Weekly Insight
15 June 2015
For private circulation only
Review and Equinomics’ Views on Economies and Markets
Most Asian equity indices opened with losses this morning as the talks between Greece and the
creditors on the bailout deal failed. On June 18th the euro finance ministers are meeting to
avert Greece’s default.
 Last week most global equity indices fell anywhere from 0.5% to 2%. However, the Chinese
stock market is going strong – its marketcap touched $10 trillion for the first time. In 12
months it has seen an increase of $6.7 trillion. The Chinese marketcap is two-times Japan’s
entire stock market value;
 Wholesale prices in the U.S. rose in May as the biggest jump in fuel costs in at least five
years swamped muted advances in other categories. The 0.5% increase in the producerprice index followed a 0.4% decline the prior month;
Review of the Domestic Economy and Equity Markets
There was a sigh of relief in the domestic market on Friday after is steep fall on Thursday. The
BSE Sensex gained 54 points to end at 26,425 while the NSE Nifty climbed 18 points to close at
7,983. In the broader space, the BSE Midcap gained 0.2% while Smallcap fell 0.5%. For the
week, the Sensex declined 1.3% and Nifty dropped 1.6% while the CNX Midcap plunged
2.4% and BSE Smallcap lost 2.6%. In our view, the negative perceptions are still
haunting the domestic equity markets. Additionally, the Nifty’s fall below important
psychological 8000-mark, Greece concerns and also selling of equities by the FIIs also triggered
sell-off. For the week ended 8th May, 2015, the FIIs were net sellers of stocks worth
Rs.2,966.22 crore while the DIIs were net buyers of stock worth Rs.2,347.57 crore;
 The rupee extended losses for the second straight day on Friday against the American
currency by slipping 9 paise to close at 64.06 on sustained dollar demand due to firm US
dollar in the overseas market. Since the beginning of this year, the rupee has lost 1.64%;
 The Indian sovereign bonds due in 2024 completed the second weekly decline. The yield
on the notes due July 2024, the current 10-year benchmark, climbed 12 basis points from
June 5 to close at 8.11%, the highest level since November, while the yield on the bonds
due May 2025, the new 10-year security issued last month, jumped 10 basis points from
June 5 to 7.89%;
 India’s factory output rebounded in April after touching a five-month low in March, though
retail inflation rose marginally in May. Index of industrial production (IIP) rose to 4.1%
in April from 2.5% in March and 3.7% recorded in same month last year mainly on
account of a sharp pickup in manufacturing. While manufacturing production rose 5.1% in
April, mining output grew at a marginal 0.6% and electricity generation contracted 0.5%.
The volatile capital goods segment—an indicator of the investment demand in the
economy, grew 11.1%, faster than the previous month’s 7.6%. Consumer goods also rose
3.1%.
 The consumer price index-based retail inflation has marginally moved to 5.01% in
May from 4.87% in April, mainly on account of higher fuel prices;
 India's foreign exchange reserves rose marginally by $239.4 million to $352.71 billion in
the week up to June 5. In FY2015, there was an accretion to foreign exchange reserves
to the tune of $61.4 billion compared with $15.5 billion last year;
 The banking credit growth slowed to 9.8% yoy to Rs.66,33,417 crore for the fortnight
ended May 29 whereas deposits of the banks increased by 11.48% to Rs.87,89,273 crore in
the reporting period as compared to Rs.78,83,586 crore in the year-ago period;
 The Finance Minister on Friday promised more capital infusion into public sector banks,
saying there's "merit" in their demand for more funds over and above what was provided
in the Budget. The government has already earmarked Rs.7,940 crore in the Budget for
recapitalization of PSU banks for the current fiscal;
Founder &
Managing Director
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Equinomics Research & Advisory Private Limited - Investment Adviser
15 June 2015
Equinomics
Weekly Insight
|
Review of the Domestic Economy and Equity Markets (Continued)
 Indian economy saw the "strongest growth" (2.1.%, up from 1.4% in the previous quarter) in the first
quarter of 2015 among large economies, including China, the US, Germany and Canada, according to OECD. while
overall GDP growth in the G-20 area was slightly lower at 0.7% during the January-March period;
Equinomics’ View: The Sensex is down 4% year-to-date in 2015 and it is up mere 3.2% on year-on-year basis.
The Sensex, at the current level of 26,400, is back to the level reached in August 2014. Suddenly the majority in the
market have become apprehensive of the further fall in the domestic equity markets and the pessimism is at its peak.
The recent fall in the midcap space reminds us the way stocks cracked by September 2013 – all those invested at the
peak of previous “fear cycle” in 2013 have made phenomenal returns in the markets. We firmly believe that the
damage to the markets is overdone – we are at the beginning recovery cycle of the industrial economy in our view.
Our conviction comes from the following facts:
o Many other major equity markets are in bubble - China trades at 25x, while India at 20x on FY2015
earnings;
o The government has proposed over 30% jump in the capex of public sector undertakings;
o For the whole of FY2015, the FDI inflows rose 27% yoy to $30.92 billion, which is quite impressive;
o While the revenues from the freight for the Railways grew at 17% yoy, the domestic aviation traffic
has grown at 23% yoy in April to 6.5 million (a fourth consecutive month of strong growth);
o The Gross NPAs of PSU Banks have moderated to 5.2% in March quarter from 5.6% in Dec quarter;
o Excise duty collections have jumped 88% yoy during Apr-May – which is partly on account of rise in
duty on petrol & diesel, but significantly due to some improvement in manufacturing sales;
o Current account deficit has fallen to 0.2% of GDP in Q4FY2015;
o The addition to the forex reserves was $30.2 billion in a single quarter (Q4FY2015). Moreover, the RBI
has purchased over $67 billion since January 2014 from the spot markets – while it purchased $33.1
billion in 2014, another $34 billion during January-April 2015. Today, the monetary authority is in a better
position to manage any possible stress on the rupee exchange rate, if the US Fed hikes the benchmark
interest rates significantly;
o While the crude oil prices are still lower by 45% from last year peak price, the global agri- crop prices
are at 6-year low - so if monsoon fails significantly, India can import agri output to contain food prices;
o The top 100 companies have reduced their debt by 4% in FY2015 despite corporate earnings taking hit
in FY2015;
o Many individual stocks have corrected 20% to 30%, making their valuations once again attractive;
o In the last 4 years, Sensex earnings have gone up hardly 5% per annum. If the industrial economy picks up
the Sensex earnings would jump substantially due to low base effect. We believe that the corporate earnings
will pick up as a couple of key macroeconomic indicators provide significant optimism:
Only risk is if monsoon fails in more than 20% of total area. So far the monsoon progress in terms of cumulative
rainfall in the last 14 days is in excess – of course, it is too early to judge the performance. Otherwise, we firmly
believe that once again rally will start by end of July and hence, those investors who have cash can start buying the
stocks now.
Corporate Developments
 ITC Ltd has announced that the company has lined up Rs.8,000-crore investments in the state of Telangana for
ongoing as well as new projects. These investments will go into projects including the doubling of capacity to
1million tonnes of its paper manufacturing plant at Bhadrachlam, Rs.1,000 crore on a second star hotel project in
the Hyderabad city's IT hub and about Rs.800 crore on a large food processing park to be set up outside the city;
 The Vedanta Group on Sunday announced a merger between its flagship Indian mining firm Vedanta Limited
(formerly Sesa Sterlite) and its oil subsidiary Cairn
India. The deal, in which minority shareholders of Cairn India
EquiNomics Research & Advisory Private Ltd | For private circulation only
will receive one equity share in Vedanta for each share held, along with one 7.5% redeemable preference share
with Rs 10 face value, is expected to be completed in the first quarter of calendar year 2016. This is unfortunate
development for the shareholders of Cairn India, which has paid out poor dividends in the past, despite such
huge cash on the books. This cash will go to the amalgamated entity, which will help Vedanta to reduce its
leverage ratio. At the closing price as on last Friday, Cairn India stock is worth Rs.194 (Rs.184 being the share
price of Vedanta plus Rs.10 in terms of preference shares) which is 7.3% premium to the closing price of Cairn
India. The value of preference shares to be allotted to the Cairn India shareholders is about Rs.1,870 crore, which
is mere 9.1% of total cash held by Cairn India (ie net cash, current investments plus Rs.7,830 crore lent to
Vedanta from Cairn India’s cash). We suggest our investors to hold on to the stock – while the opportunity
of utilizing the free cash is already lost, there is a consolation that the merged entity would reduce the
volatility in business and also get better rating as the global economy recovers going forward;
Equinomics Research & Advisory Private Limited - Investment Adviser
15 June 2015
Equinomics
Morning
Insight
| EquiNomics Research & Advisory Private Ltd
Weekly
Insight
We reiterate our ‘BUY’ recommendation on Polaris Consulting & Services Ltd (Polaris)
In tandem with the fall in the domestic market, the stock price of Polaris got corrected by ~5% to Rs.161 on
Friday. We initiated this stock on March 8, 2015 at a price of Rs.148 and post our initiation, the company has
declared a total dividend of Rs.15 per share. Adjusted for this dividend, the stock is down by 14% from its 52-week
high of Rs.204. We recommend our investors to use this correction as an opportunity to accumulate the stock. Our
conviction in the stock emanates from the following reasons:
Consolidation in the midcap IT space will continue
Most large IT companies have come out with poor revenue growth – the year-on-year revenue growth has come
in a single digit for many. Hence, we believe that the next phase of growth for the large IT companies could
come from possible consolidations – already Patni Computer and Hexaware have seen change in the stakeholders and post-change in the stakeholder, Hexaware has seen steep rise in its valuation multiple. We expect
such consolidation should continue in the midcap IT space, which should augur well for the improvement in the
valuation multiples of mid-sized IT companies like Polaris.
IT Past Deals
Sr.No
Target
Deal size (Rs.cr)
Target
Revenue
(Rs.cr)
Deal to
Revenue (x)
Buyer
Deal Date
1
Aug-05
i-flex Solutions
Oracle
3,960
1,140
3.47
2
Jun-06
Mphasis BFL
EDS
3,318
956
3.47
3
Sep-10
Kale Consultants
Accelya Holding
275
169
1.63
4
Jan-11
Patni Computer
Igate
5,560
3,383
1.64
5
Aug-13
Hexaware
Baring Private Equity
3,000
1,994
1.5
6
7
Nov-13
Apr-15
Thinksoft Global
Igate Corp
SQS Software
Capegemini
264
25,700
164
8,077
1.61
3.18
Source: Economic Times
In the past, the acquisition deals have happened at anywhere from 1.5 times to 3.5 times annual revenues. In a couple
of cases, it was stuck at 15x EBITDA. If we apply the same yardsticks to Polaris, we find significant upside potential
for the stock.
Mkt.
Ann.Net
EBITDA
Potential Upside (Deal
Potential Upside
Cap
CMP
EV/Sales
Sales (Rs.cr) (Rs.cr)
at 1.5x Revenues)
(Deal at 15x EBITDA)
(Rs.cr)
Polaris
1609
161
1716
225
0.82
60%
110%
We have chosen this stock for this analysis for few reasons: Polaris has demerged its product business and
the promoter’s stake in this service company is quite low at 29%. Secondly, Polaris has announced 89%
payout from the profit towards dividend – such exhaustion of free cash also makes us to wonder this
company can opt for any possible consolidation.
Polaris has declared a final dividend of Rs.10 per share, taking the total dividend to Rs.15 for the financial year
(including the interim dividend of Rs.5 declared in March 2015). It is worth noting that the company is paying out
Rs.15 per share as the dividend, while its total earning per share is Rs.17 – its payout stands at whopping 89%!
Outlook & Valuations
This cash-rich and high dividend-yield company is trading at 9.4x its FY2015 EPS of Rs.17 which is very attractive as
compared to its close peers. Recent fall in currency also augurs well for IT stocks. Hence, we recommend a BUY
on Polaris Consulting, which offers a lot of comfort in terms of both valuation and dividend payout, with a target
price of Rs.225/.
Polaris Consulting & Services: Equinomics’ View on the Stock Risk and Suggested Investment Horizon
Stock Risk Profile
Investment Horizon
Low
√
1 Year
Moderate
High
Very High
1-2 years
2-3 years
3 years & Above
√
Disclosure: I, G.Chokkalingam, personally do not hold the stock of Polaris Consulting & Services directly or indirectly
through any friends, relatives or proxies;
Equinomics Research & Advisory Private Limited - Investment Adviser
Equinomics
Weekly Insight
(Source: Capitaline, Sensex: on base of 150)
Monsoon Update
Clouds on the western coast give us some hope of good rainfall in next one week.
So far during the first 14 days, the monsoon has been excess in terms of cumulative rainfall at All-India level India received 61.5 mm of rainfall which is 11% more than long term average. However, it is too early to make
any view on monsoon progress.
Equinomics Research & Advisory Private Limited - Investment Adviser
15 June 2015
Equinomics
Morning
Insight
| EquiNomics Research & Advisory Private Ltd
Weekly
Insight
Stock Disclosure: Whether Stock Held By:
Polaris Consulting & Services Ltd.
G.Chokkalingam & Family
Equinomics
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