Gladiator Stocks October 10, 2014 Time frame: 6 months Key Technical Data Recommended Price 3810-3750 Price Target 4490.00 Stoploss 3490.00 52 Week High 3892.95 52 Week Low 2880.00 50 days EMA 3605.00 200 days EMA 3282.00 52 Week EMA 3236.00 *Recommendation given on i-click to gain on October 10, 2014 at 09:33 Stock price movement vs. BSE IT 10,700 3,750 10,200 3,550 9,700 Infosys Oct-14 Sep-14 Aug-14 Jul-14 Mar-14 Jun-14 8,200 Apr-14 8,700 2,950 May-14 9,200 3,150 Feb-14 3,350 BSEIT Price performance over last five years 30% 32% 55% -20% -16% 2011 2012 19% -50% 2010 Year 2013 YTD 2014 Gladiator Stocks: Series 5.0 Infosys Ltd (INFTEC) (CMP- | 3810.00) Technical view Strategy: Buy Infosys Ltd in the range of | 3810.00–3750.00 for a target price of | 4490.00 with a stop loss below | 3490.00 on a closing basis The share price of Infosys remains in a well defined up trend on the long term chart and emerged as a key performer over the past few quarters against benchmarks and even within the IT pack. The share price got a further shot in the arm after it came out with better-than-expected earnings on Friday triggering the next leg of the overall up trend. Key technical observations ¾ The share price zoomed to new life-time highs on Friday signalling the end of the short-term corrective phase and resumption of the next up leg within the primary up trend offering a fresh entry opportunity ¾ While long term charts clearly exhibit a structural bull market for the stock, a closer look reveals that since May 2014 lows, the rallies are getting bigger and faster while corrections have been shallow and time consuming affairs. Such price/time behaviour depicts a positive price structure and highlights the underlying bullish trend ¾ Recently, after the July – August rally of (| 3188-3795) consuming 32 trading sessions, the short-term correction consumed 21 sessions retracing the rally by only 38.2% validating the positive structure. More importantly, the entire correction panned out above the key retracement, which coincided with its March 2014 peak, which has reversed its role from a resistance to a support exhibiting the change of polarity principle ¾ The volume behaviour is supportive of the bull market phenomenon as volumes during the current week doubled their 10-week average of 50 lakh shares supporting sustainability of the up trend ¾ Among oscillators, the 14-week RSI is trending above the bullish threshold of 40. It is seen diverging from its nine period average highlighting the bullish momentum in the stock price from a medium-term perspective Conclusion: Based on the various technical observations listed above, we believe the stock is set for its next up leg towards our target area of | 4500 being the 161.8% extension of the previous up move from | 3188.00 - | 3795.00 as projected from the recent higher bottom of | 3570.00 ICICI Securities Ltd. | Retail Equity Research Exhibit 1: Infosys Ltd – Weekly Bar Chart 161.8% extension @ 4554 The share price is in a secular up trend and has recently resolved higher from short term corrective phase. The stock price is expected to rally towards 4500 mark being 161.8% extension of July-August rally 3795 3548 38.2% retracement @ 3570 3188 Analyst 2764 Dharmesh Shah [email protected] Nitin Kunte, CMT nitin.kunte@ icicisecurities.com 52-week EMA 1953 Weekly volumes doubled the 10 week average of 50 lac shares during current week highlighting massive participation in an up trend and boosts sustainability of the trend Weekly RSI is trending up within positive territory and diverging from its 9 period average indicating bullish momentum from medium term Source: Bloomberg, ICICIdirect.com Research ICICI Securities Ltd. | Retail Equity Research Page 2 Stock Data Bloomberg/Reuters Code Sensex INFO in Equity/Infy.NS 26,945 Average Volumes (yearly) Market cap (| crore) 104,541 | 222851 crore 52 week H/L (|) Equity capital Fundamental view • Q2 marked the first earnings address of Dr Sikka who impressively laid the road ahead for building Infosys into a next generation services company. The company aspires to regain the bellwether status by achieving consistent profitable growth through the use of innovation, newer technologies, automation and employee reskilling. The company also plans to renew each and every services currently being offered and augment them with new services along new technologies such as big data and analytics. From an FY15E perspective, though Infosys maintained its 7-9% YoY growth guidance, we believe it has its work cut out in achieving the same. The rationale is with 2.3% growth in Q1 and 3.1% in Q2, Infosys now needs 2.6% CQGR in H2 to achieve the mid-point of its guidance vs. 3.2%, had it delivered 2.5% QoQ growth in Q2, in line with our estimate. Though Q3 and Q4 are seasonally soft, the management noted that the large deal wins and client additions could aid revenue growth • At 26.1%, Q2FY15 EBIT margins were ahead of 25.5% led by operational efficiency (offshoring and utilisation benefit). Infosys highlighted that the margin could range in the narrow band of 25% +/- 1% as it would reinvest efficiency gains into rebuilding sales efforts and building capabilities for newer technologies. Recall, during FY09-14, EBIT margins declined 564 bps to 24% vs. 29.7% in FY09 primarily led by deterioration in operational metrics such as utilisation ex-trainees, which declined 510 bps YoY to 77.4% in FY14 and attrition, which rose 760 bps to 18.7% in FY14 vs. 11.1% in FY09. Utilisation continues to improve 220 bps QoQ to 82.3%, above its FY09-14 average of 74.1%. LTM attrition continues to remain at elevated levels and rose 60 bps to 20.1%. However, the management highlighted that employee engagement initiatives including promotions, 100% of variable payment and re-skilling to adapt to newer technologies has moderated attrition on an MoM basis during the quarter. We expect FY15E margins to improve 150 bps YoY to 25.5% • We estimate Infosys will report revenue, EPS CAGR of 8%, 12% over FY14-16E (with average 25.7% EBIT margins in FY15-16E), slower than 18.2%, 12.2% reported during FY09-14 along with average 28.1% margins, led by improving operating metrics, focus on client mining and a healthy deal pipeline 3893 / 2880 | 286 crore Promoter Stake (%) FII Holding (%) 15.9 41.6 DII Holding (%) 14.1 Financial Highlights | crores FY13 FY14 FY15E FY16E Net Sales 40,352 50,133 53,940 58,876 EBITDA 11,551 13,415 14,734 16,275 Net Profit 9,421 10,648 11,939 13,314 EPS (|) 164.9 186.4 209.0 233.0 Source: Company, ICICIdirect.com Research Valuation summary FY13 FY14 FY15E FY16E P/E 23.7 20.9 18.7 16.7 EV / EBITDA 16.4 14.1 12.8 11.6 5.6 4.7 4.1 3.5 RoNW (%) 25.7 24.4 23.4 22.7 RoCE (%) 28.5 27.6 26.9 25.9 P/BV Source: Company, ICICIdirect.com Research ICICI Securities Ltd. | Retail Equity Research Page 3 Simplex Infra (SIMCON) Time frame: 6 months Key Technical Data Recommended Price 257-251 Price Target 310.00 Stoploss 224.00 52 Week High 392.25 52 Week Low 49.65 50 days EMA 264.00 200 days EMA 219.00 52 Week EMA 207.00 *Recommendation given on i-click to gain on 10th October 2014 at 09:58 Stock price movement vs. BSE Small cap Index 380 11,000 330 10,000 280 9,000 230 Simplex Infra Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 6,000 Apr-14 7,000 80 Mar-14 8,000 130 Feb-14 180 BSE Smallcap Price performance over last five years 201% 150% 70% -10% -26% -56% 2010 2011 43% -66% (CMP- | 257.00) Technical view Strategy: Buy Simplex Infra in the range of | 257.00–251.00 for a target price of | 310.00 with a stop loss below | 224.00 on a closing basis Key technical observations ¾ The share price of Simplex Infra made a sharp rebound from the key supports placed at ~| 205 during the current week. In the process, it pierced through the short-term down trend resistance (placed at ~ | 256), thereby signalling the end of the medium-term correction and resumption of the next uptrend led within the well established uptrend. This offers a fresh opportunity to enter the stock with a favourable risk-reward set-up ¾ Earlier, the stock price retraced its February-July advance (80-391) by 61.8% over the past 13 weeks and is seen finding buying support near the key support of | 200. The significant support of ~ | 200 was formed by the confluence of the key Fibonacci retracement (at | 200) along with rising 52-week EMA (placed at | 207) and rising trend line drawn off September 2013 lows and running through November 2013 and February 2014 lows (currently placed at | 210). During the current week, the price action validated the support and made a sharp rally resulting in a Bullish Key reversal Bar on a weekly time frame ¾ The volume behaviour is in line with the bull market assumption where rallies are supported by volumes. During the current week, volumes surpassed their 50-week average of 2.15 lakh shares by 150% while the corrective decline of the past 13 weeks witnessed subdued participation ¾ Among oscillators, the 14-week RSI is seen bouncing off its own support near reading of 40 validating the bullish momentum from a medium-term perspective Conclusion: Based on the various technical observations listed above, we believe the stock is set for its next up leg and is likely to head towards the August 2014 swing highs placed at | 318 offering a favourable risk-reward set-up to ride the bull trend. -90% 2012 Year 2013 YTD 2014 ICICI Securities Ltd. | Retail Equity Research Page 4 Exhibit 2: Simplex Infra – Weekly Bar Chart (Log scale) 391 The stock price seen taking support at key support and breached short term resistance signalling resumption of up trend Stock price is expected to rally towards August 2014 high of 318 in the near term 318 61.8% @ 200 Bullish Key reversal at key support 80 11 While corrective phases witness low volume activity, rallies have been on the back of far greater participation highlighting bull market phenomenon Weekly RSI is seen bouncing off its support at reading of 40 Which have generated significant rallies in the past Source: Bloomberg, ICICIdirect.com Research ICICI Securities Ltd. | Retail Equity Research Page 5 Fundamental View Stock Data Particular Market Capitalization Total Debt Cash EV 52 week H/L (|) Equity capital Face value FII Holding (%) DII Holding (%) Amount | 1276 Crore | 2928 Crore | 31 Crore | 4173 Crore 392 / 50 | 9.9 Crore |2 11.6 18.9 • Simplex Infrastructure (SIL) is one of the leading and oldest companies in the construction space, with expertise in specialised work such as piling, urban utilities, etc. SIL has an excellent track record of successful project implementation across a wide range of projects ranging from housing & building to power, ports, railways and roads. The company also has a very well known clientele and gets repeat orders from its clients. Unlike other construction players, we also like SIL given its focused approach on the cash contract in the construction space rather than committing huge equity towards the BOT project portfolio • SIL currently has a strong and well diversfied order book of | 16,128 crore, 3.0x book to bill providing strong revenue visiblity over the next few years. In terms of segments, buildings & housing constitutes ~ 40% followed by roads, railways and bridges (~27%) and power (~12%). SIL had an order inflow of ~ | 2,200 crore in Q1FY15, which bodes well for execution, going ahead. We also highlight that SIL will be a key beneficiary from the anticipated recovery in the investment cycle given its higher exposure towards the private sector (~52% of the order book). The company indicated that it expects the topline growth of ~10% and order intake of ~| 7000-8000 crore in FY15, which again would depend on how the macroeconomic recovery shapes up • SIL has a BOT road portfolio of three projects where its equity commitement is very low compared to other construction players. We highlight that SIL has only invested ~| 100 crore among BOT projects, which is only ~6% of its net worth, significantly lower than that of its peers. In terms of BOT project details, Bhubaneswar Chandikol is complete (invested equity of | 65 crore) and is currently tolling at | 25 lakh/day. The company indicated it has applied for the completion of a bridge, post which the toll/day would rise to | 35/day. For the remaining projects (Mahulia Kharagpur & Jowai Meghalia), the company had not yet received land and other clearances. Consequently, it has served a notice for amicable termination of project. Hence, we derive comfort from this stand of SIL, as it ensures no equity commitment towards the BOT projects portfolio, ahead • In terms of financials, we anticipate SIL’s revenues will grow at a CAGR of 14.2% to | 7189 crore during FY1416E on the back of a strong order book and a pick-up in execution given the anticipated recovery in the investment cycle. This coupled with stable margins and leverage, lends us comfort that its net profit will grow at 49.7% CAGR to | 135.8 crore during FY14-16E • At the CMP, the stock is trading at 9.5x FY16 PE, 0.8x FY16 P/BV and 5.5x FY16 EV/ EBITDA. Considering its strong well diversified order book and relatively better quality of management and execution capabilities ensuring 49.7% CAGR in earning during FY14-16E, we believe SIL’s current valuation is very attractive Stock return (%) Return (%) Simplex Infra Supreme Infra NBCC 1M (10.6) (10.6) 35.6 3M (25.1) (24.5) 75.2 6M 60.6 38.7 274.0 12M 389.0 85.7 525.0 FY11 10.4 8.7 1.2 12.0 12.7 FY12 14.3 7.9 1.1 7.8 11.4 FY13 22.8 7.8 1.0 4.8 9.3 FY14 21.1 7.1 0.9 4.5 9.3 FY12 5,897.6 527.7 89.2 18.0 FY13 5,820.8 538.1 59.8 11.3 FY14 5,513.0 589.8 60.6 12.2 Exhibit 1: Key metrics (x) P/E EV / EBITDA P/BV RoNW (%) RoCE (%) FY10 10.4 9.6 1.3 13.1 12.8 Exhibit 2: Financial highlights (| Crore) Net Sales EBITDA Net Profit EPS (|) FY10 4,443.5 433.7 122.6 24.7 FY11 4,691.2 478.2 123.2 24.8 Source: Company, ICICIdirect.com Research ICICI Securities Ltd. | Retail Equity Research Page 6 Strategy Follow up Date Scrip 19-Sep 19-Sep 16-Sep 16-Sep 8-Sep 8-Sep 9-Jun 9-Jun 9-Jun 9-Jun 9-Jun 9-Jun 9-Jun 9-Jun 9-Jun 9-Jun 9-Jun UltraTech CementCash Heidelberg CemenCash KPR Mill Cash Repro Cash EPC Industries Cash Phoenix lamp Cash SKF Cash Aban Cash BEL Cash SBI Cash Federal Bank Cash Essel Propack Cash India Cements Cash Cummins Cash Ingersoll Cash KSB Pumps Cash EIH Hotels Cash ICICI Securities Ltd. | Retail Equity Research Product Strategy RP Target SL Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy 2630.00 78.50 305.00 290.00 196.00 144.00 980.00 720.00 1835.00 2710.00 122.00 95.00 112.00 636.00 669.00 500.00 94.00 3100.00 98.00 375.00 355.00 255.00 180.00 1425.00 1050.00 2350.00 3515.00 165.00 155.00 160.00 860.00 995.00 790.00 150.00 2435.00 69.00 267.00 261.00 167.00 125.00 780.00 575.00 1490.00 2350.00 97.00 64.00 87.00 545.00 528.00 390.00 74.00 Gain/Loss % 30.00 10.00 -10.00 20.00 20.00 19.00 25.00 31.00 Comment Open Target achieved Book profit at 336.5 Stoploss triggered Book profit at 235 Open Book 50% profit at 1180 Book profit at 853 Book profit at 2290 Open Open Book 50% profit at 124 Open Open Open Open Open Page 7 NOTES: • It is recommended to enter in a staggered manner within the prescribed range provided in the report • Once the recommendation is executed, it is advisable to keep strict stop loss as provided in the report on closing basis • The recommendations are valid for three to six months and in case we intend to carry forward the position, it will be communicated through separate mail. Trading Portfolio allocation • It is recommended to spread out the trading corpus in a proportionate manner between the various technical research products • Please avoid allocating the entire trading corpus to a single stock or a single product segment • Within each product segment it is advisable to allocate equal amount to each recommendation • For example: The ‘Daily Calls’ product carries 3 to 4 intraday recommendations. It is advisable to allocate equal amount to each recommendation ICICI Securities Ltd. | Retail Equity Research Page 8 Recommended product wise trading portfolio allocation Products Allocations Product wise Max allocation allocation in 1 stock Return Objective Number of Calls Frontline Stocks Mid-cap stocks Duration Daily Calls 8% 2-3% 3-4 Stocks 0.50-1% 2-3% Intraday Short term Delivery 6% 3-5% 7-10 p.m 4-5% 7-10% Opportunity based Weekly Calls 8% 3-5% 1-2 Stocks 5-7% 7-10% 1 Week Weekly Technical 8% 3-5% 1-2 Stocks 5-7% 7-10% 1 Week Monthly Call 15% 5% 2-3 Stocks 7-10% 10-15% 1 Month Monthly Technical 15% 2-4% 5-8 Stocks 7-10% 10-15% 1 Month Techno Funda 15% 5-10% 1-2 Stocks 10% and above 15% and above 6 Months Technical Breakout 15% 5-10% 1-2 Stocks 10% and above 15% and above 3-6 Months Cash in Hand 10% - - - - - 100% ICICI Securities Ltd. | Retail Equity Research Page 9 Pankaj Pandey Head – Research [email protected] ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai – 400 093 [email protected] Disclaimer The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Ltd (I-Sec). 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