Stock Review: Dishman Pharmaceuticals

Contract research and manufacturing services (CRAMS) major Dishman Pharma has seen its stock slide from `219.55 in January to `132.15 in November, on the back of declining revenues and profits. The sluggish business prospects dented the company's performance despite astrong CRAMS product pipeline.

As the slowdown in outsourcing continued, there was a suspension of Eposartan supplies to Solvay due to the restructuring of manufacturing and the merger of Solvay with Abbott. A strengthening rupee against the euro and a delay in the completion of new high potency (HIPO) plant (unit-IX) added to the woes.

However, things are set to improve with better revenue visibility. Solvay's supplies have resumed and could go up to 150 tonnes per annum, analysts said. The HIPO plant is expected to be operational in the March 2011 quarter and commercial supplies to three-four new contracts will commence in the next one year. The commercial supplies for cardio-vascular intermediates will also start in the fourth quarter, and are expected to add $6.5 million ( `29.3 crore) to the Q4 revenues.

Stock Review: Gayatri Projects (GPL)

HYDERABAD-BASED infrastructure firm Gayatri Projects (GPL) has performed poorly on bourses in the past six months. Investors are cautious about the infrastructure sector since project execution delays have affected earnings growth of most companies over the past few quarters despite higher order intake.

    Although small in size, GPL appears to be in a sweet spot compared to its peers. The company has moved up in the value chain from being a sub-contractor to owner of projects. It has also forayed into energy generation.

    The firm derives nearly two-thirds of its revenue from road construction and a fairly large chunk of the balance revenue from irrigation projects. The company has an order book of . 8,000 crore, which is six times its trailing 12-month revenue. A chunk of this is concentrated in irrigation and road projects with half of the orders related to Andhra Pradesh. This poses a segment concentration and geographic risk.

    GPL is into civil construction and operates its road and power sector businesses through subsidiaries. It recently bagged a . 113-crore contract in the core construction business and a . 1,135-crore order for road projects through its joint venture with Maytas Infra. Its energy subsidiary is developing a thermal power plant in Andhra Pradesh and analysts expect the project to start generating revenues from 2015.

    The company grew revenues at a compounded annual growth rate of 36% over the past four years and maintained its operating margins in the range of 11-13%. But for the quarter ended September 2010, GPL's revenue grew 12% and net profit increased by a modest 6.7% over the year-ago period, largely due to high interest cost.

    What still holds good for the company, though, is that its stock valuations are modest. At the last traded market price of . 320 on Wednesday, the stock has a price-earning ratio of 7.8, which is at a discount to the average P/E of 19 for small- and medium-infrastructure firms. Given the strong order book and reasonable execution history, the company is expected to post sustainable revenue growth in the long term.

Stock Review: CIPLA

THE stock of pharma major Cipla has mostly underperformed the ET pharma index in 2010 due to its lacklustre financial performance.

    But, in the past three months, the scrip has gained nearly 15%, beating the 11% return of the index. This is not because of any major fundamental trigger; it has more to do with speculative expectations of stake dilution and major outsourcing deal wins. The company has, however, denied any such developments.

    Cipla is facing headwinds on various counts. Expenses pertaining to the newly-commissioned Indore SEZ and an appreciating rupee have led to margin erosion in the past few quarters. Despite being the secondlargest pharma player in the domestic market, it has lagged the industry growth rate in the last couple of quarters.

    Its formulations business grew at a fast clip of 21% year-on-year in the September quarter, but the company may find it difficult to maintain the momentum due to intense competition from multinationals. Its export business, which accounts for nearly half of the total revenues, is sensitive to rupee appreciation. The technology fees earned by the company are also volatile in nature. They vary between 20% and 40% of the total revenue.

    There is no visible catalyst for Cipla's base business. A ramp-up of the Indore SEZ will take time as it has to get approvals from regulated markets. The launch of combination inhalers in the EU and biosimilars would take 12-15 months. The company has incurred heavy capital expenditure of over . 500 crore annually for the last three years. In FY11, it plans to invest . 500-600 crore more. Despite such an aggressive capex strategy, the management still maintains last year's growth guidance of 8-10% increase in revenues for this fiscal.

    Cipla's stock trades at 30 times its last 12 months' earnings. The valuations are fair, given the company's low-risk partnership-based business model. However, the upside in the stock looks limited in the absence of a fresh trigger.

Stock Review: Godrej Consumer Products

Though declining sales in soaps business was a major contributor for the disappointing standalone performance in the September quarter, analysts expect a bounce back in the second half of 2010-2011 due to price rise (about 3 per cent), last year's lower base and lower food inflation going forward. However, the impact of higher palm oil prices, a key raw material in soaps, on profitability is to be monitored.

More, analysts believe investors should not worry too much about the relatively muted growth expected in soaps as the industry is more mature with high penetration levels. Its contribution in Godrej Consumer Products (GCPL's) consolidated revenues is expected to decline over the next few years from the current 22 per cent.

Meanwhile, the company is doing well in relatively less competitive hair colours (13 per cent of overall sales) and home insecticides (30 per cent); thanks to its market leadership. Revenues of both the businesses grew by 21 per cent and 38 per cent, respectively in the second quarter with stable operating profit margins.

The company derives over 40 per cent of its domestic revenues from rural markets, which can grow faster as penetration increases. The fear about competition from global players in hair colours is overdone as they are mostly in the premium category, is just 10 per cent of the overall market.

Analysts feel the change in GCPL's business model from being a predominantly soaps to a multi-product company with presence in several geographies will yield results over the long term. However, there are concerns of integration, currency fluctuations and relatively high debt compared with other FMCG players.

While GCPL is doing well in Indonesia, the growth of its businesses in Africa, South America and the UK (accounting for 16 per cent of consolidated revenues) has not been encouraging. With a positive outlook in most business segments, the GCPL stock trades at a reasonable valuation of 22 times 2010-2011 average estimated earnings. On Friday, the stock jumped about 5 per cent.

Stock Review: Tata Sponge Iron

ORISSA-BASED Tata Sponge Iron is India's leading manufacturer of sponge iron. A secured raw material supply from Tata Steel, high operating efficiency and higher contribution from its power business will fuel the company's growth. Long-term investors can consider the stock.

BUSINESS

Tata Sponge Iron is an associate company of Tata Steel. It has its manufacturing facility in Bilaipada, Orissa. It is a pure sponge iron player as it drives 93% of the revenue from sponge iron business while power contributes the rest. The company currently has a sponge iron capacity of 39,000 tonnes and uses the electric arc furnace method of production. It has a power generation capacity of 26 megawatt.

GROWTH DRIVERS

Being a manufacturing company, power and fuel costs are an integral part of its operations. The company produces power from the waste heat recovery process. Heat generated during sponge iron manufacturing is used for power production. This process is economical as compared to the conventional coal-based generation. The company is expanding the capacity to 50 mw over the next two to three years. After meeting its own consumption, the company can sell excess power to the grid. The share of revenue from the power segment is expected to increase by 10-12% of sales in the next three to four years. Power business is highly profitable, which can boost overall margins.

   The company has an assured supply of iron ore from Tata Steel with a long-term pricing arrangement. As for its coal requirements, it currently depends on Coal India and imported coal. The company also owns a 45% stake in a coal block in Orrisa with estimated reserves of 120 million tonnes. The captive mine will lead to savings of 1,100 per tonne on coal, when it starts the commercial operation in FY12.

   Sponge iron prices have increased in recent months in tandem with the rise in Chinese domestic steel prices. They are expected to gain further momentum given the demand for long products.

FINANCIALS

Over the past 10 financial years, the company has grown its net sales at an average annual rate of 15%. This has been on the back of a 5% annual growth in volumes and 9% annual improvement in realisation. In the quarter ended September 2010, the company reported sales growth of 55% to 175 crore compared to the previous year. Net profit, however, fell by about one-fourth to 10 crore due to higher raw material prices. As these prices have moderated in the current quarter, it would help the company improve its margins. The company has almost no debt on its books. It has been consistently paying dividends in the past.

VALUATIONS

At the current market price of 357, the company's stock is trading at six times its trailing 12 - month earnings. This is at a discount to most of its peers like Usha Martin and Monnet Ispat that trade at a price multiple of 16 and 10, respectively. Backward integration and increasing power business contribution will help the company report higher profits in future, giving an upside potential to the company's stock.

 

Stock Review: Dabur India

The BSE FMCG (fast moving consumer goods) index has registered a 26 per cent gain in 2010, outperforming the Sensex, which has given 14 per cent returns in the period. However, Dabur India lost 38 per cent after a disappointing performance in first half of 2010-11. The consolidated top line grew 17 per cent, while the operating profit margin of about 18.5 was flat, courtesy a challenging domestic market.

But, since the announcement of acquisition of USbased Namaste Laboratories on November 16, the stock has gained about eight per cent, while the FMCG index and the Sensex have remained flat.

Analysts are positive on companies foraying abroad, mainly because margins are better there than in the domestic market, which is intensely competitive. They have re-rated Dabur as an 'outperformer' due to a reasonable valuation of 23 times 2011-12 estimated earnings amid positive outlook for the domestic business, followed by the progress on recent international acquisitions.

Its acquisition of Namaste, along with Turkey's Hobi Kozmetik, its first foreign buy, fits well with the international growth strategy in terms of product portfolio and geographic distribution.

Both companies will contribute significantly to Dabur's revenues from 201112 and will help increase its international market share from the current 20 per cent of overall sales.

Though the outlook for the domestic business is cautious, Dabur is better placed due to its presence in herbal/ayurvedic products, where competition is relatively less intense. Revenues are likely to improve with launches in health supplement, home care, foods and consumer health divisions.

Analysts expect the company's top line growth in the second half of 2010-11 to be better than in the first half. The operating profit margin is also expected to be stable, as the rise in raw material costs is likely to be offset by calibrated price incrteases and control over advertising expenses. The stock may surprise on the upside.

The company is set to benefit from international acquisitions and launches in the domestic market

Stock Review: Asian Paints

The demand for decorative paints, which account for a bulk of Asian Paints' revenues, is robust, as paints are increasingly being looked at as a necessity and not just a discretionary spend. The industry has a strong linkage to the gross domestic product (GDP) growth. As a result, the Indian paint industry gets to cater the second-fastest growing market after China.

Though competition is increasing due to entry of global players and capacity expansions, analysts believe companies have reasonable pricing power on account of rising incomes and a shift in consumer preferences to the high-margin and fast-growing emulsions category.

With a 51 per cent market share, Asian Paints will be the biggest beneficiary of the industry growth. Moreover, competition is limited, as its distribution network of 27,000 dealers (twice its closest peer) is a good entry barrier.

Spiralling raw material prices, specifically crude-oil based goods that account for 35-40 per cent of total raw material cost, are a concern. But, the company has been able to maintain margins through price increases and an improved product mix (high-margin emulsions account for about a third of its revenues). The company had raised prices by eight per cent in the first half of 2010-11 and there would be asmall increase in the second half as well.

After a subdued September quarter, the company is expected to report a strong performance in the December quarter, as the pre-Diwali buying shifted to the third quarter of 2010-11, while it was in the September quarter last year. Though margins are expected to be stable, there could be some negative surprises on raw material and advertising cost fronts.

The stock, which hit an all-time high of `3,027 on Thursday and trades at 27 times 2011-12 average estimated earnings, is not cheap. However, there is a strong possibility that analysts will revise earnings forecast upwards, after which the price earnings multiple may not seem high.

Rising incomes and a shift in consumer preference to high-margin emulsions augur well

Stock Views on SINTEX INDUSTRIES, HAVELLS INDIA, ROLTA INDIA

CITIGROUP on ROLTA INDIA

Citigroup reiterates 'Buy' rating on Rolta India. Rolta is well on its way to transforming itself from a services-led approach to a solutions orientation. The early signs are visible with the IP (internet protocol)-led revenues in Q1 at about 16%. This journey will not be without hiccups - as a result, management has guided for revenue growth in FY11 of about 12-15% y-o-y, lower than that of previous years. If the company were to adopt IFRS starting April '11, then there will be two predominant additional charges to the P&L:

 

(1) Interest expense on FCCBs; and

(2) Markto-market charges on foreign currency loans.

 

While the MTM charges would be a function of the prevailing exchange rates, the interest on FCCBs would be about $6-7 m annually leading to an additional charge of about 300 million. The stock has underperformed the Indian market by about 36% YTD.The stock now trades at about 8x 12-month forward earnings.

UBS INVESTMENT on HAVELLS INDIA

UBS initiates coverage on Havells India with a 'Buy' rating and a price target of 465. Havells India is a leading Indian consumer electrical goods company. The company has demonstrated an ability to gain market share and imp rove profitability. Havells will continue its industryleading growth in India's electrical consumer durables sector. HVEL has a strong distribution network and its product strategy is aimed at capturing a larger share of distribution channels. UBS forecasts FY12-15 revenue CAGRs of 26% for lighting and 19% for durables. HVEL has succeeded in turning Sylvania around by cutting fixed costs, exiting unprofitable products and outsourcing manufacturing, resulting in 34 million in annual cost savings. Sylvania contributed 28% of consolidated EBITDA and 49% of consolidated revenue in H1FY11.

J P MORGAN on SINTEX INDUSTRIES

JP Morgan maintains the 'Overweight' rating on Sintex Industries with a price target of 237.5, which implies a 39% upside potential from current levels. Over the last five years, the bottom one-year forward P/E for Sintex has been 7.5x and it has traded at an average forward P/E of over 12x. Some recent concerns seem unfounded: 1) Slowdown on government orders: There have been concerns about a slowdown in government orders over the next two-three quarters. Sintex derives its government orders from multiple states and multiple agencies, mainly pertaining to education, health and mass housing, which are likely to remain sticky even in the event of a slowdown. Management has stated that operations continue on track and they are not witnessing a slowdown, 2) Promoters Selling: Management has denied this. Based on transaction data from Bloomberg, promoters purchased equity in July 2010 at 175- 185 per share.

Stock Review: Unity Infraprojects

But Timely Execution Will Be a Key Determinant

 

THE stock of mid-sized infrastructure player Unity Infraprojects, has fallen by 18% in the past six months. However, the trend may reverse since the company's future revenue visibility has improved following new order wins. Its better performance in the September quarter un-derscores the expectation.

   Unity Infraprojects is engaged in the construction of commercial, residential and industrial complexes, besides transport and irrigation infrastructure. It started with civil engineering projects and expanded into other verticals such as irrigation and water supply that now account for majority of its revenues.

   A little over half of its order book consists of government projects. It pre-dominantly focuses on the western part of the country, which contributes nearly four out of every five rupees of revenue.

   Unity Infraprojects bagged new orders worth . 200 crore earlier this week. Its order book is now worth . 3,836 crore, three times its reve-nue during FY10. The orders will be executed within the next two years.

   Unity Infraprojects has reported robust growth over the past three years. Its revenue grew by 41% and net profit by 31% during the period at the compounded annual growth rate (CAGR). The growth in recent quarters, however, has tapered off due to sluggish construction activity. In the September 2010 quarter, its net profit rose by nearly 15% year-on-year. The company expects to maintain its current growth rate with higher focus on irrigation projects.

   A relatively higher debt-equity ratio at 1.2 may cause some concerns, since other comparable players have lesser proportion of debt in their capital structure. To reduce its debt, Unity recently raised funds through sale of fresh shares worth 73 crore to institutional investors.

   The scrip trades at seven times the trailing twelve-month earnings. This is at a discount compared with the stocks of its peers Ahluwalia Contract and BL Kashyap, which trade at P/Es of 10 and 13. While the company has been able to bag new contracts, timely execution will be a key determinant of future profitability.

           

Stock Review: Essar Shipping

Essar Shipping got shareholders' approval to demerge its ports and shipping businesses last week. In August, it had announced plans to separate shipping, logistics and oilfields businesses and club these into a separate entity – Essar Shipping (ESPLL). The existing entity will be renamed as Essar Ports.

According to the proposal, Essar Shipping will issue one equity share for every three in the existing company, while the promoters will continue to hold 83.7 per cent stake in the new companies. The port division can handle 76 million tonnes (mt) cargo every year and intends to raise this to 158 mt by 2013. The new entity will get 25 vessels, along with 13 rigs, including a semi-submersible one. All trans-shipment assets and land logistics fleet will also be with Essar Shipping. Also, 12 ships and two jack-up rigs are on order.

The ports business recorded a turnaround in the first half of the current financial year, posting a net profit of

`8.81 crore as against a loss of `47.8 crore in the corresponding period a year ago. The top line surged 70 per cent year-on-year to `338.9 crore, with operating margins at 76 per cent. However, the shipping segment was dented by weak freight rates. Some respite came from better deployment of rigs, which pushed revenues to `1,353.63 crore (up 18.5 per cent year on-year).

After valuing each division on a discounted cash flow basis, analysts at ICICI Direct have arrived on a sum-of-the-parts price target of `112. Ports and terminals contributed `68 to this, while sea and surface transport and oil services accounted for `24 and `19, respectively. Thus, the proposed share capital split in the ratio of 2:1, where for every three shares of ESPLL, shareholders will get two shares of Essar Ports and one share of Essar Shipping, looks fair.

The proposed de-merger of the company's ports and shipping businesses augurs well

Stock Review: Tata Chemicals

The acquisition of the UK-based company will secure long-term supply of the key raw material for manufacturing soda ash

Tata Chemicals, the world's second-largest soda ash manufacturer, has inked a deal to acquire British Salt, a soda ash raw material maker in the United Kingdom (UK), for £93 million (around `650 crore) through its UK-based subsidiary, Brunner Mond. The acquisition is expected to be completed in the next 3035 days and will be funded through debt finance against assets on a non-recourse basis to Tata Chemicals.

The move augurs well for Brunner Mond, which will be able to secure long-term supplies of a key raw material for manufacturing soda ash. The supply contract with the UK-based Ineos is set to expire in 2016. The renewal would have led to a substantial increase in sourcing costs for brine (salt water).

Brunner Mond contributed 19.21 per cent to Tata Chemicals' total revenues of `9,543.79 crore in 2009-10. Soda ash, which contributed 45 per cent to consolidated revenues of Tata Chemicals, is witnessing firm demand in the domestic market, led by FMCG (fast moving consumer goods) majors in the detergent and glass industry.

The demand for glass has risen at a compounded annual growth rate (CAGR) of 11.5 per cent for the past 10 years and is anticipated to grow at a CAGR of 11 per cent over the next 10 years, reckon analysts.

The global demand for soda ash, which declined six per cent during 2009-10, is likely to grow seven per cent in 2010-11, according to industry estimates. Hence, Brunner Mond's revenues, which declined 12 per cent to `1,834 crore in 2009-10 due to poor global demand and plant shutdown in the fourth quarter, are likely to turn around going ahead.

British Salt, which is estimated to report revenues of £30-35 million (over `210 crore) in the current financial year, will also provide a boost to Brunner Mond's top line, with earnings before interest, taxes, depreciation and amortisation likely to grow £15-17 million (over `105 crore).

Stock Review: Tata Motors

Jaguar Land Rover (JLR) reported a 22 per cent year-on-year (y-o-y) rise in sales to nearly 23,000 units in November, aided by higher sales in the US and Europe, while the UK volumes recovered from the steep dip in October. Going ahead, favourable product and geographical mix (China sales being more profitable than UK) will help keep realisations above £40,000 and margins at buoyant (management guided 16-17 per cent) levels, according to Spark Capital. A weaker dollar versus the Euro and pound could pinch.

However, the domestic passenger vehicle sales for Tata Motors were disappointing in November, down over 40 per cent month-on-month (m-o-m) on a combination of factors, including increased competition in the space, supply side constraints and dipping demand for the Nano. Unless this trend reverses going into the next quarter, volume estimates will see lower revisions especially as the company has announced that it will hike prices for models other than Nano and Aria by up to 1.5 per cent.

On the bright side, commercial vehicle (CV) sales bounced back in November 2010, with medium and heavy CV sales up 17 per cent y-o-y. Tata Motors gained market share as Ashok Leyland volumes continued to struggle over the dip seen in October. Going ahead, small LCVs (Tata Ace) are expected to grow at 22-23 per cent over the next three to five years, which should see LCV volume growth at about 15 per cent CAGR over this period. The truck (goods, medium and heavy CVs) segment is expected to match this space, while buses (passenger vehicles) could grow below10 per cent levels.

The freight price index is flat m-o-m, although it is lower than last year (down 11 per cent y-o-y, according to IDFC Securities research, adjusted for the fuel price rise).

This is robust enough to sustain a strong demand environment, say analysts, despite the rise in interest costs. There is ample availability of funds, which is seen as a more critical factor compared to funding costs in determining demand outlook in the sector. The current pause in policy rate rise gives an additional breather.

The stock, at `1347.95, prices in a lot of the good news, analysts say. But the DVR (different voting rights) play looks attractive at an almost 40 per cent discount to this, at `820.50.

Issued at a 10 per cent discount in FY09, according to a BoA-ML report, given that the DVR free-float is about 18 per cent of total free-float, the discount is much steeper than similar DVRs globally. Hence, a possible narrowing is envisaged.

Robust JLR sales justify continued bullishness and the widening DVR discount offers a good route to play this

Stock review: NEYVELI LIGNITE

NEYVELI Lignite Corporation's performance has lagged the growth of other power and mining companies for years. Despite sufficient reserves of lignite for power production, the company has remained less aggressive in its growth plans. This may change now, as the company embarks on ambitious growth plans. Besides expanding its lignite-based power capacity, it also wants to explore coal-based, wind and solar power generation projects. Neyveli has a fully integrated business model, generating power using fuel from its captive lignite mines. It plans to expand the current power capacity of 2,740mw by more than half by FY14 and by four times by FY20. Its current annual mining capacity of 30.6 million tonnes is sufficient to produce more than 4,500 mw of power.

   It has partnered various states, including Rajasthan, Gujarat, Uttar Pradesh and Orissa, to expand its power generation and mining operations outside Tamil Nadu. These places have large lignite reserves, which would enhance its lignite capacity by over 27% in three years.

   Lignite is the lowest-quality coal with low calorific value and requires higher consumption than other fuels. Hence, the power plants are generally very close to the mines to keep transportation costs under check.

   Power and mining companies work on regulated (constant) return on equity model. The new tariff norms have increased the mandated post-tax RoE from 14% to 15.5% till FY14. This is likely to improve its cash generation. Tower Capital's senior analyst Rahul Modi says: "The company is expected to generate . 16.4 billion of operating cash in FY11E, which will increase to . 22.4 billion in FY13 due to the commissioning of new mines and power projects."

   Neyveli Lignite's stock took a beating after its poor show in the September 2010 quarter. Its volume growth failed to match the pace of capacity addition since its contract workers were on strike for more than a month.

   Due to the fully integrated business model, the company has a stable supply of fuel unlike other power companies. It has cash of around . 600 crore on its balance sheet. Its aggressive expansion and diversification plans are expected to keep its cashbook ringing in the coming quarters.

Stock Review: UNITED PHOSPHORUS

United Phosphorus's (UPL) acquisition of RiceCo LLC, USA, last week is beneficial for both the companies and will reflect in UPL's financials from the March quarter. RiceCo, which has a strong herbicides product portfolio with afocus on rice, will benefit by leveraging UPL's global sales and marketing network. The company will also be able to crosssell UPL's current portfolio of products to its existing customers, while adding strong brands to UPL's branded product portfolio. For UPL though, while the deal valuations and funding is not a concern, the abnormal monsoon in India and some key markets has impacted crop production, leading analysts to lower the company's earnings estimates. However, UPL shares have corrected 28 per cent since its one-year peak of `219.70 and are now trading at eight times the 2011-12 estimated earnings. Analysts say investors are getting a good entry point.

Experts believe RiceCo's estimated acquisition cost of`225 crore is below UPL's historic average valuation of two times the enterprise value to sales. With UPL sitting on a cash pile of

`2,000 crore, funding the deal shouldn't be an issue. Notably, RiceCo is a debt-free company. In CY2009, RiceCo clocked in revenues of $25-30 million. This is the second acquisition by UPL this year, following the acquisition of Mancozeb's global business and the Manzate brand, both from DuPont in June.

Meanwhile, UPL's Spain production facilities are expected to be shifted to India soon, and should save the company about `30 crore. The company intends to launch two new molecules every year in the US, with about seven products in the pipeline for registration currently.

While UPL's longer-term prospects look good, prolonged rainfalls in India coupled with abnormal weather conditions in South America will impact the top line growth of UPL in the December quarter. Analysts have trimmed their December quarter estimates to reflect the same.

Sales growth is now expected at 2-5 per cent versus 15 per cent earlier, with the volume growth pegged at 6-8 per cent versus 20 per cent earlier. However, Ebitda margins are likely to expand 100-150 basis points, at 19 per cent, reflecting the impact of cost rationalisation and plant restructuring already completed in Europe in FY2010. Strengthening raw material prices will not result in a significant margin pressure because of the low quantum of the rise.

Overall, while analysts have reduced their 2010-11 and 201112 revenue and net profit growth estimates, the company is still expected to report an annual growth of 10-12 per cent in revenues and 21-24 per cent in net profit in these two years. These, however, could change as UPL continues to look for more acquisitions.

 

Stock Review: ADF Foods

ADF Foods is into food processing. It is focused mainly on export markets. The company is involved exports a number of products like chatnis, ready to eat foods, pickles. They also own a number of brands like Ashoka, Camel and Aeroplane. The company recently launched a brand which is targeted towards the domestic market by the name of ADF Sole.

Indian markets offer a very good opportunity as far as food processing companies are concerned. Their focus is mainly on the export markets and deriving roughly 85-90% of the revenues from its exports.

India is still a virgin market for this company and the introduction of organized retail has given a good fillip to food processing companies in India. If you look at the financials, in FY10 they did revenues close to Rs 100 crore, made a profit after tax (PAT) of about Rs 15.5 crore which means an EPS of close to Rs 7.5 to 8.

The best thing is that this company enjoys operating margins of close to 25%. In the first half, the sales are almost static at about Rs 52 crore and profit after tax was slightly down at about Rs 8 crore which means on a conservative basis, you can expect the company to do an EPS of about Rs 7 to 8.

They recently made an acquisition in the US of a company called Elena Foods which does revenues close to USD 9 million. This will automatically add about Rs 40 to 50 crore to their revenues and will lead to higher earnings in the future.

Elena Foods have got a USFDA approved plant in the US. The company can introduce a number of Indian products and also manufacture through that plant. It will give them better penetration into the US market. They have opportunity in the US market as well as Indian markets.

The stock has corrected from about Rs 80 to 90 to the current levels of about Rs 55 to Rs 60 and at a PE multiple of about Rs 7 to 8 which will go down once the revenues from Elena start to come in. I find that the stock looks attractive for investment.

 

Stock Review: Lanco Infratech

In order to secure fuel to take generation capacity to 15,000 Mw by 2014-15, Lanco Infratech is reported to have paid about `3,800 crore for 100 per cent stake in Griffin Coal, the largest operational thermal coal miner in Western Australia, with estimated reserves of 1.1 billion tonnes.

Analysts are positive on companies (including Lanco) buying coal assets abroad as domestic production of coal is lagging demand. Also, developing domestic captive coal blocks involves operational and regulatory hurdles. Sourcing coal from captive mines abroad guarantees timely supply and protection from volatile prices.

However, analysts are concerned that Indian companies are paying too much for coal assets. Based on the deal amount (in rupee terms), Lanco's acquisition, at around `35 atonne, is estimated to be expensive compared to Adani's (Linc Energy`16 a tonne) and JSW Energy's (CIC Energy

`7a tonne). The three acquisitions are not strictly comparable, considering the location of the mines and the coal quality. But the fact that Lanco's officials are not disclosing the deal amount before completing the formalities highlights the possibility of it being expensive.

However, Lanco will have to spend less on creating infrastructure for evacuation and transport of coal, unlike in the other two cases. The mines are strategically located on Australia's western coast (closer to India) and well connected to two ports through rail and road.

Lanco plans to almost quadruple the mines' current capacity of four million tonnes ayear over the next three-four years. The decision to import captive coal (and the quantity) will depend on the requirements of power plants in India and arbitrage opportunities available to the company in a rising coal price scenario, given its intention to participate in the burgeoning natural resources trading market.

In the medium term, the acquisition will put a strain on the company's already stretched balance sheet (2.5 times consolidated net debt to equity ratio as on September).

Acquiring coal assets abroad is a smart move, but investors need to watch out for the valuation of the asset

Stock Review: HINDUSTAN ZINC

ZINC prices have increased more than 6% in the past three months due to devaluation of the US dollar and higher imports from China, the world's largest zinc consumer.

The upside, however, will be limited in the nearterm due to higher London Metal Exchange inventory and supply glut. But that should not matter to the Indian zinc player Hindustan Zinc, which is likely to retain its margins, backed by expanded capacities.

Zinc inventory at the London warehouse is at a fiveyear high, reflecting more supply than what is needed to quench demand. Though the demand-supply scenario is unfavourable for zinc producers, prices of the base metal have firmed up mainly due to higher institutional purchases. This is reflected from the fact that prices of galvanised steel, which is the key end market for zinc, have not increased.

According to International Lead and Zinc Study Group, zinc supply is likely to remain in surplus of 160,000 tonnes in 2011. This excess of supply can keep prices of zinc in a tight range in the coming quarters. The stock of Hindustan Zinc, India's largest zinc producer and second globally, rose by over 18% in the past three months, following higher zinc prices. The company's sales grew by 20% in the September 2010 quarter, but operating margin suffered due to higher non-recurring employee cost and power expenses.

The company is expanding its Zinc production capacity by 10% and its mining capacity by around 40% by the end of March 2011. This augurs well, since it is the world's most efficient low-cost zinc and lead producer, with more than 50% of operating margin.

Another growth driver is the buoyancy in silver market. Hindustan Zinc produces silver and sulphuric acid as by-products. The zinc ore from its mines is rich with silver traces. Silver contributes just over 7% to operating profit before depreciation. This would jump to 16% once the company expands its silver production capacity by nearly three times to 500 tonnes in the next six quarters. The timing is perfect given that silver prices have increased by 58% in the past six months.

Hindustan Zinc's decision to acquire zinc assets of American miner Anglo American will help in securing future zinc reserves. The deal will make the Indian player the world's largest integrated zinc and lead producer, commanding 12% of global capacity.

At the current price, the stock is trading at 13 times its trailing twelve-month earnings, which is similar to its global zinc-producing peers such as Nyrstar. Given its expansion plans and better profitability, Hindustan Zinc may attract a better valuation in the future.

ELSS: Tax-saving funds dole out dividends to lure investors

ELSS: Mutual Fund Schemes in this category give 19% return in past year

 

WITH tax-saving season slowly emerging in picture as we step into the New Year, investors in equity linked saving schemes (ELSS) – better known as tax-saving mutual funds – are set to receive hefty dividends as fund houses go all out to attract fresh inflows, people aware of the developments said.

January-March has historically been the strongest period in terms of inflows for tax saving funds as taxplanning gains vogue. Taxsaving funds have recorded an average 19 per cent NAV gain in last 12 months. At the end of November, Amfi data showed that ELSS managed over Rs 26,000 crore in assets – the fourth largest fund category in the mutual fund (MF) industry.

ELSS equity schemes saw net inflows of Rs 1,244 crore in January-March 2010, another Rs 1,134 crore in the same quarter in 2009, over Rs 3,800 crore in the same period in 2008 and around Rs 3,100 crore in 2007.

It's an important quarter for the MF industry.

Many investors await dividends in tax-saving funds before allocating fresh money. Tax-saving funds could see dividend announcements soon, but wished to remain anonymous.

This month, Sundaram Tax Saver (Rs 1.50 per unit) and Franklin Templeton Pension Fund (Rs 1.3 per unit) declared dividends. Others are set to follow suit over the next 45-60 days, MF industry officials said. During September 2010, tax-saving funds such as Birla Sun Life Tax Plan (D), Tata Infra Tax Saving Fund (D) and Axis Tax Saver (D) announced dividends between Rs 1-2 per unit.

Fund-houses have seen nearly Rs 17,600 crore net outflows from equity schemes in the current year, while ELSS equity schemes have seen close to Rs 1,000 crore going out in the same period. Tax-saving season gives the fund houses a fresh trigger to collect assets. With most fund-houses having a taxsaver scheme and Sebi voicing its displeasure of me-too New Fund Offers (NFOs), dividends are expected to play an important role this time.

"If you check history, most tax-saving funds start declaring dividends between November and March. This year will not be any different. This helps the advisors to sell products to investors since they will be competing with products like Ulips. Don't be surprised if dividends are chunky this time," said the head of financial products distribution firm.

In March 2010, more than 10 schemes including Taurus Tax Shield (D), IDFC Tax Advantage ELSS (D), L&T Tax Advantage Series I (D), Can Robeco Equity TaxSaver (D) and Bharti Axa Tax Advantage Eco (D) had record dates for dividends. Another eight schemes such as HSBC Tax Saver Equity Fund (D), HDFC Long Term Advantage (D), JPMorgan Tax Advantage (D) and UTI Equity Tax Saving (D) declared record dates between November 2009 and February 2010.

 

Stock Review: IDFC

Besides immediate profit, the stake sale in asset management company will ensure access to global investors

IDFC's 25 per cent stake sale in IDFC Asset Management to Natixis for 300 crore values the asset management company (AMC) at `1,200 crore, or six per cent of the assets under management (AUM). In March 2008, IDFC bought the AMC for `820 crore (5.8 per cent of AUM) from Standard Chartered. For IDFC, the pre-tax profit works out to `95 crore. Analysts have welcomed the deal, especially the valuation, which is higher than in the recent deals (threefour per cent of AUM). IDFC may have been able to command the premium valuation because it managed to increase assets by 43 per cent between March 2008 and September 2010.

Besides the immediate profit, Natixis will open access to global investors for IDFC. Natixis is one of the 15 largest asset managers in the world in terms of assets and managed about $719 billion as of September. IDFC AMC will be able to use Natixis's distribution network to raise funds abroad for investing in India.

In the core business, while liquidity crunch poses a potential threat to margins of the entire financial sector, IDFC is relatively better positioned than banks, given the comfort on the asset-liability profile and its 'infrastructure finance company' status that gives it the benefit of cheaper funds and the identity of being a specialised player in the robustly growing infrastructure finance space. Analysts have upgraded the stock and expect a 22 per cent return over a year.

Stock Review: JSW STEEL

JSW Steel's offer to acquire 41% stake in Ispat Industries through the preferred share route will benefit the company in the long run. The deal is not expensive, but there can be some concerns over Ispat's operation efficiency in the short-term. JSW's offer values Ispat at . 4,800 crore, marginally lower than the . 5,000 crore replacement cost of Ispat's assets net of debt. JSW has paid around $130 per tonne for Ispat's production capacity. It is cheaper than the $780 per tonne cost for JSW's own green field capacities. This makes the deal lucrative for JSW's shareholders. The additional capacity comes with Ispat's fat debt burden of over . 7,000 crore. The JSW management plans to restructure the entire debt, which would reduce the cost of debt by 3-4%. Ispat's shareholders on the other hand will have to settle for an offer price of . 19.9 per share, which was at least 30% lower than the Street's expectation. The stock fell by 15% after the announcement of the deal. But, in the long term, they can expect higher operating efficiency given the experience of JSW's management. Also, a reduced debt burden after the financial restructuring will help in reducing interest costs, supporting profitability.

   During the September 2010 quarter, Ispat reported a loss of . 330 crore due to higher raw material prices and delay in its plans to reduce input costs through backward integration. JSW's management has stated that it would pursue the ongoing plans of Ispat to improve efficiencies. One of the projects is the 110mw power plant at Dolvi, Maharastra. Once commissioned, it would bring down Ispat's power cost by 40%.

   JSW Steel uses iron ore beneficiation model wherein low-grade iron is processed to increase iron content. It is cost-effective since low-grade iron ore is cheaper. The same model can be replicated to improve Ispat's profitability. JSW also plans to restart Ispat's 3.3-million tonne steel plant in Maharashtra, which was closed due to working capital problems.

   Ispat's investors may have to wait for four more quarters to see the benefits of the restructuring. The deal is expected to turn the company around into a leaner and more efficient steel maker. While its stock may see some selling pressure in the near term, its long-term outlook is promising.

Stock Review: Jayant Agro

The opportunity for the company is very big mainly because of a very important statistic which is that India produces about 60% of the global production of castor seeds. That will give castor companies in India a big competitive advantage.

Jayant Agro is probably the only listed player in the castor sector. That is what excites us. The user industry for castor oil and castor based chemicals ranges from lubricants to pharma, food to fragrances, telecom to paints and coating. So they are used in a variety of industry segments.

If you look at the financials for FY10, sales were close to Rs 900 crore, whereas the profit after tax is about Rs 12.5 crore. In the first half, their sales are up by close to 55% to about Rs 580 crore. PAT is up by more than 100% to about Rs 13 crore which is more than PAT for the full year FY10.

We do not have any peer group as far as the listed space is concerned. But there is also a very big company in the castor business which is Biotor Industries. Biotor Industries is a private company. Not much information is available about this company in the public domain. Two years back, this company gave a minority stake of about 25% to Morgan Stanley Private equity for about Rs 182 crore, which got Biotor close to Rs 700-800 crore.

There are some press reports which suggest that Biotor maybe planning an IPO of about Rs 500 crore. Even if we assume 50% dilution, it will give Biotor a marketcap of about close to Rs 1,000 crore. Biotor is slightly bigger than Jayant Agro. A marketcap of Rs 1,000 crore for the number one company and Rs 150 crore for the number two company will see the disparity narrow down.

Jayant Agro has also formed a joint venture with Mitsui Corporation where Mitsui holds about 24% stake to manufacture high value added products. Once earnings from that venture start to kick in, we can see a substantial rise in the earnings of Jayant Agro. I find the stock looking undervalued.

 

Stock Review: Punjab National Bank

Punjab National Bank's stock seems to be cheaper compared to its larger peer. Long-term investors may consider the stock

 

   WITH a market capitalisation of around 38,000 crore, Punjab National Bank (PNB) is the second-largest public sector bank in the country. On the back of higher loan book growth and margins, the bank, which had come out with an initial public offering in 2002, has reported a robust financial performance for the past three quarters.

BUSINESS:

PNB, which was nationalised with other banks in 1980, has a strong presence in the northern parts of the country. It has also taken initiatives to expand its network in the country and will add 350 branches by the end of this fiscal to its existing 5,000. PNB has a history of growing through the inorganic route. It was the first bank to acquire a nationalised bank in 1993. It also acquired Kerala-based Nedungadi Bank in 2003. This was the seventh merger of the bank in its history of over 115 years. Not many public sector banks have shown a similar aggression.

FINANCIALS:

The bank has outgrown its industry in terms of loan book growth. In the past three quarters, advances have grown on an average 27% year-on-year as against the industry's 19%. This has resulted in a net interest income growth of 45% in the same time. Net interest income is the difference between interest earned and interest expended by the bank.

   Its operating profit before provisions and contingencies has grown in excess of 30%. But higher provisioning costs have limited the bank's bottom line growth. The bank's provisioning costs have almost doubled every quarter for the past two quarters.

GROWTH STRATEGIES:

The management has net interest margin target in excess of 3.5%, which it has achieved for the past five quarters. One factor that has helped the bank in maintaining this is its higher share of low-cost deposits. Current and savings account balances form 41% of its total deposits. When interest rates are rising, this helps the bank in constricting the rise in its overall costs of borrowing. The bank also changes its strategies as per the business environment. For instance, during the economic turmoil, PNB took the high cost bulk deposits at around 9% and lent it at around 13%, thereby maintaining its margins.

   At the same time, the bank has realised that its income through the core operations of lending and borrowing has to be complimented by its income through other sources. It has started offering correspondent banking services to banks that do not have such a wide network. This means that PNB offers services to other banks' clients and in turn charges a fee from those banks. It has also floated a subsidiary, which is dedicated to merchant banking and loan syndication activities.

VALUATION:

The bank's stock is trading at 2.1 times its book value, cheaper compared to its larger peer State Bank of India, which trades at 2.4-times the book value. At the same time, the stock's beta, which indicates its correlation with the broad-based market, stands at 0.8, lower than its peer's 1.1. This shows that the bank's stock is both cheap and less risky compared to its larger peer.

   Moreover, the stock has a good dividend paying history. The bank has given a payout of around a fifth of its earnings for the past four years. Investors lost confidence in the stock as one of the bank's employees was named in the housing loan scandal. However, the bank has most of its fundamentals in place. As such, it would be a good time for investing in the stock. Investors with medium to long-term perspective can consider the stock.

CONCERNS:

For the past two quarters, the bank's asset quality has deteriorated. Net nonperforming assets averaged 0.7% as against 0.2% in the same period a year ago. Higher bad loans affect a bank's profitability, as higher proportion of the earnings needs to keep aside for the provisioning purposes. If not for this, the bank's profit growth would have been higher. But, even at this level, the bank's asset quality is much better than its peer SBI, which has reported 1.7% net non-performing assets.

 

Stock Views on DISH TV, NTPC, BAJAJ AUTO

UBS on BAJAJ AUTO

UBS maintains `Buy' rating on Bajaj Auto with a price target of 1,775. Bajaj Auto announced plans to raise prices by up to 1,000 per bike across models effective January 1, 2011 to offset commodity price increases. The company had previously taken a price increase of about 2% on October 1. UBS expects margin outlook to remain strong, helped by the recent price increases by the company despite increase in raw material costs. The current pricing of Bajaj versus Hero Honda makes Bajaj's products relatively competitive and gives it leeway to increase prices going forward. UBS expects new launches and distribution expansion to drive FY12 volume growth. Bajaj has announced plans to add 130 dealerships in the next six months leading to total dealerships of more than 600. UBS expects new model launches from Bajaj to help drive higher-than-industry growth in FY12.

NOMURA on NTPC


Nomura maintains `Buy' rating on NTPC with a price target of 228. NTPC scores well as a defensive growth option with high earnings visibility, low funding risk, high payment security and adequate fuel security. The stock has lagged YTD pricing in risk of competition, execution delays and fuel availability. Investor expectations seem low. FY11E-13E EPS CAGR is seen at 14%, and valuations are below historical averages. In a press release recently, NTPC stated that the Ministry of Power has allowed 15% of power generation from the incremental 500-MW capacity each at Korba and Farakka to be sold outside long-term PPAs (power purchasing agreements). NTPC offers the highest earnings visibility amongst IPPs (independent power producers), high payment security, the lowest funding risk, adequate fuel security, competitive cost of generation and sustainable 20%-plus RoE on core operating assets. Like NTPC, PWGR offers defensive earnings growth; it is a 'hedged play' on India's 150-GW-plus generation capacity pipeline and 30% upside in its CMP.

JP MORGAN  on DISH TV

Industry growth is exceeding expectations, and management expects this to continue. While set top box prices have been cut, freemonth offers have been reduced and customers are migrating to higher-ARPU (average revenue per user) packs. Subscriber additions for new entrants have picked up, although firms are maintaining pricing discipline. Management indicated strong growth visibility - industry subscriber additions saw a strong pick-up in October and November. Additions are likely to accelerate with the Cricket World Cup commencing in February 2011. DITV had 55% customers at the base 'silver pack' in April 10, but this is down to 20% now. High-end Gold and Platinum now account for 50% of total customers. Blended net ARPU is up from 139 in August to 144 currently.

Power Finance Corp may launch FPO in April-May

 State-run Power Finance (PFC) may come out with a 20% follow-on public offer in April-May next year if the department of disinvestment clears a proposal floated by the power ministry. The power ministry has proposed disinvestment of 5% of the Centre's stake in the public sector finance institution, as well as the issue of 15% fresh equity, through the FPO route. "The power ministry has sent a proposal for a 15% fresh equity and 5% disinvestment of government stake in PFC," department of disinvestment secretary Sumit Bose told reporters here. "The company needs funds, that's why they have asked for a bigger share of fresh equity," Mr Bose said. PFC, which is engaged in funding power generation, transmission and distribution projects across the country, plans to use the funds mopped up from the FPO to finance both existing loans, as well as future lending activities. The follow-on public offer is likely to be launched in April-May next year, according to sources. At present, the government of India holds 89.78% stake in the firm. The government, which hopes to raise . 40,000 crore through its disinvestment programme this fiscal, has already mopped up close to . 20,000 crore through the sale of stakes in PSUs Satluj Jal Vidyut Nigam, Engineers India, Coal India and PowerGrid Corporation.

Stock Review: National Thermal Power Corporation (NTPC)

The National Thermal Power Corporation (NTPC) scrip has declined 15 per cent in 2010, as against a12 per cent rise in the Sensex, courtesy delays in capacity addition, subdued financial performance for the past few quarters and poor response to its follow-on public offer. After a correction in October-November, the stock has bounced back seven per cent in December, as compared to a marginal gain of 0.7 per cent in the Sensex in the same period.

Many analysts find the risk to-reward ratio favourable and feel negatives have already been factored into the stock price, which now trades at a reasonable valuation of 14 times and two times 2011-12 average estimated earnings and book value, respectively.

At present, merchant power and unscheduled interchange charge rates are under pressure. Fuel security is also becoming a hurdle for the execution of power projects. In such a scenario, NTPC – with its regulated business model and the comfort of coal availability (supply agreements with Coal India) and prices (pass-through of escalated fuel costs) – provides better earnings visibility, despite expected rising dependence on the costly imported coal (seven per cent of 2009-10 total consumption).

Also, the company's capacity ramp-up is happening at a faster rate, with an average expected annual capacity addition rate of 3,250 Mw in FY11-FY12, as compared to 1,430 Mw in FY08-FY10.

Though the competitive bidding mechanism is starting from January 2011, NTPC is unlikely to be affected, as it is going to tie up for 75,000 Mw under the regulated model by the same period, but analysts expect it to achieve an operational capacity of around 66,000 Mw only by 2016-17 (end of the 12th plan).

To avoid delays in the supply of boiler-turbine-generator (BTG) required for the commissioning of capacities in the 12th Plan and to achieve the management's guidance of 75,000 Mw by FY17, NTPC aims to award BTG contracts of 30,000 Mw (including the bulk tender) over the next two years. Analysts seem impressed with the company's efforts to minimise slippages.

The company is being increasingly looked at as the best value buy in the utility space

Stock Review: Aventis Pharma

Aventis Pharma has decided to sell its 49 per cent stake in the vaccine manufacturing unit, Chiron Behring Vaccines, to its joint venture partner, Novartis Vaccines and Diagnostics, for $22.4 million.

The deal puts an end to atwo-year-old battle over rights for India's largest selling anti-rabies vaccine, Rabipur. The vaccine posted sales of around `118 crore (for Aventis) two years ago, with a market share of about 70 per cent.

Until February 2009, Aventis marketed the anti-rabies product manufactured by Chiron Behring Vaccines Private Ltd (51:49 joint venture between Novartis and Aventis) at the Ankleshwar plant in Gujarat. Novartis had objected to the renewal of a 10year marketing licence to Aventis Pharma then and got afavourable court verdict.

Aventis, while gaining on cash after its exit from the joint venture, can now also market Aventis-Sanofi's anti-rabies brand, Verorab, in the estimated `250-crore anti-rabies market in India. The company plans to launch low-priced anti-infective and anti-inflammatory products, while also increasing its field force through the Prayas project. Analysts estimate incremental revenues to the tune of `500 crore over the next five years.

The acquisition of Shantha Biotech in calendar year 2009 (CY09) is expected to pave the way for more launches, especially in the cardiovascular segment and vaccines. The cash received from the stake sale in the joint venture will strengthen its balance sheet, which had cash of `585.95 crore at the end of CY09. This can be used for future inorganic growth, as well as good dividend payouts, reckon analysts.

Looking at various initiatives, analysts at Angel Broking estimate revenues to grow at a compounded annual rate of 14 per cent over CY10-12 to `1,390 crore. The stock, at `1,747, trades 20 times CY11 and 18 times CY12 estimated earnings.

Besides monetary gains, the exit from Novartis JV paves the way for marketing of Aventis-Sanofi's anti-rabies vaccines

Stock Review: Emami

The Emami scrip has risen nearly 16 per cent in the last two trading sessions as the company lost the battle to buy Paras Pharma (acquired by Reckitt Benckiser for `3,260 crore).

It was the front-runner and ready to pay about $750 million, or `3,400 crore, as Paras would have offered it synergy in over-the-counter and personal care segments. Besides high top-line growth, it has superior operating margins of 27 per cent compared to Emami's 24 per cent.

However, the deal, which happened at eight times the enterprise value to Paras' 2009-10 sales, would have strained the company's balance sheet (near zero-debt position). Analysts are more positive on companies looking at international acquisitions, as opportunities in India's fast moving consumer goods space are getting limited and expensive, prolonging the payback period.

Meanwhile, Emami is doing well on its own. In the first half of the current financial year, sales surged 27 per cent to `514 crore on the back of 25 per cent volume growth. Net profit jumped 61 per cent to `88.5 crore.

The company aims to increase sales organically by 25-30 per cent over the next few years; acquisitions will only add to it. Emami's board recently approved raising 5,000 crore for purchases in personal care and healthcare spaces, either in domestic or overseas markets.

Analysts like the company due to its focus on the mass market and leadership in categories that have less competition (cooling hair oil, antiseptic cream, headache balm, men's fairness cream, among others). New product launches and rejuvenation of Zandu brands will act as upside triggers for sales growth.

However, operating profit margins, which have been under pressure in the first half of the current financial year, are likely to be hit further due to higher raw material prices and advertising expenses. But net profit may rise on account of lower tax rates, as a majority of its plants are in tax-free zones.

Losing the battle for Paras is seen as a positive for the company

Stock Review: Rallis India

Rallis India, a Tata Chemical subsidiary, has acquired a 53.5 per cent stake in Bangalore based Metahelix Life Sciences for `99.5 crore in an all-cash deal. Going ahead, after subscribing to an additional equity of `25 crore and increasing its stake to 59.02 per cent, Rallis will enhance its holding to 100 per cent over five years. At present, Metahelix is predominantly present in hybrid seeds and plans to launch Bt cotton within a year.

According to analysts, with Metahelix valued at 1.92times 2011-12 estimated revenues, the deal looks quite attractive. The Bangalore based company is estimated to garner `100 crore during 2011-12. Angel Broking says the valuation is in line with that of the peers in the seed business.

However, looking at the high research and development (R&D) expenses, Metahelix' operating profits are currently minimal. According to analysts at Prabhudas Lilladher, Rallis believes the company is likely to become earnings per share accretive only by 2011-12, when R&D expenses to sales ratio comes down.

Rallis will benefit from the acquisition, as the seeds business enjoys a better margin of around 20 per cent compared to the pesticides business (around 18 per cent). The `6,500-crore Indian seeds industry is growing at 12-13 per cent a year, according to Angel Broking. Of this, the commercial segment accounts for 25 per cent of the total market. Hence, the opportunity for commercial seeds is substantial. While Metahelix has astrong presence across the nation, with a powerful network selling Dhaanya seeds, growth will be further propelled by Rallis' strong distribution channels.

Given that the seed industry has high entry barriers in the form of product IP (technology), regulatory clearances and substantial R&D and manpower investments, the development of a product takes years. The acquisition of Metahelix will strengthen the company's seeds business, which currently contributes just around one per cent to revenues, reckon analysts.

The acquisition of Metahelix will strengthen the seeds business

Stock Reivew: MindTree

MINDTREE, the Bangalore-based mid-sized IT services provider, has failed to earn returns on bourses in 2010. The sluggishness in its financials and the lack of major growth triggers have impacted its stock market performance. The stock is expected to remain under pressure in the near term since the company is less likely to report stronger year-on-year growth in the remaining two quarters of the current fiscal.

    MindTree offers IT services, software testing, infrastructure management, and product engineering to its global clientele. The company has aggressively pursued inorganic growth. Over 20% of its revenue comes from acquired businesses. The company's revenue in the last 12 months is 1,389 crore.

    Higher foreign exchange loss and volatile business environment were the key factors that impacted its performance over the last eight quarters. One concern is that while it has been adding new clients every quarter over the last three quarters at least, its total client base has not grown much.

    For instance, it added 114 new clients since December 2010 quarter but the total active client base increased by just eight during the period. This reflects the short-term nature of its projects, which restricts client penetration. A higher client penetration is desirable since it would shield the company from changes in the broader economic parameters.

    In the September quarter, the sequential growth in its sales and profits was remarkable mainly due to the relatively lower operating costs. On yearly comparison, however, the profits have declined, a reflection of the fact that the company is yet to report a significant turnaround in operations.

    Its future growth depends upon how well it can take advantage of the global demand recovery. According to its chief financial officer Rostow Ravanan, MindTree's clients have started ramping up projects.

    Also, the average deal size has improved by 6% to 10% in the IT services segment. This should help it grow again in the coming quarters.

    The high level of attrition may, however, come in the way of timely execution of projects. MindTree's attrition rate at 21% is higher than the industry average. The company has no plans to offer an interim salary raise. This may stoke more attrition since its larger peers are scrambling to increase their headcounts.

    At Wednesday's close of . 520, the stock trades at the trailing 12-month price-earnings ratio of 14, which is higher compared with the P/E range of 8-12 for mid-cap IT stocks.

Stock Review: Tata Consultancy Services (TCS)

India's largest software company, Tata Consultancy Services (TCS), recently won a deal estimated to be worth $100-million for providing core banking solutions to Deutsche Bank. This deal is one of the biggest banking product deals of 2010 for TCS.

As a part of the deal, TCS will implement, TCS Bancs, its core banking software, in 30 countries where Deutsche Bank has operations. The deal consists of licence fees, implementation, maintenance and post-implementation services for a period of ten years.

TCS is also looking forward to some other deals, which are similar to the Deutsche contract, some of which are in the bid stage.

While software product sales and solutions for the financial services industry contribute 4-5 per cent of TCS revenues, improving overall demand led by the recovery in the US augurs well for players like TCS.

Improving demand

The Information Technology giant has won 18 large deals during the April-September period, double than the nine deals won by Infosys during the same period. Analysts say the company is a serious contender for winning large deals, thanks to its experience in implementing large, complex and mission-critical projects.

The company remains positive about its business prospects given a strong deal pipeline, visibility across all key verticals and expectations of higher IT budgets for CY11.

Robust performance

The tech giant has delivered robust performance in the first half of this financial year. Analysts at Karvy Stock Broking believe TCS would register a strong 2830 per cent dollar revenue growth in 2010-11. An indication of the improving demand scenario is the revision in its hiring guidance to 50,000 for 201011 from 40,000 guidance provided in the June quarter.

On the margin front, volatile rupee, wage hikes would be the key pressure points in December quarter, but price hikes towards the end of 201011 should cushion the margin growth. TCS' earnings before interest and tax (Ebit) margin has expanded over 300 basis points in the last four-five quarters hitting 30 per cent, led by better higher productivity and scale. Currently, margins are close to that of Infosys, which has highest margins of 33 per cent.

Some monitorables

Although the overall situation remains healthy, key monitorables include a double dip recession in major market US (which is receding), prolonged slowdown in Europe, sharp cross currency movements and appreciation of rupee against the dollar, euro and British pound. Lastly, analysts say it will be interesting to see how well TCS can maintain its margins while pursuing large deals given that pricing pressures remain.

The road ahead

With consistent outperformance on revenues and profitability, the stock (up 55 per cent) has outperformed its larger peers, the BSE IT index (up about 25-27 per cent) as well as the Sensex (up 17 per cent) in the last one year. Analysts expect TCS' valuations to improve further and its stock to trade in line with Infosys going forward –historically, it has traded at a 5 per cent discount, driven by its consistent performance.

With the prospects for TCS looking good, most analysts have a buy rating on the stock and expect an upside of 10-12 per cent over a one year horizon.