Edelweiss Securities on Aurobindo Pharma

Aurobindo Pharma’s (ARBP) recent entry into CRAMs with a new division, Aurosource, is a positive, enabling the company to participate in the growing outsourcing opportunity. Besides, ARBP is favourably placed to garner contracts, given its relatively low-risk strategy for US, low cost of manufacturing and current relationships with innovators. Initial focus will be on pre-clinical and late phase IV candidates, with revenues expected to commence from late 2010-11.
Current stock price performance partially alleviates market concerns on FCCBs, which is the key overhang to higher valuations. ARBP has $37 million of FCCBs scheduled for redemption/conversion in August 2010 at a conversion price of Rs 522. Total FCCB conversion could lead to an 8.3 per cent dilution in equity.

ARBP’s valuations are at a 40-60 per cent discount to peers, likely affected by key concerns on $200 million of FCCBs to be redeemed in May 2011, and which offset potential upsides due to the Pfizer contract ramp up and likely upsides from recent CRAMs initiatives. Edelweiss has maintained its outperformer rating on the stock.

Chettinad Cement

THE key takeway from Chettinad Cement's March 2010 quarterly result is that in the southern market, there appears to be no visible sign of improvement in the operating environment. As a result, the company's operating profit margin plummeted 2,000 basis points Yo-Y to 30.8% in the fourth quarter of FY10.

   The results were declared after the close of Tuesday's trading, but the stock had already gained 1.6% to close at Rs 584. This stock has also outperformed the broader Nifty since the start of calendar year 2010, on expectations of a revival in the operating environment in the South.

   Meanwhile, pressure on the company's operating profit margins during the quarter under review was due to a decline in realisations on a per tonne, coupled with a rising input cost, especially power & fuel.

   For instance, the company's realisations declined nearly 17% Y-o-Y to Rs 3,131 per tonne in the fourth quarter, given that its cement despatches were estimated to have increased 29.5% Y-o-Y to 1.08 million tonne. There were signs of recovery in cement demand in the South in the fourth quarter, given a pickup in implementation of government-funded infrastructure projects, but analysts also point out to a rapidly expanding capacity in this region and the resulting pressure on realisations on a per tonne basis.

   In addition, the company's key operational cost, power & fuel increased nearly 18.4% Y-o-Y to Rs 864.3 per tonne, given the rapid rise in domestic and international coal prices over the past 3-4 months. Earlier, Shree Digvijay Cement, a largely western region-focused player, had also reported a 260-basis-points Y-o-Y decline in its operating profit margin to 21.4% in the March '10 quarter, due to a fall in realisations and rising operational cost structure.

   However, in the case of Chettinad Cement, a 61.6% Y-o-Y reduction in its depreciation provision to Rs 94.1 crore in the March '10 quarter, helped the company record a net profit of Rs 7.2 crore in the quarter under review, compared to a net loss of Rs 98.3 crore a year earlier. That's because during FY09, the company had made a change in the method for calculating depreciation and coupled with the arrears in depreciation from this accounting change were included in the fourth quarter.

   Going forward, concerns remain regarding the rapid expansion in cement capacity in the South, coupled with a rising cost structure for this sector. And with the stock trading at nearly 18.9 times on a trailing four-quarter basis, it is expensive.

 

Punj Lloyd

 

 

In recent times, Punj Lloyd (PLL) has been in the headlines for the wrong reasons. First, it announced that it was writing off Rs 160 crore in Q4FY10. And now the company has divested its stake in Pipavav Shipyard (PSL) for Rs 700 crore. The timing of the deal and the pricing have raised questions.

 

The company's woes started when (in 2006) it bought Sembawang Engineers and Constructors (SemCorp) of Singapore along with its wholly owned subsidiary Simon Craves (SCL), UK. At that time, PLL was betting that this acquisition would enable it to enter into the construction of SEZs, among other verticals.

 

Prior to the acquistion (FY06), SemCorp recorded revenue of $1 billion with an order book of $1.9 billion while SCL's revenue stood at $350 million. PLL bought both for just $40 million. When asked by analysts about the low valuation and the low profitability of the companies, Atul Punj, chairman and managing director had said: "I am not complaining when people ask me what their profit numbers are. In this kind of opportunity landscape, to get a company with this kind of pre-qualification itself is the real steam, if I may use the term. I am really happy that their numbers are where they are. I think we have got a great deal for a very, very good price.

 

Troubles begin

But three years down the line, SCL is losing money fast. First, it lost the adjudication proceedings against Sabic Petrochemicals, UK. For this PLL had to take a one-time charge of Rs 470 crore in the books of SCL. It is contesting this adjudication in higher courts.

 

Now SCL has been penalised for delaying completion of a project by Ensus for whom it was setting up a bioethenol production facility. Till Q3FY09, PLL had written down losses of Rs 300 crore. And in this quarter it is all set to write down another Rs 160 crore. Some analysts, like those from HSBC, fear that PLL might report a loss for FY10.

 

Divestment raises questions

On top of all these woes, the management's decision to offload its stake in Pipavav Shipyard, which it got into to support its offshore business, is not a sign of confident decision making. More so when the exit price (Rs 49.80) is at a 15 per cent discount to the IPO price (Rs 58) and at a 20 per cent discount to the current market price (Rs 63.85) of Pipavav Shipyard.

 

If PLL was a PE investor or an institutional investor, then an exit after almost doubling its investment might have been justified, but not for a strategic investor that invested for better synergies. SKIL (a co-promoter), by buying out PLL's stake, has laid to rest any speculation regarding Pipavav Shipyard.

 

But the reason behind PLL's exit remains shrouded in mystery. The Street has already made provisions for PLL's lower earnings. Year-till-date (till March 29, 2010) the stock has lost 13 per cent while over the same period the Sensex has gone up by 1 per cent. Shailesh Kanani, research analyst, Angel Broking, says that the claim by Ensus was expected

 

However, the stake sell-off is not something analysts have factored in. This could only mean that the company is facing cash flow problems and had to resort to a fire sale to keep its head above water. With the stock under a cloud, most analysts are today recommending a "Hold" on it. The annual results should help clear up the picture regarding its performance.

 

Religare Hichens on India Cements

With elections in Tamil Nadu next year, India Cements believes the government would expedite infrastructure projects, resulting in a degree of demand revival in the southern market. However, the capacity overhang in the south will continue as additions of over 30 million tonnes (MT) become operational over FY10-FY11.

India Cements’ 1.5 MT cement expansion project in Rajasthan is progressing as per schedule and should be commissioned in June this year. Based on expanded production, volume growth estimates are 20 per cent and 12 per cent for 2009-10 and 2010-11, respectively. The company is likely to incur a total capex of Rs 1,500 crore over the next two years, for which it has raised debt to the tune of Rs 550 crore. It is also incurring $20 million for the acquisition of a 30 MT coal mine in Indonesia. The company is confident of mining captive coal in 2010-11, thereby lowering its coal cost going forward.

Pricing pressure is likely to continue in the south with oversupply setting in. Being a fragmented market, cement players are likely to battle for market share, undercutting prices. India Cements’ stock is trading at 20 times its 201011 estimated earnings. It is trading at 8.5 times its two-year forward earnings for the base business and Rs 25 for the company’s India Premier League (IPL) cricket team. Maintain sell.

Ajmera Realty

 

 

THE erstwhile steel company Shree Precoated Steels demerged its steel and realty business into separate entities. The real estate business has been housed under the company named Ajmera Realty and Infra India. Trading in the demerged entity started on June 16, 2009 after the stock was delisted. Since then, the stock has gained 37% as against a 17% and 13% upsurge in Sensex and ET Realty index, respectively. Its onemonth and three-month return was 4% and 16% respectively, beating benchmark indices. The company announced its results on Monday. The stock closed at the day's low of Rs 226.60, after a touching a high of Rs 233.

   Ajmera Realty has been in realty business and has constructed about 20 million sqf of area. The company has a strong presence in western suburbs (Andheri and Borivali) of Mumbai, and is also present in Pune, Gujarat and Bangalore. The company built the first mall at Andheri in Mumbai. Currently, two residential projects (Wadala in central suburb in Mumbai and in Bangalore) are under construction with an area of 1.7 million sq ft. About 20% of these projects are sold. The company expects a re-rating in prices in its Wadala project, which will increase its average selling price from the current Rs 11,000 per sq ft to Rs 15,000 per sq ft. These projects will be funded though internal sources and through pre-sales. Going ahead, these projects are expected to bring revenue visibility for the next 18 months.

   The company is also in the process of acquiring land for further projects in Mumbai and Pune. It also plans to launch a few commercial projects. It does not believe in amassing huge land banks from borrowed funds and thus is a zero-debt company. In case of paucity of funds for its projects, it can easily raise debt. Currently, the company has Rs 50 crore cash on the books and it expects another Rs 200 crore in March 2010 quarter. Ajmera Realty is valued at 52 times its annualised earnings of Rs 4.36, making it one of the higher P/E companies in the realty sector in India. However, investors must keep a track on this stock as it has a potential to become a good portfolio stock.

   It reported a 10% growth in revenue for the quarter ended December 31, 2009 at Rs 7.21 crore as compared to Rs 6.57 crore in the September 2009 quarter. Due to the demerger of business, previous year comparable results are not available. At a net profit of Rs 3.86 crore for the December 2009 quarter, the company's net profit grew 12%, higher than the growth in topline for the above-mentioned period. The revival of the real estate has added to the investor confidence, especially in Mumbai, which is the core market for Ajmera Realty.

 

SHREE Digvijay Cement

SHREE Digvijay Cement, a mid-sized player focused on the western region, is one of the first few players in the sector to report its March '10 quarterly performance.

   Its operating profit margins declined 260 basis points Y-o-Y to 21.4%. The company's net sales also declined 5.8% Y-o-Y to Rs 90.6 crore in the March '10 quarter.

   The stock plummeted nearly 6% to Rs 18.2 on Monday. In addition, over the past three months, this stock has declined nearly 3%, compared to a more or less flat Sensex during this period.

   Meanwhile, pressure on the company's operating profit margins in the quarter under review was due to its key power & fuel costs that rose nearly 14.9% Y-o-Y to Rs 1,172 per tonne, given that its cement dispatches in the March '10 quarter were estimated to have grown 5% Y-o-Y to 2,98,000 tonne.

   Domestic and international coal prices have risen sharply over the past 3-4 months, with analysts pointing out to a 25% rise in the average cost of imported coal at the end of the fourth quarter of FY10 compared to a few months earlier, given a pick-up in global industrial activity.

   In addition, the company grappled with its realisations that declined nearly 10.3% Y-o-Y to Rs 3,040 per tonne. Also, analysts highlight increased quantities of cement from the southern market that were being sold in the western region, given the difficult operating environment in the South at the start of the fourth quarter of FY10, and the resulting pressure on realisations in the western region.

   This lacklustre operational performance also resulted in the company's net profit that also declined nearly 14.2% Y-o-Y to Rs 16.3 crore in the March 2010 quarter. Going forward, demand for cement is expected to reach a peak in the June quarter, given strong construction demand before the start of the monsoon season. However, a rising trend in operational costs is a cause for concern for Shree Digvijay and the broader cement sector.

Ambit Capital on RCom

The mobile industry has been adding more than 15-16 million subscribers per month. However, the proportion of multiple SIMusers is on a rising trend, leading to more than 100 per cent penetration in some metro areas.

Consequently, the company believes subscriber based criteria is increasingly becoming irrelevant. According to RCom, MNP, which is set to be implemented over the next few months, is expected to be beneficial. The company expects competitive intensity to increase in the high-value post-paid and corporate subscribers and expects to be a net beneficiary of this move. The number of players is expected to go up further after launch of services by new players. This will put further pressure on revenue and profitability of all operators. RCom believes that it will not be possible for all the players to survive and remain profitable in the long term, and hence, consolidation is inevitable. Due to rising competition, margin dilution due to MNP implementation, cash outflow (3G spectrum auction) and regulatory uncertainty about spectrum allocation, Ambit maintains a sell on Rcom.

5 money must-dos before you turn 30

 

Without financial goals and specific plans for meeting them, you drift along and leave your future to chance. There are often times when you require a lump sum amount. With the help of financial planning, such occasions can be anticipated and met without any problem.

Financial planning is simply assessing your income and expenses and making the best possible investments and tax saving plans. Financial planning might even involve making career-related decisions or choosing the right insurance.

When you are in your twenties, it is time to enjoy the money that you are making and indulge in all the freedom of being financially independent. But stop for a moment and think…your first baby may be five years down the line and you may be buying your first home around the same time. True you don't believe, you will ever be retired but you still need to plan for the time when you will have no income and you will need to live on your savings. All financial planning need to start now. At this age they can invest a larger percentage of income since most of the unmarried people are living with their parents and do not have major financial responsibilities.

So without much ado, here are five money action plans you must start on right now.

1. Take some risks

You have your whole career and life ahead of you. This is the time you can take risk and even if you make mistakes there is ample time to cover up.

Invest in equity. Find shares of little known companies which show potential. It feels great to out guess the fund managers who tend to walk on well trodden paths.

Another risk you can afford to take is in choosing your career path. Try something new and who knows it may change your life. Since most under thirties would be single or at least without kids, it is a good time to get some experience working in an international environment. If your company does not offer the opportunity looks around for corporates who do. You can also work with an NGO for a few months. It adds an impressive base to your resume and widens your horizons.

2. Buy insurance

The best insurance rates are available to people under the age of 30. Take advantage of this and buy term insurance. This is not the time to put in money in investment based insurance products. The below thirties should buy term insurance of varying maturities. Term insurance will give you adequate risk cover at a low cost.

Also absolutely necessary is medical insurance. Again the rates will be advantageous at this age. Also illness and mishaps do not come announced, so it is best to be prepared rather than drown in debt.

3. Invest in an education

A higher education is often the key deciding factor for promotions. With a few years of experience under your belt, it is time to upgrade your skills and qualifications. You may do a part time course along with your current employment or even quit and take a sabbatical to become the person that employer is going to chase.

4. Start a retirement fund

You need more income than you can imagine when you retire. With life expectancy moving up you will live longer. Medical expenses too are on the rise. Money invested early grows at a compounded pace. Make sure your retirement fund is in safe investments and is virtually untouchable.

5. Plan for short term goals

Short to medium term planning is as important as long term goals. If you plan to buy a home in a few years, you will need a lump sum for the down payment. You may also have the yearn to travel the world…well with a bit of planning it can be done.

 

Fortis Healthcare

 

 

With the recent acquisition of 23.9 per cent of Parkway Holding for a price of $959 million, Fortis Healthcare has become the biggest private healthcare company in South Asia. This stake was purchased from the private equity firm TPG Capital, which is Parkway's single-largest shareholder. After this deal, Fortis intends to seek four directors on the board of Parkway. It will also nominate Malvinder Mohan Singh as chairman. Parkway Holdings is a leading provider of healthcare services across South Asia. The company is listed on the Singapore Stock Exchange. 

 

Pros and cons

 

Analysts have divergent views about the acquisition. Some consider it unnecessary since there is a lot of scope for growth within India. Others disagree. According to Rashes Shah, Pharma analyst at ICICIdirect, a brokerage firm, "Though the hospital market in India has seen very low penetration (0.9-1 bed per 1,000 population), basically there is an acute shortage of beds in tier II, tier III and other rural areas, not in the metros.

Considering the long gestation period of hospital projects in these areas, investment by private players is not feasible. Hence, in these areas the government has a greater role to play." Therefore, if the metro markets are saturated and rural markets are not profitable, it makes sense for private players such as Fortis to venture abroad, argues Shah.

 

While many consider the deal to be expensive, Shah is of the opinion that the premium over the market price paid at the time of the acquisition is justified if one compares the operating margins of the two firms: Parkway's is almost double compared to that of Indian healthcare providers.

 

Some analysts believe that there are very few direct synergies between the two companies. But according to Shah, "We believe this acquisition will give the combined entity the benefit of an unparalleled medical talent pool in Asia and access to best-class practices, thus creating synergies that will help offer global quality healthcare experience across regions."

 

Experts have pointed that with this acquisition Fortis has managed to kill two birds with one stone. Not only will it have a global footprint, but Parkway, which was growing fast in the Indian market, will not be a competitor any more. According to a Citi group report, "Fortis has only one directly comparable company listed on the Indian market - Apollo Hospitals."

 

Will it work?

 

A recent McKinsey report on what it takes for mergers and acquisitions to create value for shareholders states: "For shareholders the sad conclusion is that the average corporate-control transaction puts the market capitalisation of their company at risk and delivers little or no value in return." There is no standard outcome for such mega-deals: some succeed and others do not.

 

What should you do?

 

Fotis's debt exposure will increase with this takeover. However, the debt-to-equity ratio will still remain under control at 1:1. Though Fortis's operating margin is nearly double that of its competitors, that does not justify its current 12-month trailing PE of 459x (on March 23, 2010), the highest among peers. Given its current fancy valuation, look at the stock again only after the exuberance around the deal dies down and the outcome of the acquisition becomes visible.

 

Past Acquisitions

Earlier, in January 2009 Fortis partnered with Mauritian Industrial Group CIEL, through its subsidiary Novelife, to jointly acquire 58 per cent stake in Mauritius' Clinique Darne for $7 million (approximately Rs 35 crore). 

 

Zee News

 

Zee News will emerge as a one-stop shop for advertisers looking for a national audience across all categories. Investors can accumulate the stock

 

THE media and entertainment industry in India is at an inflexion point right now. The companies that are well-paced in terms of cashflows and earnings are seeking inorganic growth, while others are undergoing restructuring to improve their ability to take advantage of growth opportunities. One such development is the recent demerger of regional general entertainment channels from Zee News into Zee Entertainment Enterprise. With the addition of regional entertainment channels, the company would emerge as a one-stop shop for advertisers looking for a national audience across various categories. This is expected to significantly improve its bargaining chip with advertisers and thus improve profitability. Currently, Zee Entertainment operates over 15 different TV channels, a cable company SitiCable, a record label Zee Records and a production company. It has expanded operations overseas and its channels are available in the UK, the US, Africa and Asia.

THE INDUSTRY:

The media and entertainment industry in India is highly fragmented. In the past few years, players had to deal with issues like increasing digitisation of digital infrastructure and mushrooming of channels to cover each possible niche in the market. Of the huge analogue subscriber base — it is estimated to be around 71 million and is growing at a robust rate of 8-10% — cable companies had been able to digitise around 12 million subscribers by the end of March 2009. This is a 100% growth in digital subscription in the past one year.

   Digitisation boosts broadcasters' subscription revenues and makes it difficult for multi-service operators (MSOs) to underreport subscribers in their service areas. According to reports by independent media research firms, Informa Telecoms and Media Group and Media Partners Asia (MPA), the total digital cable subscribers will grow to 154 million by 2012 in the region and to 209 million by 2017. This implies that close to 60% of the region's cable homes will have at least one set-top-box by 2017. Big players like Zee Entertainment Enterprise are bound to benefit from this trend.

BUSINESS & FINANCIALS:

Due to entry of new players like Colors, NDTV Imagine and others, the pie of general entertainment viewership has shrunk for established players. Especially considering that the new broadcasters offer free or discounted subscription even at the cost of lower subscription revenues. This puts pressure on the subscription revenues of established broadcasters, besides dividing advertising spends pie. However, Zee Entertainment Enterprise through its flagship channel Zee TV still dominates the general entertainment space. The de-merger of regional general entertainment channels from Zee News into it, the former will further enhance its market power. The addition of regional channels such as Zee Marathi, Zee Bangla, Zee Talkies, Zee Telugu and Zee Kanada, which have an average viewership of around 20%, are expected to boost the company's total revenues by around 23%. And its impact on the company's finances would be visible from the first quarter of FY11.

   In December '09, the company's subscription revenues increased by 8% on year-on-year basis, while its advertising revenues increased by 1% for the same period previous year. Going forward, revenues from regional general entertainment channels would boost both these revenue streams. Globally, the company caters to more than 500 million viewers and broadcasts to over 167 countries worldwide. As of December '09, the company's international subscription revenues contributed to over 19% to its total revenues.

GROWTH PROSPECTS:

Going forward, the company would concentrate on three things — exploiting the market synergy between its existing bouquet of channels and regional channels, minimising operating costs, and extending and deepening its international presence. In December '09 quarter, it cut its programming and operating costs by 14% on a year-on-year basis. It also reduced its employee costs by 3% in December '09 on a year-on-year basis. It also forayed into new markets such as Russia, Indonesia, Malaysia, and Saudi Arabia.

VALUATIONS :

Valuation at its current stock price, stock is trading at a price to earnings multiple of around 29x on consolidated basis. This is comparable to its peer Sun TV Network, which is trading at a P/E of 32.7x. With the addition of regional channels, revival in advertising situation and increasing global reach, the company would see increased flow of revenues in the coming quarters. Investors are advised to accumulate the stock at current level

 

Gujarat Gas

Gujarat Gas’ fourth quarter ended December 2009 numbers came in line with expectation, net profit increased 43 per cent year-on-year to Rs 46 crore while top-line grew by 16.7 per cent to Rs 386 crore. Top-line was driven by both an improvement in average realisations and regassified-LNG (RLNG) volumes. Average realisations increased from Rs 12.8 per scm to Rs 13.8 per scm. The company’s gross gas spread touched an all-time high of Rs 4per cent scm and led to a 569 basis points expansion in OPMs to 19.9 per cent.

The company’s volumes continued to be supported by RLNG in the quarter as well, with 20 per cent of the total gas sourced being RLNG. This was on account of subdued RLNG prices. In the ensuing quarters also, expect RLNG volume to be robust as prices are expected to be subdued. Going ahead, RLNG and expected gas flow from KG-D6 will be the growth drivers. With incremental volumes likely to flow to the high-margin industrial retail segment, margins would expand going ahead. The potential appreciation of the rupee would be the icing on the cake. At Rs 266, the stock trades at 13 times its CY2011 estimated EPS of Rs 20.4. Maintain neutral.

Mangalam Cement

 

 

Mangalam Cement seems to be a good bet for mid-term considering its strong presence in north India where demand is high

 

FOR cement players, North India is one of the fastest growing regions and production in this region grew 13.7% y-o-y during the April 2009-February 2010 period, according to various estimates. A ramp-up in construction activities for the forthcoming Commonwealth Games and a pickup in residential activity in this region have boosted the demand for cement.

   BK Birla Group-controlled Managalam Cement, which has a presence in the northern region, is expected to benefit from the strong demand for cement here. We had recommended this stock in our issue dated November 23, 2009 and since then, the stock has gained nearly 64.5% and we believe that there is still potential upside in this stock over the medium term. The stock currently trades with a P/E of just 4.1 times on a trailing four-quarter basis, which is among the lowest in the industry.

   In addition, it trades at nearly 2 times its trailing book value as compared to a range of 0.6 and 2.7 times between March 2007 and March 2009. Over the past fortnight, the stock has witnessed a sharp rise in delivery trades in the counter — the proportion of deliverable quantity to total trading volume of Mangalam Cement shares. This indicates a bullish sign for the stock in the near to medium term, say analysts.

CAPACITY:

The company had a capacity of two million tonne at the end of March 2009, double from two years earlier. Its key markets are Rajasthan, Uttar Pradesh and Delhi, where demand for cement has remained strong and prices have also increased on a y-o-y basis in the quarter ended December 2009. However, this was in sharp contrast with the situation in southern region in the third quarter of FY10.

   The company had invested Rs 198.5 crore between March 2007 and March 2009, while its operational cash flow during this period was Rs 277.7 crore. As a result, its leverage ratio was just 0.2 at the end of the previous financial year despite it doubled its cement capacity.

EXPANSION PLANS:

The company's board had earlier approved the setting up a new cement manufacturing plant with a capacity of 1.5 MT at its existing facility at Kota district, Rajasthan, along with a captive thermal power plant with a capacity of 17.5 MW. The cost of this project is estimated at Rs 750 crore that would be financed by internal accruals to the tune of Rs 300 crore and the remaining from loan and debt instruments. And given the company's low leverage ratio at the end of March 2009, coupled with strong cash flows, analysts don't expect any significant increase in its debt levels over the next two-three years.

FINANCIALS :

The company's operating profit margin improved by 850 basis points yo-y to 30.4% in the December 2009 quarter, helped by its realisations that grew nearly 10.2% to Rs 3,500 per tonne. The company's cement dispatches fell nearly 4.3% to 427,000 tonne in the third quarter of FY10, but strong realisations helped its total operational income improve by 5.5% y-o-y to Rs 149.4 crore.

VALUATIONS:

Mangalam Cement at Rs 204.3 per share trades at 4.1 times on a trailing four-quarter basis, while its peers, such as Binani Cement trades at 5.6 times and JK Cement at 5.4 times. Investors could consider Mangalam Cement to leverage medium to long- term growth opportunities.

 

4 common strategies to build MF portfolio

 

 

MOST mutual fund investors end up investing in three-four schemes with the investment split between systematic investment plans (SIPs) and lump sum. This means that while one has a portfolio of mutual funds -there is a hardly any strategy to manage that fund portfolio. Financial Chronicle talks about how to manage a mutual fund portfolio by walking through the most common strategies and discusses with experts each strategy's pros and cons.

The first and most commonly used mutual fund strategy is one where the investor basically has no plan or structure: Blind strategy. This happens when the investment amount and funds, as well as goals, are not set. The investor blindly puts in money into three-four funds and expects big re turns. If you already have a plan, then adding money to the portfolio is really easy. But you see easy. But you see in this strategy, nothing is fixed, which is the reason why this strategy will have the least success.

Most investors start off their mutual fund investment experience with this strategy and get disillusioned.

The second most commonly used strategy is market timing, a rare ability to get into and out of sectors at the `right' time. Investors believe this fund is the `hot' fund right now. Even experts find it hard to time the market leave alone retail investors to be able to successfully do this.

Retail investors often lack the resources, time and expertise required to analyse the movements of the stock market. The `risks' in timing the market out weigh the likely `gains'.

Once people TMENT Once people burn their hands with the first two strategies, they adopt the third most common ploy: Buy and hold. Make no mistake about it, but this strategy has solid statistics to back it and it will make money most of the time.

This strategy is most popular because it is easy to employ and taxes and exit loads are minimum.

However, the biggest problem is the selection/choice of funds. How do you choose the fund that is re ally going to profit if you hold it for a long time? Selecting the right fund is an imperative to succeed. The fourth common mutual fund portfolio strategy looks at performance weighting. Here, you re-examine your portfolio mix from time to time and fine tune them by selling some of the funds that did the best to buy some of the funds that did the worst.

Let's say you divided your investment sum in four parts with each fund having 25 per cent allocation.

After a year, performance may prompt tweaking the allocation to two funds having 70 per cent, while the other two have 30 per cent.

The problem is people do it too simplistically. One-year performances could be misleading if just three months have made all the difference. The worst-performing funds may be the ones that carry more risks and now you are putting more money into it.

 

Godrej Consumer Products

 

 

Godrej Consumer Products remains an attractive buy for investors with a long-term horizon

   GODREJ Consumer Products, the midsized FMCG company, with products in personal and household care has seen its stock surging to a record high of Rs 335.85 on April 9, 2010. The company's stock price has witnessed a gradual re-rating since we recommended it in January 2008. The price has almost tripled since then.

   A member of the Godrej Group, the consumer products company has been growing rapidly — organically and inorganically — consolidating its presence in the fast-growing product categories, such as soaps, hair colour and household insecticides. Hence, despite the rally in the stock, the growth-oriented company remains a good buy for investors with a long-term horizon.

BUSINESS:

GCPL, which was a small-sized domestic player, is gradually shaping into a multi-national Indian FMCG company. The company has built strong brands in soaps, hair care, household insecticides, shaving cream, dish wash, wool fabric care and baby care in the domestic market.

   Now, it has turned its attention to emerging markets to juice up its growth. GCPL's policy has been to acquire profit-making FMCG businesses in developing and emerging markets that have strong brands in personal and household care — the two key areas identified by the company.

GROWTH OPPORTUNITIES:

The company currently has operations in Africa, Europe and West Asia. Among these, opportunities in the African region look the most promising. It has motivated the company to make three acquisitions such as Rapidol, Kinky and the latest being Tura, the maker of personal care products in Nigeria. It recently announced its entry into the Indonesian market with the acquisition of the household product maker Megasari Group. This latest acquisition will catapult GCPL to the number two position in household insecticides in Asia (ex-Japan). The company, meanwhile, continues to scout for acquisition in Asia, Africa and Latin America.

FINANCIALS:

Over the past five fiscals, the company has posted a compound annual growth rate (CAGR) of 26% in its consolidated revenues that stood at Rs 1,393 crore in FY09. Its consolidated earnings have grown at a CAGR of 13% during the same period to Rs 173 crore for FY09.

   The company has consistently paid dividends — maintaining an average dividend pay out of 70% since the past three years. At its current stock price, dividend yield works out to be 1.3%. Since the company is into growth phase, its dividends have grown at a CAGR of 9%, lower than the CAGR in profit.
   The company's debt burden is likely to rise following the purchase of the remaining 50% stake in the Godrej Sara Lee joint venture and the acquisitions of companies in Nigeria and Indonesia.

   The funding of these acquisitions may lead to company diluting its equity to raise funds. However, the company's balance sheet is still underleveraged and it has already sought approval to raise funds up to Rs 3,000 crore ahead of its planned acquisitions.

VALUATIONS:

GCPL is valued at nearly five times its annual consolidated revenues of Rs 1,900 crore. These are premium valuations for a mid-sized FMCG company. The stock is currently trading at a consolidated price to earnings multiple of 30. Once the recently acquired businesses get reflected in the consolidated financials of the company, it will bring down the P/E on account of higher earnings growth going forward.

 

Sharekhan on ORBIT CORPORATION

In the last conference call after the announcement of the company’s December 2009 quarter results, the management indicated the launch of five new projects and the first phase of the Mandwa project over the next 3-6 months. However, in the current quarter, Orbit Corporation has not launched any project so far and will not do so until the next quarter. One of the primary reasons for this was that people were waiting for the Budget 2010-11, and hence, any new launch prior to its announcement might not have evoked a very positive response. Besides, projects like Orbit Residency (Andheri) and Orbit Grand (Lower Parel) are expected to get delayed.

The brokerage is lowering its earnings estimates for 2009-10, 2010-11 and 2011-12 due to a delay in the new launches as well as the delay in revenue recognition from two of the projects. However, some positives are that Orbit operates in the key property market – Mumbai – and a project pipeline which provides strong revenue visibility. The stock is trading at 12.9 times 2010-11 earnings estimates. Sharekhan maintains a buy on the stock with a price target at Rs 340 (earlier Rs 393).

Nitesh Estates IPO

Though Nitesh Estates' issue is expensive, brave-hearts can take the plunge factoring in the promoter's strength

 

 

NITESH Estates, incorporated in 2004, is in development of residential projects in Bengaluru. Its target customers, in the initial years, were the high-income IT executives; but now the company has shifted focus to middle-income projects in the range of Rs 25-60 lakh.

   A first generation company, Nitesh Estates is tapping the primary market with a fresh issue of 7.2 to 7.5 crore shares to raise Rs 405 crore. Out of this, Rs 21 crore will be used for acquisition of joint development rights, Rs 303 crore for funding subsidiaries' requirement and Rs 35 crore for debt funding of the parent company. Balance will be used for general corporate expenses. The issue represents around 50.8% of the post-issue equity capital of the company at the upper price band.

BUSINESS:

Since inception, the company has developed three residential projects totalling 0.56 million square feet (mn sq ft) of saleable area. The company also develops retail and commercial projects and is expanding in Chennai, Goa and Hyderabad. Nitesh Estates has also forayed into the hospitality sector and is developing its first project, the first Ritz-Carlton brand hotel in India, in Bengaluru. It holds 20.7% stake in the project with Citi Property Investors holding 74% share in the subsidiary. Its other financial investors include AMIF I, a PE fund of Och-Ziff Capital that holds 14.4% of the pre-issue equity share capital in the company. HDFC asset management company, holds 10.1% stake in another subsidiary of Nitesh.

   It has also received Rs 60 crore under its anchor investor category from the likes of HDFC MF, SBI MF, Nomura Japan and Halbis Capital. As of March 2010, the company has around 5.31 m sq ft ongoing projects and 2.7 m sq ft of developable area. It has about 11 m sq ft developable are, taking the total land bank to 19 m sq ft, which will be developed over the next four to five years. About 73% of its portfolio is earmarked for residential development, thus providing a regular revenue visibility.

FINANCIALS:

In the past three years, the company's net sales jumped three-and-ahalf times to reach Rs 87 crore in FY09. Net profit grew 10 times during the same time to touch 2.8 crore for the period ended FY09. It launched two projects in January and March 2010 that will be recognised in the coming quarters. The company will continue to hold its retail asset and a project of similar scale could fetch an annual income of about Rs 35 crore. It has a net cash of Rs 200 crore on its books.

   Going ahead, the company is expected to operate at 25% gross margins converting to 15% net margins. Being a fairly young company, it has a pipeline of some good projects; however, its execution skills do not match its ambition.

VALUATIONS:

The company closed the nine months to December 2009 in red on a consolidated basis. It is asking for a market valuation of Rs 797 crore at the upper price band and is valued at 1.5x to 1.6 times its price to book value making it an expensive bet. A close comparison will be with Peninsula Land that operates on similar joint development model in prime market of Mumbai. For risk-averse investors, the stock is expensive and they must stay away from it. However, those brave hearts that wish to ride on the promoter's strength can risk their money.

 

Shilpa Medicare

 

New Investors Should Be Cautious As Current Valuations Discount Earnings Upside

 

THE bulls have taken fancy to the Shilpa Medicare — a small-sized pharma company. Its price made a record intra-day high of Rs 362.50 on Tuesday after having risen by more than eight times over the past one year. News of financial institutions buying a small stake in the company along with a dilution by the promoters has fuelled the recent rally in the stock.

   Besides the news-driven buying interest, the re-rating witnessed by the stock has been sparked due to the strong growth delivered by the company over the past one year. Shilpa Medicare has seen a steady rise in its consolidated revenues and improvement in its operating profit margin over the past four quarters.

   The company that earns 75% of its revenues from exports manufactures active pharmaceutical ingredients (API) products in the oncology segment. While its product portfolio is doing well, the company is also building its pipeline of oncology products that are slated for expiry. The company is also ramping up its contract research and manufacturing services (CRAMS).

   Shilpa Medicare is entering into a joint venture agreement with an Italian company to set-up manufacturing facilities for its products.

   The company is also coming up with an export-oriented undertaking for manufacture of oncology formulations and APIs. Once this unit becomes operational, it is further likely to increase the company's business.

   At a market cap of nearly Rs 750 crore, Shilpa Medicare is valued at more than three times its consolidated annual revenues. The company's stock is trading at a consolidated price-to-earnings (P/E) multiple of 23. These valuations appear to be too stretched for a small-sized pharma company.

   Though the company may have promising growth prospects, new investors who are lured by the recent run up in the stock price must be wary of entering the stock at the current high price levels. This is because most of the visible earnings upside seems to have been factored into the current valuations.

 

ORIENT Paper and Industries

ORIENT Paper & Industries, a part of the GP & CK Birla Group, is a diversified player in products, such as cement (contributed 58% of the total segment sales in the current financial year), coupled with electric fans, paper and paperboard.

The company’s key market for cement includes Andhra Pradesh and Maharashtra, and while it was adversely affected in the third quarter of FY10 by weak realisations, the operating environment for this division has shown signs of improvements over the past few weeks.

For instance, cement prices in Hyderabad have shown an uptick with prices currently at Rs 155 per bag levels, as compared to Rs 130 per bag in November 2009.

In addition, a revival in the residential construction sector should help improve demand for Orient’s products, such as electric fans, going forward. The stock currently trades at discount to other South-based diversified cement conglomerates.

CAPACITIES & EXPANSION PLANS: The company’s cement capacity was 3.4 million tonne at the end of March 2009, a rise of nearly 41.7% from two years earlier.

In addition, the company’s new kiln at Jalgaon, Maharashtra, had started commercial production in the third quarter of FY10, and Orient will also shortly bring on stream an additional 1 MT unit at Devapur, Andhra Pradesh. This would raise the company’s cement capacity to 5 MT.

Its other product segments include electrical consumer durables like electric fans, where it is one of the leading players in the organised sector, with a capacity of 3.5 million units at the end of March 2009, a rise of 35.7% from two years earlier. In addition, its paper and paperboard capacity was 171,000 tonne at the end of March 2009, unchanged for the past two years.

The company had invested nearly Rs 762 crore during March 2007- March 09 period, while its cash flow from operations during this period was Rs 768.8 crore. FINANCIALS: Orient Paper’s operating profit margin declined 630 basis points y-o-y to 18.8 % in the third quarter of FY10, at a time when its net sales rose 2.6% to Rs 372.2 crore.

Pressure on its operating profit margins was due to its key cement division, where realisations declined nearly 8 % y-o-y to Rs 2,713.8 per tonne, while its despatches grew almost 5% yoy to 0.78 MT in the third quarter. Orient Paper, along with other players operating in the southern region, has been grappling with additional capacities coming on stream in this region over the past few months, coupled with signs of a slowdown in implementation of government-funded projects in Andhra Pradesh in the third quarter of FY10.

However, cement prices have shown signs of bouncing back over the past few weeks, In Orient Paper’s other divisions, such as electrical consumer durables, which include electric fans, the company benefited from a broad revival in demand, especially from the residential sector. As a result, segment profit of this division improved 168 % yoy to Rs 6.6 crore in the December 2009 quarter.

VALUATIONS : Orient Paper & Industries at Rs 47.6 per share, trades at nearly 5.8 times on a trailing four-quarter basis. Other diversified cement players in the South, such as India Cements, trade at 8.3 times, while Madras Cements trades at 6.7 times. Investors could consider investing in Orient Paper in a bid to take advantage of the long-term growth opportunities in the company’s various product segments.

Nitin Fire Protection (NPF)

NOTWITHSTANDING the 10% fall in the last four trading sessions, Nitin Fire Protection (NPF) has substantially outperformed the markets over the last one year. The scrip has nearly tripled during the past 12 months against a 105% appreciation in the benchmark Sensex during the period.

The company which had launched its IPO in May 2007 to raise Rs 65 crore was commanding a price above Rs 600 per share at its peak in January 2008. But the stock fell below Rs 120 in March 2009 when the market tanked. However, the recovery since then has been sustained.

Earlier in FY10, NPF’s two main segments — fire protection and CNG cylinders — had hit the slow lane as demand weakened owing to the economic downturn. As a result, the company posted numbers sindicating a stagnation for the first half of FY10. However, with a strong demand recovery in its user industry, the company posted a 72% jump in its December 2009 quarter profits.

NPF also holds a stake of 11.1% in a 4,613-sq km petroleum exploration block in Rajasthan, where exploratory drilling is underway. By September 2010, the results of exploratory drilling will be known.

The main problem for the company today is ramping up its CNG cylinder manufacturing unit in Vizag SEZ. The company had set up the 5- lakh units per annum in 2008, but is able to operate it only at 25% capacity, which is expected to go up only to 30% in FY11.

The use of natural gas is increasing across the globe recently surpassing 24% of all energy consumed. The automobile industry is also fast adopting this fuel, particularly in Pakistan and Iran.

Although this paints a rosy picture for the demand for NPF’s products, it does not reflect in actual sales. NPF has tied up with Tata Motors and Swaraj Mazda — two leading producers of commercial vehicles — for supplying CNG cylinders.

In the integrated building management business, which includes the fire protection business, NPF holds around Rs 80 crore of outstanding order book. It already has a number of large corporate clients in this business.

Recently it won a single contract of $3.5 million for installing firefighting and safety equipment for utility tunnel project outside India. It recently announced its intention to go for an acquisition particularly in the Europe and in the fire protection business.

Other than inorganic growth plans, it’s not contemplating any major capex next year. However, there is little clarity at this point in time on the company’s inorganic growth plans.

At the current market price, the scrip is trading at a price-to-earnings multiple (PE) of 13.3. The March 2010 quarter results are expected to be better against the year ago period. NPF’s growth will depend on the ramping up of the cylinder unit.

UBS Investment on ADANI ENTERPRISES

Adani Enterprises is expected to get a fillip from the power business. We believe its power business earnings will grow rapidly (from our estimated PAT of Rs4.8bn in FY10 to Rs60.5bn in FY14), which would be a big positive. In addition to commissioned/under-execution 6,600 MW of capacity, Adani Power (APL) has 3,300 MW under development and 5,280 MW under planning. Given that the additional developments are largely at the same sites and its execution capabilities, we expect newsflow to remain robust. Moreover, the company has developed a large contract-mining portfolio with peak mining capacity of 70mtpa. There are many upcoming opportunities in the sector as other state electricity boards (SEBs) adopt the route of private sector contract mining and existing SEBs offer more contracts. We view it as more as a conglomerate as compared to the other holding companies. We set the twelve month’s price target at Rs 550 per share.

Supreme Industries

Sale Of Company's 18 Office Blocks In Mumbai & Excess Land Bank Will Spice Future Show

 

THE 30% profit growth reported by leading plastic product manufacturer Supreme Industries has failed to impress investors as its share has remained more or less stagnant since it declared its March 2010 quarter numbers last Friday. Lacklustre operating performance and the company's inability to complete the sale of its office property in Andheri in West Mumbai appears are some of the reasons behind the lukewarm investor response.

   The company has 18 office blocks available for sale out of which it has been able to sell only one so far. In the December 2009 quarter, Supreme Industries had clocked Rs 20.5 crore revenues from the sale of 13,106 sq ft of premises at an average realisation of Rs 15,600 per sq ft from its commercial complex in Andheri. At this rate, its 2.5-lakh sq ft the commercial complex is valued at Rs 390 crore and investors expected a steady flow of revenues from the sale.

   The profit growth during the quarter was primarily driven by extraordinary gain from the sale of company's land in Sewri in central Mumbai for Rs 3.72 crore. Excluding this, the company's operating performance was much less fanciful. Despite a 15.4% sales growth to Rs 512 crore, the operating profits grew just 3.3% as the margins shrunk. Halving of interest cost to Rs 8 crore was the other key driver of the profit growth.

   In line with its restructuring efforts over the past couple of years, the company recently shifted its manufacturing unit for protective packaging from Nandesari to Pune, which has left it with another piece of land worth Rs 1.5 crore that can be sold in future.

   The company's operative performance, although uninspiring presently, could improve in future, as the global polymer prices come under pressure with higher supplies from West Asia and China. Despite the pressure on margins, the company has been consistently achieving volume growth.

   Going forward, the sale of company's Andheri property and excess land will continue to spice up its financial numbers. At the current market price of Rs 510, the scrip is trading at a price-toearnings multiple (P/E) of 9, which appears reasonable. Investors should continue to hold the scrip for higher returns.

 

Jagran Prakashan

 

 

Stock Ripe For Long-Term Gains As Co Strikes Big PE Deal, Eyes Tie-Up with Mid-Day

 

IN THE past few days, there has been a sudden rise in investor interest in Jagran Prakashan, one of the largest regional language newspaper companies in India. In the past three trading sessions, the delivery volumes — shares bought by investors to hold for longer period — have more than doubled, which is a strong bullish sign.

   Of the total trading volume in the stock, the percentage of deliverable volume has increased to 40% from 18%. This shows that long-term investors have bought into the stock by factoring in the good times the company will see, going forward, especially after considering two important developments in the company. The US-based private equity (PE) player Blackstone Group last week announced its plans to invest around Rs 225 crore in the company and secondly, the company admitted that it was exploring the possibility of forging an alliance with Mid-Day Multimedia, the company that publishes the tabloid Mid-day. These two developments have enhanced investor interest in the stock, which has done will in recent quarters.

   In the past few quarters, regional language newspapers have garnered a larger pie of advertising revenues than their English peers. In December 2009 quarter, Jagran Prakashan, which has a dominant readership in North India, reported a 10% year-on-year (y-o-y) increase in advertising revenues, one of the highest among listed companies. For instance, HT Media's advertising revenues declined on a y-o-y basis in the last quarter. Jagran achieved this by focusing on local revenues, which now account for 63% of its ad revenue, up from 45% three years ago.

   Going forward, the company expects to derive a strong flow of revenues from local advertising. It is in this scheme of things that the alliance with Mid-Day Multimedia will make sense for the company. It will give Jagran Prakashan access to the coveted Mumbai market, where advertising rates are higher than the northern region. Secondly, it may be a stepping stone for the company to enter the English newspaper market.

   Mid-Day Multimedia and its subsidiaries have been making losses for years. An alliance with Jagran Prakashan, one of the most profitable publishers in the country, is likely to increase Mid-Day's profitability. If the alliance with Jagran Prakashan fructifies, the Mid-Day will benefit from the former's strong and efficient management, which will fuel its growth. In the media space, Jagran Prakashan can afford to take this plunge considering its low debt and higher profitability.

 

BANK OF AMERICA MERRILL LYNCH on JET AIRWAYS

We have raised our FY10-FY12 EBITDAR estimate by 2-3.5% on better visibility of continued strong traffic growth. The focus on the low cost arm Jet Konnect and route rationalization have enabled Jet to post its strongest passenger growth in last 3 years. For the month of November, Jet Airways recorded a 33% growth in passenger traffic, in the domestic sector (industry growth 29.8%) and 19% in the international segment. For FY11, Jet is expected to show strong 15% passenger growth (earlier 14%) in the domestic sector. Jet Airways is expected to post strong passenger growth numbers and yields in the month of December on the back of ongoing holiday season. This should enable Jet to breakeven for the first time in the last seven quarters. Maintaining our target multiple, our price objective increases to Rs 600.

IndusInd Bank

 

 

Stock Up 59% Since '09, Price To Mirror Its Fin Performance In Quarters Ahead

 

INDUSIND Bank recently raised Rs 420 crore through tier-II bonds. This is done to boost its capital adequacy ratio (CAR), which stood at 13.8% at the end of December '09 quarter.

   The bank's CAR is more than minimum 9% stipulated by the Reserve Bank of India (RBI). But since it is growing at a high rate, it would require additional capital to maintain its CAR. The bank grew its loan book by 33% year-on-year in the December '09 quarter, when growth in aggregate credit in the banking industry stood at only 13%.

   On the similar lines, the bank more than doubled its profit in the first nine months of the current fiscal. Given such a high rate of growth, it has raised capital through tier-II bonds. It must be noted that the bank raised capital through the qualified institutional placement (QIP) route in August last year. A spate of capital raising and a high growth also hint that the bank is expected to grow at higher than industry rates even, going forward.

   In fact, the bank can be called as the most improved bank in the past two years. For instance, its net interest margin (NIM) improved by 113 basis in the December '09 quarter, as it stood at 2.94%. It has leaped into the league of top India banks, which boast of NIM around 3%. Similarly, the bank has posted a significant improvement in its non-performing assets (NPAs). Gross NPAs formed more than 3% of gross advances at the end of March 2008. This has come down to a mere 1.3% of gross advances by December 2009. Clearly, the bank has done a turnaround.

   This gets reflected in the way the stock has performed, of late. Since the start of October 2009, broadbased indices like Nifty and Sensex have remained, by and large, flat. The Nifty has jumped by 6% since October 1, 2009. In the same time-frame, Bank Nifty — the benchmark index for banking stocks — moved up by 10%. While the broad indices didn't show great exuberance, IndusInd Bank's stock moved up by 59% in the similar time-frame. This shows that the stock market has richly rewarded the shareholders for the bank's performance. And, if the bank maintains its growth rate, the stock price will continue to rise in line with its financial performance.

 

Mahindra Lifespaces

 

At Current Price Of Rs 482, It's Trading At A P/E Multiple Of 17 Times

 

MUMBAI-BASED realty developer Mahindra Lifespaces Developer (MLD) has gained 16% in the past one month, as its rental portfolio increases. The stock has managed to put up a good show despite the overall market gaining just about 5% in the same period. It touched its 52-week high of Rs 543.4 on April 8, '10 and closed at Rs 482. The stock also witnessed an unusually high trading volume. Foreign institutional investors have been bullish on the stock, as their shareholding in the stock in the March quarter has gone up against domestic institutional investors that have reduced their exposure slightly, compared to the December quarter.

   The company's performance on bourses over a long tenure has been improving consistently. For instance, in the past three months, the stock gave 28% returns, and over a six-month period, it has been an outperformer, with its stock price doubling in value whereas the Sensex was flat during that period. On an annual basis also, the stock outperformed the Sensex as well as the ET Real Estate Index that gained 67% and 82% each, respectively.

   The company's net sales almost doubled in the quarter ended December 31, 2009 at Rs 109 crore, compared to Rs 56 crore in the same quarter last year. Its net profit, for the same period, registered a 150% jump at Rs 27.9 crore, compared to Rs 11 crore. The company expects to maintain this growth momentum in coming quarters. Mahindra Lifespaces builds residential homes and commercial property under the brand 'Mahindra Lifespaces' and its integrated business cities under 'Mahindra world cities'. The company has completed about 5.8-million sq ft of development and currently has close to 8-m sq feet at various stages of launch or under construction. This is spread across Mumbai, Pune, Nashik, NCR, Chennai and Nagpur.

   The company operates in the mid-, and high-end residential segment. It recently launched its mass housing project in Gurgaon costing Rs 25-40 lakh. Unlike other players, the company is debt-light with Rs 390-crore debt on its subsidiaries' books. Cash on the book is Rs 170 crore. Pre-sales and internal accruals would be used to complete under-construction projects.

   The company currently has two SEZs in Chennai and Jaipur, both of which are seeing a strong traction in the recent past. At an annualised EPS of Rs 27.38 and the current market price of Rs 482, it is trading at a price to earnings multiple of 17 times. The company is well poised to benefit from the buoyancy in the real estate market, as it has priced its product correctly.

 

Ipca Labs

 

At A P/E Multiple Of 18, Stock's Relatively High For A Mid-Sized Pharma Company

 

THE stock of Ipca Labs, a mid-sized Indian pharma company, has seen a rerating on bourses. The price has quadrupled in the past one year, thus significantly outperforming the Sensex.

   The company's steadily improving financial performance, along with the promise of future growth, has enhanced investor interest in the stock. Traction in the domestic formulation business and increased exports of active pharmaceutical ingredients (APIs) have led to an increase in revenues as well as enhancement of profit margins since the past three consecutive quarters. The company is expected to maintain its current growth trajectory.

   Growth in domestic formulations, increase in exports earnings from the formulations business in the US and other semi-regulated markets and growth in revenues accruing from the Indore SEZ plant — once it receives US FDA approval — are going to be the growth drivers for the company, going forward. Consequently, several broking firms, over the past quarter, have recommended this stock to investors as an attractive bet in the mid-cap segment, fuelling a rally in its stock price. In February, the company announced a stock split, which further added bullishness to the stock.

   The stock hit an all-time high of Rs 304 on March 22 and is now priced at Rs 269. It is currently trading at a price-to-earnings multiple of 18 — relatively high for a mid-sized pharma company. At a market cap of Rs 3,400 crore, the company is valued at a little over twice its annual revenues of Rs 1,500 crore. These are fair valuations in the pharma sector for a growth-oriented company.

   Most of the near-term bullish factors leading to an upside in earnings have been factored into the current stock price. Considering this, along with current stock valuations, there seems to be a limited upside to the company's stock price. New investors would be better off avoiding buying this stock at a high price level.

 

NOMURA on Tata Steel

We expect Tata Steel India to see significant earnings expansion on account of new capacity, lower raw material costs and an improving price cycle. We believe that Tata Steel’s domestic value is worth Rs 735 per share based on 9x FY12 standalone EPS of Rs 92.3. Tata Steel is also augmenting the capacity of its coal mines along with its 3mn tonne expansion. After the 1.8mn tonne expansion completed earlier this year, the company’s dependency on imported coking coal has gone up from 30% previously to 50% now. However, with the expansion of coal mines, Tata Steel expects to meet 60% of its overall requirements through domestic coal. We believe the company can save significantly from it. With the European operations improving rapidly, we believe the negative contribution from Corus would turn positive as earnings turn around. This, we believe, makes Tata Steel one of the most attractive plays in the Indian steel sector.

Talwalkars Better Value Fitness

 

 

Though Talwalkars' issue appears to be fairly priced, there is likely to be limited upside for investors as the next few years' growth is already factored into its offer price

 

IPO details:
Price Band: Rs 123 - 128
issue size: Rs 74.4 - 77.4 crore
Date: May 21 - 23


Mumbai-based Talwalkars Better Value Fitness (TBVF), the company owning the chain of Talwalkars gyms and health clubs, is proposing an initial public offer. The offer consists of a fresh issue of 60.5 lakh shares of face value Rs 10 each to raise around Rs 75 crore. Out of the issue proceeds, around Rs 50 crore are to be used for setting up of additional health clubs, Rs 20 crore for repaying certain unsecured loans and remaining for meeting the issue related expenses.

   The total issue represents around 25% of the post-issue capital of the company. While there are no listed peers of this service company, an analysis of the company's business and valuations indicate that though the issue appears to be fairly priced, there is likely to be limited upside for the IPO investors as the next few years' growth is already factored into the offer price.

BUSINESS:

The company owns one of the largest and oldest fitness chains in India. The company (as of December '09) owned 37 health clubs and operated 14 more through franchisee route across 24 cities in 11 states across the country. The company's health clubs offer a P suite of standardised services like gym, spa, aerobics and health counselling under the brand name 'Talwalkars'.

   Trained personnel, imported fitness equipment and airconditioning are some of the basic features of the clubs run by the company. Over the years, the company has built a strong brand equity and market leadership in the fitness industry.

GROWTH STRATEGY:

The company, being present in the health, fitness and wellness industry has tremendous growth potential in an under-penetrated market like India. As economic prosperity improves coupled with increased awareness about fitness and healthy lifestyle, the patronage of health clubs is bound to increase.

   Moreover, with changing demographic profile, health clubs are increasingly being accepted as a means of achieving good health.

   The nascent industry is quite fragmented as small and standalone players dominate the field. This presents a strong case for the growth of an organised professional player like TBVF.

   The company has been aggressive in opening new clubs in various tier I and tier II cities in the country. It plans to open 38 clubs in FY11. Of these, work is already in progress in seven clubs. Besides this, the company, under its franchisee agreement, has the option to buy out the franchisees in the case of 13 of its clubs at attractive valuations.

FINANCIALS:

The company's revenues have grown at a compounded annual growth rate (CAGR) of 63% since fiscal year '05 to reach Rs 59.2 crore in FY09. Its profits have grown at a CAGR of 118% since FY05 to hit Rs 5.7 crore at the end of FY09. The company's operating and net profit margins presently stand
at 29% and 10% respectively. Postissue, the company is likely to reduce its debt-equity ratio to around 0.4, improving its borrowing capability. The company has a good track record of robust growth, strong cash flows and consistent dividend. Moreover, the company's business has good growth prospects.

VALUATIONS:

The company is valued at 46 to 48 times its estimated full-year earnings of FY10. This may appear to be a high price to earnings multiple by any industry standards. However, considering the growth to be generated by the company through a capital infusion of around Rs 50 crore, the current valuations look fairly priced. However, the current valuations are discounting the growth of the company over the fiscal years FY11 and FY12. Long-term investors ready to bet on the company's growth story and management's execution ability can go ahead and subscribe to the issue.