March 21, 2022

From Equity Research Desk

IT Sector: Strong Q2FY22 results along with guidance upgrade by Accenture provides +ve read through for Indian IT players

Accenture reported strong Q2FY22 results, ahead of the streets’ expectations. Total revenue came at $15.0 bn (24% YoY in USD) as against the guidance of $14.3-14.75 bn. Outsourcing revenue grew strong (2.3% QoQ, 19.0% YoY) along with record outsourcing bookings ($8.7bn, +17.6% QoQ; +8.7% YoY) while Consulting grew 29.2% YoY (-0.8% QoQ). On geography wise, US grew by 25.7% YoY (+2.5% QoQ) while Europe grew by 24.3% YoY (-1.8% QoQ); Growth markets grew by 22.0% YoY (+0.1% QoQ). Segment wise, all 13 industrial groups grew double digits in Q2FY22 with Healthcare (18.8% YoY), BFSI (20.8% YoY), Telecom (28.7% YoY), Products (29.6% YoY) and Resources (20.8% YoY).
In Q2FY22, Accenture won 36 clients with >$100 mn bookings vs 20 in Q1FY22. (72/53 clients in FY21/FY20). Accenture also upgraded its FY22 revenue growth guidance yet again to 24-26% YoY in local currency (from 19-22% earlier), a massive upgrade. The FY22 organic guidance upgraded to 19-21% YoY in local currency from 14-17% YoY earlier. Similar to the last quarter, FY22 guidance upgrade is mostly organic and does not include any incremental contribution from inorganic or travel reimbursements. Q3FY22 guidance also stands strong at 4.3-7.3% QoQ growth and 18.4-21.8% YoY in USD terms (22-26% YoY in local currency with -4.0% FX).
Accenture management continues to believe that the current demand is sustainable, led by compressed digital transformation. With strong bookings, robust pipeline, strong guidance upgrade, optimistic demand commentary and no impact of Russia-Ukraine crisis on business (yet), provides strong visibility for the Indian IT Sector. We remain bullish on Infosys, TCS and TechM in large cap IT names and Persistent in Tier-II names.  

Jindal Steel and Power: On track to become net debt-free

Jindal Steel & Power (Mauritius) or JSPML, a wholly-owned subsidiary of JSP has prepaid a USD 357mn loan to its lenders. This prepayment will help clear the entire debt on JSPML. This loan had corporate guarantees from JSP India, which will also get released. Over the past three years, JSP has been able to reduce its overseas debt from USD 1.8bn to USD 130mn post this payment. The bulk of JSP’s overseas debt now sits in its Australian subsidiary (USD113mn). The Group plans to repay this loan by September 22. JSP Group’s net debt has come down from a peak of Rs 465 bn to Rs 109 bn in December 2021. The’ management indicated that the company is pre-paying lenders to further strengthen balance sheet and become a net debt-free company by FY23 through accelerated deleveraging. It is also expanding steelmaking capacity to over 15 MTPA by 2025.
Steel prices across India, China and Europe have increased by 10-15% in the past one month, led by Europe. However, the recent surge of Covid cases in China and related lockdowns has started reversing some gains. In India, HRC prices have increased to Rs75,800/ton, +16% CYTD22 whereas rebar prices have increased to Rs72,500/ton, +34% CYTD22. With disruptions in trade flows, export market for Indian mills has improved and export prices have increased to US$864/ton FoB India, +20% CYTD22. We note that the steel price hikes, so far, do not cover the expected increase in costs as per spot prices. However, given the 30-60 days of consumption lag, the recent surge in costs would hit companies in 1QFY23E whereas price hikes should result in stronger margins in 4QFY22E.
Further, JSP is better placed than peers in the current environment of surging coking coal prices. A third of its steel volumes come from thermal coal based DRI plants. Also, it has partial integration of coking coal from its captive mines in Australia and Mozambique which would help abate cost pressures. JSPL  company expects to complete the JPL divestment in 4QFY22. We note that JSP now has the strongest balance sheet among all primary steel producers. The stock trades at PE of 7x FY23 consensus estimates. We remain positive on JSPL given strong balance sheet to drive future growth capex and ongoing expansion which will drive volumes in the medium-term. We expect the company to generate strong cash generation in the coming years.

Thermax: Won large order from PSU refinery

Thermax Limited has concluded an order of Rs. 11.76 bn from an Indian public sector refinery to set up their Sulphur Recovery Block on LSTK basis. Reducing the sulphur content in fuels produced by the refinery is important for emission control. The sulphur recovery unit (SRU) converts the hydrogen sulphide gas generated during the process to elemental sulphur, thus decreasing the amount of sulphur compounds released into the atmosphere. The scope of supply includes project management, engineering, procurement, manufacturing, construction, and commissioning of the Sulphur Recovery Block. The project is slated to be completed in 28 months. The entry into SRU enables it to bid for a high single-digit share of refinery capex versus mid-single digit levels until now. In this order, TMX outbid the two other contenders in ISGEC and BHEL, both of which have recently won similar orders over the past one year.
TMX would likely end FY22 with >Rs80 bn order backlog. It has won orders in three new EPC businesses beyond CPP – Bio CNG, Bio ethanol, SRU and has outgrown the market for its environment offering for its three segments – air, water, FGD. TMX’s focus on growing its products + services portfolio and on diversifying projects business beyond captive power is playing out well.
TMX is a premier engineering company driven by strong management quality and robust balance sheet. It enjoys negative working capital, which is a rarity in the Capital Goods space. The company has in the past shown strong risk management in terms of bidding for orders, which gives immense confidence to investors so far as future profitability is concerned. However, while we remain positive on the company, we find valuation to be expensive FY23 PE of 41x. Hence, possibly, one should be looking for more lucrative ideas in the small cap capital goods space. In this regard, we like KSB Ltd, which is into Pumps and is seeing good export growth.

Cochin Shipyard: Rs 9.5 bn order from Dredging Corp

CSL has signed an agreement with Dredging Corporation of India to build India’s largest dredger in collaboration with IHC Holland. The project cost is Rs 9.50 bn. The order is almost 10% of the current order book of the company. Hence, it is a significantly large order.
CSL is primarily a defence vessel (Aircraft Carriers) manufacturing company, but is now also adding capabilities with a view to reduce dependence on defence business. This order is part of such efforts by the company to increase presence in the non-defence specialised vessels segment. With MoUs with various global players such as Fincantieri, Italy for ship building, Robert Allan for tug manufacturing and potential discussions with new players already in place, we expect CSL to benefit from upcoming opportunities. On the existing capex plans, ISRF and New Dry-dock projects have been impacted by Covid and contractor-related issues during FY21 and to an extent in 9MFY22. ISRF is expected to commission by the latter half of CY2022. The dry dock project is targeted to be complete by December 2022. CSL is also ramping up manpower.
The company has order book of Rs 106 bn, which is ~ 5x its FY21 revenues. Moreover, it is L1 for a Rs 100 bn order for Next Generation Missile Vessels for Indian Navy.  We expect modest topline CAGR for Cochin Shipyard over FY2020-24E (in line with past trend). The company reported weak gross margins in 9MFY22 which has pulled down its profit margins and earnings growth. This has led to correction in stock price. As a result, the stock’s valuations look appealing at PE of 4x FY23 consensus estimates. Dividend yield is in the range of 5%.

Disclaimer: The views expressed here are based solely on information available publicly/internal data/other reliable sources believed to be true. Facts presented have been verified, however, the same may contain human errors/ errors from database. The information is provided merely as a complementary service and do not constitute an offer, solicitation for the purchase or sale of any financial instruments, inducement, promise, guarantee, warranty, or as an official confirmation of any transactions or contract of any kind.