Exide Industries

India's largest lead acid battery manufacturer, Exide Industries, came out with a good set of numbers on Tuesday. The company reported a 35 per cent rise in net profit in the June quarter on the back of robust sales growth of 28 per cent.

The profit growth looks impressive in the midst of continued volatility in raw material prices even as competition from cheaper imports continue unabated. Increased demand from both industrial as well as automotive segments has augmented higher growth rates, which looks sustainable.

Automotive sector: Leading the way

Sales from the automotive segment contribute a fair chunk of revenues at around 60 per cent. The demand from the original equipment manufacturers (OEMs) has come back in the last four quarters. In the June quarter, too, car and two-wheeler sales volumes were robust, ensuring a good quarter for Exide.

In the auto segment, OEM supplies account for over half of Exide's total business, with the rest coming from replacement demand from existing vehicle owners. The company's penetration strategy in the replacement market for commercial vehicles and tractor helped grow the segment's volume 14 per cent in the quarter.

Among other segments, motorcycle battery sales showed significant volume growth of 27 per cent. Overall, the company's automotive and industrial battery segment revenues grew 28 per cent and 26 per cent, respectively.

This was faster than volume growth, consequent to higher lead (key raw material) prices, which were up about 30 per cent year-on-year in the June quarter.

What's even more impressive is that, in spite of higher raw material costs, the company's operating margins were down just 40 basis points year-on-year in the June quarter.

The gain in margins can be traced to Exide sourcing around 45-50 per cent of its raw material from its smelting and refining subsidiaries (Chloride Metals-100 per cent stake and Leadage Alloys-51 per cent stake), which have provided some cushion against volatile lead prices.

Outlook

Experts forecast a robust double-digit growth in demand for batteries from OEMs as well as replacement markets in the next two years. To meet the rising demand, Exide plans to expand its production capacities, for which it has earmarked Rs 350 crore in 2010-11.

The company also plans to acquire the remaining 49 per cent shareholding in Leadage, a move IIFL analysts say is positive as this subsidiary is larger and more profitable (Rs 54 crore pre-tax profit in 2009-10) than Chloride Metals.

Meanwhile, lead prices have slipped by 10-12 per cent since the March quarter and should provide further support to margins. At Rs 138.65, the stock is trading at 15.2 times its estimated 2011-12 earnings. The stock, which has outperformed broader indices in the last three months, should deliver healthy returns, going ahead.

Infotech Enterprises

 

 

THE scrip of Hyderabad-headquartered Infotech Enterprises lost over 6% during Wednesday's trade. Investors dumped the stock after the poor show of the midtier IT company in the June '10 quarter.

   Infotech Enterprises, which grossed Rs 1,053 crore of revenue in the past 12 months, provides IT solutions in the fields of engineering design and geospatial information services. It has witnessed weakness on bourses since past one month compared to the BSE's benchmark Sensex. The depressed stock performance reflects investors' concerns over the deteriorating operating parameters of secondrung IT exporters.

   Infotech's first quarter results were not assuring either. The company's operating profit fell in double digits despite a decent 3.6% increase in revenues over the previous quarter. Its salary costs and travel expenses rose faster than the topline growth, thereby pulling down operating profit by 23%.

   The IT exporter also faced headwinds due to adverse currency movements during the June quarter on a sequential basis. The appreciating rupee against the pound and the euro — the two major currencies in which the company earns revenue — dented its operating margin further to just over 16% against 22% in the previous quarter.

   A matter of concern is that during the June quarter, Infotech witnessed a lower offtake from its top five clients. Its European business also suffered due to economic problems in the region.

   The company may also face pressure while retaining talent, given the uptick in hiring of experienced IT professionals or laterals over the past two quarters. It reported a significant increase in salary expenses sequentially, even though its headcount has not changed much from the previous quarter. This means that it had to hike salaries during the quarter, even though it faced pressure on the operating front.

   At the Wednesday's close of Rs 176, the Infotech stock traded at 5.5 times its trailing twelve-month earnings. This is lower than P/Es of 7-10 commanded by other mid-tier IT companies.

   Going ahead, the management believes that demand traction will improve for the type of services rendered by Infotech. The company expects to report a better growth in the second quarter with buoyancy in telecom and government segments. However, more than one-thirds of its revenues come from the European market. Hence, it needs to be seen whether the company is able to grow its business in the region, which is grappling with economic slowdown.

Sintex Industries

 

Sintex Industries posted on Monday a good set of numbers for the June quarter, with significant contribution from all business segments and foreign subsidiaries. While the quarter's performance was better than estimated, the management's guidance of robust growth in 2010-11 also boosted the stock. After its conference call on Tuesday, the company's stock closed 2.38 per cent higher at Rs 331.80, compared to a 0.27 per cent gain in the Sensex. While economic growth is picking up, the company's moves to launch innovative new products and expand into untapped markets suggest that its longer-term prospects remain good.

All-round growth

Sintex, which derives a majority of its revenues from plasticbased products and solutions, has been steadily gaining from increased demand among customer segments. In building materials — which includes storage tanks, doors, pipes, windows and prefabricated (prefab) building systems for schools, housing, project site offices, portable toilets and many more – revenues jumped 42.6 per cent year-onyear to Rs 358.4 crore in the June quarter. While the increased housing demand has helped, a rise in government spending on social schemes have also contributed significantly to Sintex's growth. Going ahead, Sintex is also enhancing its domestic presence in the prefab business. While it currently has five plants covering about two-thirds of India's geography, a sixth plant is slated to come up in Uttar Pradesh, which will help cater to newer markets. Within building materials, the monolithic construction business has been growing the fastest. This segment has astrong order book of Rs 2,300 crore, which is to be executed over 20-22 months, and provides good revenue visibility. With the Indian economy picking up, analysts expect an across-the-board improvement in demand for Sintex's building materials business. The company's ability to innovate new products to meet customer needs should ensure that it continues to capitalise on emerging growth opportunities and report healthy growth.

The same looks true for its custom moulding business, which produces plastic-based components for various user industries, including auto, telecom, defence, power and electronics, among others, across India, the US and Europe. To give an example, since early 2007, when Sintex acquired the Europe-based Nief Plastic (which now accounts for over 60 per cent of subsidiary revenues), the share of revenues from the company's auto sector customers has declined from over 55 per cent to 25 per cent at present — as it enhanced focus on other segments like aerospace, medical and electrical. Nief, along with India-based subsidiary Bright AutoPlast (latter helped by a robust demand from auto original equipment manufacturers), were largely responsible for the 39 per cent growth rate in custom moulding revenues to Rs 450.7 crore in the June quarter. Going ahead, this business, which has seen consistent rise in revenues in the last few quarters despite economic concerns in key foreign markets, should continue to report healthy growth, feel analysts.

Outlook

For the June 2010 quarter, Sintex posted a year-on-year 39 per cent growth in revenues at Rs 910 crore and a 190-basis-point rise in operating profit margins to 15.1 per cent. However, lower other income and higher interest outgo restricted net profit growth to 30 per cent (Rs 79 crore). Notably, albeit a small contributor, the company's textile business has also shown improvement with rising revenues and better profitability, which should be sustainable.

Going ahead, analysts expect the company to clock average earnings growth of 22 per cent annually over the next two years. At Rs 331.80, based on an estimated 2011-12 earnings per share of Rs 36, the price-to-earnings ratio works out to 9.2. Given that the stock has run up in the recent past, investors can consider it on dips with a time-frame of one-two years.

Stock views on SESA GOA, S. KUMARS NATIONWIDE, HDFC

HSBC on HDFC

HSBC reiterates the `Neutral' rating on HDFC. HDFC reported Q1 net profit 13% below the Street's estimates mainly because of lower-thanexpected trading gains. The stock fell about 2% on the back of these numbers. Robust growth of 62% in new residential loans led to a 17% loan book growth after sell-down of some parts of the loan book. While new developer loans data was unavailable, overall disbursements grew 25-30% in Q1FY11. Home loan spreads, too, grew from last year to 2.34%. Fees and capital gains are typically lumpy and hence acted as a drag on topline growth, even though operating profits grew 24% and earnings 23%. HSBC values HDFC using a weighted average combination of PE, PB, and economic profit model (EPM) methodologies and incorporates sum-of-the-parts to value its non-mortgage businesses. HSBC raises the 12-month target price to Rs 3,010 from Rs 2,657, now implying a potential return, including dividends, of 1.7%.

JP MORGAN  on S. KUMARS NATIONWIDE

JP Morgan recommends `Overweight' rating on S. Kumars Nationwide (SKNL). SKNL is a leading branded textiles and garments player in India with a presence across economy, mid-market and luxury segments. It has expanded into European and North American markets through its acquisitions of Legguino in Italy and Hartmax in the US. Rising discretionary consumer spending in India is driving over 25% growth for branded textiles and apparel. SKNL is well positioned to benefit from this trend-it offers a wide product range spread across all market segments, has well recognized brands and a strong distribution network. Its domestic growth strategy is aligned to the changing customer profile, as it shifts its product mix in favor of ready-to-wear clothing. JP Morgan sees SKNL trading beyond 6-8x forward P/E, unless it allays concerns on: 1) high working capital intensity and 2) accounting policy followed on CDR (corporate debt restructure) related interest payments. Key risks include delay in listing of Reid & Taylor, rising working capital, changes in accounting treatment for deferred interest, which would impact our profit estimates, and delays in turnaround of the overseas business.

CLSA  on SESA GOA

CLSA downgrades the rating of Sesa Goa to `Sell' with a target price of Rs 290. Spot iron ore prices are down 35% from the April '10 peak but that the worst is not over. CLSA's resources team has come out with new iron ore price forecasts of $90-95/tonne for CY11-12 - 15-20% below consensus. Factoring in this, CLSA cuts Sesa Goa's EPS estimates 34-48% over FY11-12. CLSA's estimates assume flawless execution by Sesa on volume growth and assumes iron ore volumes growing at 25% CAGR over FY10-14, hitting 50 million tonnes in FY14. On the revised estimates, Sesa's NPV (net present value) on existing mine-life drops to Rs 247. CLSA gives the company the benefit of doubt on reserve accretion and assumes a further 250 million tonnes of reserves at zero cost taking NPV higher to Rs 290 - still 18% below current price. Any disappointments in volume growth and reserve accretion could pull NPV lower. Sesa's stock remains highly correlated to spot iron ore prices and CLSA does not expect any reversal of the recent underperformance of the stock.

Sesa Goa

 

 

The company is the country's leading private sector iron ore producer and exporter, with mining and processing facilities at various locations in India. It currently has access to 240 million metric tonne (MMT) reserves of iron ore. It is part of the Vedanta group's diversified global business interests in metals and mining industry with operations in India, Australia and Zambia.

 

Given the slowdown in the global economy, it is not surprising that the steel industry witnessed a sharp drop in demand during the second half of 2008-09. This led to a sharp reduction in steel production and hence contraction in demand for iron ore.

 

However, the company has a strong cash position and is actively exploring opportunities for acquiring mines to add to its resource base - both organically and inorganically - at a time when the depressed global economic scenario offers cost-effective opportunities.

Finolex Industries

Finolex Industries' capex plans and higher cash earning ability make it an attractive bet for long-term investors

 

WITH completion of its key capex projects, Finolex Industries appears stronger than ever to face future challenges. The company is set to enter a phase with high cash generating capacity and holds large land parcels that could be either developed or sold off. The steady growth in its core business and expected growth in dividends in the coming years appear attractive for long-term investors.

BUSINESS:

Finolex Industries is India's only integrated PVC pipes and fittings manufacturer with 140,000 tonne per annum (tpa) capacity and 260,000 tpa capacity of polyvinyl chloride (PVC) polymer. The company is also in drip irrigation business through its JV company Finolex Plasson. FIL has PVC manufacturing plants in Ratnagiri with an open sea jetty for importing raw materials. Half the PVC capacity is based on vinyl chloride monomer (VCM) route, while the other half uses ethylene and ethylene dichloride (EDC) as raw materials. FIL's pipes capacity is spread across two plants — Ratnagiri and Urse near Pune.

GROWTH DRIVERS:

The demand for company's pipes and fittings is growing. There are a number of government schemes that encourage micro and drip irrigation. Minimum support prices and Rural Employment Guarantee Scheme are further adding to the demand. Out of the pipes capacity, the company has commissioned 40,000 tpa capacity by FY10 end. It has plans to add another 50,000 tpa capacity by FY12. It also has completed its 43 mw thermal power plant at Ratnagiri, which is double the capacity it needs for captive consumption. Thus, apart from cost saving on energy, the company will have earnings from merchant sale of electricity going forward. It has 78 acre of free land in Chinchwad near Pune and over 600 acre in Ratnagiri that could either be sold off or utilised for expansions. FIL looks to set up 30 mw gasbased power plant in Chinchwad and amended the objects clause in memorandum of association last year. All these initiatives are expected to take FIL from its investment phase to a high cash generation phase going forward.

FINANCIALS:

After 10 consecutive years of profits, the company reported losses in FY09 due to fluctuations in the raw materials and PVC prices. However, FY10 has been much better for the company as it posted its highest-ever annual profits of Rs 132.3 crore — that too after writing off Rs 54 crore on forex loss. It has a history of strong operating cash flows and has never missed a dividend in the past 10 years. FIL has announced dividend of Rs 3 per share for FY10, which translates in a payout of around 30% — substantially lower compared to
average payout of 52% for the past 10 years.

VALUATIONS:

The scrip is trading at priceto-earnings multiple (P/E) of 7.8 based on its earnings for FY10. Other players from the plastic processing industry, such as Supreme Industries, Jain Irrigation, Tulsi Extrusion, Kisan Mouldings, are all trading in P/E range of 7 to 31. FIL's dividend of Rs 3 per share translates in dividend yield of 3.6%. The company is likely to close FY11 with profits of Rs 172 crore and pay dividend of Rs 4 per share. On the current market price this works out to a forward P/E of 5.9 and forward dividend yield of 4.8%.

 

Piramal Healthcare

 

 

It is a healthcare company and is currently the fourth-largest in the Indian market with a diverse product portfolio spanning several therapeutic areas. It is also one of the largest custom-manufacturing companies with a global footprint of assets across North America, Europe and Asia.

 

In April 2010, the company acquired Bharat Serum & Vaccines' Anesthetic products' business consisting of Propofol, Bupivacaine and Atracurium Besylate. Recently, Piramal Healthcare sold its domestic formulation business to Illinois-based pharmaceuticals major Abbott.

Fame India

 

Industry Ready For Consolidation; Stock Price Likely To Appreciate Further

 

THE slow but undiminished aggression shown by the Anil Dhirubhai Ambani Group (ADAG) in acquiring a controlling stake in Fame India has served the investors of the exhibition company well. Fame India's stock price has more than doubled in the past six months to Rs 82, even as the benchmark Bombay Stock Exchange (BSE) Sensex remained unchanged during the period.

   Reliance MediaWorks through its several subsidiaries and associates such as Reliance MediaWorks, Reliance Capital Partners and Reliance Capital has so far acquired a 15.71% stake in Fame India through open market purchases.

   For investors, this acquisition has immense significance. Especially, when one considers this acquisition in the light of the fact that only a few months ago, Inox Leisure had acquired a 43% stake in Fame India and subsequently increased its stake to 51% through open market purchases. Because of this duel, the whole concern over the takeover of the entity still remains unresolved. The reason being that at present, there is an open offer from both Inox Leisure and Reliance Media-Works. Inox Leisure has proposed an open offer to acquire 20% at Rs 51 a share, while Reliance Media-Works is offering Rs 83.4 per share to Fame India shareholders. But since the whole issue is with the Securities and Exchange Board of India (Sebi), there is still no clarity over the entity that will take over Fame India. Investors of Fame India, however, are advised to hold onto their investment, as there is still scope for the company's stock price to appreciate.

   In case of Fame India, it has two advantages in the form of locations and a better film-distribution network. More so, being a smaller player with an already established infrastructure, it will help its acquirers —either Reliance MediaWorks or Inox Leisure — to significantly scale up their network.

   The multiplex industry in India is currently fragmented with a large number of small and regional players. This has set the stage for consolidation either through mergers or hostile takeovers as is happening in the case of Fame India. The reason being that for most multiplex owners, the recurring capital expenditure and working capital continue to be higher than the cash profit generated by the business. This results in a perennial shortage of funds, which is met through external financing and leads to constant equity dilution or debt overload. This is financially unsustainable. Consolidation is likely to give these multiplex owners better negotiating power with the producer-distributor lobby besides reducing the intensity of price competition in the industry.

 

Marico

 

 

It is a leading group in the beauty and wellness space. The company occupies a leadership position with significant market shares in categories such as hair oil, post-wash hair care, anti-lice treatment, premium refined edible oil and niche fabric care. The company's branded products are present in  SAARC countries, West Asia, Egypt, Malaysia and South Africa.

In January 2010, Marico entered the South East Asian region through the acquisition of the hair styling brand Code 10 in Malaysia.

 

The company plans to focus on rural markets in order to achieve deeper penetration for its existing products and develop a basket of products more suited for these markets.

Standard Chartered Plc

 

With economic conditions improving, Standard Chartered's management expects strong performance in the first half of CY10. The bank, which gets over 90 per cent income from emerging markets in Asia, Africa and West Asia, has outperformed most of its peers due to its relatively larger exposure to these markets, which have rebounded faster following the global financial crisis of 2008-09. Although recent news from Europe hasn't been great, StanChart is banking on consumer and wholesale banking businesses for growth. In its first analyst call after the listing of Indian Depository Receipts, the management shared its view on the bank's January-May 2010 performance and the future outlook. It expects income in the first six months of CY10 to be flat year-on-year, but sees it growing in double digits in the second half of CY10.

Business picking up

Compared to consumer banking, StanChart has focussed on lending to the safer wholesale banking business in the last two years, helping the latter grow much faster at 20 per cent annually. The restrictive lending in the consumer business ensured that the wholesale banking's share in the overall pie rose from 47 per cent in 2007 to about 61 per cent in 2009.

The bank's wide branch network, with strong cross-border capabilities, has helped it capitalise on international trade flows.

Notably, with economic conditions slowly improving, the bank is likely to lend more to the consumer segment. Lending in the consumer business, which grew a modest seveneight per cent on an average in the last two years, should pick up pace in 2010, with growth rates seen inching to 10-12 per cent. Profit growth in the segment is expected to be robust.

Outlook

StanChart's limited exposure to Europe augurs well for it in the uncertain environment that prevails globally. The bank is fairly capitalised with its Tier-I capital at 11.5 per cent, which will act as a cushion and provide fuel for growth. Positively, the management has said that impairment charges in the wholesale banking segment in H1 CY10 will be around half comared to the corresponding period last year. In the consumer bank segment, this will continue to be around two-thirds of H2 CY09 levels. This is comforting and should improve profits.

On the flip side, although business environment is improving, competition could tighten spreads, while higher investments for future growth could increase costs. Analysts are expecting costs to rise 11 per cent in CY10, which should push up the cost-to-income ratio from 52 per cent in CY09 to 55 per cent in CY10.

Overall, they expect the bank to post 23.5 per cent and 16.3 per cent growth in earnings in CY10 and CY11, respectively. At Rs 106.25 (it represents a tenth of Stanchart's London listed share), the stock is trading at 2.4 times its estimated CY10 book value and can be accumulated for the long term.

 

Oil India

 

 

Oil India's heavy capex plan, gas deregulation and expanding portfolio of E&P blocks make the stock an attractive bet for long-term investors

 

   ALTHOUGH Oil India's results for the June 2010 quarter will appear subdued, long term investors betting on India's oil sector should buy into the stock on dips. The company is set to double its gross block in the next couple of years and to invest in several projects also.

BUSINESS:

Oil India is the country's third-largest oil producer at 70,000 barrels per day and 6.6 million cubic meters per day of natural gas. Oil India, in which the government holds a 78.4% stake, recently achieved a 'Navratna PSU' status.
   The company holds stakes in 65 domestic oil blocks and 9 overseas blocks. It has historically operated out of north eastern states of India and its production predominantly comes from onshore blocks. The company's proven reserves (1P) are estimated at 521 million barrels of oil equivalent or 12 years of current production level. The proven and probable (2P) reserves are estimated to last over 22 years at the current level of production.

   The company also owns and operates 1,157 km-long crude oil pipeline with an annual capacity to transport 6 million tonne that transports its crude oil to refineries. Similarly, it also operates 660 km 1.72 mtpa pipeline for petroleum products. Besides, it holds minority stakes in two other pipelines — 741 km pipeline in Sudan and 192 km Duliajan-Numaligarh pipeline. The company also holds a 26% stake in Numaligarh Refinery. Being an upstream oil producer, the company had been forced to share a part of the underrecoveries of the downstream oil marketing companies. In the past 6 years, the company has shared over Rs 10,500 crore, or 9%, of the total under-recoveries borne by the upstream companies.

GROWTH DRIVERS:

The recent deregulation of administered gas prices has immensely benefited the company, which has indicated a net benefit to the tune of Rs 350 crore on an annualised basis. This will immediately improve the company's net profit for FY10 by more than 13%.

   Despite being in production for more than a century, the Assam Arakan basin is relatively underexplored with DGH estimating discovered hydrocarbons so far at around 27% of the total prognosticated resources. Induction of world-class technology to increase reserves and production from existing acreages is one of the key strategies adopted by the company.

   For the next two years, the company has lined up an ambitious capex programme to invest nearly Rs 8,500 crore, which will more than double its gross block. While nearly 60% of the capex will be incurred on exploration and development activities, more than one-fourth of the kitty will be spent on merger and acquisition activities. The management has indicated their preference to go for small and medium-sized companies in E&P space producing around 10,000-20,000 bpd.

   The company is also investing in creating evacuation and storage infrastructure that can support higher natural gas production. Its pipeline to carry natural gas to Numaligarh refinery is set to complete by July-end. The gas-based Brahmaputra Cracker and Polymers project is expected to come up by 2012 that will almost double Oil India's current gas output. It has also tied up with other oil companies to lay city gas distribution projects. The company has picked up a 3.5% stake in Venezuela's Carabobo project, which will translate in 14,000 bpd production once the project reaches its plateau at 400,000 bpd over the next few years.

FINANCIALS:

The company's net sales have grown at a cumulative annualised growth rate of 16.7% during the past 10 years, while the net profit grew at 21.1%. The company has always been a cash-rich and debtfree. The Rs 2,800-crore IPO in August 2009 has given an additional booster to its cash on books, which has increased at a CAGR of 47.7% in the past 10 years to Rs 8,542.9 crore as on March 31, 2010.

   The company has increased its oil production in the past 5 years at a CAGR of 2.8% and natural gas at 3.7%. Its reserves replacement ratio — addition to hydrocarbon reserves compared to its depletion due to production — has always remained above 1 in the past five years.

   The company's performance for the June 2010 quarter will be subdued against the previous year due to the extended shutdown of its largest customer, Numaligarh refinery, in April and May 2010. This resulted into a loss of sales to the tune of 1 million barrels of oil and 28 mmscm of natural gas.

VALUATION:

Based on the profits for FY10, the company's shares are currently trading at a price-to-earnings multiple (P/E) of 12.8 and the dividend yield works out to be 2.4%. Its immediate competitor ONGC is trading at a P/E of 14.3 with a dividend yield of 2.5%. Considering the scaling up opportunities available to it going forward, the company is likely to outperform in the longer run.

 

Nitco Tiles

Nitco has had some non-operational problems over the last year. They have lost about five months of working. So if you go by the quarterly results when most other ceramic tiles, most tile companies, flooring solutions companies have been reporting better numbers every quarter, you will find a lot of erratic behaviour in Nitco's quarterly performance. I think the problems have been more than resolved. The last quarter, which is January to March 2010, if you see that quarter, it gives you an indication that finally things are back on track. We reported a quarter revenue of somewhere around Rs 120 crore.
 
I have a feeling that this year is going to be better. The company is over with problems. Most reassuringly I think the brand continues to be strong. Again more of a balance sheet side perspective you got a flooring solutions company, you have got a real estate company because they are two in one. They have got very rich holdings or I would say reasonable holdings in Mumbai today. If you combine two, I think it is an extremely compelling package. Market cap is just about Rs 50 crore and you are looking at a company which is number 3 or number 2, number 4 in India in its sector, available at a market cap of about Rs 150 crore with an extremely prominent brands in India.

I would say from a P&L perspective, you can look at a discount of 5-10 for the current year. So what I am saying is I would expect it to report Rs 20-25-30 crore for current financial year. But more compelling is that even if you assume, this your returns of real estate, which I think could be very-very attractive have not been factored into the pricing at all or from a reverse perspective if you see Nitco from a real estate perspective only then the flooring side of the business come absolutely free. I think it is more of a balance sheet perspective today with a gradual unfolding of its P&L potential over the next two-three quarters.

Larsen & Toubro

With Larsen & Toubro bagging the Rs 12,132-crore Hyderabad Metro rail project, the company's order book position has started to look stronger. This provides strong revenue traction for the company, even as the valuations look to be fair at the moment. The company has now obtained orders worth Rs 21,444 crore since April.

According to analysts at Goldman Sachs, this is around 28 per cent of the new order inflow for the current financial year. This will also keep the company on track to achieve 27 per cent sales growth between FY10 and FY12, they add.

The Metro project

The 71-km elevated Metro rail project will be built under a PPP (public-private partnership) model on aDBFOT (design, build, finance, operate and transfer) basis with a concession period of 35 years. The viability gap funding (VGF) – which the government provides in the form of grants, one-time or deferred, to infrastructure projects with a view to make them commercially viable – would be around Rs 1,460 crore.

The internal rate of return (IRR) for the project is estimated to be around 15 per cent for the company, according to Goldman Sachs, based on the ticketing revenue estimates and possible real estate development. But, apart from this, the company would also gain from the engineering, procurement and construction (EPC) contracts from the project. According to analysts at Religare, there would be an additional inflow of around Rs 8,000 crore on account of the project (excluding rolling stock).

With a VGF of around Rs 1,460 crore, the debt funding requirement for the project will be Rs 10,500 crore. As the debtto-equity ratio for the project reaches 70:30, L&T will need to invest Rs 3,150 crore over the next four years. With cash of around Rs 9,900 crore and strong cash-flows from its businesses, L&T is well-placed to meet the Rs 3,150-crore requirement. The company is required to achieve financial closure within six months of the award, which does not look difficult.

Outlook

L&T has built substantial strength in the railways segment, having bagged the Mumbai monorail project of Rs 1,360 crore and the Rs 3,000-crore Chennai Metro project. It also has a stake of around 15 per cent in the Kalindi Rail Nirman, which is engaged in signal and track-laying business. On the whole, L&T has been witnessing good order inflows, led by an improving economic growth that provides revenue visibility. Analysts expect the company's revenues and earnings to grow 2025 per cent annually over the next two years.

At Rs 1,874, the stock is currently trading at 26.4 times and 20.3 times its 2010-11 and 201112 estimated earnings, respectively. The five-year mean priceto-earnings (PE) ratio for the company is around 20 times. The valuation, therefore, looks to be fair with an upward bias when the order book starts to pick up as capital expansion plans for India Inc pick up.

Hotel Leela

 

At Current Price Of Rs 51, Co Trades At 39 Times Its Trailing 12-Mth Earnings

 

IN the past one year, hotels stocks have been immensely rewarding to investors — these stocks have appreciated almost two-folds. This appreciation had come at a time hotels slipped in terms of revenues and profit growth.

   But investors, it seems, are betting on higher earnings in future. Going by the June '10 quarter performance of Hotel Leela venture, investors' optimism about the sector seems justified.

   On a year-on-year basis, Leela venture's sales increased by 25% to Rs 104 crore from Rs 83 crore in the last year's June quarter. Improvement in the overall travel situation — both in leisure and business —, and attractive peak rates in comparison to last year, have contributed to higher revenues for the company.

   Better management of operating costs resulted into an even higher growth of 63% in operating profit before depreciation (EBIDTA) at Rs 19 crore. The company saw an extraordinary jump of eight times in its profit for the June quarter on a year-on-year basis.

   Hotel Leela venture has six properties stretching across Bangalore, Mumbai, Gurgaon, Goa, Kerala and Udaipur. The management credits the sharp growth in revenues and net profit to the improvement in the occupancy levels at these locations.

   For instance, its Bangalore property reported a 15% jump in average room rates during the quarter. Considering the fact that all big hotel chains have their presence in these locations, the overall sector is likely to do well in the June quarter on the operational front.

   Overall, on a sequential basis, Leela venture's occupancy level increased from 59% to 64%. The company is expected to continue its growth streak considering the improvement in business and leisure travel. At the current price level of around Rs 51, Hotel Leela venture is trading at nearly 39 times its trailing 12-month earnings. Its peers such as Asian Hotels North and East India Hotels are trading at a P/E of 10 and 83 times, respectively.

 

IndusInd Bank

IndusInd Bank's results for the June 2010 quarter did not surprise the markets. This is largely due to high expectations because of robust past perbank by market value has been churning net profit growth of over 50 per cent for the last 10 quarters. In the June 2010 quarter, this fell a little to 37 per cent.

However, net interest margins (NIMs) rose to around 3.3 per cent, one of the best in the bank's history. Besides profitability, efficiency and productivity parameters improved.

Growing fast

Buoyed by demand from corporate and consumer segments, advances have grown 22 per cent on an average during the last five years. The bank has managed to lend more of late, with advances growing over 30 per cent in 200910; it continued the trend in the June quarter.

Consumer loans have gathered steam with segments like vehicle loans growing faster. Consequently, the share of corporate loans fell sequentially from 60 per cent to 58 per cent of total advances. The management expects the bank's credit growth to be 25-30 per cent this financial year.

Besides credit off-take, NIMs improved. Though yields on advances cooled from 13.4 per cent a year ago to about 12.2 per cent, NIMs rose from 2.6 per cent to 3.3 per cent, as cost of deposits slid from 7.7 per cent to 6per cent.

Besides, better management of yields and cost of deposits, NIMs got a boost from low-cost deposits — the share of current and savings account deposits improved to 24.3 per cent, up 60 basis points sequentially and 400 basis points since a year ago.

Network expansion over the last one year has been robust, helping the bank garner low-cost deposits; the bank's branch network increased to 225 in the June quarter, a jump of 25 per cent in the last one year. The bank intends to add 115 branches in the financial year, which should improve margins further.

Outlook

Together with an increase in the loan book, the bank's asset quality has been improving. Indicatively, net non-performing loans (NNPL) improved from 1per cent in the June 2009 quarter to 0.4 per cent in the June 2010 quarter. In line with this, the provision coverage improved from a poor 31 per cent last year to the central bank-mandated 70 per cent.

NNPLs from the consumer segment were stable, while the corporate segment saw some deterioration. However, most corporate bad loans were provided for, which is a positive.

The bank is adequately capitalised, with capital adequacy ratio at 13.7 per cent as of June 2010 quarter, and the management is looking to raise another Rs 1,000 crore Tier-I capital, either through a qualified institutional placement, a global depositary receipt issue or a preferential issue, by December 2010.

This issue is likely to dilute equity capital by 8-10 per cent. Meanwhile, due to improving fundamentals and the bank's ability to deliver robust numbers, the stock has run up from around Rs 80 in July 2009 to Rs 214.90.

At this level, the bank is trading around three times estimated 2010-11 price-to-book value, which captures near-term growth expectations. Investors with a long-term perspective can consider the stock on dips.

 

Stock views on JYOTI STRUCTURES, WHIRLPOOL INDIA

LKP SECURITIES  on WHIRLPOOL INDIA

LKP Securities initiates coverage on Whirlpool of India with a Buy' rating and has a one-year price target of Rs 356. Whirlpool India, owned 75% by the $19-billion US-based home appliances giant, Whirlpool Corporation, has generated over Rs 200 crore in cash (Rs 145 crore) from operations last fiscal while emerging as a debt-free entity. LKP expects washing machines to remain an urban-centric product and the volume mix to shift towards the fully automatic models and its share to rise significantly. They however, expect the addressable market size of refrigerators to increase going forward and the mix to shift towards the high end frost-free segment, which would aid the growth of Whirlpool in India. Whirlpool is best placed to expand its footprint aided by modern trade given its brand equity, RoE of 44%, RoCE of 49% and vast distribution strengths. LKP expects Whirlpool to grow its net profits at a CAGR of 31% over the next two years on the back of an expected 22.8% CAGR growth in revenues.

RELIGARE CAPITAL  on JYOTI STRUCTURES

Religare reiterates `Buy' rating on Jyoti Structures with a target price of Rs. 185. Even as competition in the power transmission EPC (engineering, procurement and construction) sector has intensified, order flows could positively surprise in FY11E. Religare believes that large ticket size orders (in comparison to the current order backlogs) could be important triggers for stocks in the transmission sector. Religare prefers Jyoti Structures (JYS) due to three reasons: 1) Its market share in orders from Power Grid Corporation of India (PGCIL) has been higher over FY08- FY10 2) The company's margin profile has been less volatile than peers due to higher concentration of price variable contracts 3) It has a higher share of domestic power transmission EPC orders in the backlog. According to conservative estimates, order flows from PGCIL for the power transmission EPC segment could grow about 3x in FY11E. At the current estimates, the stock is trading at a P/E of 11.6x and 10x for FY11E and FY12E respectively.

GSK Consumer Healthcare

 

 

The company leads in the malted food beverage segment with brands such as Horlicks, Boost, Maltova and Viva. It continues to leverage on the strong brand equity of Horlicks and Boost by introducing value-added variants of these brands. The parent company, GlaxoSmithKline Plc. UK, has a strong and well-established product portfolio of various brands.

The company has over the past  few years put up a robust performance through sustained volume growth in its core brands and higher contributions from new product launches. It is a cash-rich company with a balance of Rs 820 crore as on December 2009.

 

Rising household incomes, increasing urbanisation, more hectic lifestyles, and growth in the number of working women are some of the factors that are expected to boost the demand for processed food products. The company is expected to maintain its recent pace of growth on account of a positive outlook for the food industry.

Titagarh Wagons

 

At Current Price Of Rs 374, Co Trades At 10.8 Times Its Trailing 4-Quarter Earnings

 

THE scrip of Titagarh Wagons fell by nearly 1% in a buoyant broader market on Monday, following its announcement of an overseas acquisition. Titagarh Wagons, which is a leading player for the supply of wagons to the Indian Railways, has acquired the assets and the business of Arbel Fauvet Rail, a French rail wagon maker.

   Though financial details of this transaction are not available, Titagarh's senior management has indicated that it would pay nearly € 1.9 million (nearly Rs 12 crore) towards the acquisition.

   To begin with, Titagarh has chalked out plans to beef up the working capital of Arbel Fauvet. The French company is reeling under financial difficulties and reviving its operations will be the immediate need. Though details are not available, Titagarh may have to spend over € 15 million (approximately Rs 90 crore) over the next few years, according to experts.

   Titagarh had a cash and bank balance of Rs 98 crore at the end of March '09. Its debt was negligible compared to its equity (debt: equity ratio of 0:1), which leaves enough room for the company to raise further capital through debt. Hence, financing the latest acquisition should not be a problem. The acquisition would give Titagarh an access to additional capacity to manufacture up to 5,000 wagons per year in the European market.

   The company had supplied 3,685 wagons during the financial year ended March '09 in the domestic market. It would also get the technology related to the production of wagons used for transporting oil and cars, which is not easily available in India.

   Over the past two months, the Titagarh stock has outperformed the benchmark indices. It gained 20% during the period while the Sensex rose by 4.6%. The company's stock market performance reflects positive investor sentiment that follows the proposal in the current fiscal's Railway Budget to procure 18,000 new wagons.

   Titagarh Wagons trades at nearly 10.8 times its trailing four-quarter earnings (excluding the acquisition), while its bigger peer Texmaco trades at a P/E of 18. Titagarh's latest acquisition is expected to bring positive results only in the long term. And hence, its current valuations are unlikely to change in near future.

 

Tech Mahindra

 

 

 

The top IT companies have shown exceptional resilience over the past two years despite multiple negative factors like flat volume growth, sharp correction in pricing, and rupee appreciation. Analysts generally take Cognizant's performance as the precursor for Indian IT companies. Cognizant's results indicate that the demand environment for IT services is improving, and more significantly, the guidance for CY2010 is "at least" 20 per cent revenue growth. This is very much in line with Infosys' conservative revenue guidance of 16-17 per cent. According to an analyst at BNP Paribas Securities, there is adequate evidence of recovery in corporate spending on IT.

Indian IT showed a lot of resilience during the last crisis. But if the recent crisis in Greece takes the form of a contagion, then Indian IT could once again come under pressure. According to a note by India Infoline, margins of Indian IT companies are likely to come down due to increased hiring and wage hikes across the board. Moreover, adverse currency movements like rupee appreciation and strengthening of the US dollar against the British pound and the euro will also contribute to shrinking margins.

 

The company

Tech Mahindra is India's leading tier II IT company. It provides IT services and solutions to telecom service providers (TSP) and telecom equipment manufacturers (TEM). The TSP segment contributes close to 85 per cent of the company's total revenue. The company was initially formed as a joint venture between Mahindra & Mahindra and the BT Group under the name Mahindra-British Telecom. It was only in 2006 that it assumed its current name.

 

Strengths and weaknesses

Relationship with BT. This relationship started in 1988. Over the years Tech Mahindra has evolved from being just an offshore supplier of telecom applications into a key strategic partner. Though over the years Tech Mahindra has added new clients, BT still contributes around 46 per cent of its revenue. According to Srishti Anand, IT analyst at ICICIdirect.com, a brokerage firm, "The large long-term end-to-end transformational deals that Tech Mahindra bagged from BT and its role as a strategic transformational partner to it was once considered its competitive strength. But with the global telecom industry underperforming, this boon has now turned into a bane." Though being concentrated on one client gives it stable revenue visibility, it also raises Tech Mahindra's company-specific risk.

 

High client penetration. Tech Mahindra has cultivated long-term relationships with top clients like AT&T, Telefonica O2, Alcatel and Motorola. It has got Master Service Agreements with all these clients, enabling it to have long-term revenue visibility. But according to a recent note from ICICIdirect.com, capex growth for most of the top five clients is likely to be muted over the coming years. Hence, while Tech Mahindra will offer stability, you are unlikely to get positive surprises.

 

AT&T post liquidation. AT&T, Tech Mahindra's number two client, contributes around 15 per cent to its revenue. The strategic partnership between the two included awarding of options with the completion of certain revenue milestones. In March 2010, AT&T exercised its options and converted them into equity shares. But it has since then sold its stake in the open market, which raises questions about the depth of the business relationship between the two.

 

Promise of developing economies. While the Western telecom markets have become stagnant, emerging markets like India and the Middle East are poised for growth. Says Srishti: "Tech Mahindra has in-built capabilities to service TSPs which can be leveraged in these markets. Both Tech Mahindra and Wipro are likely gear themselves up to compete against giants like IBM in this space." Tech Mahindra has already won contracts from new entrants like Etisalat, S Tel, and Videocon.

 

Geographic risk. Around 56 per cent of its business comes from Europe's troubled economies. Due to the crisis brewing there, there has been a significant slowdown in the decision cycle. Says Srishti: "The management has a vision to increase its wallet share from non-BT accounts over time, hence now it has started focusing on growth geographies like India, Middle East and Asia Pacific." But in the near to medium term Tech Mahindra will face strong margin pressures due to the weakening of the pound and the euro.

 

Integrating Satyam. Tech Mahindra intends to fully integrate Satyam with itself and become a full service provider. This should help it scale up faster giving it access to new geographies, new clients and a diversified service mix, positioning it in the top tier of Indian IT companies. But Srishti points out that Satyam's turnaround will take considerable time to yield dividends for Tech Mahindra.

 

Valuation

The BT business has now reached a steady state revenue run rate of £70-72 million after the entire restructuring exercise at BT (de-growing by 18 per cent YoY). The non-BT accounts (54 per cent contribution) that proved to be the company's saviour in FY10 (growing by 23 per cent YoY) are expected to continue to be the growth drivers. Srishti expects Tech Mahindra will clock in revenues at 12 per cent CAGR over FY10-FY12 on account of strong 5.5 per cent CQGR (cumulative quarterly growth rate) in non-BT accounts over the next eight quarters and flat performance in BT. Also net profitability is expected to grow at 9.5 per cent CAGR over the same period on account of operational improvements. In the near term (i.e. FY11), though, he expects margins to come under pressure on account of volatile currency, highly competitive wage inflation environment, and limited cutback possibility on selling, general and administrative expenses. But by FY12 margins are expected to rebound once the share of non-BT accounts becomes dominant and utilisation heads northward. Currently the stock is trading at 9.5 times FY12E EPS, while analysts value the stock at 13-14 times FY12E.

 

Should you buy?

A recent note from Prabhudas Lilladher says that the stock price factors in the negatives and there is a lack of positive triggers. They further add that the company is operating in a more challenging environment that its peers.

According to Srishti, "The stock has corrected too much but is in sync with market discounting. At current price the stock looks good fundamentally to buy. But if the market as a whole is expected to have further downside one can wait for further decline."

 

The PEG ratio (taking five-year historic EPS) of the stock stands at 0.27 compared to industry average of 0.63. You could buy the stock on decline, but should hold it for at least five years to be able to weather the near- and medium-term problems in the European markets.

 

Maruti Suzuki

 

 

The company, which is a subsidiary of Suzuki Motor Corporation of Japan, is India's leading passenger car company, accounting for over 50 per cent of the domestic car market. It offers a full range of cars -- entry level Maruti 800 and Alto; mid-range cars such as the stylish hatchback Ritz, A star, Swift, Wagon R, and Estilo; sedans such as DZire and SX4; and sports utility vehicle Grand Vitara.

 

Financial year 2008-09 witnessed unprecedented fluctuations in the macroeconomic environment both globally and in India. However, the Indian economy was less affected and managed to grow well above 6 per cent. In FY10, however, the auto sector left behind its blues and put up a stellar performance, with Maruti Suzuki leading from the front.

 

The company has identified some key areas for action in the coming years, such as global procurement of high-technology components which are not available in India. Further, it plans to enhance the reliability of its supply chain, by focusing on industrial relations issues.

Anant Raj Industries

 

This is a real estate company. They have huge presence in the non-development assets also like hotels etc. But maybe for last one or so, though you see these sporadic upsides coming-in in the stock, but I don't think anything is really happening. In the past, they have tried to sell some of their hotel properties, some of their plots also to deleverage the balance sheet, but honestly I have not been able to get any further or any concrete move having initiated by management in last three-four months. But you do see sporadic upside coming in the stock at a frequent interval.

Sirpur Paper

 

Actually for a lot of people who look at Sirpur from a P&L perspective there is no story. The company has not being doing well for the last couple of years and they have very erratic performance every since they expanded, ever since they modernised the mill. But Sirpur is not a P&L story as much as it is a balance sheet story. I say this very deliberately because you have a company, which is integrated pulp and paper, they have a capacity of nearly 1,38,000 tonne, replacement cost if you had to set up an entire plant from scratch with facility in place, I think it would cost you around Rs 2,000 crore. Sirpur today is available at market cap of just about Rs 75 crore. So I think it is more of a balance sheet story and a balance sheet perspective into Sirpur rather than a P&L perspective into Sirpur.

It is important to get into a P&L perspective some time or the other because at the end of the day whatever fundamentals you have must reflect in your earnings. I have a feeling that Sirpur, which is struggling to gets its capacity utilisation right, it is not that they are not producing paper, they are, they are just not getting up from a level from where your capacity utilisation starts translating into high margins. We are not at yet at that point.

I have a feeling that the management will sooner or later resolve this. The moment they do, you have a capacity of 350 tonne per day. The big money is as per Pareto's Law make only after you cross 300-310. They are not at 310-320, not on a consistent basis. I think the consistency will reflect hopeful over the next quarter. When it does I think the market capitalization will immediately correct itself because you are getting a plant with a replacement cost of Rs 2,000 crore at only Rs 75 crore and at time when paper is on an upswing. So I would back this penny stock in the paper industry a very-very long way.

 

Hindustan Motors

 

We have been holding quite a positive view on the company mainly because of the assets held by it. When I read this news couple of months back that the company has been referred to BIFR (Board for Industrial & Financial Reconstruction), I said that this company has rich assets, but bad management.

If you recall in the past, some couple of years back, they have sold 315 acres of land, realized Rs 300 crore, but since the money came in four installments over two years, the entire money has been in use for financing the losses. Now, same thing is happening here, they have the Chennai car plant where they make the Mitsubishi, Pajero and Lancer cars, that is a most modern plant and in fact there have been suitors for this plant last year also or maybe couple of years back also because this could act as a hub for exporting to South East Asia. And now since the company has been referred to BIFR, there is no significant debt, so you cannot expect any debt waiver or any interest reduction. You need to come out of BIFR by working your own package. That can only happen, if company contemplates for selling any of these assets which could be in the form of this Chennai car plant and or 49% stake, which they are holding in AVTECH Ltd, again a company which is making engines with automobiles with 1500 CC and above. In fact both these assets are having value of about Rs 400-500 crore each.

So, this time it has been forced upon the company that if you want to come out of BIFR, you will have to sell either of these assets. I won't be surprised to see if both the assets are sold by the company and can mobilise about Rs 1,000 crore to pump in that money to expand their core operations, which could be car and making the castings, forgings etc.

Indian lifestyle stocks: Jubilant Foodworks

As economic prosperity improves, the demand for convenience foods like pizzas and pastas is likely to increase. Moreover, with changing demographic profiles, pizza is accepted as a replacement for a meal. A busier lifestyle is resulting in growth and penetration of quick-service restaurants. The Rs-425 crore Jubilant Foodworks, a food service company, having exclusive franchisee of the international Domino's brand of pizza stores, is well suited to benefit from this trend.

Rei Agro

 

Co's Rs 1,245-Cr Rights Issue Will Lower Debt, Additional Capacity To Boost Efficiency

 

THE shares of India's biggest basmati rice player REI Agro have heavily underperformed the markets in the past one year, falling 26%, while the BSE benchmark Sensex gained 21%. With its Rs 1,245- crore rights issue, the company is expected to lower its debt burden and improve efficiencies with additional capacities. This can boost its profitability and mark a key turnaround in the performance of its shares.

   The company ended FY10 with a debt burden, which was 4.45 times its equity and interest cost, which was more than twice its reported net profit. The debt-equity ratio is likely to fall to 1.5, post the rights issue while the saving on interest cost alone could be around Rs 85 crore annually.

   At the same time, the company is planning to increase its rice processing capacity by 60% in the coming months to replace the leased capacity it currently uses. This is expected to bring in additional gains in the form of improved operational efficiency.

   The company reported a strong 51% growth in net sales to Rs 3,693.2 crore for the year ended March 2010, while the net profit jumped 158% to Rs 157.2 crore. The company has had an exciting growth record with a compounded annualised sales growth of 37.7% in the past 10 years, while its profits grew at 46.1%.

   However, the nature of the basmati rice industry meant that the high-speed growth needed a more-than-proportionate rise in inventories. The inventory of basmati paddy increased annually at 55% as the company expanded its maturing period to 14 months from four months earlier, which necessitated huge investments in inventory.

   As a result, the company's cashflows from operating activities remained negative continuously in the past 10 years, requiring continuous debt financing. Since the company is not going to increase the maturing period any further, the growth in inventories is likely to fall drastically.

   The company, which markets its product under the brands of Real Magic, Hungama and Kasauti in India, had earlier also entered the retailing business. Subsequently in 2008, the retail venture was demerged in a separate company named REI Six Ten Retail (RSTRL) that has 310 outlets mainly in northern and western parts of India. REI Agro holds nearly 24.4% stake in this company, which had posted a net profit of Rs 26.4 crore in FY 10 and has a market capitalisation of around Rs 780 crore.

   The company's growth so far has highly been dependent on outside funds, which didn't find favour with the general investors and resulted in continuous underperformance. However, the scene may change if the company manages to improve its earnings and cashflows along with its balance sheet. Despite its overall underperformance, the scrip is commanding a premium over its peers.

   Based on the earnings for the past 12 months, the scrip currently trades at a price-to-earnings multiple (P/E) of 17.5 against a P/E between 4 and 5 for competitors such as KRBL and Kohinoor Foods.

 

Noida Toll Bridge

 

To give a background this is a company which is promoted by IL&FS and it was promoted as a special purpose vehicle for implementing the Delhi Noida Toll Bridge project. The reason we like this stock is that Noida Toll Bridge is one of the most lucrative public private partnership which this country has seen. As per the terms of the concession agreement which they have signed with Noida Authority, they are entitle to a 20% return net of taxes on the investments made in the toll bridge project over a concession period of 30 years. 

Noida Authority is ensuring 20% return net of taxes and the concession period can be extended beyond 30 years in case the desired returns are not achieved in that stipulated period. Positives about the stock is that there is a lot of construction activity which is happening in Noida and JP Infratech is making a highway which connects Noida to Agra and there are about 7-8 huge townships which are coming along the expressway. 

This is going to be a big positive for Noida Toll Bridge because you will have a lot of traffic which currently flows to Agra through the Faridabad route taking this route and this bridge is also very close to the Commonwealth Games village and may see more activity during the Commonwealth Games. This company faces competition from one, metro rail where the rail link has been extended to Noida and second, there are two bridges which are within the vicinity of Noida Toll Bridge which provides competition. 

The company has got about 100 acres of land in it's a lease hold land and the company has the right to develop this land subject to Noida Authority granting the development rights of the land to the company in lieu of the shortfall in profit. If you look at the valuation of the company at the current price of about Rs 31.5 marketcap of the company is about Rs 580 crore, company has debt of close to Rs 200 crore which makes the enterprise value of close to 780 crore. 

As on March 31, 2009 this company had receivables of about 1486 crore from Noida Authority which is a shortfall in 20% guaranteed profits and as on 31 March, 2010 that figure would have jumped to about Rs 1,700 crore. So you have a company which is available at enterprise value of Rs 780 crore where the value of the asset if build today maybe much more than the current enterprise value of the company and along with that they have got receivables which are good which will come to them over a period of time of about Rs 1,700 crore. From these levels the probability of going wrong is extremely less even though the stock is depressed on account of uncertainty over a grant of development rights by Noida Authority but that negative factor is fully discounted in the stock price. 

The major risk which I see with this investment is that in case of termination of agreement or in case of Noida Authority not honouring their commitment, that's the major risk to the investment but the probability of that risk is extremely low. So I think there is deep value in this stock at the current market price and the downside looks extremely restricted from the current levels. 

 

Stock Views on ITC, ASIAN PAINTS

BANK OF AMERICA MERRILL LYNCH  on ASIAN PAINTS


Bank of America Merrill Lynch has reiterated `Buy' on Asian Paints and has also increased EPS estimates for FY11-12 following the announcement of 2.8% price hike by the paint major. The price hike of decorative paints is effective from 1st July and is over and above the 4.15% price hike taken from 1st May. The brokerage believes that this fits with the possibility of margin surprise by Asian Paints contrary to management guidance of a possible margin decline. Post this price hike, it now expects flat margins for Asian Paints over FY11-12E against the earlier estimate of a 70-basis point decline. With this, the brokerage has raised EPS estimate by over 5% over FY11-12E and price target to Rs 2,700 in line with the earnings rise. The brokerage believes that unlike staples, competition will remain relatively benign (at least in terms of pricing) for paints in India. This should allow Asian Paints to exert its pricing power going forward as well.

HSBC on ITC

Though ITC's FMCG division is expected to report a loss in the coming quarter, HSBC believes that the division may perform well in future. HSBC expects the segment to clock compounded growth of about 20% over the next five years. The division is also expected to increase market share in almost every category. Moreover, the newer launches by ITC have been in higher margin categories. HSBC estimates a 160-basis point margin benefit on the mix improvement. Coupled with a margin gain on account of increased prices and operating leverage, it estimates stable-state EBIT margin for this segment at over 10% by FY15. HSBC has arrived at a valuation of Rs 315 for ITC on a sumof-the-parts basis. It has applied a multiple of 21x for the cigarettes division. It believes this is in line with the global peers, adjusting for growth and return metrics. Its FY11 EPS estimate is the highest among all the estimates by other brokerages.