Container Corporation of India (Concor)

Concor is a debt-free company and a dominant player in the containerised rail freight segment

CONTAINER Corporation of India (Concor), which has the near monopoly in the domestic container rail freight segment, may be considered for investment given its dominant position in this segment of the logistics industry.

Concor, has also been a debt free company for the past several years and in addition, it offers a dividend yield of 1.14 % currently. This PSU currently trades at 20.7 times its trailing 12-month earnings, broadly in tune with multi-modal logistics services provider Allcargo Global, partly-owned by buyout firm Blackstone Group, which trades at 19.3 times.

Although private sector operators started operations in a limited way in this segment from April 07 with about 15 companies currently competing for business, they are not a threat, at least immediately, to Concor, which is 63% owned by the government. Network infrastructure & expansion plans: At the end of March 09, the company owned fleet consisted of 8,117 wagons, a rise of nearly 37% from the levels two years earlier. In addition, at the end of FY09, Concor had 49 inland container depots (ICDs) and nine domestic container terminals on a pan-India basis, which store goods and provide allied infrastructure facilities for cargo transported from across the country to key container ports at the Jawaharlal Nehru Port, near Navi Mumbai, Chennai and Mundra.

The PSU had invested Rs 653 crore in the fiscal years from March 07 up to March ‘09, to expand its wagon capacity, improve infrastructure facilities, like handling equipment, new terminals and information technology services. Concor funded the expansion through cash generated from its operations, which was Rs 2253.8 crore during the same time period. The expansion happened at a time when the global economy was grappling with a credit crunch and the resulting shrinkage in external trade volumes, especially in the second half of the last financial year. Neverthess, its 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% in fouryear time period. The company plans to invest nearly Rs 600 crore this fiscal, to further expand its network infrastructure and funding this capex should not be a problem, given its strong operating cash flows.

FINANCIALS:

Concor’s net sales was Rs 3417.2 crore at the end of March 09, a CAGR of 12% in a threeyear time period; Its net profit, however, grew at a CAGR of 14.6% during this time period. Growth in its net profit during this period was helped by other income, which nearly quadrupled to Rs 211 crore at the end of March 09. However, its operating profit margin was 27.2% for the previous financial year, as compared to 28.7% at the end of March 06, given higher operational costs. Meanwhile, during the quarter ended September 09, the company’s operating profit margin also contracted by 350 basis points to 26.4%, despite 6.2% improvement in net sales. Pressure on its operating margins was due to the cost of running empty trains amounted to nearly Rs 70 crore in the first half of FY 10, which more than doubled from a year earlier. This took place due to the sluggish trend in India’s external trade, where exports have been falling month-after-month, and the corresponding weak demand for container rail freight services. In the first half of FY 10, Indian exports declined 28.5% y-o-y in dollar terms, while imports also fell 32.7%.

VALUATIONS:

Concor trades with a P/E of 20.7 times its trailing 12-month earnings, while other multi-modal players in the logistics segment, like Allcargo Global Logistics trade at 19.3 times, and for Gateway Distriparks it is at 18.7 times. Investors could consider Concor in a bid to exploit the potential long-term opportunities from the logistics segment, and in particular containerised rail freight traffic.

City Union Bank (CUB)

City Union Bank may be small in size, but it has scaled the heights in terms of performance. Investors can consider buying it for long term

CITY Union Bank is one of the most efficient banks in the country. With a network of 202 branches, it is present in many parts of the country but its operations are primarily concentrated in southern India. City Union Bank (CUB) ranked among the top 10 banks in three of the four main parameters. Of the 39 listed Indian banks, CUB stood 7th on efficiency, 10th on growth and 10th in terms of return to shareholders. It is well known that CUB is one of the strongest banks in the country. Our study showed that it is equally good in terms of rewarding its shareholders. The bank has consistently reported net interest margin (NIM) in excess of 3% in the last nine financial years. Only a handful of Indian banks have managed to achieve this feat.

In FY 2009, the bank posted the second highest return on assets (RoA) across listed banks. Only Indian Bank did better. While CUB clocked a RoA of 1.5% in FY 2009, the average RoA of Indian banks was only 1%. This is a key ratio in the banking industry because it explains how efficiently a bank is utilising its assets.

The current fiscal year has been the most challenging for the banking industry since the start of the boom in 2003. For starters, the pick-up in credit slowed down. As per latest Reserve Bank of India data, the growth in aggregate bank credit has slowed to 10.6% year-onyear. Moreover, bankers are still grappling with shrinking spreads, which is an offshoot of tight monetary conditions in the last months of calendar year 2008. Despite such headwinds, CUB managed to grow its loan book at 19% y-o-y at the end of Sept ’09 quarter. Though, its net interest income fell down by 4% y-o-y, it still managed to grow its net profit by 21% in the six months ending Sept ’09. Net interest income is calculated by deducting interest expense from interest earned and is a measure of spread between cost of deposits and yield on advances. In the absence of growth in net interest income, non-interest income, which grew by 59%, came to the bank’s rescue. Meanwhile, the bank has come out with a rights issue in the ratio of one share for every four shares held. The price of one rights share will be Rs 6. The current market price is Rs 25 per share. This shows that there is significant discount embedded in the rights issue. So, it makes lot of sense for investors to subscribe to rights issue. The issue closes on December 16, 2009

VALUATION:

The stock is trading at 1.4 times its book value. Compared historically, the stock is just inches short of its all-time high valuations, as it was trading at 1.6 times its book value in March 2008. However, the banking sector, and CUB in particular, have shown resilience in tough times. Going forward, investors are likely to give more premium to the banking sector in general and efficient banks like CUB in particular. Its peers like Federal Bank, South Indian Bank, Karur Vysya Bank and Indian Bank are trading at an average price to book value multiple of 1.3 times. This shows that City Union Bank’s stock, at 1.4 times price to book value, is reasonably priced. Moreover, the bank consistently pays dividend to its shareholders. At the current price, the dividend yield stands at 2.4%, which shows that the stock offers value to conservative investors as well.

Bhushan Steel

Higher demand for flat products and expansion in operating margin will benefit Bhushan Steel in the near term

THE recent recovery in Indian economy has once again increased the demand for steel products. There has been significant rise in auto sales and other consumer goods in last few months. All these factors have led to a rise in sales of flat steel products. Bhushan Steel, a leading producer of flat products, is set to benefit from all these. The gains will be driven by faster topline growth coupled with backward integration, which will lead to significant improvement in operating margins. Investors with a mid-term horizon of 2-3 years can add this stock to their portfolio kitty.

BUSINESS :

Bhushan Steel is a secondary steel producer and mainly produces value added flat products. It gets more than twothird of its revenue from cold rolled and galvanized steel products. Bulk of its revenue comes from the automobile and white goods sector, which uses the flat products predominantly. It has three plants, located strategically in different parts of the country. The Dhenkanal plant in Orissa is close to the raw material source and manufacturers sponge iron and billets, the primary steel products. The Khopoli plant in Maharashtra and Sahibabad plant in Uttar Pradesh are close to the two auto hubs in India namely Pune and Gurgaon. These two plants primarily manufacture cold rolled and galvanized products used by the auto companies. It has a close to one million ton capacity for cold rolled products, which is used as a key input for other value added products.

FINANCIALS:

The company's topline has almost doubled in last four years to Rs 5,000 crore in FY 2008-09. The net profit, however, grew at a faster rate during the same time period.

For last four years, the company has been making significant capex to link its operations backwards and to become more integrated. Bulk of this capex program is being financed through debt. As a result, its debt-equity ratio has increased close to four, from the two earlier. This is not a major concern given its higher interest coverage ratio (more than 5). The company has expanded its operating margin by around 500 basis points over last two years to 20.4% in FY 2008-09. In fact, its operating margin in September 2009 quarter increased to around 26%, thus reflecting the partial impact of backward integration. Its return on capital employed (ROCE) of 10% for last several years appear to be lower. But this is a result of higher capital expenditure made during the same time period.

GROWTH DRIVERS:

The company plans to make a structural change in its business model to become an integrated steel company. The management feels that at a time when primary steel producers are planning to produce more value added products, it is imperative for the company to integrate itself backwards to remain competitive in secondary market. The integration process itself will be completed in two steps. In first step, the company will set up around 2 million tons of hot rolled coil (HRC) and 0.3 million tons of slab capacity by this year-end. The HRC capacity will be further augmented to 5 million tons by FY '13. In second step, the company will start mining iron ore and coal from the mines allocated to it. This process will take around 4-5 years. Hence, the full impact of integration, from mining to value added steel products, can be seen from FY '14 onwards. The company has already spent 50% of total capex required for all these expansion programs.

VALUATION:

The full impact of first phase of expansion will start flowing into the financials of the company from FY '11 onwards. As a result of this backward integration, its net profit margin is expected to rise to 15-16%, from the current 9%. This will also boost the company's operating cash flow significantly.

The earning per share (EPS) for FY '10 and FY '11 is estimated to be Rs 171 and Rs 243 respectively. At the current price level, the forward price-earning multiple works out to be 7.9x and 5.6x for FY '10 and FY '11 respectively. The company's scrip has always traded at a P/E multiple in the range of 13-17 during good times. This provides significant upside potential for investors with a horizon of 2-3 years.

REC follow-on offer on Feb 19

REC's follow-on public offer, through which the government plans to divest 20% stake, would open on February 19. According to the draft red herring prospectus filed with Sebi, the issue would close on February 23. At Thursday's closing price of Rs 242.75 on BSE, the FPO of 17,17,32,000 equity shares would raise over Rs 4,100 crore. The offer would comprise a 5% stake dilution by the government and issuance of a 15% fresh equity. Post-FPO, the government's share in REC would come down to nearly 66% from the current 81.82%.

Compucom Software:

 

This is in a space which is in vogue right now basically education, e-governance software services. They have mainly 3500 government schools and catering to around 10 lakh students. It's shown an EPS of Rs 3.5 this year and is expecting around Rs 4.75 for FY11. It's a dividend paying company. It's not a very low price stock because its Rs 2 paid up. In fact, its quoting at around Rs 85 if you multiply by 5.

It is not a future Educomp Solutions. It's a poor cousin of Educomp. You can compare that with Core Projects & Technologies Ltd to a certain extent but this stock has not performed in the recent past. So looking at the EPS estimates we are expecting that this stock should go to levels of around Rs 24-25.

Bharat Electronics (BEL)

Considering the growth potential, expertise and recession-proof nature of its order book, Bharat Electronics can be expected to record profit growth of 25-30% p.a. over the next few years. Investors with a time frame of 2-3 years can consider taking exposure in the stock

BHARAT Electronics (BEL) is a public sector enterprise with 76% government ownership. The Bangalore-based company is country’s premier manufacturer of electronics products and components for the defence sector. Even though the stock has nearly doubled in last six months, it is still trading at an attractive valuation. Considering the growth potential, its expertise and recession proof nature of its order book, the company can be reasonably expected to record profit growth of 25-30% over the next few years. Investors with a time frame of 2-3 years can consider taking exposure in the stock.

COMPANY’S BUSINESS:

As the name suggests, BEL is an electronics manufacturer and mainly caters to the defence needs of the country. It makes communication devices like radars & sonars. Besides that it makes telecommunication and broadcast equipment, electronic voting machines and e-governance network, among others. While most of its revenues come from meeting the needs of defence sector, in recent years the company has been creating a market potential for its various product and systems in non-defence sectors, such as, for civil aviation, oil & gas and railways, among others. The share of non-defence continues to remain low at 15% of the sales, which the company targets to take up to about 30%. Its civilian product portfolio includes items, such as, high frequency communication sets, transceivers, radio relays, fire control systems, communication systems for various ships and yards, air traffic control surveillance, 3D surveillance radar, night vision binoculars, satellite based mobile communication system and electronic voting machines. It is also into solar products, where it is serving the needs of individual and private organisation also.

The company’s market is relatively protected from foreign and domestic competition owing to the sensitive nature of the products, and the threat for orders drying up is low. This business offers a high potential, with increasing importance of renewable source of energy, and the developing stage of technology for the product. The entry into non-defence market is significant as the company has a high degree of technical and manufacturing expertise, which it can leverage to become a leading supplier of high-end electronic systems to the civilian sector. Unlike many of its competitor, the company is an integrated manufacturer of most of the electronic components that go into the final product. This lowers its cost and significantly improves its profitability.

While the company’s product line continues to remain protected, the defence sector is progressively being opened to private players and foreign competitors. Still, the downside of this to BEL is limited and it has actually helped the company improve its operations through various efforts related to quality, cost control and so on. The company has also focussed on improving the product development and delivery cycle time, to match the international standards.

Among other growth initiatives, BEL is now focussing on focus on exports, indigenisation of imported systems and exploring new segments in the domestic market. The company is also actively exploring various JV especially with foreign players for domestics as well as foreign market. Further, newer high-growth areas such as solar energy and egovernance provide good upside potential and they share complementarities with its exiting businesses. It has also identified areas for further exploration such as homeland security and nuclear power Instrumentation, where there is significant scope for the company, more so because of its public sector status.

FINANCIALS:

The company net profit grew at a compounded annual rate (CAGR) of 22% during three years ending March 2008, much faster than 10% CAGR growth in its net sales. While it managed to grow sales by nearly 13% in FY09, profitability took a knock leading to 9.6% decline in net profit. This was mainly due to 47% increase in raw material cost, impacted due to depreciation in rupee, as 70-80% of its raw material is imported.

However, it has managed a turnaround in H1’FY10 recording sales of Rs 2219 core, an impressive increase of 88% year-on-year. With relatively lower growth of 62% in raw material cost, the company managed to improve its operating margin by as much as 10 percentage point. With a marginal growth of 1% in total other costs; company managed to register profit of Rs 310 core, an impressive growth of 146%.

VALUATIONS:

While the profit growth of 150% in H1’10 is not sustainable, but it has enough capability to sustain growth rate of 25%, at least over the next few years. Since, the defence continues to remain a priority for successive government, its core business area remains unaffected by the economic ups and downs. Further, the diversification into non-defence market will help it shore up the volume further, even though the margins may not be as good as in the defence market. The stock is trading at an attractive priceearnings ratio of 15 times its trailing earnings and is an attractive proposition for investors with a medium term outlook.

Zensar Technologies - Midcap stock for 2010

 

The first company in midcap IT space is Zensar Technologies. It has had quite a bit of a run but again demonstrated topline growth even through 2008-09 period – margins have been expanding, net cash balance sheet and trades at really low multiple of mid to high single-digits. As we have seen from the results from Infy, things aren't as bad as people had thought and if anything they might be getting better.

So Zensar is one that I like. You could see it somewhere between Rs 500-550 per share. This is what I think its worth – demonstrable upside from here.

Celestial Labs

Celestial Labs is a combination of a technology and a pharmaceutical company. They have bioinformatics, enterprise resource planning (ERP) and molecule development software for the pharma companies. They are also into herbal and allopathic products. So it's a combination of these two.

We expect earnings per share (EPS) of around Rs 10 for this year. Next year it could be Rs 13-14. These are companies, which are trying to put their act in place. That's the biggest risk.

We could see levels of around Rs 60-70 but at least a short to medium-term target is around Rs 40-45.

Radha Madhav Corporation

 

This was a highflier sometime back. It was quoting Rs 80-85 levels and people had targeted around Rs 120-125 for this stock around one-and-a-half to two years back. But from there it fell to levels of around Rs 10-12. Currently, it's quoting at around Rs 19-20.

These people are basically into packaging, especially pharmaceutical packaging. But unfortunately they had expanded when the markets had started coming down, the economy was on the downturn and this reflected in the results where they have been reporting losses. But with the facilities which they have – they have sixth largest plan as far as packaging is concerned – so if things work out fine for them going ahead this stock should be a flier. But at least for the time being it would be limited to around Rs 25-30.

 

Allcargo Global

Allcargo Global is expected to gain from a revival in the global logistics sector over the next few years

ALLCARGO Global Logistics, partly owned by the world’s biggest buyout fund Blackstone Group, may be a good investment option given the slowly reviving world trade, coupled with the company’s diversified businesses. Allcargo is now the world’s second-largest player in the less than container load (LCL) segment following its acquisition of Belgium based ECU Line in 2006. LCL implies goods which don’t require a full container, but only a portion of it. So, there are logistics operators such as Allcargo who receive goods from various customers at its offices across the globe and in turn, books space on shipping lines, to transport goods to its final destination.

In addition, in the domestic market, the company is present across several segments, including container freight station (CFS) and inland container depots (ICDs), equipment hiring and project cargo, and is aggressively expanding.

Allcargo trades at 18.9 times on a trailing four-quarter basis, which is lower than the largest domestic logistics player, the PSU- Container Corporation of India. Investors could consider Allcargo Global in a bid to gain from the growth opportunities in the logistics sector over the next few years, both within the country and globally.

NETWORK INFRASTRUCTURE

Allcargo acquired Belgium-based ECU Line in 2006 and revenues from its overseas operation contributed almost 76.9 % to its consolidated net sales of Rs 2314.1 crore in the financial year CY08. In the domestic logistics industry, Allcargo’s CFS are located at key container ports at Jawaharlal Lal Nehru Port Trust, near Navi Mumbai, Chennai in Tamil Nadu and Mundra in Gujarat. Its CFS have a total capacity of 2.78 lakh twenty foot equivalent units (TEUs) in November 09, helped by facilities set up at Chennai and Mundra in CY 07. However, the dominant player in the domestic containerised rail freight segment is Concor. Meanwhile, Allcargo’s equipment division currently operates 64 cranes, 72 forklifts and 363 trailers. The operations of this division have been scaled-up considerably with the acquisition of 50 cranes in January 08.

During its financial year ended December 06 and December 09, the company has invested nearly Rs 574 crore, on a consolidated basis, to expand its nfrastructure, while its cash flow during the period was just Rs 238.9 crore. As a result, the company had to borrow, pushing its total debt four and half times to Rs 344 crore at the end of December 08. Its leverage ratio was also 0.3 at the end of the previous financial year.

FINANCIALS & EXPANSION PLANS

Allcargo’s consolidated net sales declined 21.2 % yo-y to Rs 497.85 crore in the September ‘09 quarter, compared to a 3.6 % growth in the trailing four quarters. This was largely due to a 15.5 % y-o-y fall in the volume of cargo handled at its overseas operations given the falling trade. However, its operating profit margins improved 40 basis points y-o-y to 11.7 % in the second quarter of FY 10, helped by a tight check on its operational costs. Allcargo plans to set-up ICDs at Bangalore, Hyderabad, Nagpur and in addition, it has entered into a joint venture with Concor to establish an ICD at Dadri in Uttar Pradesh. The company recently got shareholder approval to raise upto $150 million (nearly Rs 700 crore) through share sales to expand existing facilities, acquisitions and working capital needs. This is in addition to nearly Rs 242.3 crore investment by Blackstone in Allcargo from recent warrant conversion.

VALUATIONS

Allcargo Global trades at 18.9 times on a trailing fourquarter basis. Industry peer Gateway Distriparks trades at 18.4 times and Concor at around 20.7 times. Investors could consider Allcargo Global to leverage the growth opportunities in logistics.

Geodesic - Midcap stock for 2010

 

Now Geodesic is the company I met for the first time two-and-half year's ago at a conference in Mumbai and at the time I admit I was sceptical. I discounted the exclusive growth in the mobile application and telecommunications value added services. But you look at the record they have had of again topline growth, margin expansion, healthy balance sheet, cash flows and it surprises that it trades where it does – this is another one, which is probably trading at 30-40% discount to where it should be.

Vascon Engineers

A presence in real estate business raises the possibility of an exponential growth in future, however, its pricing includes the upside

IPO details:
Price Band: Rs 165-185 per share
Net issue size: Rs 177-198 crore
Date: January 27 - 29

PUNE based Vascon Engineers is an engineering, procurement and construction (EPC) services and realty company. Vascon commenced operations primarily as a construction company, lately it has diversified into real estate development. As of December 31, 2009, Vascon has completed 181 EPC contracts valuing Rs 8,89 crore, out of which 157 EPC contracts representing 75% of the total value were for third parties, and the remaining for its own projects. The company proposes an initial public offer of 1.07 crore shares of face value of Rs 10 each to raise around Rs 200 crore and at the higher price band it is valued at Rs 1656 crore.

   The net issue represents around 11.95% of the post-issue capital of the company. The company intends to use Rs 115 crore of the issue proceeds for EPC contracts and realty projects. Around Rs 39.6 crore to be used for debt repayment and the balance to be used for meeting issue and corporate expenses.

   Company's financial analysis and peer comparison shows that the issue is richly priced. Though its presence in realty segment warrants an exponential growth in the future, long term investors are advised to invest post listing.

BUSINESS:

Started in 1986, Vascon is engaged in EPC activity with an estimated total contract value of Rs 40,14 crore with an order backlog of Rs 32,27 crore as on 31st December 2009. Out of this 30% represent third party contracts and the other 50% totalling Rs 2012 crore is for group projects. So far, Vascon has developed an aggregate saleable area of over 4.99 million square feet. In addition, it has sold land and land development rights aggregating 2.04 million square feet. Out of 55 mn sq ft land bank, about 30 mn is under sole company ownership. HDFC Real estate fund holds 12.85% equity stake post issue in Vascon.

FINANCIALS:

The company's net sales have grown at compounded annual growth rate (CAGR) of 38.3% since FY06 to reach Rs 502 crore in FY09. Similarly, profits have grown at a CAGR of 10.9% during the period to stand at Rs 30.6 crore at the end of FY09. This is on account of a slowdown in the realty sector. In FY09, contribution from realty development declined to 5% of Vascon's net sales as against 42% a year ago. However revenues from the EPC grew 48% during the same time thus insulating the company against downturn in realty business. Its operating and net profit margins stand at 16% and 6% respectively, in line with the construction industry. Going ahead, the management expects realty business to be a major contributor to both revenue and profit

VALUATIONS:

The post issue valuation comes to 29x to 33x of its annualised estimated earnings of FY10. This is much higher than the existing listed players like Pratibha Industries (13x) and J Kumar (10x). Though, this will not be a fair comparison as none of the above companies have a presence in the high margin-high risk realty sector as Vascon has.However, being a new entrant, the company must come at a discount to its peers. Risk averse investors can wait for its listing while those willing to take the risk may subscribe to the issue.

Thangamayil Jewellery

Thangamayil Jewellery's IPO looks attractive. However, given the cyclical nature of its business, the upside could be limited. Those with higher risk appetite should go for it

IPO details:
Price Band: Rs 70-75
Net issue size:  Rs 28.75 crore
Date: January 27 – 29

 
THANGAMAYIL Jewellery is a Madurai based company engaged in manufacturing and retailing of precious jewellery. The company is an established brand in Tamil Nadu and currently operates five retail outlets. Post IPO it plans to expand its network of retail showrooms to 11. It proposes an initial public offer of close to 4 million shares to raise Rs 28.75 crore. This issue includes an employee reservation of shares worth Rs 0.90 crore, hence, net issue for the public stands at Rs 27.85 crore. A part of the proceeds will also be used to meet the working capital requirement of the company. The IPO proceeds will form about 60% of the total cost of these two objectives while the rest of the funding requirement is to be met through internal accruals and pre-IPO placement to the promoters.

BUSINESS:

The company currently trades in gold, silver, diamond and platinum jewellery. The ornaments are made to order as per specific requirement of the customer and the same are manufactured at the company's unit near Madurai. A portion of the jewellery is also bought readymade from various dealers in Andhra Pradesh, Gujarat, Kerala and West Bengal. The company is also in the business of jewellery exchange and has popularized the concept of hallmarking in the region. The company currently has five retail outlets across the state of Tamilnadu. While the company started its biggest showroom at Madurai in 2001, the remaining four showrooms were opened in the last two years.

FINANCIALS:

The topline of Thangamayil has experienced an impressive growth of more than 70% for the last five financial years when compounded annually. Net profit on the other hand has more than doubled every year in the period. While the cash profit demonstrated an equally impressive CAGR of 75% during the period, the cash flow from operating activities remained negative and has risen on an average by 66% .

CONCERNS:

The company is still to identify the locations for three of its proposed show rooms . The cost of project for these three plans turn out to be Rs 12 crore, about 55% of the total cost of projects. 

   Inventories during the last five financial years have increased at a CAGR of 54% which is much higher than that of other competitors like Rajesh Exports (32.5%) and Su-Raj Diamond & Jewellery (20%) . Consequently, the inventory turnover ratio has declined in FY09 and stands at an unimpressive 5 against 54 and 10 for Rajesh and Su-Raj respectively. While negative cash flow and rising working capital requirement is not unknown phenomena for the industry, barring FY06, Thangamayil has failed to generate a positive cash flow.

VALUATION:

Post issue the company will be valued at 6.5 times its annualised H1 FY 10 earnings at the higher end of the price band and 6.1 times at the lower end. The valuation looks attractive compared to the P/E ratio of established players like Su-Raj Diamond and Gitnjali Gems, which are in the range of 8-9.5. However, given the cyclical nature and the working capital requirement of the industry, the issue may be a good bet for investors with higher risk appetite.

 

Syncom Healthcare

High priced Syncom Healthcare's IPO offers little to a retail investor

   Indore-based Syncom Healthcare is a small-sized pharma company engaged in the manufacture and sale of drug formulations and also undertakes contract manufacturing. It proposes an initial public offer of a fresh issue of 75 lakh shares to raise Rs 48.7 to Rs 56.2 crore. From the proceeds of the issue, Rs 20.5 crore is to be used for setting up a new manufacturing unit in Indore SEZ, Rs 6 crore to carry out modernization of the company's existing facility at Dehradun, Rs 15 crore towards meeting working capital requirements and the balance for administrative and general corporate expenses. The current public offer represents around 43% of the total post-issue share capital of the company. The company is raising funds to the extent of 80% of its annual turnover of over Rs 60 crore. Despite its diminutive size and short history of good track record, the company is being valued quite high at 19 to 20 times of its estimated full year earnings of FY10. Given the small scale of operations, its financial numbers also don't seem to be very credible for a retail investor to park funds with a long-term view. Investors are advised to avoid subscribing to this issue.

IPO details
Price Band: Rs 65-75
Net issue size: Rs 49-56 crore
Date: January 27 - 29

Aqua Logistics

Aqua Logistics has grown aggressively over the last few years, but it is saddled with poor operating cash flows

IPO details

Price Band: Rs 220-230 per share
Net issue size: up to Rs 150 crore
Date: January 25 - 28

AQUA Logistics, is a Mumbai-based logistics player with a presence in different segments of the logistics sector, including supply chain solutions and freight forwarding. The company proposes an initial public offer of around 6.9 million shares, at lower end of the price band, in a bid to raise up to Rs 150 crore. This issue is being offered in the price band of Rs 220 and Rs 230 per share, but retail investors would get a Rs 5 per share discount at the time of allotment. Aqua plans to use Rs 30.5 crore of the funds raised for purchase of logistics equipment. In addition, Rs 17.1 crore would be used for setting up additional offices, coupled with Rs 35 crore for a planned acquisition. This IPO represents nearly 33.9% of the post-issue equity capital of the company, at lower end of price band.

BUSINESS:

Logistics started in 1999 and initially offered lower-margin freight forwarding services and over the years it has moved up value chain. As part of this strategy, the company offers project logistics to diverse user industries, coupled with multi-modal transportation services, including movement of cargo within and outside the country. Also, Aqua Logistics, unlike other players in this sector, has over the past few years been following an asset light strategy and largely relied on third-party providers for equipment. The revenue mix for the company for FY 09, comprised 91.6% of its net sales from freight services and 5.5% from project logistics.

FINANCIALS:

Since FY05, the company's income from operations grew at a staggering compounded annual growth rate (CAGR) of 144.6% to reach Rs 213.4 crore at the end of FY '09. The company however, incurred a net loss during FY05 and FY06, but during the period March '06 and March '09, the company's net profit grew 87% on a CAGR basis to reach Rs 9.83 crore. Also, Aqua Logistics' operating profit margin varied between 3.2% for FY '05 and 10.5% for FY '09. Other logistics players like Arshiya International grew its standalone revenues by 354.7 % on a CAGR basis between FY 05 and FY '09.

CONCERNS:

A key concern is that Aqua Logistics' negative cash flows from operating activities amounted to Rs 23.83 crore at the end of March '09, compared to negative Rs 0.26 crore four years earlier. The offer document highlights a rise in debtors outstanding during this period due to rapid rise in its turnover.

VALUATIONS :

At the higher end of the price band (Rs 225, adjusting for the retail discount on allotment), the company demands post-listing P/E of nearly 29.6 times its FY09 net profit and 27.2 times, annualised H1FY10 earnings, adjusted for the expansion in the company's equity. However, Arshiya International trades at 22.6 times consolidated earnings on a trailing basis, while Transport Corporation is at 21.3 times. However, a new listing should come at a discount to established players and we recommend retail investors to avoid this issue.

 

ABG Shipyard

THE year old drama over the acquisition of Great Offshore appears to be coming to an end. In a block deal reported to the stock exchanges earlier this week, ABG Shipyard Ltd (ABG) and Eleventh Land Developers Pvt Ltd (ELDPL), a wholly owned subsidiary of ABG, announced the sale of 30.78 lakh shares of Great Offshore through a stock market transaction. This accounts for approximately 8.27% of the current paid up shareholding of Great Offshore.

Bharati Shipyard holds a 23% stake in Great Offshore and currently has an open offer to acquire an additional 20% at Rs 590 per share. Since this is 13% higher than ABG Shipyard’s open offer, it nullifies ABG’s open offer, paving the way for Bharati to takeover Great Offshore.

The story dates back to December 2008, when Vijay K Sheth, vice-chairman and managing director, Great Offshore knocked at the doors of his friend P C Kapoor, Bharati Shipyard’s managing director, for a loan of Rs 240 crore. This was an amount he owed two financial institutions - IL&FS and Motilal Oswal. In exchange, Sheth pledged 14.89% of his stake in Great Offshore with Kapoor. These shares were earlier placed as collateral with the two financial institutions.

In May this year, Bharati Shipyard acquired the shares pledged by Sheth in a cashless deal taking Bharati’s stake in Great Offshore to 14.89%. This brought Sheth’s holding in the company to less than 1%. According to a statement from Bharati, the company has acquired 55.34 lakh shares at Rs 315 a share resulting in a deal size of Rs 174 crore.

Sheth took management control of Great Offshore after the company was demerged from Great Eastern Shipping which was run by his second cousin, Bharat Sheth following a split in the family business in 2006. To buy his holding of 15.73% in Great Offshore from Great Eastern Shipping, Vijay Sheth sold his resultant 3% stake in GE Shipping post the demerger. However, to raise more funds to facilitate the purchase, he pledged his 14.89% stake in Great Offshore to IL&FS and Motilal Oswal.

Great Offshore’s stock took a major beating when the markets crashed in 2008. The scrip fell from a high of Rs 1,102 on January 7, 2008 to Rs 212 on December 26, 2008. The financial institutions got edgy and it is understood that they wanted to dump their holding in Great Offshore.

The battle for Great Offshore ending is a win-win situation for both companies. The deal for Bharati, makes tremendous business sense as it would help it in consolidating its position across the oil exploration industry. “As of September 2009, Bharati Shipyard has a cash of Rs 550 crore on its balance sheet, which could be used to acquire the 20% shares through the open offer”, says Kunal Lakhan, Analyst at KR Choksey. To sum it up, a win-win situation for both with Bharati deriving business synergies and ABG making a cash profit.

Bharat Heavy Electricals Ltd (BHEL)

Profile

Bharat Heavy Electricals Ltd (BHEL) produces over 180 products and provides systems and services to meet the needs of core sectors like power, transmission, industry, transportation, oil & gas, non-conventional energy sources and telecom. Its business can be divided into three — power generation & transmission, industries/transportation and renewable energy/oil & gas. The power generation segment comprises of thermal, gas, hydro and nuclear power plants business.

Till the end of last fiscal BHEL supplied nearly 64 per cent of total installed power capacity in India. In the renewable energy segment, BHEL is involved in production of solar panels. In the oil & gas segment it produces equipment for on-shore oil drilling and extraction purposes. It is currently planning its venture into the nuclear power space.

Fundamental Performance

The company has got a spectacular dividend paying record dating back to 1971-72. Further in the last 5 years, BHEL has been able to grow its top-line at 26 per cent, while its bottom-line has increased at a much greater 36 per cent. Its internal strength is amplified by cash reserves that are in excess of Rs 12,000 crore. In the last fiscal, BHEL received a record order inflow of Rs 59,687 crore.

There is some concern over the ability of this giant PSU to garner market share in the private power utilities space, but with 95 per cent of the orders in FY10 being placed by private players, that fear has proven to be erroneous.

Stock Performance

Over the past 5 years, an investor in the stock wouldn’t have any doubt about its ability to mint money. It has gained more than 50 per cent annually over the period. It is currently trading at an earnings per share (EPS) of 63, with a PE of 35.47. Though this is higher than its historic trading PE level of 27.29, but it is still way off its peak of 44.

Moreover, as activity in the power sector is intensifying, and as the company is in a commanding position, it can reap benefits thereof.

History

BHEL was established more than 40 years ago to fulfill the national goal of making India self-reliant. It is now the largest engineering and manufacturing company in the energy-related infrastructure sector. It is controlled by the Ministry of Heavy Industries and Public Enterprises.

Maruti Suzuki

The fixed burden of royalty payments to its parent and its stinginess in paying dividends make Maruti Suzuki a risky bet in the auto sector

MARUTI Suzuki has been one of the star performers among large-cap stocks. Since the beginning of this year, the car maker’s stock price has nearly trebled and the company is India’s most valuable automobile company now.

So, what should the retail investors do now? The company is one of the fastest growing car makers in India and its revenues and profits are at an all-time high. On the downside however, the company acts miserly while rewarding its shareholders with dividends unlike other automakers.

Despite being one of the largest campany in the sector, Maruti Suzuki has one of smallest dividend pots. In FY08, the company paid a total dividend of Rs 101 crore and the amount was less than 10% of its net profit. In contrast, Tata Motors and Mahindra & Mahindra distribute nearly a third of their net profits as dividends. And 2009 was no exception. This makes Maruti Suzuki’s shareholders overtly depended on the vicissitudes of the stock market to make money from this stock. And given the company’s cost structure and its capex plans, the situation is not likely to change much in next few years. This raises the risk-to-reward ratio and may not suit investors who believe in buy and hold strategy and like to savour the fruits of their investment over the long term.

BUSINESS:

Maruti Suzuki controls over 50% of the domestic market. In the near term there is no threat given its high brand recall, superior sale and service network and the widest product range in the industry. Its dominance in the all-important small and compact car segment is even stronger. With six models and dozens of variants, it controls nearly two-thirds of the segment. It has further consolidated its position in this segment by launching a slew of international models in last few quarters . The company has also expanded its export business and is now one of the leading suppliers of fuel-efficient cars to European markets. Export now accounts for nearly 15% of its production and has more than doubled this year.

FINANCIAL PERFORMANCE:

The company’s net sales have expanded at a compounded annual growth rate (CAGR) of nearly 18% between FY04 and FY09. The growth was aided by 11% CAGR in its sales volume during the period besides price hikes and launch of higher priced models. However, the company’s operational cost grew at even faster rate, which eroded its operating margin. Its operating profit expanded by just 9% CAGR during the period. It’s operating margin has shrunk from a high of 14.6% during year-ended September ’06 to 6.7% in March ’09. It has recovered in last two quarters, thanks to gains from excise duty cut, but is still below its historical levels. Rise in operational cost was mainly because of rise in raw material costs and royalty payments to its Japanese parent, Suzuki Motor Corporation. Maruti Suzuki pays 5% (of net sales) for domestic sales and 8% for exports as royalty to Suzuki for the use of latter’s brand and technology. In last five years Maruti’s expenses on royalty has jumped six times against two-and-half times growth in net sales. Given the fact that operating margin in auto industry now hovers at around 10-12% for most manufacturers, royalty payments may act as a drag on company’s profitability in future. In the past, the company was able to restrict the impact of falling margins on its net profit, thanks to copious growth in its other income, which expanded by 21.5% (CAGR) in last five years. In FY09, other income—comprising dividends, interest, profit from sale of investments and scrap sale—accounted for 60% of its profit before tax. Going forward, it would be difficult to achieve this given the turmoil in financial markets. Moreover, its capex programme forced it to liquidate a substantial chunk of its investments last year.

VALUATIONS:

At its current price, the stock is trading at around 28 times it’s earnings per share in last four trailing quarters and looks expensive on historical valuations of around 20-22x. Besides, the stock offers one of the lowest dividend among all leading auto majors. High valuations coupled with the fact that metal prices are once again on an upward trajectory, makes us cautious on this counter.

Sushil Finance views on Mangalam Cement, Avaya GlobalConnect, Ahluwalia Contracts

Sushil Finance on Mangalam Cement - Target Rs 235

Sushil Finance has recommended buy rating on Mangalam Cement with a target of Rs 235, in its research report.

"Mangalam Cements (MCL), a B.K. Birla Group company, manufactures Cement and Portland Pozzolana Cement (PPC) using the dry process and markets them under the brand names of Mangalam and Birla Uttam. The manufacturing units of the company namely Managalam Cement and Neer Shree Cement are both located at Morak in the Kota district of Rajasthan. The company has a very strong Balance Sheet with zero Net Debt & Net Cash of Rs 285 million and we expect it Net Cash accruals to grow to Rs 2084 million by FY11. At the CMP, the stock trades at an attractive valuation of 3.9x its FY11 earnings and EV/EBIDTA of 1.2x FY11E, with high FY11 ROE of +20%," says Sushil Finance research report.

Sushil Finance on Avaya GlobalConnect - Target Rs 245

Sushil Finance has recommended buy rating on Avaya GlobalConnect with a target of Rs 245.
"Avaya GlobalConnect, with its best in class communications products & solutions and alliances with global technology leaders, is uniquely positioned to offer high-quality solutions to enterprises across industries. Recently, the Company has taken several measures to reduce its operating cost and has developed many industry-specific solutions, which are well-accepted by its customers. These continuous efforts have started benefiting the Company, while in Q4FY09 its profitability has improved significantly. Going forward, we expect AGC’s consolidated APAT to grow by 36.5% & 22.7% in FY10E and FY11E respectively."

"At the CMP, the stock is trading at an attractive valuation of 9.1x & 7.4x its FY10E & FY11E earnings of Rs. 20 & Rs. 24.5 respectively. Moreover, AGC has strong balance sheet with high net cash and is available at an attractive 2.3x FY11E EV/EBITDA. We recommend “BUY” rating on the stock, with a price target of Rs 245, at which the stock would quote at PER of 10x based on FY11E Earnings," says Sushil Finance research report.

Sushil Finance on Ahluwalia Contracts - Target Rs 228

Sushil Finance has recommended buy rating on Ahluwalia Contracts with a target of Rs 228, in its research report.

Ahluwalia Contracts, ACIL has a strong order book of Rs 53 billion and its order-book to bill ratio is likely to improve further in near future. This gives a clear visibility to the earnings of the company for more than two years. Its strategy to increase infrastructure order book would ensure growth until a demand revival is seen in the retail and commercial projects. We expect the company to grow at a CAGR of 30% for next two years. At CMP , the stock is trading 14x FY11E EPS of Rs.14 & 10x FY12E EPS of Rs 19. Given its strong order book, strong balance sheet and proven track record of the management of timely execution of the projects, ACIL is well poised to ride the construction boom in the country and thus we initiate coverage with a Accumulate rating on the Company with a target price of Rs 228 (based on 12x its FY12E EPS of Rs 19).

Stock views on Nalco, Dena Bank, Royal Orchid Hotels

IndiaInfoline on Nalco - Target Rs 445

IndiaInfoline is bullish on National Aluminium Company (Nalco) and has recommended buy rating on the stock with a target of Rs 445, in its research report.

"On the daily chart, National Aluminum has given a trendline breakout after closing at its 52-week high. The stock has rallied sharply over the past few weeks holding on to its short-term support trendline. This week, we saw Nalco gaining fresh upside momentum after crossing over its stiff technical resistance levels of Rs 404-407 accompanied by high volumes."

"On Thursday, the stock rallied by 7% in a rangebound market, confirming the bullish set up. The other supportive technical oscillators RSI and Stochastic are exhibiting positive divergence which signifies the up move may extend to the levels of Rs 445. Based on above observations, we recommend high risk traders to buy the stock in the range of Rs 414-422 for target of Rs 440 and Rs 445. It is advisable to maintain a stop loss of Rs 406 on all long positions," says IndiaInfoline research report.

Angel Broking on Dena Bank - Target Rs 104

Angel Broking has recommended a buy rating on Dena Bank, with price target of Rs 104, in its report

"Dena Bank, with a strong CASA ratio of 36.9%, is better placed than peers to protect its NIMs. Post the proposed capital infusion, the Bank's Tier-I ratio will improve to 9.9% by end FY2011E from 6.8% in FY2009 and enable it to maintain its CAR well above 12% levels till FY2012E. We estimate Advances to grow at 16% CAGR over FY2009-12E driving Earnings' CAGR of 15% over the period. At the CMP, the stock is trading at attractive valuations of 0.7x FY2012E ABV. We have valued the stock at its 5-year median P/ABV of 0.9x FY2012E ABV and arrived at a 15-month target price of Rs 104, an upside of 23% from current levels. We Initiate Coverage on the stock with a Buy recommendation," says Angel Broking report.


SKP Securities on Royal Orchid Hotels - Target Rs 108

SKP Securities has recommended a buy rating on Royal Orchid Hotels, with price target of Rs 108, in its report.

"At current market price, Royal Orchid Hotels is trading at EV/EBITDA of 12.0x and 8.0x of FY11E and FY12E EBITDA, respectively. We have valued the stock at 9.5x its FY12E EV/EBITDA (which is inline with its historical average and discount to its peer group). We expect ROHL’s EBITDA to grow at a CAGR of 17.35% over FY09-FY12E. We hereby initiate coverage on ROHL Ltd. and recommend buy rating with a target price of Rs 108 (32% upside) in 15 months," says SKP Securities report.

United Bank files for IPO

Kolkata-based United Bank of India (UBI) has filed a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) for an initial public offer (IPO). The issue size will be Rs 50 crore. The bank had appointed SBI Capital Markets (lead merchant banker), Enam Securities and Edelweiss Capital as merchant bankers for the issue, T M Bhasin, executive director, UBI, said.

The government's stake after the issue will come down to 84.20 per cent.

The bank expects to raise Rs 350-400 crore through the issue, depending on the market conditions.

Earlier, SC Gupta, chairman and managing director of the bank had said the bank planned to issue 50 million shares with aface value of Rs 10 each.

The IPO is expected to be launched by the last week of January or the first week of February 2010.

The government has already restructured and reduced the equity capital of the bank from Rs 1,532 crore to Rs 266 crore by allowing transfer of Rs 1,266 crore to the capital reserve account. With this, the book value of Rs 10 per share of the bank has gone up to Rs 104 per share. This will be close to Rs 94 per share after the IPO.

The bank expects to get another Rs 550 crore capital before March 2010. Subsequently, the book value per share of the bank would be close to Rs 125, said Bhasin.

The bank had kept options like follow-on-public (FPOs) at a later stage to raise more capital, he said.

At present, UBI and Punjab &Sind Bank are the two nationalised banks yet to get listed on the stock exchanges.

In March this year, the government had contributed Rs 250 crore as Tier-I capital at UBI.

Koutons Retail

 

At an EPS of Rs 22.9 for FY10, co's share price seen cheaper than those of other retailers

 

INVESTORS in Delhi-based Koutons Retail have not been able to rake in much moolah despite the overall market rally. The stock has been a laggard in the past year, posting a negative return of 31%. But it's gradually gaining ground having recorded its 52-week low of Rs 293 on January 11. 

   Koutons' performance on bourses, over a longer period, has been consistently bad. For instance, in the past three months, returns on the stock were a negative 5%. And over a six-month period, it was negative 11% whereas the Sensex reported a return in excess of 30% during this period. On an annual performance basis also, the stock under performed the benchmark index Sensex as well as the ET Retail index that gained 92% and 90%, respectively. 

   Koutons, which grossed Rs 1,155 crore in the past four quarters in revenue, manufactures semi-formal and casual wear under the brands Koutons, Charlie Outlaw, Les Femme and Koutons Kids. Each of these brands operates in a separate segment, ranging from the premium to value segment, with Koutons positioned as the higher-end brand. The company currently has 230 family stores and 1,388 exclusive brand outlets (EBOs). Most of these are on a franchisee basis, which keeps it an asset-light model for Koutons. Last year, the company also forayed into women and kids' wear, as these are high-margin segments, which will help improve the overall return on the capital employed. 

   The company has seen a subdued 15% growth in profits in the first half of FY10 despite a good 36% increase in operating margins. Improved inventory management, lesser markdowns and higher volumes were the key contributors to this. However, in the second half of FY10, the company is not be able to record a 25% growth in sales as seen in the first half, with the festive period over. The company reported Rs 347-crore sales in the quarter to September '09, a 23% year-on-year (YoY) growth. With an operating profit of Rs 61 crore and net profit of 24 crore, margins have improved on a YoY basis, but higher interest outflows still weigh heavy on quarterly growth in profits. This has impacted its interest coverage ratio which has come down from 2.36 times as on March '09 to 1.74 times as on September '09. Interest coverage is a measure of the ability of the company to pay interest out of its earnings. 

   Going forward, the company expects to grow the ladies and kids segment that will improve the overall margin. It also expects higher realisation and improved inventory management system that will reduce its working capital cycle. The management expects a 300-bp reduction in its interest cost that will further improve margins. At Rs 348 and an annualised EPS of Rs 22.9 for FY10, the stock is valued at 15.3 times its earnings, cheaper than some other retail players.

 

Supreme Petrochem

 

Supreme Petrochem is set gain from a turnaround in the polystyrene industry. Long-term investors should invest in the stock

 

 

SUPREME Petrochemicals is India's largest producer and exporter of polystyrene (PS) polymer with an installed capacity of 272,000 tonne per annum (TPA). The company acquired Shin Ho Petrochemicals in 2006 with a manufacturing capacity of 6,000 TPA of expandable polystyrene (EPS) at Chennai. The name of the company was later changed to SPL Polymers, before merging it with Supreme Petrochemicals.

   In 2006, the company had entered into an MoU with the Maharashtra government to set up a world class styrenics complex and a minor port in the Raigad district at an estimated investment of Rs 1,115 crore. However, the land acquisition for the project is still continuing through MIDC while the company has obtained environmental clearances. The company has implemented a share buyback last year to acquire and extinguish 15.4 lakh shares. The company's equity capital now stands reduced to Rs 96.8 crore.

GROWTH DRIVERS:

The polystyrene industry globally had been suffering from overcapacity and stagnating demand due to competition from polypropylene. However, the scenario has improved with nearly 1.5 million tonne or 10% of the world's PS capacity closing down in last three years. At the same time, the demand prospects are improving. The lightweight sheets made from extruded PS are increasingly being used for insulation in construction buildings to reduce energy consumption. In fact several developed countries have made this kind of insulation mandatory, and even in India the concept is gaining currency as part of 'Green Building' initiatives. In fact the first half of 2009 witnessed the domestic demand for PS spurt 22% against a year ago.

   Supreme Petrochemicals is also shifting its focus from commodity polymer to value added varieties such as coloured, compounded, specialty, expandable, extruded and cup grade polystyrene. It has lined up investments of over Rs 200 crore to expand its capacities in all these value added products within next 18 months. The company has also entered in a tie-up with Italy's Ultrabatch to manufacture and market high-end additive masterbatches, which are concentrated mixture of pigments and additives. Similarly, it has joined hands with the US based Nova Chemicals to set up 20,400 TPA cup-grade EPS plant in India, which has recently commenced operations.

FINANCIALS:

The company has been stagnating over last 5 years - both in case of topline as well as bottom line - due to difficult situations in the global polystyrene markets. During these five years, the company improved its debt-equity ratio gradually to 0.7 as on June 30, '09 as against 1.48 five years ago.

   For the year ended in June '09, the company recorded a net profit of Rs 19.2 crore despite a net loss of Rs 46.7 crore in the December '08 quarter due to inventory losses. A strong rebound in demand in the first half of 2009 enabled the company to wipe out these losses and end the year in profit.

VALUATIONS:

At the current market price of Rs 26 the company is valued at eight times its profits for the trailing 12 months. The current price is just 1.3 times the book value of the company's stock price. Going forward, we expect the company to report net profit after tax of Rs 55 crore during the year ending June 2010, which translates in a forward P/E of 4.6. The dividend yield of 3.8% can add to the margin of safety for an investor. Considering the growth prospects as a result of the industry turnaround Supreme Petrochemicals appears attractively priced.

Punjab & Sind Bank seeks govt OK for IPO

Punjab and Sind Bank Ltd had sought government approval for its proposed initial public offer, a source close to the development said today.

The bank aims to launch the issue in early part of the financial year starting April.

We are planning to raise around 5 bln rupees through the IPO and are targeting to launch it in early next financial year

Stock views on Yes Bank, Sobha Developers, Crompton Greaves

Motilal Oswal on Yes Bank - Target Rs 327

Motilal Oswal is bullish on Yes Bank and has recommended buy rating on the stock with a target of Rs 327, in its reports.

“Despite 76% CAGR in assets over FY06-09, Yes Bank's market share is a mere 0.55% as of September 2009. Rapid branch network expansion, acquisition of new customers and deepening of existing customer relationships would help ensure that its asset growth remains higher than industry. With likely capital raising in next one year (we have factored in USD 235 million at Rs 250 per share), tier-I CAR would improve to ~12% and support asset growth over the next 2-3 years. We expect loan CAGR of 37% and PAT CAGR of ~32% over FY09-12.”

“We expect RoA of 1.5%+ and RoE of 17%+ over the next three years, despite equity dilution. Given the superior return ratios, superlative growth and a competent management, we believe Yes Bank deserves premium valuations. The stock trades at 2.3x FY11E BV and 15.7x FY11E EPS. We initiate coverage with a Buy recommendation and a target price of Rs 327 (3x FY11E BV).”

Edelweiss on Sobha Developers - Target Rs 316

Edelweiss has initiated coverage on Sobha Developers with a Buy rating and a fair value of Rs 316 per share - implying an upside of 29%.A report released on December 31 said: "We value Sobha based on DCF value of cash flow from ongoing projects (9.4 mn sq ft) and forthcoming projects – to be launched over FY10-14 (13.6 mn sq ft) and value of its balance land reserves (134 mn sq ft) land. We expect Sobha to generate INR 43.6 bn net cash from its ongoing and forthcoming projects, and value the same at INR 10.7 bn. We value the balance land reserves on land bank valuation at INR 27.5 bn, taking the total EV at INR 41.0 bn and a fair equity value of INR 30.9 bn. Consequently, we initiate coverage on the stock with a BUY and rate it Sector Performer on a relative return basis."

Angel Securities on Crompton Greaves - Target Rs 525

Angel Securities has upgraded the rating on Crompton Greaves from Accumulate to Buy with a target price of Rs 525 - an upside of over 20%.A report released on January 4 said: "We have been maintaining our positive stance on Crompton Greaves (CGL) right from our initiating coverage report dated June 12, 2009, citing its unjustifiably huge valuation gap with peers ABB and Areva T&D. Now we introduce our FY2012 estimates, and expect the company to register a topline and Bottomline CAGR of 12.1% and 19.8%, respectively, during FY2009-12E."At the CMP, the stock is quoting at 18.8x and 16.2x FY2011E and FY2012E EPS, respectively, which we believe is attractive compared to its peers ABB and Areva T&D (which are quoting at 24.9x and 21.5x CY2011E EPS, respectively).

We believe that such a high valuation gap is unwarranted and going ahead it would narrow down as CGL has been bridging the technological gaps through various acquisitions. The gap would also narrow down on the back of superior earnings growth and higher average RoEs for CGL as against its peers. We assign CGL a Target P/E multiple of 20x and upgrade the stock from Accumulate to Buy with a 15-month Target Price of Rs 525."

PSL

Stock Trading At P/E Multiple Of 11 With A Lot Of Steam Left For Further Upside

 

THE stock price of PSL, a leading manufacturer of steel pipes in the country, has been surging upwards for quite a while. It has posted a return of 25% in the past two months compared to the rise of 7.6% in the Sensex. 

   Other than a general improvement in overall economic sentiment, a key driver has been the company's burgeoning order book. This week, the company bagged an order worth Rs 425 crore to supply water pipes to large private infrastructure companies such as Larsen & Toubro (L&T), Lanco and Nagarjuna, among others. Though this order may not look very big compared to the company's total order book size of Rs 3,100 crore, it accounts for more than two-thirds of its order book from water pipeline segment. And strategically, this is important for the company because such a big-size order will help it get more such orders from this segment, which holds a lot of potential for future growth. 

   The company has a competitive advantage of diversified plant locations and this has helped it outbid its rivals while bagging this project, which will be implemented in states such as Tamil Nadu, Karnataka, Andhra Pradesh and Gujarat, among others. What is positive from the investors' perspective is that the impact of this order on the company's earnings could be seen in the next 2-3 quarters since it has already started working on it. PSL generates roughly Rs 600 crore of revenue every quarter and the current order will account for around one-fourth of quarterly revenue for the next 2-3 quarters. The management expects to get 4-5% of net profit margin, in line with the overall margin of the company. And this will translate into an annualised earning per share (EPS) of Rs 5.6, one-third of its current TTM (trailing twelve-month) EPS. 

   Its strong order book is likely to result in a better financial numbers next year. The stock is now trading at a price-earning multiple of around 11. The stock has historically traded at a P/E multiple of 15-20 in good times. Considering the short-term outlook on order book execution, it appears that the stock still has some more steam left behind.

 

Nilkamal

Softer Input Costs Help; Stock Trades At A P/E Multiple Of 15, Far Ahead Of Its Peers

PLASTIC product maker Nilkamal witnessed a sharp rise of 7% in its stock price on Tuesday. The counter is buzzing following a turnaround in the company's performance in the past two quarters. The stock has been up over the past one month. 

   The scrip has gained 41% in one month, notwithstanding the sluggishness in the broader market. The benchmark Sensex posted a modest return of 2.7% during the period. Nilkamal's performance on the bourses stands out taking into account the returns for the three months, six months and one year. 

   For instance, in the past three months, the stock has gained 64%, and it has more than trebled in six months. The Sensex returns lagged behind in each of these periods. Compared to the yearago level, its current price of Rs 245 is four times higher. 

   Nilkamal, which grossed Rs 564 crore in the past four quarters in revenue, manufactures injection moulding products, including home furniture. It had posted net losses in the second half of FY09. The trend, however, has reversed since then. It has reported an impressive operating performance in the past two quarters. 

   This was largely aided by a significant drop in raw material prices due to a relative softening in prices of petrochemical intermediaries, including polyethylene and polypropylene. As a result, input costs as a percentage of sales fell sharply from 71% a year ago to 59% in the September 2009 quarter. 

   Lower costs have resulted in improved profitability. From the lows of 7% in the March 2009 quarter, operating margin expanded to 13% in the September 2009 quarter. At the current price, the scrip of Nilkamal commands a price-earnings multiple of 15 on a trailing 12-month basis. Other injection moulding manufacturers, including Supreme Industries and Wim Plast, are trading at a P/E of nine and seven, respectively. 

   Nilkamal's higher valuations partly reflect its financial recovery and its expansion plans for plastics retail. The company is investing in its own retail chain under the name @Home across the country. In the September 2009 quarter, it opened two new stores under this brand.

 

Mercator Lines

Mercator Lines has diversified its activities in a bid to offset the impact of cyclical nature of the shipping industry

 

MERCATOR Lines, India's third-largest shipping company by tonnage, has been attempting to diversify its activities in a bid to minimise impact of the cyclical nature of the global shipping industry. In the last two years, the company has made investments in offshore, dredging and coal mining activities.

   Also, with Western economies emerging from recession, the shipping sector is expected to be one of the first sectors to benefit from a possible upturn in the global demand for transporting crude oil and other products. Mercator Lines currently trades at a discount to the largest private sector player GE Shipping and the government controlled Shipping Corporation of India, the largest company in the sector.

FLEET CAPACITY:

Mercator Lines' total owned fleet capacity amounted to nearly 2.12 million dead weight tonnes (DWT) at the end of FY 09, an increase of 55% from two years earlier. The company has further expanded its owned fleet with the recent delivery of a vessel of 42,235 DWT.

   Rival GE Shipping's fleet capacity was almost 2.84 million tonnes at the end of October '09, while Shipping Corporation of India's fleet capacity is 5.35 million DWT as on August '09. Like most of its peers, majority of Mercator's fleet capacity is in the tanker segment, which entails transportation of crude oil products. As part of Mercator's strategy to diversify its activities, it acquired a jack-up rig, four dredgers, and coal mines overseas. Nevertheless, the company's shipping business contributed nearly 74.3% to its consolidated net sales during the first half of FY 10.

   Mercator incurred a capex of Rs 4,472.4 crore from FY07 to FY09 to purchase additional vessels and to diversify into allied businesses. However, its cash flow during this period was just Rs 2,882 crore and its total debt jumped 54.6% to Rs 2,835.6 crore at the end of FY 09.

FINANCIALS:

The sluggish trend in global merchandise trade had a visible impact on Mercator. Its operating profit margin declined 2,670 basis points y-o-y to 22.7% in the September '09 quarter, and its consolidated net sales plummeted by 47% y-o-y. The difficult environment for the shipping industry was reflected with the average spot freight rates in tanker segments like VLCC (very large crude carrier) declined 93% y-o-y to $4,514 per day, in the second quarter of FY 10, point out sources. No doubt, Indian shipping companies have longterm contracts with customers but that could

not prevent deterioration in quarterly results. However, signs of a global revival of trade flows have helped to bring some revival in spot freight rates over the last few weeks.

VALUATIONS :

Mercator, at CMP, trades at 5.7 times on a trailing basis. GE Shipping trades at 6 times and Shipping Corporation at 11.3 times. Investors could consider Mercator Lines to take advantage of long-term growth opportunities in shipping sector.
 

Indian Bank

Profile

 

Indian Bank is a Chennai based public sector undertaking. It was established on 15 August, 1907 as part of the Swadeshi movement. In 1969, the Government of India nationalized most banks in the country, including this one.

 

Its market history is recent though, having been listed in March, 2006-07 fiscal. Like most other banks it too has a presence in segments such as  Treasury, Corporate/Wholesale Banking, Retail Banking and Other Banking Operations. The company has three subsidiaries namely: Indbank Merchant Banking Services Ltd, IndBank Housing Ltd. and IndFund Management Ltd. 

 

Promoters

 

The Government of India (GoI) holds an 80 per cent stake. Other than that, foreign institutional investors (FIIs) had the next largest interest in it through their market-based stockholding, but during the Bull Run (starting March 9, 2009) they have reduced it. Mutual funds had less than five per cent stake in the company, but they too have reduced their positions.

 

Investment Rationale

 

High Growth Rate

 

The bank's business has grown steadily over the last 5 years, from Rs 530 billion in FY04 to Rs 1,244 billion in FY09. It was the fastest growing PSU bank in FY09. Most of its segments grew in double digit.

 

Rising Deposits and Advances

 

Its deposits have grown at a compounded annual growth rate (CAGR) of 19 per cent from Rs 303 billion in FY04 to Rs 726 billion in FY09. The advances have grown at a CAGR of 29 per cent, from Rs 141 billion in FY04 to Rs 518 billion in FY09. Deposits in FY09 have grown by 18.9 per cent, advances are up by 28.8 per cent and total business is up by 22.8 per cent. 

 

NIMs & NPAs

 

Net interest margins (NIMs) are pretty healthy at 3.45 per cent for the September quarter and 3.51 per cent for the HY10. With the lowest gross and net non-performing assets (NPAs) among PSU banks (0.89%, 0.18% respectively), this is one bank which has shown no sign of slippages this year. Recoveries of loans gone bad too have been strong, but this can taper off. 

 

New Tie-up

 

A new car loan venture with Tata Motors has been cleared, while the one with Hyundai is already in progress. This will help increase its market share in the segment wherever the bank has its branches (1,657 branches spread all over India). Expectations are that the hi-yield lending may pick up as retail's share in loans rises. 

 

Urban and Semi-urban Connect

 

Non-metro (urban/semi-urban) branches have grown fast. In fact there has been a 20 per cent rise in ATM/debit card holders in H1FY10, which indicates a strong retail franchise-building effort by the bank. 

 

Risk & Concerns

 

Government Investment 

 

Indirect intervention by the government (the majority stakeholder) to lend under social-sector scheme, concessional lending and other such unremunerative exercises pose a grave risk. The farm debt waiver, or scheme of that nature, will hamper the bank. 

 

Private/Foreign Competition

 

An intensifying struggle for dominance has seen the aggressive, greater risk-taking private banks gaining ground in the domestic market. Foreign banks too have made similar inroads with their aggressive push, backed by a the strong skill-set of their employees. 

 

RBI Policy 

A systemic squeeze may happen if the Reserve Bank of India (RBI) starts tightening credit support faster than expected. RBI's second quarter monetary policy review clearly indicated tightening/reversal of the current accommodative monetary stance. However, most analysts expect this process to be gradual. But, there is uncertainty here as rising inflation may force RBI into a faster-than-expected withdrawal of liquidity, which will raise in interest rates. 

Crude Surge

 

Oil imports constitute about 30 per cent of India's import bill. The current year-to-date (YTD) average crude oil price is about $66 per barrel compared to $ 86 in FY09. 

 

Any significant surge in crude oil prices will impact balance of payments, which in turn will also impact domestic liquidity. 

 

Valuation

 

Indian Bank has given a guidance of 20 per cent growth in advances and a 17 per cent growth in deposits in FY10. It is expected that the total business will touch Rs 1.5 lakh crore in FY10. 

 

On a price-to-equity (P/E) basis, the bank is trading at ~5x FY10 and under 4.4x FY11 estimated earnings.

 

Stock views on Bharati Shipyard, Ashok Leyland, Alphageo India

Sharekhan on Alphageo India - Target Rs 297

Sharekhan has recommended a buy rating on Alphageo India, with price target of Rs 297, in its report.

"The order pipeline from fresh tenders is also healthy and Alphageo India hopes to announce more new orders from private operators in the coming months. The efforts to reduce the company’s dependence on public sector oil companies (like ONGC and Oil India) are yielding results now both in terms of better revenue growth outlook and improved utilisation of resources (seismic crews). Given its strong performance in Q2FY2010, healthy order book position and improving client profile, we have significantly upgraded the estimates for FY2010 and FY2011. Consequently, we have upgraded our recommendation to Buy with the price target of Rs 297 (12x FY2011 earnings)," says Sharekhan report.

Sharmila Joshi on Ashok Leyland - Target of Rs 56

Buy Ashok Leyland with a target of Rs 56, says Sharmila Joshi, Investment Advisor.
Joshi told, "Ashok Leyland is bought with an intraday target of Rs 56. Couple of reasons why I like this stock and I do think from current levels these could be an outperformer in the space. I think similar to the kind of catch-up that you saw between Bajaj Auto and Hero Honda; you could see that repeated in this space largely because of the kind of recovery one is seeing in the commercial vehicle space. So this is a high performance kind of potential, the management has given a guidance of about 60,000 to 62,000 units for FY10."

She further added, "The kind of performance this company has shown in the second quarter where they have done about 23.6% kind of growth that’s likely to be maintained in the next two quarters as well and that’s good news. Their AVIA is very close to breakeven and their Uttarakhand plant is getting sanctioned in January ’10 and this will mean an excise duty kind of saving of almost about Rs 6,000 per unit. So, good stock especially if you have maybe FY11 kind of an EPS in mind and as I said I bought it with an intraday target of Rs 56."

KRChoksey on Bharati Shipyard - Target Rs 206

KRChoksey research is bullish on Bharati Shipyard and has recommended buy rating on the stock with a target of Rs 206, in its research report.

"Considering Bharati acquires 20% stake in Great Offshore from the open offer at Rs 590 per share, the average price of its acquisition of 43.1% stake (post open offer) comes out to be Rs 475 per share. At this price Great Offshore is valued at ~12x its FY10E earnings. Though this acquisition may look expensive when we compare it with the valuation of Aban Offshore (P/E of 10x), however, Aban’s discounted valuation is justified by its debt burden. So we believe, that Bharati Shipyard would be acquiring Great Offshore at a fair valuation. This acquisition presents significant synergies to Bharati, whose current order book would last for another 2-3 years. In the next two years, Great Offshore’s 70% of assets will come for replacement or repairs. These orders can be worth Rs 2500-3000 crore. Thus, great offshore’s orders will come at the time when Bharati’s orders are about to get exhausted. We maintain a BUY on Bharati Shipyard with a target price if Rs 206,"says KRChoksey research report.