PRE IPO NOTE: Ambit
>> Mahanagar Gas: Promising play
> MGL is the third largest CGD network in India with a presence in Mumbai and its satellite towns - Thane and Navi Mumbai. We expect MGL to sustain its historical 8% volume CAGR (FY11-15) given under-penetration for both CNG and PNG. Over FY11-15, MGL has posted good operating and free cash flows, generated healthy RoEs of 35%+ (ex-cash) and maintained a 30% dividend payout. Margins have seen some moderation over FY11-FY15 leading to flat profitability wherein investors should seek more clarity. Higher share of OMC-owned pumps in the fuel retailing mix is a source of potential risk. Despite higher business RoEs, we believe MGL should trade at a marginal discount to IGL on account of regulatory support enjoyed by the latter. (Ritesh Gupta, CFA, +91 22 3043 3242)
> (Click here for detailed note)
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> ANALYST NOTES:
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> Tech Mahindra (BUY): Addressing key pushbacks
> TechM is one of our top picks in the Indian IT space (the other being HCLT) given its competitive advantage in the telecom vertical, room to improve margins and inexpensive valuation (11x FY17 P/E on depressed earnings). The key pushbacks on our BUY call are: 1) telecom segment will never pick up; 2) delivering higher margins will be difficult; 3)the rumoured acquisition of Mphasis could fail. We believe that merger related integration spend from top 3 telecom clients + other large deals can potentially add 21% to FY16 telecom segment revenues. In the past, TechM has shown strong growth in its telecom business despite sector headwinds (it grew 19% CAGR in organic, USD terms, ex-BT over FY10-FY15). Apart from margins being materially below management's aspiration levels (13.4% in FY16E vs 19.4% in FY14A), TechM also has bottom up drivers (employee-productivity is 25% below peers, offshore ratio is 8% lower) to achieve better margins. We expect FY18E EBIT margin to increase to 16.5% vs consensus estimate of 14.8%. While the acquisition of Mphasis could possibly end up being unfavourable, we think the downside will be capped given its low valuations. (Sagar Rastogi, +91 22 3043 3291)
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