The BSE Sensex and NSE Nifty are likely to open in green on Monday tracking SGX Nifty and global markets. (Photo: PTI)

The BSE Sensex and NSE Nifty are likely to open in green on Monday tracking SGX Nifty and global markets.

At 8.27 am (IST), SGX Nifty was up 46.50 points, or 0.56 per cent, at 8,242.

Infosys’ second quarter results which is due to be unveiled on Monday may impact market movement.

Asian shares rose on Monday, extending an October rally, as investors hunted for bargains in industrials and basic materials, fueled by a rebound in commodities while the dollar struggled as hopes of a Fed rate rise this year grew even dimmer.

In a sign that the sentiment towards emerging markets may have turned a corner, the much-tracked Bank of America Merrill Lynch fund flow report showed that weekly outflows from emerging market funds were at their lowest since July.

Hang Seng, Nikkei and Shanghai were up 1 per cent, 1.64 per cent and 2.38 per cent at 22,683.01, 18,438.67 and 3,257.17, respectively.

On Wall Street, major indices closed slightly higher on Friday, chalking up one of the best weekly performances so far this year. S&P 500 e-mini futures was broadly flat in Asian trading on Monday.

Back home, Sensex and Nifty gained 0.87 per cent and 0.74 per cent at 27,079.51 and 8,189.70, respectively on Friday.

(With inputs from agencies)

Upgrade to Buy from Neutral — L&T has fallen nearly 20% in just three months and now trades below its historical mean, over-reacting to the faster-than-expected negative news of tepid inflows in Q1, fewer announced orders in Q2, defaults by two road subsidiaries, and delays in Riyadh Metro. The stock has underperformed the Sensex by 13% and trades at 17.5x FY17e adjusted standalone P/E (price-to-earnings ratio). We consider L&T as the best play on India’s infra development and economic growth, and a major beneficiary of the $245 bn defence and $140 bn railway upcoming opportunities. A likely post-Q2 guidance cut is largely priced in, we think.

* Target price cut to Rs 1,746 from Rs 1,845 — We factor in: (i) 10-11% standalone EPS (earnings per share) cuts and 13-15% lower consolidated EPS. For our standalone numbers, we have assumed inflow growth of 5.0% for FY16e, sales growth of 7.5%, 15.0% and 15.0% for FY16e, FY17e and FY18e respectively, and a 40bp margin contraction for FY16e.

* Focus on sales growth, not order inflows—L&T has won enough orders in the past two years to secure decent sales growth over the next three years (with flattish inflows in FY16e). Investors should therefore focus on execution pick-up in 2H FY16 and beyond. Aggressive competition has undoubtedly led to order losses in power, roads, hydrocarbons and DFC in 1H FY16, but L&T’s strong backlog gives the company the luxury to avoid aggressive bidding.

* Rationalising the business and unlocking value — Management’s focus on making the business leaner is evident from the Dhamra port sale; efforts to sell the Kattupalli port; sale of Chandigarh realty assets; value unlocking of legacy landbank in Mumbai, Chennai and Bangalore; and potential listing of subsidiaries.

We upgrade L&T to Buy (from Neutral):

After its 19% decline in the past three months, the stock looks cheap below its historical mean on an adjusted standalone P/E; L&T is a proxy for India’s infra development and economic growth with its unparalleled/diversified skill sets. We think likely guidance cut (order inflows/sales) post Q2 is largely factored in. We cut our target price to R1,746  (from R1,845) to factor in 10-11% standalone EPS cuts and 13-15% lower consolidated EPS. Our top India industrial picks now are L&T, Bharat Electronics, Cummins, Voltas and Crompton Greaves.

Less Expensive Than What Most Believe
* Is L&T stock expensive? L&T is trading 1sd above its historical average consolidated P/E. Some believe these valuations are expensive. We however think the stock is not extremely expensive.
* Some subsidiaries pulling down consolidated recurring PAT (profit after tax): Over FY12-15 some of the developmental subsidiaries, shipbuilding and nuclear forging entities were commissioned and are incurring losses, negating the positive contributions of other subsidiaries to consolidated PAT.
* Don’t look at just cons P/E: We do not believe in attributing negative or zero value to the developmental subsidiaries, shipbuilding and nuclear forging entities just because they are incurring losses currently. These assets have long gestation. Last but not least, in our view, extreme reduction of the subsidiary fair value as the stock corrects is not reasonable.

EPS revisions

We cut our standalone numbers by 10-11% for FY16E-17e (estimates) to factor in slower execution of the Mideast backlog and lower order inflows on account of competition. Further, we factor in smaller margins, extrapolating from trends in Q1FY16. Our consolidated numbers are down 13-15% as we factor in larger losses in shipbuilding and nuclear forgings than earlier. Our standalone and consolidated EPS estimates are 7-18% and 17-30% below consensus respectively.

Defence Opportunity: All Set to Take Off

Defence manufacturing in India is at an inflection point with a capex opportunity of $245 bn over the next decade.

Defence Acquisition Council (DAC) is the apex body of GoI for the capital acquisition. Hence, we believe, GoI’s intent and actions can be/should be judged on the work done by DAC. From July 2014 to July 2015, DAC approved projects worth more than Rs 2,350bn ($36 bn) to kick-start the revival of the defence manufacturing sector for the modernisation of the armed forces. Our interaction with the L&T management suggests the following opportunities are on the horizon:
* Landing Platform Docks (LPD): Four multipurpose ships to ferry tanks, landing craft, and helicopters and to transport troops. In the fray: L&T with Navantia of Spain, Pipavav Defence with DCNS, France and ABG Shipyard with Alion, US.
* Submarines: DAC on October 25, 2014 approved the proposal to build six diesel-electric submarines indigenously at a cost of R500-600 bn. In the fray: L&T, Mazgaon Docks, Pipavav and Hindustan Shipyard.
* Tracked Self Propelled Gun: 100 guns to be procured for R40-50bn. In the fray: L&T with Samsung Techwin and Rosoboronexport.
* Towed Gun:  This is a R120-150 bn opportunity. In the fray: L&T with Nexter, France and Elbit, Israel with Bharat Forge.
* Tactical Communication System: R80-100 bn opportunity. Both players in the fray will develop prototype system with 80% funding from the Government. After trials, the winner will get a major share of subsequent production. In the fray: L&T with Tata Power and HCL Infosystems and Bharat Electronics.

Set to get Rs 50 bn artillery 155mm gun order

According to Economic Times, L&T has emerged as the finalist for the $750m (~Rs50 bn) contract to supply 100 self-propelled artillery 155mm guns to the Indian Army.

Two Road Subsidiaries of L&T IDPL Default

ICRA has revised the rating on: (i) Rs 4.75 bn term loans of L&T Chennai Tada Tollway from BBB- with a stable outlook to D and (ii) R10.1 bn long term loan of L&T Halol Shamlaji Tollway from BB+ with a stable outlook to D.
How many roads does L&T IDPL have?
* L&T IDPL had 19 roads. But two of those, Amravati-Jalgaon and Jalgaon-Gujarat border, were terminated by L&T IDPL with mutual consent (with forfeiture of bids security equivalent to 1% of project cost). L&T IDPL had fulfilled a majority of its conditions, but NHAI could not procure 80% of land after 380 days of signing of the concession agreement.

Key Takeaways

Revenue growth would remain tepid in y-o-y (year on year) terms (our focus), showing further deceleration but q-o-q (quarter on quarter) growth (street’s focus) would be healthy due to seasonality. Cross- currency impact would pull down revenue growth and partially offset margin gains from INR depreciation. Revenue growth convergence between TCS and Infosys would also be apparent, with the two also leading on q-o-q growth. We expect quarter results to determine stock leadership for the next quarter.

Sept-15 preview: Growth lacklustre, cross-currency offsets some INR gains

While sequential USD revenue growth is likely to remain healthy in the seasonally strong quarter, on y-o-y terms growth is likely to remain lacklustre and fail to indicate a pick-up in overall demand. The growth convergence between TCS and Infosys would be apparent, with the two companies also leading on sequential growth. Currency would again play spoilsport, with the movement in certain currencies like AUD (Australian Dollar) and LATAM (Latin America) currencies partially offsetting some gains due to the depreciation of the INR. Cross-currency was a small positive in the previous quarter. Pressure on margins due to pricing and competitive intensity would again be evident, with the companies failing to pass on the full impact of INR depreciation in the P&L.

Currencies – cross-currency again a headwind

Companies had faced a significant headwind from cross-currency moves in the March-15 quarter. Although not as significant, the cross-currency factor would yet again come into play after a quarter of respite. Across our coverage, we expect a negative 60-100 bps impact on reported USD revenue growth. This should offset some gains from the 2.5% q-o-q (quarter on quarter), 7.3% y-o-y (year on year) depreciation of the INR versus USD on a realised rate basis.

TCS—leading on growth. We estimate a q-o-q growth of +3.5% (+6.3% y-o-y, +4.3%in cc, terms). Given the expectations and traditional seasonality of a weaker 2H, growth below 4% in cc terms would be a significant negative. Margins would likely expand 90 bps on account of no visa costs, no wage increases and INR depreciation.

Commentary on demand environment, pricing trends, attrition and update on Japan business and Diligenta would be critical.

Infosys—catching up. We expect growth of +3.5% q-o-q (+6.1% y-o-y, +4.2% in cc terms) and closing of growth gap versus TCS. Margins should expand 80bps q-o-q. Pricing pressure as indicated by company management and Infosys itself being aggressive on pricing has been a focus and margin guidance on the account would be keenly watched.

Wipro—energy woes. USD revenues should likely grow +2.2% q-o-q (+3.5% y-o-y, +3% in cc), in line with its guidance of +1.5% to +3.5% q-o-q growth for the Sept-15 quarter. Energy vertical will likely remain a drag on growth. Margins will likely decline 50bps q-o-q, on account of the two-month incremental impact of the wage hike and cross-currency flowthrough partially offset by the INR depreciation. We expect Wipro to guide to a 2-4% q-o-q growth in the Dec-15 quarter.

HCL Tech—pre quarter warning–In line with the pre-quarter briefing note, we expect HCL Tech to report USD revenue growth of +0.5% q-o-q (+7.8% y-o-y), cross-currency to have an impact of -80bps as indicated and client-specific issues an impact of -130bps. Margins are likely to come under pressure due to wage hike (negative 80-90bps), flow-through of cross currency and client-specific issues and cost associated with delay in the IMS engagement, partially offset by INR weakness. We forecast an 80bps q-o-q decline in margins.

Tech M—some recovery in sight. We expect the company to post 2% q-o-q increase in USD revenue (+12% y-o-y, +3% in cc basis) with growth across the telecom and enterprise segments. An improvement in utilisations due to cost and manpower rationalisation, absence of visa costs, improving margins in LCC and INR depreciation should help margins expand 200bps q-o-q. Commentary on growth of telecom business and on margin trajectory overall for FY16 would be critical, given these have been the reasons for recent disappointments.

Apart from CCD and IndiGo, at least 15 firms have got the go-ahead from regulator Sebi to launch their respective IPOs, while another 17 companies are awaiting green signal from the markets regulator. (Graphic: Sanjay Tambe)

With big brands like Cafe Coffee Day and IndiGo lining up their public offers, the IPO market is set for a four-year record performance this year as close to Rs 6,600 crore has already been raised and plans are afoot for garnering another Rs 20,000 crore.

Coffee Day Enterprises, which runs Cafe Coffee Day (CCD) chain of restaurants, will hit the capital markets this week on October 14 to garner Rs 1,150 crore — which would take the total mop-up in 2015 so far to close to 7,800 crore.

This itself would be the highest amount raised from IPOs in four years.

Additionally, low-cost carrier Indigo’s parent company Interglobe Aviation is slated to hit the IPO market later this month to raise about Rs 2,500 crore.

Besides, many more firms are expected to take the plunge into the primary market during the festive season starting from Dussehra to Diwali. Those in pipeline include Infibeam, the first e-commerce firm in India to tap IPO market.

Apart from CCD and IndiGo, at least 15 firms have got the go-ahead from regulator Sebi to launch their respective IPOs, while another 17 companies are awaiting green signal from the markets regulator.

These 34 companies are together estimated to raise more than Rs 20,000 crore.

“Festive season is approaching, so I expect many companies that are holding their IPO plans and companies that have not hit the capital market despite getting Sebi’s approval would definitely plan to go ahead with their public issues,” CNI Research Head Kishor Ostwal said.

The companies are tapping primary markets to raise funds to meet their business expansion plans, to support capital expenditure needs. In addition, the firms are launching IPOs, to give institutional investors like private equity funds an opportunity to exit.

So far this year, 15 companies have launched their IPOs and have collectively raised over Rs 6,600 crore. This year is set to become the best period in four years in terms of fund raising through initial share-sale programmes.

In comparison, six IPOs had hit the market in the entire 2014 and together garnered just Rs 1,261 crore, while three firms had launched their public issues in 2013 to mobilise Rs 1,284 crore.

A total of Rs 6,938 crore and Rs 5,966 crore had been mopped-up in 2012 and 2011 respectively. The highest-ever mobilisation through IPOs in a single year was in 2010 at Rs 37,535 crore.

Since the beginning of 2015, as many as 37 companies have filed their draft documents with Sebi to float their IPOs. In the same period, the markets watchdog has given approval to 28 firms to launch their initial share sale plans, some of which were pending from the previous year.

Among the forthcoming IPOs, L&T Infotech, the IT unit of engineering and construction giant L&T, is eyeing Rs 2,500 crore, Alkem Laboratories is aiming to garner Rs 1,500-3,500 crore, and Matrimony.com is looking to raise an estimated Rs 600-700 crore.

Others in the queue include Team Lease Services, VLCC Health Care, Dr Lal Pathlabs, Matrix Cellular, Infibeam Incorporation, Parag Milk Foods, Narayana Hrudayalaya, RBL Bank and Quickheal Technologies.

During earlier auctions, government bonds have always been subscribed multiple times, given the huge interest among foreign investors, while the demand for corporate bonds remains less. (Source: PTI)

Leading bourse BSE, will tomorrow, auction investment limits for foreign investors to buy government debt securities worth Rs 5,600 crore.

It would include the increased investment cap announced by markets regulator Sebi last week.

The auction will be conducted on BSE’s ebidxchange from 1530 hours to 1730 hours, after the close of market hours on Monday, October 12, the exchange said in a circular.

A total of debt limits worth Rs 5,600 crore, including new limits, would be auctioned on the exchange platform.

The debt auction quota gives overseas investors the right to invest in the debt, up to the limit purchased.

A mock bidding session was conducted on Friday to check the system performance.

During earlier auctions, government bonds have always been subscribed multiple times, given the huge interest among foreign investors, while the demand for corporate bonds remains less.

Last month, an auction for government bonds worth Rs 661 crore had attracted bids to the tune of Rs 1,561 crore.

Sebi has decided to enhance the limit for investment by FPIs in government securities in two tranches from October 12, 2015 and January 1, 2016.

The limit for overseas investors in securities would be hiked to Rs 1,29,900 crore and Rs 1,35,400 crore on October 12 this year and January 1, 2016, respectively.

Currently, they are allowed to invest up to Rs 1,24,432 crore in government debt securities through auction.