Happy New Year 2010

Wish you and your family a very happy, successful and prosperous new year ahead 2010. Have a wonderful weekend.

United Breweries

 

The benefits of the truce with Heineken for United Breweries are mostly of longterm nature. At the current price, the stock's valuation does not look attractive

 

THE management of United Breweries (UBL) will breathe easy now. Country's largest brewer, UBL, has finally managed to pull the curtain down over a year-old tiff with Amsterdam-based Heineken, one of the largest beer companies in the world. This resolves, though to certain extent, UBL's concern over increasing competition from the multinational brands in the fast growing Indian market and also the uncertainity over Heineken's business in India.

The agreement and its impact:

The dispute began when Heineken introduced its key beer brands Heineken and Tiger in India through Asia Pacific Breweries (APB), its joint venture arm with Singapore-based Fraser and Neave. At the time, Heineken was also holding 37% stake in UBL. This created a conflict of interests as UBL strongly objected to Heineken's stance in India. 

   According to the current settlement between UBL and Heineken, the latter would purchase the remaining stake in APB and transfer the assets to UBL within a year. It will also transfer rights to brew and distribute Heineken brands in India in the name of UBL. Heineken currently owns 170 beer brands globally and UBL would be the single source of distribution if Heineken decides to introduce any of these brands in India. This means UBL certainly has an immense opportunity to be a major catalyst of Heineken's growth in India.
   The benefit to UBL is not restricted only to the domestic market. As part of the arrangement, UBL will also be able to promote its brands in international markets using Heineken's global reach. The latter commands a network of 115 breweries in 65 countries.

GROWTH PROSPECTS:

Indian liquor market is witnessing a revival of beer consumption given the growth in beer-drinking population among the youth in the country and entry of new players and brands in last few years. With a volume of 174 million cases (9 litres per case), domestic beer market grew by 10% in FY09 and UBL was the largest player claiming 50% share. 

   The growth rate for beer consumption is expected to remain intact in the near future. Further, the deal gives UBL an easy access to the upper layer of the market, the target segment of Heineken. This segment currently constitutes just over 5% of the total beer consumption but it is likely to grow fast with increasing number of the affluent youth class in the country. Thus, it's a double benefit for UBL. While it retains its leadership in the domestic market, it also gets a pie of the high-end market.

VALUATION:

At the price of around Rs 170, UBL's stock trades at 50 times its trailing twelve months (TTM) earnings. There is no other listed pure-play beer company to compare valuations. While UBL stands to gain from the arrangement, most of these gains would accrue over the next few years. Its current valuation appears to reflect these future benefits. Hence, the room for further appreciation looks limited.

 

Mastek

THE stock of Mastek, a Mumbaibased mid-tier IT firm, plunged 7.4% on Friday, triggered by its disappointing results for the September 2009 quarter. Barring Friday’s steep fall, returns on Mastek’s stock have outperformed the Sensex and the Nifty since the beginning of 2009. From January 1 to October 8, the scrip gained 79% compared with a 70% gain in Sensex and 65% in Nifty. However, Friday’s fall has reduced the cumulative return on the scrip to 66%.

Mastek’s stock closed on Friday at Rs 274, its two-month low. The stock has seen high volatility in these two months reflected by its beta, which has inched up to over 0.56 from just over 0.44 six months ago. A stock’s beta measures volatility in its price relative to the volatility in the price of the benchmark index.

The stock has fallen by 20% since August 25 when it had touched its 52-week high of Rs 343. At the current price, Mastek is valued at nearly six times its trailing 12-month net profit. This is lower than P/Es of other similar-size IT companies which are in the range of 7-15. Mastek’s profits have been sliding since March 2009 quarter. The quarterly net profit has fallen from Rs 88 crore in December 2008 quarter to Rs 26 crore in the September 2009 quarter. The company has witnessed delayed order closure in its solutions business due to the global economic slowdown. On top of it, it has finished work on one of its major project in the UK in the last quarter as a result of which revenue from this engagement seized to occur.

Mastek has so far been unable to bag projects that can generate matching revenue and profit.

Investors worried over Mastek’s falling profit can take heart from the fact that the company has provided guidance for sequential improvement of 7% in topline and 10% in net profit for the next quarter.

NTPC may be first to run on FPO fast track

THE government will use the fast track route provided by the market regulator for the first time to raise about Rs 11,000 crore through sale of shares in NTPC next month, a move that could be a precursor of several such issues by state-run companies. The country's largest power generation company will file the prospectus in the third week of January and the issue will be open for subscription immediately, said two officials involved in the procedure. 

   "The government has set January 23 as the target for the issue to open," said one official who asked not to be named. The government is looking to raise as much as possible before March 31 to bridge the large fiscal deficit of 6.8% of the country's national income. On December 11, market regulator Sebi had relaxed the guidelines for follow-on public offers (FPO). This will facilitate the forthcoming share sales in by state-run blue chip firms. The government has appointed four investment banks – JP Morgan, Citi, Kotak Mahindra Capital Company and I-Sec — for the issue. 

   Due to fast tracking of this issue, the proposed FPO of Rural Electrification Corporation (REC), which was expected to tap the market before NTPC, will have to wait. REC plans to raise around Rs 4,500 crore in which the government's portion will be around Rs 1,200 crore. But in the case of NTPC, the government will raise around Rs 11,000 crore by divesting 5% of its stake. "The government expects a substantial premium over the current market price of NTPC," said a banker advising the company. 

   The REC issue could not use the fast track route as it the company does not meet the minimum three year listing norm. It had filed the prospectus with Sebi on December 4 and is awaiting approval. The NTPC issue will also set the trend for the auction route. This will be the first FPO in which the portion subscribed by Qualified Institutional Investors (50% of issue size) will be auctioned. The government will have bridge a large fiscal deficit, which is 6.8% of the country's national income. 

   The guidelines issued on December 11 have brought down the average market value of public shareholding of the issuing company to a minimum of Rs 5,000 crore from the earlier requirement of Rs 10,000 crore. If public share holding in a company is less than 15% of the issued capital, the annualized trading turnover of its equity shares need to be 2% of the weighted average number of its shares available under free float in the previous six months. 

   A leading banker said this low benchmark will help companies with low public float such as NMDC, whose float size is only 1.62% of its paid up capital, to enter the market under the fast track route. The government has initiated the process of divesting 8.38% stake in NMDC and set to appoint six banks for the issue in the next couple of days. Since the current market value of NMDC is around Rs 1,60,000 crore, the proposed divestment of 8.38% stake may fetch Rs 14,000 crore to the government. The regulator has also allowed companies that have not complied with the provisions of listing agreement relating to composition of board of directors for any quarter during the last three years, but are in compliant at the time of filing of the document with the registrar or stock exchanges, to enter the market under the fast track route.

 

Mangalam Cement

Mangalam Cement operates in northern markets where demand is still strong due to a plethora of government-funded projects

the past three years, thanks to robust demand conditions. The octogenarian industrialist had recently willed this company to granddaughter Vidula Jalan. However, his grandson Kumarmangalam Birla, who will inherit BK Birla controlled Kesoram Industries and Century Textiles, will own a 17.7% stake in Mangalam Cement via these entities and account for a significant portion of the promoter holding.

The Mangalam Cement stock is possibly one of the cheapest in the sector right now, trading at just 2.6 times its trailing 12 months earnings. Also, it trades at just 1.2 times its book value for the year ended March ’09, coupled with a high dividend yield of 4.6%. This stock provides an attractive investment opportunity for long-term investors.

CAPACITY & EXPANSION PLANS

Mangalam’s capacity was 2 million tonne at the end of FY 09, double the level from two years ago. The company invested Rs 198.6 crore as capex during this period and its cash flow was Rs 277 crore. Despite the capex, Mangalam Cement’s leverage ratio was just 0.17 at the end of March ’09, compared to 0.48 two years earlier.

Its key markets are Rajasthan, UP and Delhi, where demand conditions have remained strong thanks to governmentfunded projects and rural housing projects, and price realisations have also remained higher on a y-o-y basis. The board of Mangalam Cement had earlier given its in-principle approval for setting up a new cement plant with a capacity of 1.5 million tonne at its existing plant site in Rajasthan’s Kota district. In addition, the company plans to set up a captive power plant with a capacity of 17.5 MW, for which it has placed orders.

The cost of this expansion project is estimated at Rs 750 crore, which would be financed via internal accruals to the tune of Rs 300 crore and the remainder by debt. Given the strong cash flows of Mangalam Cement, financing this project over the next two years should not be a problem.

FINANCIALS

The company’s operating profit margin rose by 1,460 basis points y-o-y to 36.2% in the September ’09 quarter, helped by its realisation that improved an estimated 23.2% y-o-y to Rs 3919 per tonne. However, the company’s total despatches declined 2.1% y-o-y to 423,000 tonne in the second quarter of FY 10.

Compared to its peers, Mangalam Cement has handled its operational costs quite efficiently. For instance, in the year ended March ’09, the company spent nearly Rs 831 per tonne on power & fuel costs. The corresponding figure for Shree Cement and JK Cement was Rs 781.6 per tonne and Rs 1,000 per tonne, respectively, for FY 09. Also, while Mangalam Cement has reported a decline in its power cost over last three years, its other two peers have reported a rise.

VALUATIONS

At market price, Mangalam Cement trades with a P /E of just 2.6 times its trailing earnings. Binani Cement, on the other hand, trades at 5.4 times while JK Cement trades at 3.9 times. Investors could consider Mangalam Cement for long-term investment.

Cadila Healthcare

At A P/E Multiple Of 23, Cadila's Is A Premium Valuation For A Mid-Sized Pharma Company

Cadila Healthcare, the Rs 3,000-crore Gujarat-based pharma company, has been on a steady growth path over the past couple of years. Given its track record and the potential for growth, going forward, the stock has been undergoing rerating of sorts. Rising by over 60% during the past five months, Cadila's stock has outperformed the Sensex, which has increased by a mere 8% during the same period.

While the company is one of the top five companies in the domestic formulations market, it earns onethirds of its revenues from the international generics business. The company's growth in topline, primarily comes from its exports business, which it has grown organically as well as inorganically.

It's one of the fastest-growing generic companies in the US, using its own active pharma ingredients (APIs) in half of the products. It is actively strengthening its regulatory drug pipeline. In FY09, the company acquired Spanish generic player Laboratories Combix and took a majority stake in South Africa's Simalya Pharmaceuticals. Despite having presence in regulated markets, the company has not faced any compliance issues with any overseas drug regulator.

Cadila's contract-manufacturing business built through joint ventures with Switzerland-based Nycomed, US-based Hospira and others is also gradually contributing to company's growth.

The company has also been investing in innovative research and has a new drug discovery and development agreement with Eli Lilly in the area of the cardiovascular segment. This agreement has the potential to accrue milestone payments for Cadila in case Eli Lilly commercializes a molecule.

The company's revenues and earnings have been on a steady improvement. In the first half of FY10, the company has clocked a 26% YoY growth in net sales and nearly 40% rise in net profits. The company, in its presentation to investors, has communicated of its intention to cross sales of over $1 billion (more than Rs 4,500 crore) by 2010.

The company is valued at little over thrice its net revenues (over the past four trailing quarters). It is currently trading at a price-to-earnings multiple of 23. This is a premium valuation for a mid-sized Indian pharma company. The company will have to continue delivering growth to sustain these valuations, going forward.

REC FPO may be in markets during Jan-Feb 2010

The government will come out with a follow-on public offer (FPO) for state owned Rural Electrification Corporation (REC) in January-February 2010, a Power Ministry official has said, reports CNBC-TV18.

Earlier in November, REC CMD P Uma Shankar had also confirmed the FPO would hit market by February 2010.

The company has filed a draft red herring prospectus (DRHP) with the Securities & Exchange Board of India for FPO of 171,732,000 equity shares of Rs 10 each, constituting 20% of existing paid-up capital on December 03, 2009.

 

REC is engaged in the business of financing and promotion of transmission, distribution and generation projects throughout India.

It had received an approval for FPO from the Ministry of Power on November 9, 2009. The issue consists of a fresh issue of 128,799,000 equity shares by the company and an offer for sale of 42,933,000 equity shares by the President of India, acting through the Ministry of Power, Government of India.

The issue comprises a net issue of 171,382,000 equity shares to the public and a reservation of 350,000 equity shares for eligible employees. The net issue shall constitute 17.36% of the fully diluted post-issue capital of the company.

The government holding will be reduced to 66.80% post issue. The object of the offer for sale of shares is to carry out disinvestment and the company would not receive any proceeds from the offer for sale. It intends to utilise the funds being raised through the fresh issue to augment capital base to meet future capital requirements.

The book running lead managers to the issue are Kotak Mahindra Capital Company Ltd, DSP Merrill Lynch Ltd, ICICI Securities Ltd, JM Financial Consultants Pvt Ltd and RBS Equities (India) Ltd. Karvy Computershare Pvt Ltd is the registrar. For the quarter ended September 30, 2009, the company has reported net profit of Rs 928.89 crore on total income of Rs 3,136.71 crore. The state-run company raised over Rs 1,600 crore through an initial public offer of 15.61 crore shares in February 2008.

On Friday, the share of the company closed at Rs 230.40, down 1.87% on the BSE. Its current market cap stood at Rs 19,783.53 crore. At current market price, the issue raising amount stands at Rs 3,956.70 crore.

 

IndusInd Bank

Further Appreciation In Price Unlikely As Valuations At Par With Top-Ranking Banks

 

 

INDUSIND Bank has been an outperformer in the current rally, which started in March 2009. Its stock has risen 391% since March 2009 compared to the 160% and 96% gains registered by CNX Bank and Nifty, respectively. Even in the last month-and-a-half, when the broader indices stagnated, IndusInd Bank's stock gained 14%. 

   The surge in the stock price does not come as a surprise, as the bank has been growing at a fast clip since the last financial year. For instance, its profit grew by 123% in FY09. It has been on a high growth trajectory even in the current financial year. Its net profit rose 211% in the six months ending September 2009.

This may be from a lower base, but still it is a creditable feat given the economic scenario marked by the lowest credit growth in a decade. At the end of FY08, the bank's current account and savings account (CASA) ratio stood slipped to 16%. As a result, it recorded a net interest margin (NIM) of a mere 1.7% in FY08. 

   The bank chalked out a plan to improve its share of CASA deposits to reduce its cost of funds. It was able to improve CASA's share to 21% while NIM climbed to 2.9% in the September 2009 quarter. Similarly, its return on assets (RoA) improved to 1.1% in September 2009 quarter from 0.6% a year ago. 

   The stock market has duly rewarded the stock, as is evident from the rebound in IndusInd's stock price. The stock is trading at 2.8 times its book value. Top private banks such as HDFC Bank, ICICI Bank, Axis Bank and Yes Bank are trading at an average 3.3 times their book value. The stock appears to be reasonably priced. However, the chances of further appreciation seem to be limited as valuations are at par with the best banks. Moreover, there is a risk that if the stock market slides, IndusInd Bank's stock could fall sharply than the market — similar to the way it outperformed the market. Investors may be better off booking profits at current levels.

 

Royal Orchid

Pan-India Presence & New 5-Star Hotels Help Co Derisk Bangalore-Centric Biz Model

THE worst seems to be over for the Indian hospitality industry. Nothing illustrates this better than the turnaround in the fortunes of Bangalorebased Royal Orchid Hotels. With four properties in the IT city, it was one of the many hotel stocks which fell when the Indian IT industry began to face headwinds in 2008. In the past one year, however, the stock has managed to beat the Sensex, though not by a very wide margin. The stock has generated a return of close to 80% since the beginning of the current year against a 70% appreciation in the Sensex during the period. 

   With factors such as a revival in business travel, concerns over security ebbing and start of the peak holiday season, hotels are seeing rising occupancy levels. Being an upcoming player in the hospitality industry, Royal Orchid Hotels has not been untouched by these developments. In January, occupancy levels at the company's properties had fallen to as low as 30%. They subsequently improved to 70% by the end of November this year. Its average room rate during the period jumped from Rs 3,500 per night to Rs 4,700-4,800 levels. With the upswing in business, the company seems to be stepping up its investment. It recently completed a four-star project (104 rooms) in Ahmedabad and is planning to set up five-star hotels in Hyderabad and in Jaipur. These two projects will open in October 2010. It recently acquired a 53% stake in Amartara Hospitality at Powai in Mumbai. It plans to develop the property as a four-star hotel with 250 rooms. The hotel is expected to open in 2011. 

   Royal Orchid now has a presence in Bangalore, Mysore, Pune, and Goa. With this joint venture and new five-star hotels coming up in Jaipur and Hyderabad, the company will have a pan-India presence, thus de-risking its business from excessive dependency on the Bangalore market. 

   Revenues from these new projects should certainly boost the company's bottomline during the second half of the year. Orchid is hoping to see its net profit in the range of Rs 8-10 crore in the second half, which will be more than double the figure it reported during the first half of the fiscal. Though the September-March period is always the peak season for the hotel industry, this year it's special owing to market expectations of a revival in economic sentiment.

 

LIC Housing Finance

Profile
LIC Housing Finance (LICHF) is the fourth-largest housing finance company in India. But based on incremental disbursements comes to be ranked second among all the housing finance companies. Last five years have been the golden time for the housing loan business. During this period housing loan business has grown at the rate of 31 per cent. While LICHF in the same period has been able to increase its loan book at a compounded annual growth rate (CAGR) of 23 per cent.

LICHF has diversified into fields like Care Homes Ltd, which runs assisted living community centres for senior citizens; Financial Services Ltd, which is into marketing financial products and services; Asset Management Company Pvt Ltd; and Trustee Company Pvt Ltd, dealing with venture capital trusts/funds.

Fundamental Performance

During boom time (5 years), the company has been able to increase its bottom-line at the rate of 30 per cent per annum, but not at the cost of quality — during the same period the gross non-performing assets (NPAs) reduced from 4.4 per cent in FY04 to 1.07 per cent in FY09. 91 per cent of the current loan book pertains to retail customers with only 9 per cent exposed to large ticket customers i.e. developers.

Stock Performance

Recently, LICHF raised around Rs 675 crore to keep up with its target 30 per cent expansion of the loan book in FY10. Though this has dampened its RoE somewhat, in the long run it augurs well. In the last 5 years the stock has rewarded its investors handsomely with 34 per cent annualized returns. But investors have to bear in mind that the stock’s recent (March 9, to September 15, 2009) rise of 257.4 per cent is due to internal restructuring. It is currently trading at 68 per cent above its 5-year median PE with a dividend yield of 1.93 per cent. Compared with HDFC, LICHF is trading at a steep discount, but at a premium to other financing companies such as GIC Housing Finance and Dewan Housing Finance.

History

LICHF was set up in 1989 to channel money into the housing sector by the Life Insurance Corporation of India (LIC). In 1994 the company was listed to raise funds for expanding its loan portfolio. Currently, LIC holds 40.84 per cent stake in it.

Engineers India

Engineers India is quite uniquely placed in the engineering consultancy and lump sum turnkey projects. As there are no other domestic companies, Engineers India enjoys a near monopoly position, though there are some MNCs present in this space. With the leeway provided by the Govt, the company is considering tapping the exports market, especially West Asia through JVs. It has doubled its sales with nearly 80% increase in profits for trailing four quarters till Sept'09. The stock has beaten the Sensex by a margin of 150% over the last 12 months. Thus with the UPA govt's increased focus to divest stake in most PSUs, it is essential for retail investors to be aware of the not-so-popular yet investible options. They might turn out to be the multi-baggers.

3i Infotech

3i Infotech (3i) started off in 1999 as a back-office service provider for the ICICI Group. Now, 3i is a software products, technology and transaction services provider, primarily to the BFSI segment.  It has a client-base of 1,500 customers spread across the globe, especially in North America, which contributes 50 per cent to its total revenue.

 

Over the past 5 years, 3i has increased its revenue from Rs 292 crore to Rs 2,305 crore, while its profits jumped from Rs 32 crore to Rs 266 crore. It has been able to grow in both organic and inorganic way. The result is that it now ha s a high debt-equity ratio of 2.1. To service this, it issued qualified institutional placement (QIP) of Rs 317.8 crore in September.

 

3i posted a 4.8 per cent QoQ growth (4.1% YoY) in its 2QFY10 top-line, but high interest costs, depreciation and higher operating costs affected the bottom-line. Profits stood at Rs 52.9 crore, down 9.1 per cent QoQ.

 

Institutional investors have also shown their faith in the company by increasing their shareholding from 24.11 per cent in March, 2009 to 39.14 per cent till September, 2009. The funds' interest in the company has also gone up from just 17 funds at the end of May, 2009 to 24 at the end of October, 2009. The strong institutional interest in the recent months has also boosted its stock price, currently trading at a 49.47 per cent higher P/E than its own 3-year median P/E. But there is potential for upside in the stock since it is still off its peak value.

 

Parsvnath

Company Raises Rs 358 Cr In Six Months To Improve Debt-Equity Ratio, Boost Profits

DELHI-BASED builder Parsvnath Developers has been in the news after the company sold off a 50% stake in one of its premium residential projects in Gurgaon in Haryana. Private equity fund Sun Apollo has invested Rs 75 crore in the special purpose vehicle (SPV) executing the project. The stock did not react much after the sale announcement on Friday, as it had already gained around 15% that week. Due to a weak market on Tuesday, the scrip dropped 3.55%. The stock has gained around 160% year-to-date compared to the 74% gain in the Sensex. 

   Parsvnath has a major presence in North India with an area of over 193 million sq ft. Close to 80 million sq ft is now under construction, out of which about 85% is residential. Out of this, 35 million sq ft is already pre-booked and will generate revenues of Rs 6,500 crore. The company has already recovered half of this amount and the balance is expected over the next two years. It is yet to incur construction expenses of Rs 1,400 crore. The company is now looking at delivering approximately 30 million sq ft within 24 months. 

   The realty firm reported a 22% drop in revenue for the quarter ended September 30, 2009 at Rs 173.1 crore as compared to Rs 221.5 crore in the same quarter last year. However, net profit during the quarter rose 160% to Rs 55.4 crore

from Rs 21.2 crore a year ago. After four years of negative cash flow, the company was able to generate Rs 140 crore from its operating activities due to pre-sales in the residential segment. The company expects to increase its net margins significantly from the current 25% in the coming quarters. 

   With this deal, Parsvnath Developers has raised Rs 358 crore in the past six months through private placement of shares and stake sales at project level. The fund-raising exercise is meant to cut its debt-equity ratio of 0.8x as on March 31 to 0.6x. This will result in savings on interest outflow and thus improve profitability. 

   At a trailing 12-month (TTM) EPS of Rs 4.9 and the current price of Rs 120.7, the company is valued at 24.6 times its earnings. At an annualised EPS of Rs 10, the stock is trading at a 12.1x forward P/E for FY10. Though the company is getting its act together, it makes sense for new investors to wait and watch for the next few quarters. Promoters have pledged 10.36 crore shares representing 53.68% stake of the company as on November 13, 2009. Total promoter shareholding in the company is 80.33% as on September 30, 2009.

Kesoram Industries

Kesoram Industries is one of the cheapest stocks in its category and may be re-rated as the management control passes on to the Aditya Birla Group
KESORAM Industries, the flagship company of the BK Birla Group, is a diversified player with a presence in cement and tyres. Octogenarian industrialist BK Birla had recently willed this company to his grandson, Kumar Mangalam Birla. Kesoram has benefited from the boom in the cement industry over the past three years, which helped the company offset the slump in profits of its tyre division. It is now set to emerge as one of country’s leading tyre makers. The company is currently one of the cheapest stocks in its category and may be re-rated as the management control passes on to the Aditya Birla Group, India’s third largest business house.

Business:

Kesoram Industries’ installed cement capacity at end of FY09 was 5.3 million tonnes, with plants in Karnataka and Andhra Pradesh. In addition, the company has recently brought on stream an additional 1.6 million tonne cement capacity. This additional capacity is expected to help the company’s net sales jump by Rs 500 crore in FY10. The tyre division’s capacity was at 37.1 lakh units at the end of FY09, with plants in Orissa and Uttarakhand. The company’s viscose filament rayon yarn capacity is at 6,500 tonne at the end of March 2009. The cement division contributed nearly 48% to the company’s topline in FY09, while tyres accounted for 45.5%. The company is currently setting up a tyre plant to cater to the twowheeler sector at Uttarakhand with a capacity of 78 lakh tyres per annum and capex of nearly Rs 190 crore.

Expansion plans:

The company is planning a further expansion plan of nearly Rs 1,550 crore, which would entail the addition of 1.65 million tonnes cement capacity in Karnataka, with a capex of nearly Rs 750 crore. Also, the company plans to invest Rs 800 crore for expansion of its tyre business. Post-expansion, Kesoram is set to emerge as one of the top three tyre makers in the country. This expansion plan will be financed by a mixture of internal accruals and debt. During FY09, Kesoram’s cash flow from operations was to the tune of Rs 370 crore. Against this, cash used for investment activities was a little over Rs 1,034 crore. The company’s debt-equity ratio had risen to 1.46 at the end of FY09, slightly higher than the previous year. However, with Kesoram’s comfortable cash flow and expected turnaround in the tyre business, the leverage ratio is expected to either remain stable or decline over the next two to three years.

Financials:

In the March 2009 quarter, the company’s net sales grew 26.1% to Rs 1,108 crore, but its operating profit margin declined due to higher operating costs, especially in the tyre business.

Jyothy Labs

Small obsessions look to be adding up to big gains. After the big Budget disappointment, most things 'consumer' look bright and beautiful and along with them so do the fortunes of the fast moving consumer goods (FMCG) sector. And what adds to the supplying businesses' lustre is their classic 'cash flow positive' character and relatively low capital hungriness.

In the current market scenario, companies making chips, beverages, detergents, razors, soaps, toothpaste and creams, promise much. Every man woman and child needs these products and demand is constant. Juxtaposed against the uncertainty in all other sectors, FMCG looks set to dominate.

We enumerate here the overall factors that impinge on the sector and what makes buying into FMCG stocks worthwhile.

FMCG Overview

The sector is the fourth-largest in the economy and had a market size, despite the slowdown, of $25 billion (Rs 120,000 crore) in retail sales in 2008, having grown consistently over the last 3 years — compounded annual growth rate (CAGR) was 20 per cent (6% between 2001-05). What is more, the sector is poised to grow at a 10-12 per cent rate for the next 10 years. It’s set to reach $43 billion (Rs 206,000 crore) by 2013 and $74 billion (Rs 355,000 crore) by 2018, a study by FICCI-Technopak stated.

The power-packed figures, however, are not expected to add wings to FMCG companies. AC Nielsen data shows that the sector grew 16.2 per cent year-on-year (YoY) during April-May 2009, which is lower than the 19 per cent reported for last year.

WHY FMCG

Sure, on the stock markets, FMCG companies' shares are not the most popular, even though they will never fall as sharply as those from other sectors. Simply stated, FMCG stocks are not the stock of choice in a bull run because they don’t generate superlative profits for investors.
But, in a volatile world, what FMCG stocks have become is a bulwark against uncertainty. Albeit its heyday may be over — in the 1990s it was one of the biggest wealth creators — yet they still must form a good chunk of any investor's portfolio.

Here's why: BSE FMCG index fell from 2,319 points on December 31, 2007 to 1,987.38 on December 31, 2008, a fall of 14 per cent. In the same period, Sensex fell by 52 per cent from 20,286.99 to 9,647.31 points — this was the time of the slowdown squeeze.

In fact, during the global meltdown, the sector showed resolve, with Hindustan Unilever (HUL) delivering a gain of 17 per cent — when everyone else was down by 50 per cent or more. Companies like Marico, Dabur, Godrej and HUL logged double-digit growth over the last three years — the first three by about 20 per cent and the last by 14 per cent.

This kind of guarding of capital and generating of gains during a downfall, caught the eye of the mutual fund industry, with all 12 companies on FMCG index between December 2007 and March 2009, except Colgate-Palmolive, Tata Tea and Ruchi Soya, seeing a rise in funds' holdings — funds’ stake in HUL rose 85 per cent, Dabur 143 per cent and United Spirits 337 per cent.
The first of the 5 stock selections is highlighted here. Over the next few days we will reveal the rest one by one.

The numbers are eye-catching, but the same can be said of real estate and pharma, but are they really so scintillating for stocks?

Jindal Stainless

THE current economic downturn has taken its toll on many companies, especially those in commodities space. The drop in sales volume, volatility in raw material cost and headwind in foreign currency market are some of the factors affecting these companies negatively. Jindal Stainless is one such company that suffered badly in last few quarters. Though its latest quarter result does reflect some signs of recovery, the recent run-up in its stock prices provides little upside potential, at least in short-term. The stock has nearly tripled in last three months. At the current price level the stock looks overvalued and investors can consider exiting the stock at its current price.
Business:

Jindal Stainless is the largest integrated stainless steel manufacturer in India. It currently has two plants, one at Hisar and the other at Vizag . The Hisar plant is a fully integrated stainless-steel plant with a capacity of 0.72 mtpa (million tons per annum). The Vizag plant mainly produces ferrochrome and has an annual capacity of 40,000 tonnes. Its proposed integrated stainless steel green field project in Orissa has further been delayed and is still in its initial stage.

Growth Potential:

The company plans to set up a fully integrated stainless steel plant in Orissa. The green field project, which was earlier scheduled for completion by FY11 has been delayed further. Upon completion, the Orissa plant will produce 1.6 million tons of stainless steel capacity per annum and raise JSL combined capacity to 2.5 mtpa. To meet its captive power requirement, it is also planning to build a power plant with a capacity of 500 MW.

Financial:

The company has been badly hit by the recent economic slowdown. Sharp decline in export, higher operating expenses and rising interest cost are some of factors affecting its business negatively. The foreign exchange losses from its foreign currency asset/liabilities and forward contracts have pulled down its net profit substantially. The company has reported net losses for last three consecutive quarters. For instance, its net loss for the quarter ended Mar ’09 stand at Rs160 crore.

Valuation:

The company reported a consolidated net loss of Rs 609 crore for the financial year ended March, 2009. Even after adjusting for the exceptional items, the net loss for the year works to be around Rs 160 crore. Though March quarter was relatively better and company reported little net profit from its operations. Assuming next four quarters to be slightly better than Mar ’09 quarter, the adjusted earning per share for FY ’10 works out to be around Rs 12. At the current price level, this translates into a forward price-earning (P/E) multiple of 7-8. This appears to be on the higher side considering its historical P/E of 7-10 during boom time period of 2006-07. Short-term investors might consider exiting the stock at the current price level and book some profit.

Jindal Saw

JINDAL Saw, one of the leading pipe manufacturers in the country, saw the prices of its stock plunge by close to 5% during the initial hours of trade.

Last week, the company’s stock gained around 7%. At the current price of Rs 700, the stock is trading at a trailing price-earning multiple of close to 9. During last year’s market meltdown, the Jindal Saw stock was badly hammered and the stock price dropped during the early part of this year to a level that the price-earning multiple, or PE multiple slipped to below one. However, the stock has consistently gained thereafter, thanks to the market upswing. With a priceearning multiple of 9, the stock is reasonably valued compared to its peers. If one were to look at the historical chart, Jindal Saw’s price-earning ratio (PER) has almost always traded at a discount to that of other top two pipe manufacturers — Welspun Gujarat Stahl Rohren (WGSL) and PSL.

Currently, PSL and WGSL are trading at a price-earning multiple of around 11 and 16, respectively. Having said that, the prospects of the company look bright. Its capacity is expected to grow by close to 30% to around 2 million tonnes over the next 2-3 years. Its diversified product portfolio — SAW (sub-merged arc welded) pipes and DI (ductile iron) pipes — helps in mitigating the demand risk arising out of a particular industry. It has a modest order book of Rs 3,600 crore and this translates into 0.7 times of its annual net sales in FY 2008-09. Its operating margin at 14-15% is comparable to its industry peers. However, the company lacks raw material integration and is at a disadvantageous position compared to integrated players such as WGSL.

Tide Water Oil

A debt-free, steadily growing business at reasonable price, is how one can describe Tide Water Oil—a public sector lubricant manufacturer. The company has a technical collaboration with Japanese petroleum major Nippon Oil to manufacture the 'Veedol' brand of lubricants and industrial greases. The company's promoter — the government owned Andrew Yule & Co — has just come out of BIFR. Tide Water's profits have grown at a CAGR of 29% in the last five years, while dividends have risen by 24.6%.

Rural Electrification Corporation - REC

REC is 82% government-owned and has achieved growth of nearly 48% in its sales and profits for trailing four quarters till Sept'09. It has beaten the benchmark index, Sensex by a whopping 280% return over the last 12 months. The company derives significant advantages as a Govt enterprise and operating in a thrust area, through various exemptions and access to low cost funding. Further, the power sector is witnessing tremendous growth, and with greater private participation in managing distribution centres, and developing newer distribution models, the company is expected to maintain its growth momentum.

IVRCL Infrastructures and IVR Prime

The move by IVRCL Infrastructures to transfer its BOT projects to IVR Prime is positive for the duo

Gains for IVRCL The consolidation of all its BOT projects under one entity will provide clarity on the company’s business structure. It will also enable IVRCL to bid for larger projects as this deal will lead to an improvement in its debt-equity ratio and effective utilisation of shareholders’ funds. As a consideration for transfer of these businesses, IVRCL will get 5.95 crore shares in IVR Prime, which will increase its stake in IVR Prime to 80.5 per cent. Thus, it will continue to gain from the growth in the businesses of its subsidiaries.

Better visibility for IVR Prime IVR Prime covers all segments of real estate development including housing, commercial and retail. The company has a land bank of over 3,300 acres spread across cities like Hyderabad, Bangalore, Chennai, Vishakhapatnam, Pune, Noida and Nagpur. Despite its huge land bank across major cities, IVR Prime is not doing well primarily given the slowdown in the real estate market. During 2008-09, IVR Prime reported an 87 per cent decline in sales while net profits fell by 95 per cent.

The situation was equally grim in the recent quarter ended September 2009, as the company reported revenues of mere Rs 34 lakh and a loss of Rs 6.1 crore. But now, the group wants to gradually depart from the real estate business and will possibly look for disposing off some of its assets (land bank) and use the funds for the infrastructure projects, which provide greater scope to grow given management’s experience and capabilities in this sector. Besides, it will offer relatively smoother revenue streams for the company, compared to the lumpy revenues in the real estate business.

Higher leveraging While it has a large land bank, IVR Prime does not have any debt in its book and is sitting on a large net worth of Rs 1,093 crore (including minority shareholders). Analysts believe that most of IVR Prime’s assets are not utilised fully and this move could benefit the company. According to analysts’ estimates, post merger the company’s net worth will increase to almost Rs 2,000 crore, which can be further leveraged to raise funds (including debt) enabling IVR Prime to bid for larger BOT projects in the infrastructure space, especially the large PPP projects which are expected to come in the road segment.

Conclusion Analysts believe that there would be more clarity now in terms of the structure of the business. IVRCL Infra will operate in the construction segment, whereas IVR Prime will own the various infrastructure assets in the BOT space. The deal is thus, considered to be a winning proposition for both the companies where the assets can be utilised to their optimum levels and focus can remain on the infrastructure space particularly the BOT projects, where the government is keen to encourage private participation.

For IVRCL, it already has an order book of Rs 14,900 crore, which is over 3 times its 2008-09 revenues and provides enough visibility and growth. Analysts are positive on IVRCL, and they value the company between Rs 380-460 per share on the SOTP basis including the valuations of its listed subsidiary Hindustan Dorr Oliver, in which IVRCL holds a 52 per cent stake.

In a recent move, IVRCL Infrastructures & Projects (IVRCL) has decided to transfer its BOT projects in the water and road segments to IVR Prime Urban Developers. The deal is seen as favourable for both the companies on various counts and will enhance clarity on the company’s business structure. Going ahead, the prospects of both companies look good. For IVRCL, given its strong order book position and huge investments planned towards infrastructure creation, its revenue visibility is stronger.

The deal IVRCL is one of the leading players in the infrastructure space having presence in growing segments like water, irrigation and roads. IVRCL is merging its two wholly owned subsidiaries namely, IVR Strategic Resources & Services and IVRCL Water Infrastructures with IVR Prime (a listed real estate player). Both the 100 per cent subsidiaries own and operate nine BOT projects in the water and road segments; of this five projects are completed or nearing completion while four are in early stages of development. The total value of these assets is estimated at about Rs 938 crore, which looks fair at about 2.1 times the book value of equity investments (Rs 450 crore) in these projects.

Rashtriya Chemical Fertiliser - RCF

India's third-largest fertiliser producer is set to benefit from the higher supply of natural gas and all its plants achieving higher capacity utilisation. RCF is also investing in its existing plants to increase capacities of methanol, ammonium nitro phosphate, while debottlenecking its urea plant in Thal. Additionally, it has plans to set up another urea plant at Thal with over Rs 4250 crore of investments. It is also working on several projects to add new products, augment production capacities, increase efficiencies, reduce emissions and reduce costs. Although its dependency on government's fertiliser subsidy policy will continue in the near future, its profitability is expected to move on a steady growth path. Long-term investors can accumulate this PSU in their portfolio.

Dredging Corporation of India

This debt free PSU is the largest dredging company in the country. The 78.6% government controlled dredging company is estimated to have a market share of about 80-85%. As of March '09 it had 12 dredgers in its fleet. Recent entrants in this sector include shipping companies like Mercator Lines, which had four dredgers at the end of October '09. There are 12 major ports in the country under the control of the ministry of shipping and Dredging Corporation is currently involved in dredging activities at some of these key ports like Haldia, Vishakhapatnam and Marmagoa. Dredging Corporation, along with other players operating under the Indian flag, enjoy a first right of refusal for dredging work contracts subject to certain criterion. The growth trajectory for the dredging industry would come from a spate of ports set-up in the country by private sector players, like Mundra Port and SEZ.

Indian Hotels

Having weathered the economic downturn,Indian Hotels has come off its high valuation. Not enough room for further downside makes it a good choice

THE best time to buy in a sector or a company is when it’s out of favour with the market men. This is because the valuations would be ultra-low and most of the bad news could be already factored into the stock price. The hospitality sector is in a similar situation right now. The global economic slowdown and the resultant fall in foreign tourist inflow and corporate travel has hit the sector hard. Most listed companies reported 30-70% fall in net profit in the June ‘09 quarter. The top line fell by 10-15%. Things can’t get worse from here and most of the leading hotels stocks are trading at their cheapest levels in many years. At the current valuations any minor positive news may trigger a rally in these stocks.

And what can be a better bet than the industry leader –Indian Hotels Company. The Tata group company has been one of the worst underperformers in last three years and is right now one of cheapest stocks in the sector.

BUSINESS:

With nearly 100 properties and room inventory of 11,546 rooms (and growing), Indian Hotels is set to emerge as one of the leading hotel chains in the world. It follows distributed risk model wherein hotel properties and related businesses are housed in a clutch of associate companies, subsidiaries and joint ventures. These include Taj GVK, Oriental Hotels, Benares Hotels and Roots Corporation, among others. The company also holds a significant stake in BJets, Asia’s largest corporate air travel provider. The company has holds significant interest in Oriental Express Hotels, a US based luxury hotels chain.

For FY’ 09, the company plans to add nearly 1,800 rooms. Internationally, the company has hotels, among other locations, at USA, Australia, Maldives, Malaysia, UK, Sri Lanka, Africa and the Middle East.

FINANCIALS:

In FY ’09, the average occupancy of Indian Hotels fell to about 66% from 73% in FY ’08. The company understandably had lower average room rates (ARR) during the year, which resulted in a 38% drop in the stand-alone net profit at Rs 234 crore. For the quarter ended June, the company’s net sales and net profits plunged by 30% and 73% to Rs 262.4 crore and Rs16.4 crore, respectively. This quantum in plunge in its earnings was expected considering the severe impact of global slowdown and terrorist attacks in Mumbai in last week of November ’08. The company reported a operating profit margin of 35.7 during FY2009, which is still higher than it maintained in FY2006, which was around 34%.

FEW DOWNSIDE RISKS:

A sift through the historical performance of Indian Hotels Company shows that at its peak, its share was available at around five times its book value and in downturn the stock is trading at around 1.4 times its book value. This limits a further downside in its stock price. In fact, it is true for most hotel stocks. Indian Hotels Company, being the industry leader it would be first to gain momentum once good news starts flowing. Sentiment in the form of major events like the Commonwealth Games planned in Delhi in 2010 would require addition to the inventory of rooms, which would help the hotel industry, and in particular Indian Hotels. Recently the company acquired Sea Rock Hotel, a property to its existing Taj Lands End hotel in Mumbai. It plans to integrate the two sites in three years. Once completed, the combined property may emerge as one of the largest hotels, convention and high-end retail centre in Mumbai and will help it to consolidate its market share in the central Mumbai market. The funds for the acquisition came from last year’s Rs 1,400-crore rights issue and internal accruals. With this acquisition now, the Taj Group now five hotel properties in Mumbai. The site is also close to newly opened Bandra-Worli Sea Link which has drastically reduced the travel time from the Mumbai airport to the hotel site.

VALUATION:

Currently, IHCL’s stock is trading at around 27 times its earning per share in last 12 months. Though its looks on the higher side, investor should keep in mind that, there has been a sharp decline in earnings in last few quarters. Even and when recovery begins, the company will report a sharp rise in earnings and forward earnings will fall to single digits. At its current market price, the stock is trading at around 1.4 times its consolidated book value. The corresponding ratios for EIH and Hotel Leela are 2.93 and 0.60, respectively. All this makes Indian Hotels an interesting buy for long-term investor looking for value buy on the Street.

Chennai Petroleum

Chennai Petroleum is a 51.9% subsidiary of Indian Oil and co-promoter National Iranian Oil company hold a minority 15.4% stake. Chennai Petroleum operates two refineries with a combined capacity of 10.5 MTPA. The company recently completed water desalination and 20 MW power plant making itself sufficient in key inputs. The company is also adding capacity to its Manali refinery, besides upgrading it to Euro III/IV compliant. Going forward, the company will also set up a single point mooring and crude oil terminal to reduce its logistical costs. It also plans to invest in improving distillate yields through residue upgradation. Although current conditions in refining business do not project a rosy picture in immediate future, investors could invest for long-term.

Investors Lap Up DB Corp IPO

This is one of the few IPOs to be oversubscribed in the retail category this year

The initial public offer (IPO) of DB Corp, the publisher of Dainik Bhaskar, has got the best reponse among all IPOs launched this year. Data from the National Stock Exchange show the Rs 385-crore IPO, which closed today, was subscribed nearly 40 times.

DB Corp received bids for 582.93 million shares as against 14.9 million shares on offer. The qualified institutional buyer portion was subscribed 68 times while the portion for high net worth individuals (HNIs) was subscribed 26 times. The portion for retail investors, which in some recent IPOs was undersubscribed, was subscribed nearly three times.

Market players said the subscription got a boost after the recent success of the Cox and Kings IPO. In the grey market, where punters take leveraged positions and transactions are only on brokers' books, the IPO was quoting at a premium of Rs 12-13 to the issue price. This means punters are betting that the issue will list at least at Rs 225. The price band was Rs 185-212.

"There were three things that contributed to the high subscription. The company has a proven track record, the sector to which it belongs is unique, and pricing was proper," said S Ramesh, chief operating officer at Kotak Mahindra Capital.

"DB Corp-published newspapers have a dominant market share in Gujarat and Rajasthan and that is where a majority of retail investors are based. So, the retail subscription is not a surprise given that the brand is well known in these regions," said S Subramanian, head of investment banking at Enam Securities.

The retail portions of IPOs by JSW Energy, Godrej Properties, MBL Infrastructure, DEN Networks and Raj Oil Mills were under-subscribed. JSW Energy and Godrej Properties did not see full subscription even in the HNI category.

DB Corp received a commitment of Rs 69.36 crore from nine anchor investors. The issue constitutes about 10 per cent of the fully-diluted post-issue capital of the company. About 7 per cent of the issue was fresh offering while the remaining 3 per cent constituted an offer for sale by Cliffrose Investment Ltd, an affiliate of private equity agecny Warburg Pincus.

In late 2007, DB Corp, which publishes Dainik Bhaskar, Divya Bhaskar and Saurashtra Bhaskar newspapers, filed an offer document to raise Rs 660 crore by issuing shares for Rs 350 each. But the IPO was put on hold as the markets crashed soon after.

Now, DB Corp may still emerge as the most valued listed media player if the IPO is priced at the upper band of Rs 212 per share. At this level, DB Corp's market capitalisation works out to Rs 3,848 crore, compared with Deccan Chronicle's Rs 3,778 crore, Jagran Prakashan's Rs 3,777 crore and HT Media's Rs 3,357 crore. At the lower band of Rs 185, DB's market cap works out to Rs 3,358 crore, almost on a par with HT Media.

Container Corporation of India

Container Corporation of India (Concor) has a near monopoly in the domestic container rail freight segment. Although private sector operators (15 of them now) started operations in a limited way in this logistics segment since April 07, it is till time till they catch up to this 63% government owned company.

   Concor has also been a debt free company for the past several years. The containerized rail freight segment has gained in popularity over the last few years, with Concor's total volume of container freight traffic handled (export, import and domestic segment) amounted to 23.08 lakh twenty foot equivalent (TEUs) at the end of March 09, a compounded annual growth rate (CAGR) of 7.5% over a four-year time period.

IRB Infrastructure Developers

Revenue booster
The gains from some of its existing BOT projects as well as a few others (recently operational as well as those expected to commence soon) will translate into robust growth for the company in 2009-10. IRB currently has a portfolio of 12 BOT road projects, of which 10 are operational and nine are debt free. These projects, including the Mumbai-Pune expressway (the largest contributor) put together generated annual revenues of Rs 454 crore in 2008-09.

The revenues for 2009-10 are expected to jump by 72 per cent as compared to the previous year. IRB’s 240 km Surat-Dahisar project has started operations (toll-collection) in the month of February 2009 and contributed just Rs 33 crore in 2008-09, translating into annualised revenues of Rs 200 crore. Additionally, its 65 km BharuchSurat road project, which is expected to be operational from July 2009, could fetch another Rs 120 crore. In existing projects, revenues are seen rising 6-10 per cent on account of higher volumes and revised tariffs.

Construction opportunities

The growth prospects in the construction segment are equally big, which largely comprises of EPC or road maintenance work for BOT projects. This segment, which contributed alittle over 50 per cent of total revenues last year, has an order book of Rs 5,897 crore. However, only Rs 3,000 crore of this order book is on account of EPC work which is to be executed over 30 months. The rest are for operation and maintenance (O&M) contracts, wherein revenues inflow is spread over the long term (12 years and more). Considering the current EPC and O&M orders, current year revenues could be in the range of about Rs 1,200 crore. Going ahead, bagging of new projects will only increase the order book of this division, and provide enhance visibility.

Integration benefits

What is also important to note that with the addition of new projects such as DahisarBharuch and Bharuch-Surat, the economies of scale will improve and margins. Besides, the company is also expected to benefit on account of the correction in the commodity prices. The price of bitumen, which accounts for about 30-40 per cent of the road construction cost, has fallen from Rs 45,000 a tonne in last year to Rs 35,000 per tonne currently. Similarly, the nearly 50 per cent correction in steel prices (TMT bars, used in construction) should augur well; operating profit margins are seen improving by about 340 basis points in FY10. Besides, the company is also expected to benefit from the decline in interest rates as its debts (about Rs 3,000 crore in 2008-09) are linked to the bank’s PLR.

Outlook

To sum up, the improvement in profit margins along with higher revenues in the BOT roads and construction businesses should help IRB double its net profit in 2009-10 resulting in an EPS of Rs 11. Besides, the company also has a land bank of 1,400 acre, which analysts have valued at Rs 550-580 crore or Rs 16-17 per share (on the NAV basis) of IRB. However, it will take some time (over 1-2 years) before the company could realise any revenues on this count.

At Rs 142, the stock is trading at 13 times, which is reasonable considering its large portfolio of BOT projects, strong order book and healthy prospects and, can deliver 20-25 per cent returns over a year’s time.

The opportunities in the road infrastructure space are expected to improve visibly as many constraints are seen easing going ahead. Until now, many road projects have been delayed due to issues pertaining to funding as well recent impediments like elections, wherein new projects couldn’t be awarded. According to industry estimates, about Rs 28,000 crore worth of projects, which are at various stages of bidding, are to be awarded over the next 6-8 months. These include projects of the NHAI and state governments for which, the bidding is expected to start from June 2009.

IRB Infrastructure Developers, which is India’s largest player in the build-operate-transfer (BOT) road segment and currently operating about 800 kilometres (Km) of roads, could emerge as a key beneficiary. “Out of this opportunity, which is equivalent to about 3,000 km, we are aiming to add 500 km to our kitty,” says Virendra Mhaiskar, CMD, IRB Infrastructure. This seems achievable given that IRB will now be bidding for projects across the country, as against its current presence in Maharashtra and Gujarat.

The company also stands to gain due to its proven capabilities and presence across the value chain—from construction and maintenance to operating the toll or annuity based roads. The presence across the value chain provides the company some cost advantage over others, and has been responsible for winning projects in the past. Mhaiskar says that the only serious competition for the company is from integrated players like L&T. Nevertheless, the opportunities in the road segment is large enough for IRB to sustain robust growth in the medium-term.

Syndicate Bank and Corporation Bank

Both are mid-sized state owned banks. Their performance on most of the operating parameters is more than satisfactory. They provide a unique mix of consistency with growth. These banks may not feature among the fastest growing banks in India but the sheer consistency in their numbers makes them worthwhile for investors. For instance, in case of Syndicate Bank the loan growth remained in the range of 25-40% in the past three financial years. This shows that the bank managed to grow its loan book at higher than industry rates for three consecutive years. Similar was the case with Corporation Bank.

   Their asset quality is evident from the fact that net non-performing assets form less than 1% of their net assets. However, Corporation Bank maintains an edge over Syndicate Bank, as the former has maintained an average return on assets (RoA) of 1.3% in last three financial years, while the latter clocked an average RoA of only 0.9%. On an average, Indian banks posted RoA of 1%. This shows that Corporation Bank has performed better than industry on all the counts.

BEML

This 54% government owned company has seen a modest financial performance over last twelve months with sales growth of 10% and profits growth of 19%. Despite the somewhat muted financials, the stock outperformed the Sensex by over 160%, over last 12 months. The reason for the optimism is that its main businesses of construction & mining equipment, which is witnessing a huge demand and is, expected to grow at 20-25%. Further, the company has taken several initiatives in recent past that should help it in the unfolding business scenario in the mining sector, metro coaches and also in overseas market.

Housing Development Infrastructure (HDIL)

Housing Development Infrastructure (HDIL), the erstwhile Dheeraj Group, was incorporated in 1996. Its expertise is in developing slum rehabilitation projects. The company follows a build and sell model for all residential, commercial and retail properties and operates in segments such as Special Economic Zones, hospitality, oil and gas, entertainment and media.

Its total land reserves (including Transfer of Development Rights, or TDR) add up to 196 million sq ft (msf) of saleable area to be developed through 17 ongoing projects covering 64 msf and 18 planned projects accounting for 133 msf. About 81% of the reserves are in the Mumbai Metropolitan Region, giving it a competitive advantage because this is prime real estate for which demand is unlikely to decline.

CURRENT PROJECTS & GROWTH

The focus would be on timely execution of ongoing projects in Mumbai. Under Phase I of the Mumbai Airport slum rehabilitation project, a total of some 11 msf is under construction. Out of the 2.5 msf of development rights sold in FY09, 40% was in the March quarter, an indication of a revival in the sector. The company is expected to generate 5-6 msf of TDR from the airport rehabilitation project by 2010. Assuming an average (of the peak and the lowest rate) rate of Rs 2000 per sq ft, this would add Rs 1,200 crore to the topline by ‘10.

HDIL launched three new residential projects adding up to 2 msf of saleable area in prime locations in Mumbai. Three-fourths the area of these projects have been pre-sold and this would add about Rs 1,200 crore to the topline. Advances from customers in these projects were Rs 75 crore during the March ‘09 quarter. Since one of the projects was launched at the end of March and one in April, future customer advances are likely to increase. This would ease the liquidity problem for the company.

HDIL recently tied up with the Mumbai Metropolitan Region Development Authority (MMRDA) to develop a mass rental housing scheme on 525 acres in the northern Virar suburb. Part of the developed land will be handed over to MMRDA under the housing scheme while the rest will be available for sale by the company. Not only will this project add large volumes to HDIL’s topline but also ensure a continuous stream of cash for the company. The estimated revenue from this project is expected to be Rs 20,000 crore

FUNDING

HDIL plans to raise fresh equity capital worth Rs 2,800 crore through Qualified Institutional Placement (QIP) and warrants to its promoters. The money will be used mainly to liquidate debt, which is about Rs 4,150 crore. This will help reduce interest costs and the overall leverage of the company but earnings per share for investors will also get diluted. With significant streamlining of its debt situation and sufficient cash to complete its projects, HDIL seems poised to grow. Though investment in the realty sector is still considered risky, on a long-term basis, HDIL’s business model seems to be well placed.

FINANCIALS AND VALUATIONS

HDIL’s results have not been insulated from the slowdown in the industry. Net sales fell by more than 50% in the March ‘09 quarter. The company sold TDR worth Rs 140 crore; Rs 70 crore came from plotted development in Vasai and the rest from floor space index sales at its Bandra and the Malad (W) projects. Due to lower income for every sq ft it sold, operating profit fell by over 80% from Rs 810 crore in the March ‘08 quarter. This also impacted the overall interest coverage ratio for the company. In the December ‘08 quarter, when earnings before interest and tax (EBIT) were sufficient to cover two and a half years’ worth interest costs, EBIT during March’09 is just enough to cover interest costs for a year and a half.

The annual results did not present a different picture, with both sales and operating profit declining. Annual net profit margins, at 48%, reported a 1100-basis point fall. At the current price to book value (P/BV) of 1.65, it is better placed than Akruti’s (the only other comparable developer with significant presence in slum rehabilitation projects) P/BV of 3.53. With a price to earnings (P/E) ratio of 9.5x, there seems to be little downside for investors having a long-term view of this stock.

However, HDIL’s cash flow position has been deteriorating because of rising receivables and unsold inventory. Nonetheless, improved sales would help improve this situation.

RISKS

The real estate business is driven by adequate demand for residential property and lease space. If economic conditions deteriorate further, demand for new projects would get affected. This would have a negative impact on cash flows and the revenue stream of the company, thus affecting its shareholders.

Zylog Systems

Institutional investors load up on Zylog scrip

CHENNAI-BASED mid-sized IT firm – Zylog Systems has been witnessing sustained accumulation by institutional investors, some of which include Sundaram BNP Paribas, Carlson Fund and Argonaut Ventures. According to dealers, Sundaram has bought close to 6-7 lakh shares in the past few weeks under its SMILE, Select Small Cap and Arbitrage Funds, while foreign fund Carlson has bought close to one lakh shares in the past few days. Carlson Fund, which has close to $700-million allocation to some Asian countries including India, is said to be taking further exposure to the counter.

The buzz is that the company is at an advanced stage of finalising an acquisition in Europe. The deal size is pegged at close to $30-40 million. The stock has appreciated close to 20% in the past one month on heavy volumes.

Infosys Technologies

AS A part of strengthening its back office business, Infosys Technologies made its second acquisition in the space, by acquiring Atlanta based McCamish Systems for $38 million. A couple of years ago, it had acquired the shared services centres of Royal Philips Electronics for $28 million. While the upfront consideration for the deal is $38 million, there could be a consideration of an additional $20 million payable to McCamish Systems if it achieves certain financial targets in the future.

McCamish Systems, founded in 1985, has 260 employees located at their delivery centre in Atlanta and clocked revenues of $38.2 million for the year ended December 2008.

The acquisition is expected to enhance Infosys’ capability to deliver end-to-end business solutions for the insurance and financial services industries. McCamish, which counts Nolan Financial Group, Phoenix Companies and Heritage Union as its top clients, will help Infosys not only to increase its revenues from insurance customers, but also position the Indian offshore firm as a more local company.

In a press statement, Amitabh Chaudhry, CEO and MD, Infosys BPO said, “The deal will enable us to bring together a convergence of operations and technology. Infosys BPO has in-depth knowledge of the insurance and financial services sector, and this deal reinforces our leadership position in providing business platform services. Also, this will contribute positively to our strategy of growing non-linear revenue.”

According to analysts, many financial services firms in the US who have received TARP (Troubled Asset Relief Program) funding from the US government would prefer to work with a local firm. Hence this acquisition holds significance. “The size of the announced acquisition is not significant in the context of Infosys’s total revenues. However, it is in line with Infosys’ strategy to increase share of BPO revenues from platform-based services. It could become more meaningful in the longerterm since Infosys looks to scale up business on the acquired platforms,” says Srinivas Seshadri, IT analyst, RBS.

McCamish had suffered operating loss in 2008 due to the drop in the demand from the financial and insurance sectors in the US. Though revenue ceased to grow, the company decided to keep each of its employees on the rolls to prevent a talent drain. The Infosys management has reiterated that it will keep Mc-Camish’s headcount intact. The excess staff will be deployed to deliver various projects at the IT services division of Infosys.

“McCamish reported operating loss last year since its salary expense, which is a fixed cost, did not change even though revenue skidded due to dismal business environment. Now, we have decided to deploy around 25-30 employees of McCamish to our IT division,” said Mr Chaudhry.

The acquisition will help Infosys BPO to compete with bigger players in the US insurance sector that includes CSC, Perot, and Accenture. While this is true, analysts do not see any change in the business dynamics of Infosys in the near term. “There is not much cash outgo considering Infosys’ strong cash balance (of Rs 12,273 crore as on September 09). We do see any major impact on its performance in the future,” says Kotak Securities senior VP Dipen Shah. On the financial front, Business process outsourcing (BPO) operations constitute just 6% of Infosys’ total revenue. Hence, this buyout will not have any significant impact on future performance, apart from marginally impacting its net margin. The deal will reduce Infosys’ Rs 12,273 crore strong cash base by Rs 300 crore. This may lead to a marginal drop of 30-40 basis points in net margins for Infosys on the whole.

PSU stocks: Balmer Lawrie

Balmer Lawrie is a highly diversified company operating eight distinct strategic business units (SBUs) occupying a leading presence in most of these industries. It is India's largest manufacturer of metal drums with manufacturing units at eight locations, operates three container freight stations with over 2.5 million sq ft of warehousing space and also provides integrated logistical services. The Kolkata headquartered company also manufacturers lubricants at its 5 plants with 72,000 tonne annual capacity, undertakes highly technical engineering contracts for the oil industry, and at the same time is one of the largest IATA affiliated tour & travel operator. Leather chemicals and tea are the smaller of its operating segments.

   Although the economic turmoil of last year restricted its profit growth to a single-digit, the recovery in the current year is likely to boost its profitability. Being debt-free and having a strong dividend history makes it an evergreen investment candidate.

Stock views on Maruti, Marico, Cadila Healthcare, Essar Oil, Infosys, IVRCL

IVRCL INFRASTRUCTURE

RESEARCH: MACQUARIE
RATING: OUTPERFORM
CMP: RS 365

IVRCL is one of the top picks of Macquarie in the construction space. In addition to the Sion-Panvel Highway project, IVR Prime is the lowest bidder for two new road projects—one at the Indore-Gujarat border and between Salem-Coimbatore. These two road projects would entail a cost of Rs 1,200 crore each. Of the current portfolio of road projects, the Kumarapalayam-Chengapalli toll road has already been commissioned. Another two—Salem to Kumarapalayam and Jalandhar to Amritsar—are expected to be commissioned by end of December '09. Out of these projects, IVR Prime would be required to put in equity for three new projects to the tune of Rs 1,170 crore. As per the restructuring strategy, IVRCL would receive the construction contract for these projects which would add almost 16% to its current Rs 15,000 crore order book. Moreover, the company is confident of achieving its guidance of around 30% topline growth and margin expansion of 100-150 bps. IVRCL is trading at 12.2x FY11E earnings adjusted for subsidiary valuations. The increased focus on the core EPC (Engineering, Procurement and Construction) business result in a robust 35% adjusted earnings CAGR over FY09-11E.

INFOSYS

RESEARCH: DEUTSCHE BANK
RATING: OVERWEIGHT
CMP: RS 2455

Infosys will continue to be the sector leader on both margins and earnings growth. The company's three-pronged strategy is to:

1) invest in newer geographies and services;

2) adequately de-risk the business model by broad-basing geographical and service line revenues; and

3) increase focus on 'non-linear' initiatives.

The company is proactively investing in new initiatives, but it will not compromise its positioning of 'profitable growth'. Deutsche Bank believes investments in new solutions, IP-based platforms and transformation services to drive almost 2/3rds of revenues over the long term. Also, these services are to be increasingly non-linear and as such should drive margins further. With a greater emphasis on laterals, especially as client engagement partners, and increase in the span of control at each hierarchy, the company is laying the building blocks for growth from new services. The price target is based on 22x PE FY11E, which is fair given a FY10-12E earnings CAGR of 24%.

ESSAR OIL

RESEARCH: JP MORGAN
RATING: NEUTAL
CMP: RS 140

Essar Oil is emerging as an integrated player across the energy chain with value-creation options in refining and upstream. While the competitive position in refining could be advantageous in the current environment, further value-unlocking through low-cost refinery expansion and the development of Ratna fields are likely to be contingent on funding and government approvals. ESOIL is upgrading its 10.5-mmtpa refinery to 16 mmtpa, adding significant secondary processing capacities. The expansion would give ESOIL significant advantages in:

(1) complexity-allowing ESOIL to process a tougher crude diet (API 24.8), enabling better gross refining margins (GRMs); and

(2) competitive cost structure-an operating expenditure of about $2/bbl versus $4-5/bbl for western peers.

By H1CY10 ESOIL will begin to monetise its CBM asset at Raniganj-this will deliver significant revenue and value to ESOIL. The price target of Rs 160 is based on 7x EV/EBTIDA for the 16-mmtpa refinery, net present value for Raniganj, and the value of tax incentives. JP Morgan assumes option values for refinery expansion (50% value accretion) and Ratna field (50%).

CADILA HEALTHCARE

RESEARCH: CLSA
RATING: BUY
CMP: RS 651

CLSA initiates coverage on Cadila Healthcare, one of the largest companies in domestic formulations with an expanding presence across international markets. While CLSA expects its domestic segment to grow steadily, exports of formulations will develop at an exponential pace on the back of aggressive filings across geographies and strong ramp-up in its joint venture with Hospira. CLSA expects net profit to enjoy a 29.4% CAGR over FY09-12 with potential for upgrades. CLSA expects a 28% CAGR in export revenue over FY09-12, led by continued growth momentum in formulations on the back of aggressive filings in key geographies such as the US, Latin America and other emerging markets. The company has delivered a steady RoE of more than 25% over the past three years. It has been utilising free cash generated to acquire small entities to enter specific geographies. With a 29.4% net profit CAGR over the next three years and further potential for upgrades, CLSA finds Cadila attractive and initiates coverage with a `Buy' recommendation and Rs 785 target price.

MARICO

RESEARCH: MOTILAL OSWAL
RATING: BUY
CMP: RS 104

Marico leads in the Rs 1,500-crore branded pure coconut oil market with a share of 55%. Marico's flagship brand, Parachute, holds 48% market share and Nihar and Oil Of Malabar account for 7%. Other prominent players in the category include Shalimar (~8%) and Dabur (5%). Regional brands like Panchratna and Kera account for the rest of the market. Motilal Oswal estimates that branded pure coconut oil accounts for 32% of Marico's sales but contributes more than 50% of its profits. Growth of the branded coconut oil market is expected to accelerate (12-14%) led by category expansion and upgrades from loose oil (40% of the category). Price-led competition among national brands has been minimal after the exit of HUL in FY06 (Marico acquired Nihar). Regional players' prices are at an 8-10% discount to Marico's. Its focus has been to expand the category size of coconut oil rather than to aggressively capture market share as its share is 7x more than its nearest rival. Motilal estimates PAT CAGR of 21% over FY10-12. The stock trades at 22.9x FY11E EPS of Rs 4.7 and 18.7x FY12E EPS of Rs 5.7.

MARUTI SUZUKI

RESEARCH: MORGAN STANLEY
RATING: OVERWEIGHT
CMP: RS 1587

Over the near term, Morgan Stanley views the Volkswagen (VW)- Suzuki deal as having a neutral impact on Maruti (MSIL) as the company is running at full capacity and is at par with local peers on technology. Further, as per the company, both MSIL and VW will maintain their separate brands and dealerships in India, thus not changing anything for MSIL. Over the longer term, as MSIL's capacity comes up, the partnership may give MSIL access to the EU and the US small car markets via Volkswagen's network. According to the announcement, Volkswagen will purchase 19.9% of Suzuki's shares for $2.5 bn and in turn, Suzuki intends to invest up to one-half of the amount received from Volkswagen in shares of Volkswagen. The companies will form a longterm strategic partnership and while VW will benefit from Suzuki's small car technology and strong presence in emerging markets (India), Suzuki will benefit from the middle to large car technology of VW and VW's strong presence in Europe and the US. The product profile currently is complimentary, but when VW launches the hatchback Polo, it will start competing with the Maruti Swift range.

Indraprastha Gas Limited

Profile

Indraprastha Gas Limited (IGL) supplies two products, Compressed Natural Gas (CNG) for the transport sector and Piped Naural Gas (PNG) for the commercial and the domestic sector. The company is going on an aggressive expansion plan to consolidate its monopoly position with an investments of more than Rs 1,200 crore on CNG and Rs 600 crore on PNG network this fiscal (FY10). It is also expanding its network to the neighbouring states like Uttar Pradesh and Haryana.

Fundamental Performance

IGL has steadily increased its profits over past five years, growing at the rate of 15.98 per cent per annum. With no interest obligation due to zero debt, IGL is a regular dividend paying company, with the payout ratio, as of March 31, 2009, standing at 31 per cent.

But the company’s ongoing tussel with Petroleum and Natural Gas Regulatory Board (PNGRB) makes it difficult for it to renew its license beyond 2010, when it will expire. If the board does go against IGL, then it will lose its monopoly status.

Moreover, as IGL fully utilizes gas allocated to it by GAIL, it would need to find sources to keep up with the customer demand. But this additional procurement won’t come at the same rate as it pays to GAIL. This can depress the current margins of the company.

Stock Performance

Traditionally, IGL stock has not been a fast mover during uptrends. Over the past 5 years the stock’s annualized performance is 16.64 per cent, but neither does it nose-dive like others when market crashes. Between January 8, 2008 to March 9, 2009, when Sensex was down by 55 per cent, IGL went down by just 41.5 per cent.

The dividend yield of 2.46 of the company is also an additional plus point. Currently, IGL is trading at a PE of 12.84 while its 5-year median PE is 12.64, hence the stock is trading very near its historic price. With adequate downside protection, and high dividend yield, this is still an ideal candidate as a defensive pick.

History

IGL was created to look after the distribution network of gas to the national capital, New Delhi and surrounding areas, the so-called national capital region (NCR). In 1999, IGL took over the Delhi City Gas Distribution Project from GAIL (India) Ltd. It is the sole distributor of gas in NCR.