Research Notes – February 15, 2011

Hold on Satyam Computer – TP Rs.78

• Satyam Computer (Mahindra Satyam) has produced better than expected result for 3QFY11and the numbers show that the company is making progress in its transformation program.
• Quarterly revenue at Rs.1280 crore increased 3% qoq with improvement in operating profit margin to 6.4%.
• Improvement in operating margin and significant other income pushed profit to Rs.110 crore, much better than the street estimate.
• It seems that the company is making overall progress in its performance. USD revenue for 3Q increased by 4.4% qoq. It appears that Europe and financial services clients drove the growth.
• The company added three more clients and 764 employees during the quarter. It also seems that the attrition rate is stabilizing though it is still higher at 25%.
• Employee cost is still higher at 71% of revenue. But this could be optimized if the revenue growth continues along with higher fresh graduate hiring. It may lead to margin improvement.
• Worries still remain regarding potential legal and other liabilities and this may delay the proposed merger with Tech Mahindra. This could be expected by mid 2011. Delay in the proposed merger appears to be a major negative as it delays potential synergies from the merger.
• The stock is looking attractive at the current price as it factors 15% revenue growth in FY12 and 13 as against 20 – 25% to its peers.
• Hold on with a target price of Rs.78 over one year.

Petronet LNG – Book profit

• Investors may consider booking the gains in Petronet LNG.
• The stock is a strong outperformer in the second half of 2010 and has rallied 62% while the Sensex increased only 17%.
• Near term earning visibility is also high as the company has secured 1.1 million tons per annum for FY12 and 13.
• However, the view beyond FY13 does not look attractive because of increasing LNG input cost and rising competition, which may put pressure on margin.
• In this scenario, investors may consider booking the gains around the current price level (Rs.122 range). The price is expected to drop to Rs.105 range in the long term.

Maintain ‘buy’ on IVRCL Infra – TP Rs.124

• Retain ‘buy’ on IVRCL Infrastructure with a target price of Rs.124 over one year. The stock is currently traded in the range of Rs.72.
• The company reported 3QFY11 revenue of Rs. 1420 crore, 20% increase yoy.
• Operating profit margin at 9.9% remains flat. Profit margin would have been better, had it not been written off receivable of Rs.1200 crore from Andhra Pradesh government.
• PAT at Rs.42.49 crore is lower that estimate because of 61% increase in interest cost at Rs. 59.18 crore.
• The management is confident of a strong 4QFY11 and has reiterated FY11 revenue guidance of Rs. 6250 crore. However, it seems that increase in execution rate is the key in achieving the target.

• Company’s working capital position for 4QFY11 is satisfactory and any increase in debt beyond 3QFY11 level is expected.
• Company has sufficient funds for FY12 and may sell stake in the BOT project to fund the balance equity requirement of Rs.700 crore.
• It seems that the stock price correction has more than adequately factored in the execution slowdown and looks attractive at the current price. However, the target price has been reduced from Rs.176 to Rs.124, considering its higher debt and fall in the market value of its subsidiaries.

Retain ‘buy’ on Reliance Communications – TP Rs.200

• Buy call on Reliance Communication (RCom) is retained with a target price of Rs.200 over one year. The stock is currently available in the range of Rs.97.
• The company has reported 3QFY11 revenue of Rs. 5004 crore, which is lower by 2% qoq and below market expectations.
• Management has attributed the decline in revenue to a shift in focus towards higher margin services.
• Operating profit at Rs. 166.8 crore and operating profit margin at 33.3% are lower than the street estimate because of lower revenue.
• However, PAT at Rs. 480.2 crore is better than estimates because of a tax credit of Rs. 21.3 crore, as against the market expectation of a tax outgo.
• Wireless revenue at Rs. 4064. 4 crore is lower by 2.3% qoq as a result of 9% qoq decline in average revenue per user (ARPU). This is because of a decline in minutes of usage from 276 to 251 minutes, as the company attempted to reduce lower margin traffic from services such as public call offices and fixed wireless phones.
• Global business revenue increased by 4.6% qoq while broadband revenue declined by 6.5% qoq.
• Company’s tower sharing contract with Swan Etisalat for 30000 towers by 2013 remains intact despite the current allegations against Swan in relation to 2G spectrum issue.
• Launched 3G service in the third quarter. It is expected to roll out 3G in most markets by 4QFY11.
• The share is recommended to ‘buy’ based on the base case replacement value of the stock net of debt at Rs.200 per share.

Retain ‘buy’ on Shree Renuka Sugar – TP Rs.110

• Company’s 1QFY11 result is not up to the mark because of lower realization from Brazilian subsidiary. Revenue and operating profit for the quarter are lower than market expectation despite an increase in qoq profit from domestic operations.
• Profit from sugar segment was lower yoy due to low domestic price of sugar. Profitability from distillery division was also lower as the company started ethanol blending program only towards the end of the quarter.
• However, the company is expected to report strong numbers from 2HFY11 due to strong global sugar realization due to increasing sugar prices due to lower than consensus domestic sugar production.
• Refinery volume also is expected to increase as the Khandla refinery starts operations.
• The company has export permits for 0.18 million tons of sugar under the Advance License Scheme, which would be very profitable at the current prices.
• Ethanol blending program was commenced towards the end of 1QFY11 and improved performance is expected from the distillery division in 2QFY11.
• Operating profit margin is expected at 36 -40% with profit margin of around 37% from Brazilian operations.
• Cane crushing capacity is expected to increase from 10.5 million tons in 2010 to 12 million tons in

2011due to increased cane plantation and increased crushing capacity.

• Buy call is retained on the stock on expectation of improved performance from Brazilian operations and better performance in the domestic front because of higher volume and better by – product profitability in FY11.

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February 15, 2011