Biocon’s focus has been on both branded products as well as biosimilars. With respect to the branded biopharma products, the company has been investing heavily in R&D. Biocon’s research ability is now globally recognized after it entered into tie-ups with innovator like Pfizer. At the same time, the company has been capitalising on opportunities in the biosimilars space too. Biosimilars are the generic version of biotech drugs. The company has been selling biosimilars in India and the semi-regulated markets globally. And the big opportunity for the company is when the big regulated markets of US and Europe open up, which is expected in the next few years. Biocon’s strong presence in the biopharma space can be credited to the ability and quality of its management to specialize in the biopharma space. With management focused on long term investments with the aim of strengthening the overall business model, we believe that if bought at the current price or lower, the stock of Biocon has the potential to deliver compounded annual returns of around 24% over the next 3 years.

While the company has been selling biosimilars in India and the semi-regulated markets, there is huge opportunity once the regulated markets notably the US and Europe open up. The company’s strong tie-ups and partnerships, especially the one with Pfizer is expected to contribute significantly to overall growth in the longer term. Further, Biocon had sold its stake in Axicorp in FY11 after it allied globally with Pfizer to commercialise biosimilar insulin products. While Axicorp had been able contribute to Biocon’s topline, the margins of the company were quite poor and had weighed heavy on Biocon’s overall margins as well. Thus, after the sale, while the pace of growth in the topline will be lower, we expect operating margins to significantly ramp up.

As far as India is concerned, the branded formulations business has been growing at a stupendous rate, albeit on a lower base and is expected to continue its stellar growth in the future too. Delay in the biosimilar pathway panning out especially in the US and delay in product approvals are the key challenges that Biocon faces.

At the current price of Rs 274, the stock is trading at a multiple of 12.5 times our estimated FY14 earnings. We, thus, recommend a ‘BUY’ on the stock with a target price of Rs 438, which implies compounded returns of 24% for the next 3 years.

Buy the stock from a 3 year perspective.

• Revenues grow by 17% YoY during the quarter led by an 11% increase in sales volumes. The company sells over 1.5 m units during the quarter (around 1.4 m during 3QFY11).
• Operating margins increase by 4.4% YoY to 15.6%, on the back of lower raw material costs and significant reduction in other expenditure. Operating profits grow by 63.5% YoY during 3QFY12.
• Net profit growth (excluding extraordinary items) at 21% YoY is lower than the growth in operating profits on account of a surge in depreciation charges.

At the current price of Rs 1,892, the stock is trading a multiple of 10 times of estimated FY14 cash flow per share. We believe that on account of its strong cash flow generating ability, the company will not have any major problems in paying the royalty to the outgoing partner, Honda Motors. Despite headwinds in the auto industry in the form of higher interest rates and fuel prices, the company has managed to perform well during the quarter and a strong rural demand has been one of the factors that has bolstered growth in sales. Plus, the fact that two-wheelers are less expensive and more fuel efficient than passenger vehicles has also led to good growth.

Verdict: You can BUY Hero Motocorp at current levels with 3 years perspective to get around 18% annual returns.

Results Summary

• Standalone net sales grow by 22.8% YoY during 3QFY12.
• Operating margins fall to 9.6% YoY in 3QFY12. However, operating profits increase 9.5% YoY during the quarter.
• Net profits increase by 18% YoY during the quarter.
• The company registered an order inflow of Rs 17,130 Cr during the quarter, taking the total order book to Rs 1,45,760 Cr as of 3QFY12.

Results Summary

• Income from operations fall by 42% YoY in 9mFY12 on the back of an over 90% YoY fall in profit booked on the sale of investments.
• Net profit decreased by 46% YoY for 9mFY12. For 3QFY12, profits fall by 85% YoY on lower profits booked on sale of investments.

What to Expect?

The dismal performance of BHIL is mainly due to the  negative performance of the broader markets. As BHIL is an investment company it has not got many opportunities for profit booking on its investments. However, BHIL’s investment book has continued to appreciate nicely as per the latest available data, the portfolio of investments has appreciated 4.6 times over cost. Judging by the performance of the Benchmark index so far this year, as well as the encouraging economic data the company’s prospects going forward seems to be positive. The potential of valuations catching up with earnings growth and stability in economic growth helps present lucrative opportunities in the long term for companies like BHIL.

HOLD the stock with a 3 year target price of Rs 1050.

Results Analysis:

• Net sales grew by 13.5% QoQ in 3QFY12, mainly due to depreciation of rupee as the growth in volumes was 3.2% QoQ during the quarter.
  
• Sales grew by 31.2% Year-on-Year (YoY) for the nine months ended December 2011 (9MFY12)
• Operating margins expanded by 2.1% QoQ to 29.2% against 27.1% in the previous quarter.
  
• Net profits grew by 18.4% QoQ. For 9MFY12, net income increased by 21.6% YoY.
• Close to 12,000 net employees have been added during the quarter. Attrition rate stands at 12.8%.
• Added 40 new clients during the quarter. Have more than 1000 active clients currently.
• Proposed an interim dividend of Rs 3 per share for this quarter.

What to expect from TCS Stock?

• At the current price of Rs 1,080, the stock is trading at a multiple of around 16 times the estimated FY14 earnings.
• TCS witnessed growth across all major business segments and geographies. As per the management, pricing was stable during the quarter.

  Management of TCS stated that a majority of its clients has indicated to keep IT budget flat or higher despite the global headwinds. The deal pipeline is healthy as well.

• As per the management pricing is expected to be stable in the near term and operating margin is going to stay around 27%.
• TCS recruited around 51,000 during the past nine months and has a plan to add15,000 more during the last quarter of the current financial year.
  
• Considering the healthy growth prospects and its deal pipeline TCS is going to perform well despite the global uncertainties. BUY the stock with 3 to 4 years perspective to have around 18% annual returns.
  

Results Summary

• HDFC reported a 39% YoY growth in Interest income in the first 9 months of FY12 on the back of 21% YoY growth in advances.
• Net Interest Margin (NIM) stands at 4.3% in 9 months of FY12 against 4.4% in the same period last financial year.
• Other income falls by 14% YoY in 9mFY12 mainly due to lower gains booked on sale of investments.
• Net profit grows by 17% YoY for 9mFY12. Profits grew only by 10% YoY during 3QFY12 due to lower other income and higher costs of funds.
• CAR (Capital Adequacy Ratio) stands at a healthy 13.9% at the end of 3QFY12.
• Gross Non-performing assets (NPAs) stand at 0.8% at the end of 3QFY12.

Stock Analysis:

The stock is trading at 3.6 times of estimated FY14 consolidated adjusted book value at the current price of Rs 675. In the current interest rate scenario and on a higher base of individual home loans, growth for HDFC is unlikely to come in at a sharp rate going forward. HDFC was able to maintain its margins at 4.3% in the first 9 months, but can still see some pressure on its net interest income (NII) on higher costs of funds. However, with the RBI expected to cut rates over the next few months, HDFC should soon be able to capitalize on the same.

Though the company is doing good, it is better to stay away from this stock on account of expensive valuations.

Summary of Q3 FY12 Results:

• Sales grew by 14.8% on the back of a 3.1% Q-o-Q growth in volumes. For the nine months ended December 2011, sales grew by 22.9% Y-o-Y.The depreciation of rupee helped for this growth.
  
• Operating margins are at 31.2% during the quarter as compared to 28.2% in the previous quarter (Q2 FY12).
• Net Profit grew by 24.4% Q-o-Q because of higher operating margins and other income.
• 49 new clients were added during the quarter taking the total number of active clients to 665.

Guidance for Full year FY12 :

• Infosys management has revised its full year guidance for FY12 and now expects dollar revenues to grow by 16.4% as against earlier guidance of 17 to 19%.
  
• In rupee terms, the management expects revenues to grow by around 24.6% as against earlier guidance of 21.8% to 24% and Earnings per Share to grow by 23.2% YoY as against earlier guidance of 19.7% to 21.6% YoY.

Analysis of results:

• The growth of 24.4% QoQ in net income is on account of the improved operating margins and higher other income.
• Effective tax rate was at 28.6% almost flat.
• Operating margins improved to 31.2% against 28.2% seen in the previous quarter on account of lower operating costs as percentage of sales and  the movement in rupee exchange rate.
• Employee utilization rates declined to 69.9% as compared to 70.2% during the previous quarter. Infosys added 3,266 employees during the quarter.
• The growth in sales was driven by the growth across all of the company’s key segments.
  
  • ‘Application Development and Maintenance’ (38.9% of total sales) witnessed a growth of 15.4% QoQ during the quarter.
    
  • ‘Consulting & System Integration’ (30.6% of total sales) recorded a growth of 12.6% QoQ during the quarter.
    
  • ‘Product Engineering Services’ and ‘Infrastructure Management’ segments recorded good performances as well with 21.6% QoQ and 20.7% QoQ growth in sales respectively.
    
  • ‘Product Revenues’ segment recorded a growth of 30.1% QoQ in sales during the quarter.

What can we expect?

• At the current price of Rs 2,585, the stock is trading at a multiple of 14.8 times our estimated FY14 earnings.
• Infosys had a good quarter with a moderate growth in volume across all its key segments. However, with regards to the future, the management reiterated the concerns of the uncertain demand environment. Hence, the management has revised down its full year guidance for FY 2011-12
  
• The management has stated that the pricing is stable. The average billing rates were marginally higher for both offshore and onsite services as compared to the previous quarter.
  
• The management has stated that they would be looking at high quality revenue growth with focus on increasing non-linearity in business. For that the management would continue to concentrate on ‘Products, Platforms and Solutions’ and ‘Consulting and System Integration’ business.
• BUY Infosys at current level with 2 to 3 year perspective to get good returns (of around at least 16 to 19 % annual returns) in long term.
  

• Current Market Price: Rs 1320
• Target: Rs 2300
• Period: In 2 to 3 Yrs
• Returns: 22% annual returns with 3 yrs perspective

The change of management and latest acquisition of Enam’s investment banking business did not, however, impact Axis Bank’s valuations favorably enough. The bank was known to be a conservative entity with a veteran like Mr P. J Nayak overseeing its operations. The all stock deal to acquire Enam’s investment banking business in FY11 therefore raised quite a few eyebrows. Even the RBI had reservations about buying a business with stocks. However, there is very little in the bank’s recent performance, fundamentals or future prospects to suggest that investor returns will be compromised. Even on a conservative basis, we believe that the bank will continue to outperform sector averages. In fact it may compete with its private sector peers in securing the best margins in the sector. We also derive comfort from the fact that Axis Bank has achieved its growth so far with relative conservatism, unlike some of its peers and the same will hold the bank in good stead.

We recommend investors to ‘BUY’ the stock with the target price of Rs 2,300. This will offer average annual returns of 22% (point to point returns of 75%) to investors over a two to three year period.

Performance at a Glance

• Net sales grew by 6.3% QoQ in 1QFY12, largely driven by 7.5% growth in volumes.  Operating margins declined by 2.4% QoQ due to higher cost of sales.
• Net profit declined by 7.9% QoQ during the quarter. This was mainly on account of higher interest expenses and lower operating margins during the quarter.
• Added 24 new clients during the quarter. Total number of active clients at the end of the quarter was 959.
• Added a net of around 3,576 employees during the quarter. Attrition rate currently stands at 14.8%.
• Infosys proposed an interim dividend of Rs 3 per share.

Results Analysis

• Revenues grew by 6.3% QoQ on account of volume growth of nearly 7.5%. The Revenues from various geographics areas grew during this quarter as shown below:
  • From Middle East and Africa: Grew by 16.9% Q-o-Q.
  • From India : Grew by 12.3% Q-o-Q.
  • From Asia-Pacific: Grew by 7.8% Q-o-Q.
  • From Continental Europe: Grew by 6.3% Q-o-Q.
  • From North America: Grew by 5.3% Q-o-Q.
  • From United Kigdom (UK) : Grew by 4.9% Q-o-Q.
• In terms of industry verticals, TCS saw a robust growth across almost all its key verticals except for the ‘Energy & Utilities’ vertical, which witnessed a decline of 12.2% QoQ. The major drivers were the ‘hi-tech’, ‘telecom’, ‘retail and ‘manufacturing’ verticals. These grew by 14.2% QoQ, 13.1% QoQ, 10.1% QoQ and 7.7% QoQ respectively. The key segment of the company - banking and financial services (BFSI) - (43% of total sales) witnessed a decent growth of 4.6% QoQ during the quarter.
• In terms of service offerings, the main service offering of application development and maintenance clocked a robust growth of 6.5% QoQ during the quarter. The ‘Global Consulting’, ‘Infrastructure services’ and ‘Assurance Services’ drove the growth for the company and recorded an increase of 11.4% QoQ, 11.0% QoQ and 10.9% QoQ.  The BPO division, however, witnessed a decline of 0.1% QoQ.
• The total TCS employee base now stands at around 202,190 with an addition of 3576 employee during this quarter. The attrition increased marginally to 14.8% during the quarter. The increase is despite the salary hikes given by the company to its employees.
• On account of higher interest costs which rose by 57% QoQ during the quarter, the net profits declined by 7.9% QoQ.
• Operating margins declined by 2.4% QoQ during the quarter.  This was mainly due to slightly lower cost of sales (as a percentage of sales). This increase in turn was on account of higher employee related expenses. The company has given salary hikes in the range of 10-12% to its employees during the quarter.

Verdict

At the current price of Rs 1,154, the stock is trading at a multiple of 17.1 times our estimated FY14 earnings. TCS showed strong performance during this quarter where the growth in revenues was largely driven by the volumes across all major business segments and operating regions.

The management has stated that the uncertainty in global environment will continue to boost the demand for services in the near future. This is particularly so for the BFSI segment. The management is also upbeat about the demand for the telecom vertical. This is expected to be driven by the growth in telecom sector especially in the emerging markets.

TCS has good employee utilization level of 83.2% during the quarter and the management expects to continue this trend.

Though TCS is a good company to hold for long term, at the moment the stock price seems a little too expensive. You can buy TCS if the price comes down by around 8 to 10% from current levels for a 15% annual returns from a 3 years perspective.

Q1 FY 2011-2012 Results Analysis

• Sales grew by 3.2% QoQ during 1QFY12. Operating margins witnessed a decline of 2.9% QoQ to 26.1% during the quarter as compared to 29% recorded in the previous quarter. This was on account of higher cost of sales (as a percentage of sales).
• Decline in operating margins offset the positive impact of higher other income as well as lower tax outflow. As a result, net profits declined by 5.3% QoQ.
• The company added 26 new clients during the quarter taking the total number of active clients to 628.
• Guidance: The management expects sales to grow by 15.5%-17.5% YoY and EPS to grow by 7.3%-8.9% YoY. The EPS guidance is slightly higher than the 5.5%-7.3% range guided at the beginning of the current fiscal year.

Verdict

At the current price of around Rs 2800, the stock is trading at a multiple of 14.3 times our estimated FY14 earnings. The management maintains a cautiously positive outlook for the company despite the overall slowdown in the global economic scenario. Particularly with reference to Europe, the management stated that the macro factors remain gloomy. However, with respect to each of the business lines, the management does not see a major impact. This is visible in the healthy pipeline that the company has with respect to Europe. With respect to discretionary spending, the management stated that it is seeing an uptick in the same particularly for the retail, auto, energy and BFSI segments

With respect to margins, the management stated that the margins in the current quarter were negatively impacted by the wage increase. The company has increased wages by 6-8% for the onsite staff and by 2-3% for the offshore staff. For the full year 2012, the management expects margins to decline due to the impact of higher wages as well as due to lower utilization rates and currency movements. The company currently has a utilization rate lower than its normal rates. This is due to the fact that the company has strategically increased its employee base to take advantage of a reversal in the global trends.

Going forward, growth would largely be led by the volumes, while pricing is expected to remain stable at current levels.  You can BUY Infosys from a 2-3 years perspective for around 15% annual returns.