BULL'S EYE

PUNJ LLYOD 
RESEARCH: CITIGROUP 
RATING: SELL 
CMP: RS 219 
Citigroup downgrades Punj Llyod's rating to `Sell' and cuts the target price to Rs 197 from Rs 228. It also reduced FY10E-12E EPS to 8-11% to factor in: (1) 4-5% lower sales growth and (2) 28-40 bps cut in EBITDA margins on potential write-offs in projects. Citigroup values the shipyard on the west coast at a 50% discount to book since at the current stock price, the risk reward trade off seems unfavourable given: (1) risks of additional write-offs in the Ensus project; (2) chances of potential LDs in the Ensus project; (3) cost over-runs on the ONGC Heera project; (4) Auditor qualifications of Rs 69.6 crore at the end of Q2FY10; and (5) Inconsistent earnings delivery. Earnings downgrades of 8-11% lead to a lower target price. Every months' delay beyond 12 December '09 will cost Simon Carves £5m on the Ensus bio ethanol project. Technically, Ensus can also claim liquidated damages on this project in the future. According to the FY09 annual report, estimate revisions on the ONGC Heera project have resulted in costs and revenues on the project increasing by Rs 360 crore and Rs 150 crore respectively. The company has filed claims with ONGC amounting to Rs 510 crore against the increase in cost estimates. Pending acceptance, these claims have not been accounted for in the books. 
INFOSYS 
RESEARCH: MORGAN STANLEY 
RATING: EQUAL WEIGHT 
CMP: RS 2675 
The Infosys stock is likely to continue outperforming relative to the market following December '09 results. However, the stock is trading at about 21x FY11 EPS and absolute returns may be limited in the near term. Despite significantly better results and material earnings upgrades, the stock price reaction has been lukewarm, suggesting that the stock was largely pricing in the turnaround ahead of Street expectations. Infosys' revenues of $1,232 million (6.8% q-o-q, 5% y-o-y) were ahead of the estimates. At the current rate of absolute revenue addition, even dollar revenue growth of over 25% could be achievable in FY11E. Following the strong performance in the December '09 quarter, Morgan Stanley raises FY11E/12E revenues to about $6 billion (+19% y-o-y) and $7.4 billion (+25% y-o-y), respectively. Infosys revised its FY11E campus hiring target from 13,000 to 15,000 offers. The FY11E hiring target could be as high as about 20k campus offers by the time the company guides in April, with gross hiring in the range of 25,000-30,000 for FY11E. Infosys reported a 100 bps q-o-q EBIT margin improvement despite hiking wages during the quarter. The management appeared very confident of maintaining margins. Morgan Stanley believes it may not be difficult for Infosys to maintain EBIT margins of about 32% over the next two years as the contribution from non-linear revenue models increases. 
BAJAJ AUTO 
RESEARCH: CLSA 
RATING: OUTPERFORM 
CMP: RS 1726 
CLSA maintains estimates and `Outperform' recommendation on Bajaj Auto with a target price of Rs 1,900. Bajaj reported strong Q3 results with net profit at Rs 480 crore up 189% y-o-y/18% q-o-q. Net realisations declined 4% y-o-y/3% q-o-q due to a decline in the share of three-wheelers (3Ws)and higher share of Discover 100 cc. Q3 EBITDA at Rs 720 crore grew 137% y-o-y/14% q-o-q while EBITDA margins at 22.0% were up 740 bps y-o-y/ flat q-o-q, ahead of expectations. Net profit also got a small boost from higher-than-expected other income and lower-than-expected interest costs. CLSA expects Bajaj's volume momentum to remain strong in FY11. The Discover 100 cc has received a good response, with retail sales strong even after the festival season and Bajaj has gained market share in motorcycles. The recently launched Pulsar 135 cc is likely to boost volumes further. In 3Ws, Bajaj is likely to gain some market share in FY11 with the launch of new passenger 3W variants by end-FY10. CLSA maintains the EPS estimates for Bajaj Auto, noting the likely sequential decline in margins and continues to prefer Bajaj over Hero Honda, which has been our preference since February '09. 
IDFC 
RESEARCH: JP MORGAN 
RATING: OVERWEIGHT 
CMP: RS 160 
JP Morgan initiates coverage on IDFC with an `Overweight' rating and March 11 PT of Rs 190. JP Morgan believes that IDFC will be a strong beneficiary of India's infrastructure boom, helped by regulatory tailwinds and strong markets. They expect the strong rerating to continue. The cliché suits IDFC well. Its strong investments in developing domain expertise in infrastructure are now expected to pay off. Not only is it the leading specialist in infrastructure financing, but its product suite is all encompassing, which gives it a competitive edge as well as strong long-term RoEs. The downgrade by CRISIL in July '09 was a setback, but the special status as an infrastructure lender (being contemplated by the RBI) could negate that problem. JP Morgan now factors in tier 1 CAR (capital adequacy ratio) reaching 16%. IDFC is not cheap at 2.6x P/BV (FY11E), but this still underestimates the long-term growth potential of the company. JP Morgan thinks that IDFC can grow its balance sheet at about 25% for five years or more, and that this is not fully captured in the current valuations.