on the stock and would come out with a detailed update after the investor conference call tomorrow.