Stock Review: SPICEJET

The wheels of aviation industry's growth appear well-oiled for coming quarters. With softening of crude oil prices, growth in passenger numbers driven by momentum in leisure and business travel and the upcoming holiday season, the entire airline industry is set to take off. Among the lot, we find SpiceJet's valuations highly attractive. The champion of the low-cost carrier model had posted a net loss exceeding 100 crore in the September 2009 quarter. A healthy profit jump in September 2010 would mean its current valuation is inexpensive.

   Our estimates peg SpiceJet's net profit for the September 2010 quarter at around 65 crore, which will boost its trailing 12-month profits to 256 crore. Its current market capitalisation is just 12 times this, which appears highly attractive, considering the bright prospects ahead.

Stock Review: MERCATOR LINES

Mercator Lines is another such company expected to report a significantly better performance in the September 2010 quarter on the back of a turnaround in tanker freight rates. The tanker freight market has gained from a pickup in global oil demand and is nearly twice that of the year-ago period.

   As a result, we expect the company to report a consolidated net profit of 40 crore in the September 2010 quarter, compared to a net loss of 1.9 crore a year earlier. The scrip is currently trading at a price-to-earnings multiple (P/E) of 18.4. However, post-September quarter results, the P/E would fall to 11.4, giving it reasonable scope to gain.

Stock Review: Larsen & Toubro

Larsen & Toubro's (L&T's) decision to list finance and infrastructure assets subsidiaries in the second half of 2010-11 and 2011-12, respectively, will unlock immense value, as both the businesses have extensive growth potential.

According to reports, L&T Finance Holdings, the recently formed holding arm of L&T Finance and L&T Infrastructure Finance, proposes to file for an initial public offer to raise `1,500 crore by diluting 15-20 per cent stake. This values the entire finance vertical at `10,000 crore compared to analysts' estimates of `3,500 crore.

Consequently, the share of the finance business in L&T's total market capitalisation comes to about eight per cent, compared to analysts' fair value estimate of 2.4 per cent.

During 2007-10, the combined loan book, revenue and net profit of the finance vertical grew at a compounded annual growth rate of 57 per cent, 70 per cent and 58 per cent to `10,949 crore, `1,416 crore and `267.6 crore, respectively. Even in the June quarter, while L&T's core business exhibited a muted performance, revenues from the finance companies jumped 53 per cent year-on-year to `435 crore and net profit more than doubled to `106 crore.

L&T, which holds around 86.5 per cent in Infrastructure Development Projects (IDPL), plans to buy the remaining 13.5 per cent from IDFC Private Equity and JP Morgan Chase for `740 crore, valuing the company at `5,300 crore, or 4.3 per cent of L&T's market capitalisation. With assets worth `40,000 crore, IDPL is looking to expand in high-potential sectors like railways and water.

L&T's standalone business is in a sweet spot, with all its businesses witnessing strong traction. The company has already cornered about 40 per cent of the targeted order inflows for 20102011 and is confident of 25 per cent growth. Analysts advise investors to accumulate the stock as it is trading close to its fair value of `2,113.

The process of value unlocking has begun with plans to list finance and asset subsidiaries

Stock Review: Gas Aauthority India Limited (GAIL)

 

 

Gail's aggressive plans to grow natural gas volumes and have a strong balance sheet augur well for the company in future. Long-term investors can consider buying this stock

   NOW that key regulatory issues are behind, Gail India's business model appears devoid of significant risks. The company's aggressive growth plans, such as growing natural gas volumes, have a strong balance sheet and a track record in timely project implementation will boost its stock's attractiveness. Long-term investors can benefit from the company's heavy capex cycle over the next 2-3 years.

BUSINESS:

The public sector natural gas major operates India's largest natural gas pipeline network with current length of 7,200 km and a transmission capacity of 150 million standard cubic metres per day (mmscmd). It also produces over 1.4 million tonne of liquid hydrocarbons, including LPG and 4.2 lakh tonne of polyethylene capacity.

   To extend its presence through the entire natural gas value chain, the company has also invested in 27 exploration blocks, including operatorship in two. The company also owns promoter's stake in Petronet LNG and seven other city gas distribution companies including Indraprastha Gas. The company has floated a subsidiary, Gail Gas, to lay CNG stations along the highways.

GROWTH DRIVERS:

The company has embarked on a heavy capex programme that will triple its gross block within the next four years. This will double its transmission capacity to over 300 mmscmd by the end of FY14.

   The natural gas availability in India will grow in the coming years, mainly with Reliance Industries' KG basin production and ONGC's marginal fields. India is also importing increasing amount of LNG on a spot basis. Going forward, commissioning of LNG terminals at Dabhol and Kochi would bring in additional volumes, which will be augmented by any success of exploration efforts in the CBM and other fields.

   Its 70% subsidiary, Brahmaputra Cracker, is setting up 280,000 TPA polymer unit in Assam at an investment of 5,460 crore by March 2012.
   It is expanding its petrochemicals capacity to 0.9 mmpta by FY15. The company also holds a stake in the 1.1 mtpa -ethylene cracker that ONGC is setting up under ONGC Petro additions (OPaL) at Dahej.

   The company already has eight operational joint ventures in city gas distribution. Besides, its wholly-owned subsidiary Gail Gas holds approvals for four CGD projects.

   The uncertainty over transmission tariffs is over with the regulator approving tariffs, which will be revenue-neutral for the company. The company's subsidy sharing burden has not increased in line with its growth, which reduced its impact to less than 5% of its net sales in FY10. The company is trying hard with the government for an exemption from sharing the underrecoveries of oil marketing companies.

FINANCIALS:

The company, which grew at a cumulative annualised growth rate (CAGR) of 12.7% for a decade till FY08, has improved its growth rate to 19.8% per annum thereafter. It is lightly leveraged with strong cashflows and a healthy bank balance. However, to finance its aggressive expansion plans, the company will have to raise debt of nearly 15,500 crore in the next two years.

   Being a PSU, the company has been sharing under-recoveries of the oil marketing companies since FY04. On a cumulative basis, the company has given discounts to the

   extent of 8,900 crore. The amount of subsidy is decided by the government on an ad hoc basis and hence this factor remains the biggest uncertainty for the company.

VALUATIONS:

At the current market price, the company is valued at 17.8 times its earnings for the past 12 months. It is trading at just 3.6 times its book value, which is lowest among its smaller peers. For FY11, the company is expected to post net profit of 3,815 crore for FY11 on a consolidated basis, which discounts the current valuation at P/E of 15.8.

 

Stock Review: Indian Metals & Ferro Alloys

India's largest fully-integrated producer of ferrochrome, Indian Metals & Ferro Alloys is also set to witness a boost in the September 2010 quarter profit. During the similar period of the past year, the company was suffering from lower sales and high input costs, eroding its operating profit margins and incurring a net loss.

   The scene is totally different now. The company is increasing its capacity utilisation as volumes are growing, while the international ferrochrome prices have improved. Its acquisition of Utkal Manufacturing's 40,000-tonne capacity in FY10 is adding to revenues. Our estimates for the company's September 2010 quarter are quite bullish with a net profit target of 60 crore. This will take the trailing 12-month profits to 165 crore and bring down its valuation to just 11.6 times.

   The company is also expanding its ferrochrome production capacity by another 40,000 tonnes and increasing its power generation capacity by 30 mw, which are expected to start operation from October and November 2010, respectively.

Stock Review: Tata Sponge

 

 

Firm Sponge Iron Prices, Robust Expansion Plans To Help Co Maintain Strong Growth

 

THOUGH the stock of Tata Sponge Iron (TSI) has receded from its recent peak, it has consistently outperformed the Sensex over the past one year. In the near term, TSI's expansion plans and opportunities in domestic steel and power industry are likely to keep investors interested in the counter.

   The stock has gained 46% over the one-year period, much higher than the 20% gains in Sensex. The 560-crore company has been aggressively ramping up its capacity to take advantage of growing demand in domestic steel industry. Currently, its capacity stands at 3.9 lakh tonne per annum. For the June 2010 quarter, net profit increased by 60% to 26 crore, while sales went up 20% to 140 crore, on a year-onyear basis.

   TSI is a pure sponge iron player with 93% of its revenue coming from the domestic segment. The rest comes from its two captive power plants with total capacity of 26 mw.

   The company is planning to add another 25-mw power plant at an investment of around 150 crore. The company can earn additional revenue by selling the surplus power generated by this plant.

   Sponge iron prices have seen an uptick for the past two months and are expected to remain firm in the coming quarters boosted by high scrap and other raw material costs.

   The company has a strategic tieup with Tata Steel to secure its iron ore requirements. The company's ore demand is met by Tata Steel's mines in Orissa, which are situated near its plants thereby reducing TSI's transportation costs.

   The company also has been allotted a coal block, which is expected to save as much as 900 per tonne on non-coking coal once the new power capacity goes online. This should further boost margins given that the backward integration initiative has already helped the company in improving its operating margin by 850 basis points in the June 2010 quarter.

   Over dependence on the domestic market insulates TSI from global turbulence to some extent. The company may find it easy to raise funds in future for further expansion with low debt levels.

   Currently, TSI stock is trading at six times the trailing 12-month earnings. These valuations are way below the P/E of 17 for its closest peer Vikas Metals. TSI is expected to repeat its good performance even in the coming quarters due to higher sponge iron prices and its capex plans.

 

Stock Review: Deccan Chronicle

 

 

The amalgamation subsidiaries augur well for Deccan Chronicle considering the buoyancy in the underlying businesses of the subsidiaries

 

THE stock of Deccan Chronicle Holdings in the past six months has fallen by around 15%. The company has recently amalgamated its subsidiaries that will boost overall its revenue given the buoyancy in the underlying businesses of the subsidiaries. Given this, its stock looks attractively priced at the current levels.

BUSINESS:

Deccan Chronicle Holdings is one of the largest English language publications in the South having a flagship brand Deccan Chronicle. In the past few years, the company also launched a financial daily, Financial Chronicle. The company also owns Asian Age and AndhraBhoomi, a Telugu-language newspaper. The company has also bought an IPL team named Deccan Chargers.

INVESTMENT RATIONALE :

Three factors work in favour of investing in Deccan Chronicle Holdings. First, the imminent Champions League, which started in September 2010, would provide the company with decent revenues. Deccan Chargers will be one of the three teams participating from India in matches against teams from other continents in Champions League. In FY09, the Deccan Chargers venture had a sales turnover of 56 crore. This season after taking into account the cost of players, rights, ticket sales, amortisation and sponsorship, one can expect a profit of around 11 crore from its team.

   Second, the company's stock price has fallen in the past six months by 15%. Even in the past one year the company's stock has not appreciated much compared to the gains in the stocks of its peers, Jagran Prakashan and HT Media. Hence, the company's stock has enough legroom for investors to buy into. Also, the amalgamation of its subsidiaries — Odyssey, a retail outlet and advertising arm Seiger Solutions — would also serve it well in the coming quarters. Both these subsidiaries have decent revenue generation capabilities.

   In FY09, Odyssey and Seiger Solutions have sales turnover of 80 crore and around 50 crore, respectively. The company is targeting a sales turnover of around 100 crore at the end of this fiscal. Going forward, with the improvement in advertising situation and recession sentiments ebbing out, its advertising arm, Seiger Solutions and its retail outlet Odyssey would see increasing flow of revenues.

FINANCIALS :

For June 2010 quarter, the company's net profit jumped by 18% to 91 crore in the June 2010 quarter. Also its net sales increased by 7% to 231 crore on a year-on-year basis. Increase in realisations boosted the company's advertising revenues growth. More so, with circulation increasing as realisations improve, the company may see healthy advertising revenue growth. On the operational front, the company's net profit margin also increased to 39% in June 2010 quarter.

VALUATION:

Taking into account the consolidated business of the company, Deccan Chronicle's stock is trading at a priceearnings ratio of 11. This is better than its immediate peers, such as Jagran Prakashan and HT Media, whose stocks are trading at a P/E of 21 and 29, respectively. Long-term investors may buy into the company's stock at the current market price.

 

Stock Review: TATA Steel

Turnaround show puts co on strong wicket

EXPECTATIONS of a better September 2010 quarter results have catapulted the stock price of Tata Steel, India's largest private steel manufacturer, by 25% in the past one month. This is significantly faster than the 12% increase in the benchmark Sensex.

   The company is expected to perform well given the higher international steel prices, lower raw material cost and the decision to sell Teesside Cast Product for $500 million, which will help the company reduce its debts.

   The turnaround in Tata Steel Europe (TSE) is expected to continue in the coming quarters with the parent company taking aggressive backward integration initiatives to improve margins. Tata Steel management has set a target of 40% integration for its European subsidiary. Joint ventures like Riversdale in Mozambique and direct shipping ore (DSO) project in Canada should also help the company improve the profitability of its European business.

   On the revenue side, steel prices are expected to remain strong in Europe led by a better-than-expected demand for automobile and consumer white goods sector. Recent moderation in the international iron ore and coal price can help the company negotiate lower raw material prices in the coming quarter giving boost to the company's margins.

   The decision to sell Teesside Cast Product could sharply ease liquidity concerns. Further, it should not affect the company's operating earnings since the plant was not expected to begin production in the medium term due to its unviable economics.

   As for the domestic operations, Tata Steel's own iron ore and coal mines insulate the company from fluctuations in the raw material prices. The captive production caters to its entire iron ore requirement and about two-third of the coking coal consumption. In contrast, JSW Steel is mostly dependent on outside sources for its iron ore and coking coal requirements.

   In the first quarter of FY11, Tata Steel was able to sell higher volumes of flat products compared to its peers. The company's 2.9 million tonne per annum (MTPA) brown field project is progressing on schedule and is expected to go steam by this December. These capacity additions can help the company cash in on the growing demand in domestic steel sector.

   As per ETIG calculations, the company is expected to post consolidated net profits of around 2,240 crore in the September quarter, which would take its trailing 12-month earning per share (EPS) to around 83 after September. At a current market price of 674, the company is trading at eight times its post-September expected EPS. This is relatively low compared to most of its peers. The stock of Tata Steel has started moving up in tandem with the expectation of good September numbers.

Stock Review: Ashok Leyland

As industrial and agriculture sectors post robust growth, trucks have been in demand. At the same time, a clear shift is visible towards higher tonnage vehicles. However, Ashok Leyland has seen a quieter move compared to its peers. Analysts expect this to improve, given the robust demand for commercial vehicles (CVs) moving in tandem with strong agricultural and industrial growth. A 10-year analysis puts the multiplier effect for CVs at about 1.4x Index of Industrial Production, according to a Sharekhan research.

In a recent analysts' meet, the management stood by its earlier guidance of total sales of 90,000 vehicles in FY11, adding that it was rather a conservative estimate, given adistinct possibility of additional sales of 6,000 units.

The company's market share increased to 27 per cent in the June quarter compared to 17 per cent a year ago, boosted by resurgence in multi-axle vehicle sales and high demand in South and West India. It plans to launch the U-Truck Platform by October, with 10 models slated to be introduced within the first month of the launch and around 25 models in the next 18 months.

Going ahead, the company expects to maintain earnings before interest, tax, depreciation and amortisation margins in excess of 10 per cent on the back of the price hike in June. The new emission norms effective October may hurt sales during the quarter. Incremental costs per vehicle are expected to be around `40,000 a vehicle, which the management plans to pass on to consumers. The company is looking at a capex of around 2,000 crore in the next two years, which includes spends on joint ventures.

The stock ended 1.5 per cent lower on Wednesday at 76 and trades at a P/E valuation of 17x FY11 earnings per share estimates.

The booming industrial production cycle is expected to push performance of the auto sector's low-flier

Stock views on HDIL, LIC HOUSING FINANCE, LARSEN & TOUBRO, RELIANCE INDUSTRIES

CITIGROUP on RELIANCE INDUSTRIES

Citigroup maintain Buy rating on Reliance Industries. RIL has signed agreements for sale of ~60 mmscmd of D6 gas for 5 yrs. In addition, the current EGoM-approved gas pricing formula is valid for D6 vols up to 80 mmscmd. Hence, it is likely that a higher gas price would be valid only for incremental D6 production beyond 60/80 mmscmd, limiting near-term (FY12/13E) EPS impact to 3-5%. However, more importantly, E&P value could see higher upside driven by: (1) increase in D6 NAV and (2) higher premium to NAV as all gas produced from other blocks could be priced higher. In a scenario where RIL gets US$5.2 for incremental D6 production beyond 80 mmscmd till FY14, and for entire production thereafter, E&P value could go up by ~Rs60-120/sh based on: Scenario I – E&P value of Rs522 at 9x FY12E EV/Ebitda, or Scenario II – E&P value of Rs581 at 8x FY13E EV/Ebitda discounted back. Any indications of a price increase for KG gas, which is quite possible given recent developments in the Indian gas sector, could be a positive surprise and a much-needed driver of stock performance. The gov't has recently raised gas prices for ONGC's new fields to US$4.75-5.25, leaving KG gas price of US$4.2 at the lower end of prices from various sources in India.

RELIGARE  on LARSEN & TOUBRO

L&T IDPL, L&T's 86.5% subsidiary and infrastructure arm is set to expand aggressively backed by a strong presence across all infrastructure verticals and a large portfolio of Rs 402 bn of assets. The company is foreseeing huge opportunities for private players in roads, railways and water sectors and intends to expand its project portfolio through the greenfield route. The company is also in the process of buying out minority stake holdings (~13.5%) and will plan an IPO depending on its funding requirements and growth in its project portfolio. L&T IDPL has a strong infrastructure portfolio worth Rs 402 bn. The company sees huge opportunities in road projects, railways and the water sector. Going ahead it expects an increase in the share of private sector in India's total infrastructure investments. The company also believes that the road sector would have higher proportion of EPC projects than that estimated by NHAI. For the port sector, L&T IDPL is currently focusing on the Dharma project and intends to expand its presence through the Greenfield route. The company plans to infuse Rs 10-12 bn per annum as equity in L&T IDPL for the next five years. L&T is in process of acquiring the 13.5% holding in IDPL in the next few months. There is also a likelihood of an IPO, possibly in FY12, depending on the company's funding requirements and growth in its project portfolio.

MORGAN STANLEY on LIC HOUSING FINANCE

Morgan Stanley initiates Overweight rating on LIC Housing Finance with a target price of Rs 1,500. Despite LICHF's strong run year to date, Morgan Stanley still find the stock attractive at 14x F2011e earnings and 11x F2012e, as they expect 22% average EPS growth, 26% core pre-provision growth and 23% ROE in F2011-12. Mortgage affordability in India has improved in the past three years – while income levels have gone up, home prices and mortgage penetration levels have been broadly stable through this period. Improving asset quality and operating costs have lifted ROA from 1.3% in F2005 to an estimated 1.9% in F2011. SBI and other SOE banks have been aggressive in the mortgage space in the past year, and ICICI Bank is likely to return. This should put pressure on lending yields just as LICHF's cost of funds increases amid rising short rates. Morgan Stanley look for its margins to compress from 3% in QE Jun-10 to 2.6% by QE Mar-11. The main driver of stock performance at LICHF is loan growth, which is to be robust at a 30% CAGR over the next three years. Indeed, even with this strong growth, LICHF's market share will probably increase by just 300 basis points, to 11%.

HSBC  on HDIL

HSBC reiterating Overweight rating on HDIL, and lowering 12-month target price to INR396 from INR419. Given the current backdrop of weak investor interest in public issues of real estate companies, HDIL's successful fund raising, as per media reports, of USD250m came as a surprise. HDIL management has board approval for raising a total of USD650m, of which the company raised USD250m in the current issue. However, this is despite net-debt equity of 0.47x (at end Q1 FY11). Land payments of INR4bn for incremental land for the airport project could have been managed through internal cash accruals and fresh debt accretion. Hence, the equity dilution was not necessary at the current price. HDIL's second phase of the airport project has been a slow starter due to unavailability of adequate land in the past six months. However, with the majority of the land for the second phase acquired, HDIL to use fresh funds raised to accelerate construction of rehabilitation units. HDIL is trading at a steep discount of 30% to its FY12e NAV and at a FY12e PB of 1.0x. The stock has historically traded between a 50% discount and a 10% premium to its NAV.

Stock Review: BL Kashyap

 

 

Robust Order Book Of Over 4,000 Crore To Keep Show Going For Co In Long Term

 

MID-SIZE construction firm BL Kashyap & Sons has seen its stock price shoot up 22% in the past three months bucking the 8% decline in ET Construction Index due to continuous flow of fresh orders in the first five months of the current fiscal year.

   BL Kashyap (BLKL) is focused on civil and industrial construction with most of its projects in the North and the South. Its business mix is almost equally split between real estate construction and industrial projects. It caters to both the government and private sector.

   Besides construction, it is also into furnishings business through a subsidiary that provides allied services for office buildings and residential complexes. However, it is a small contributor to revenues.

   The company had an order book of 4,000 crore as of June 30, four times its

FY10 revenues. These orders are executable within next two to three years and give reasonable revenue visibility for the company's growth in the medium term.

   The firm had relatively comfortable debt-equity ratio of 0.87 as on March 31, 2010, much lower than the average 1.1 for other mid-size construction companies.

   BLKL posted a robust 40% increase in revenue for the quarter ended June, 2010, compared to a modest 2% rise in the three months ended March. This was led by execution progress on its ongoing projects and monetisation from realty projects. The firm also reported 30% increase in the net profits despite its interest cost doubling against the corresponding period of the previous year.

   The company has been seeing erosion in its profits over the past two financial years. It now appears to have passed through the bad phase and appears better placed to grow its earnings from here on.

   At the 12-months trailing earnings per share of 21.5, BLKL stock is trading 18 times its earnings. This appears on the higher side compared to peers such as JMC Projects and Ahluwalia Contracts, which are trading at 8.3 and 16 times earning multiples, respectively. However, investors may consider taking exposure to BLKL for the long term, since its earnings growth is likely to kick-in from here on.

 

Stock Review: State Bank Of India

State Bank of India's (SBI's) stock, which has caught the fancy of investors in recent times, has delivered 30 per cent returns —four times more the broader indices — in the last two months.

One reason is the increase in the bank's market share, led by an improvement in profitability and efficiency. SBI's loan book grew 22 per cent in 2009-10, higher than the industry average of 16 per cent.

Besides an expanding loan book, the June quarter saw profitability improve, with net profit rising 25 per cent, led by robust core income and lower operating expenses. With economic growth picking up, experts suggest the macro environment is improving, which should sustain growth and lower asset quality concerns.

Improving shares, profitability

In the last few financial years, SBI has been focusing on expanding its balance sheet, when most of its private peers were conservative. This helped SBI increase market share to about 16 per cent.

While its loan book continues to be fairly diversified, with corporate loans accounting for about 44 per cent of advances, SBI has increased focus on the relatively higher margin retail segment, which should support margins.

Other key segments are international advances and retail, which comprise about 15 per cent and 24 per cent, respectively, of the bank's loan portfolio.

While 2009-10 saw a slowdown in term deposits, SBI managed to increase its lowcost deposits, aided by its 10,000-strong branch network. In 2009-10, its low-cost deposits grew 23 per cent, while overall deposits grew just eight per cent.

The share of CASA (current and savings account) deposits has risen to over 45 per cent.

Outlook

SBI is actively mulling a rights offer that's expected to fuel growth.

After the successful merger of State Bank of Saurashtra, it is looking to further consolidate other banking subsidiaries under it. However, with labour unions standing in the way, it may not be a smooth ride.

While a higher share of low-cost deposits has been aiding margins, firm interest rates on term deposits could lead to some money shifting from the former to the latter.

This could put some pressure on net interest margins in the next few quarters that stood at 3.2 per cent in the June quarter — the highest in the last five quarters. With economic growth picking up, loan growth should remain healthy.

Likewise, concerns on asset quality are abating. SBI has also been able to increase its provision coverage to 61 per cent, though lower than the mandated 70 per cent. SBI's life insurance arm reported a three-fold jump in profit to `114 crore on an year-on-year basis for the June quarter.

A separate listing of this arm should help unlock value for shareholders in the medium term.

The stock is trading at 2.1 times estimated 2011-12 earnings. Given the sharp run up, investors may wait for a correction and consider buying at lower levels.

Stock review: Tech Mahindra

TECH Mahindra's scrip has faired poorly not only during the current stock market rally but also over the past one year. Investors' concernes emanate from the fact that the company's topline has been witnessing pressure for the past several quarters due to currency fluctuations and a slowdown in global telecom sector, its only business vertical.

   With a sequential drop in revenue, the company's June 2010 financials do not look promising. What could, however, offer some solace to investors is the fact that Tech Mahindra (TechM) has continued to beef up its headcount across functions such as IT services, BPO and sales. This reflects the management's optimism about a pick-up in demand in future.

   TechM's stock has barely budged in the past one month compared to the 7% gain in the benchmark Sensex and nearly 5% returns of the ET Infotech index. Its shareholders have lost over one-fifth of their investment in one year. Had they invested in the Sensex, they would have gained 17%, or better still they would have earned a robust 27% return.

   A major concern for investors would be the sluggish trend in the dollar-denominated topline. Revenue in dollars tends to portray a fair picture since it does not reflect the impact of the rupee-dollar fluctuations. Its quarterly revenue had plummeted from the levels of $ 270 million in the June 2010 quarter to $212 million in the March 2009 quarter on account global economic slowdown. Since then though it has recovered, it is still lower than the levels seen two years ago. In the June 2010 quarter, it reported a revenue of $251 million.

   In contrast, its bigger peers including TCS, Infosys, and Wipro have reported an impressive turnaround in revenue growth in the past three quarters. Diversification in terms of verticals has helped these companies to steer back to higher volumes. TechM on the other hand depend solely on the global telecom players fro revenues, which are taking some more time to show a meaningful turnaround. TechM offers IT solutions to telecom service providers, equipment manufacturers, software vendors and systems integrators.

   Another worry for TechM is that its operating costs have not seen a proportionate decline, which has compressed its margins. Its personnel cost and other operating expenses continued to increase in the June 2010 quarter though sales declined sequentially.

   Amid the gloom, one indicator of future growth is TechM's expanding employee base. Over the past three quarters, it has increased headcount by 16%. Though on a relatively small employee base, the growth is much faster than 4-10% shown by its bigger peers.

   At the current price level of over 711, TechM's stock trades at 12.4 times its trailing 12-month earnings. Its September quarter result would play a crucial role in providing a hint of its future growth trajectory.

Stock Review: Motherson Sumi Systems (MSSL)

 

 

Domestic mutual funds have taken a keen interest in Motherson Sumi Systems (MSSL), an auto ancillary company. In the last one year (August 2009-July 2010) their interest in the company has more than quadrupled from Rs.135 crore to Rs.568 crore. The number of funds owning this stock has also gone up commensurately: from just 12 funds (August 2009) that had invested in the company the number has now reached 47 (July 2010). Bharat Forge is a distant second with just 26 funds having invested in it.

 

The business

MSSL is the flagship company of the Samvardhana Motherson Group. It was formed through a joint venture between Samvardhana Motherson Finance Limited (SMFL) and Sumitomo Wiring Systems (SWS) of Japan. MSSL is the leader in wire harnessing products (electrical distribution systems) with over 65 per cent share (according to India Infoline) in the domestic market. It is also a leading supplier of plastic components and modules to auto companies.

MSSL acquired Visiocorp's rear-view mirror business in March 2009. This has enabled it to become one of the world's leading automotive mirror manufacturers, with clients ranging from global car manufacturers like BMW and GM to domestic manufacturers like Maruti and M&M, among others.

 

Expanding in the midst of a downturn

In 2008 when the auto sector took a beating, the auto ancillary was hit even worse. Many of the companies shelved their expansion plans. While its peers scaled down their expansion plans, MSSL took a step forward by acquiring Visiocorp for $31.6 million. Visiocorp was one of the largest manufacturers of rear view mirrors in the world with almost a 25 per cent market share. MSSL was able to buy the target company (Visiocorp) at a favourable valuation because the latter was on the verge of bankruptcy. After the acquisition MSSL's sales have doubled and it is expected to comfortably reach its $1 billion sales target by 2010.

 

Valuation

In the first quarter of FY11, MSSL's consolidated topline grew by 32 per cent year-on-year and its bottomline by 439 per cent y-o-y. But quarter-on-quarter (q-o-q) numbers were more subdued due to adverse currency movements and higher input costs. According to analysts, between FY09 and FY12E the company is expected to post a revenue growth of 50 per cent and profit growth of 36 per cent. The near term concern about MSSL is that Visiocorp's acquisition might keep margins depressed. But the in the longer run, as synergies kick in margins are expected to improve. Being a global player MSSL's bottomline will now depend not only on the business cycles of developed markets but also on currency fluctuations.

 

According to an analyst at Angel Broking, at the current price level of Rs.176 the stock is trading at 15.8 times FY12E earnings. Historically, the stock has traded at an average level of 16 times its earnings, but due to the fundamental change in its business (improved return on equity in FY11-12E), analysts estimate that the stock is likely to trade at a 5 per cent premium over its historic price level. This would translate into a price of Rs.188-190. Hence investors may invest in this stock at the current levels.

 

Stock Review: Vishal Retail

Vishal Retail, which has been reporting operating loss for the past six quarters following the poor show by its retail venture, on Monday proposed to sell its core retail business to the Shriram Group and the wholesale business to TPG, a global PE investor, including all the underlying assets and certain liabilities pertaining to the businesses.

    The latest move by the Delhi-based company is not surprising given its struggle to stay afloat for the past two years. However, it's difficult to determine the exact benefit to the shareholders since Vishal Retail is tight-lipped about the deal structures under the two transactions.

    Vishal Retail had expanded its business using debtheavy capital structure. The domestic retail sector faced a tough time owing to the economic slowdown in 2008-09. The consumer spending drastically deviated from expectations. Consequently, Vishal's earnings dwindled in subsequent quarters. The company now faces liquidity issues. In the past, the company had tried to implement several corrective measures such as closing down lossmaking stores, warehouses and manufacturing facilities. It had also reduced manpower over the past few quarters. So the latest deal serves as the last resort for the company. According to media reports, the company has been trying hard to find a strategic buyer for past couple of months.

    According to the management, the proposed sale transaction would reduce a part of debt from the balance sheet. It would receive an upfront payment of 75 crore and another 25 crore in the form of bonds with yield to maturity of 7.5%, redeemable in five years.

    The cash will allow the company to clear debts from certain creditors, who have filed winding-up petitions against the company. The company's stock rose by 7% on Monday following the announcement. The sharp jump in the stock prices may be surprising given the fact that not enough details about the transaction are available.

    One reason for the renewed investor interest in the stock could be the possibility of a reduction in the company's debt burden. But a bigger question that demands an answer is what business Vishal Retail will be left with. The retail business was its core competence and after the deal the company would not be able to continue with the similar business due to the non-compete agreement with the two buyers. This means Vishal would have to look out for other avenues for business opportunities. Given this, its future looks uncertain.

    Also, it needs to be seen whether the company has been able to derive a fair value from sale of its two businesses under desperate condition. After disposing of the two core operations, Vishal is left with four properties in Kolkata, Dehradun, Hubli and Jabalpur. It is not certain in what way the company would use its properties. Investors need to wait for more clarity from the management.

Stock Review: United Spirits

The acquisition of Pioneer Distilleries will help the company increase its primary spirit distillation capacity

After gaining access to alarge brand portfolio through acquisition of Whyte & Mackay and Shaw Wallace, United Spirits seems to be focusing on ramping up its manufacturing capacity. By buying Pioneer Distilleries, it will be able to increase its in-house capacity of primary spirit distillation by 22.5 per cent, adding to the supplyside security.

United Spirits has been working aggressively towards augmenting its primary distillation and bottling capacities. It has planned a capex of `1,100 crore over the next three years. It aims to manage 35 per cent of the extra neutral alcohol (ENA) requirements through in-house production by FY13, as compared to the current level of 11 per cent. ENA is the primary ingredient for Indianmade foreign liquor. United Spirits wants to increase control and improve profitability by producing more ENA in-house. Pioneer can produce 160 kilolitre per day ENA and United Spirits will gain access to this output.

United Spirits has bought 54.7 per cent in Pioneer at `101 per share. This is almost 40 per cent higher than Pioneer's stock price on Tuesday, which was locked five per cent higher at the upper circuit. United Spirits will also have to make an open offer for an additional 20 per cent stake.

United Spirits will have to shell out `100 crore for the 74.7 per cent stake, which is not a matter of concern despite high debt, reckon analysts. The company is wellplaced as far as debt repayment and cash flows are concerned, say analysts at Prabhudas Lilladher. It has repayment obligations of £35 million each for FY11 and FY12, of which the FY11 obligations have already been deposited in an escrow account. The company has 8.3 million treasury shares amounting to `1,260 crore and had a net debt of `5,200 crore in June.

Analysts remain positive on the company, as they expect multiple triggers going forward. With retail licencing issues in Andhra Pradesh sorted out, volumes grew 20 per cent in July. Analysts project 12 per cent volume growth in FY11. There has been a price hike of about eight per cent in north Indian states, and another is expected in Tamil Nadu. Realisations are expected to improve five per cent in FY11E (two-three per cent from price hikes and the remaining from a change in product mix). Moreover, Whyte & Mackay is expected to give the company access to a global consumer base and better profitability. At a P/E multiple of 40 times estimated 2010-11 earnings, the stock is fairly valued.

Stock Review: Megasoft

 

 

Co To Benefit From Higher Prepaid Mobile Subscription In US

 

THE stock of IT company Megasoft has jumped 24% in the past six trading sessions. The sudden run-up follows the company's decision to sell its real estate assets to pay off a large chunk of its debt. This will help in reducing the interest cost. The company also expects to benefit from the upward trend in prepaid mobile subscription in the US, its biggest market.

   Megasoft offers solutions to telecom operators in the US, Latin America and Asia. Prepaid real time charge management, mobile payment recharging, and mobile advertising are its key areas of operations.

   Barring the latest run-up, the company's stock had a lacklustre time on bourses. During the last one year, it has more or less underperformed the ET Infotech index. The lack of investor interest is on account of the dull performance by the company over the past few quarters.

   As a niche player in the telecom market, its fortunes suffered due to poor show by telecom operators in the US in the last year. It had reported a net loss in each of the three quarters ended December 2009 on the back of sluggish sequential revenue growth.

   The bad phase now seems to be over for Megasoft. The telecom players are showing signs of recovery globally. Further, in the US market, telecom subscribers are fast adopting prepaid option in order to control their telecom spends. Various surveys indicate that the proportion of prepaid users is expected to more than double from the current 10% in next two years. This augurs well for Megasoft who provides prepaid solutions.

   More than 95% of Megasoft's revenue is transaction based in nature. This means, higher the number of transactions, higher would be the quantum of business. Thus the rising prepaid trend in the US telecom market is likely to boost Megasoft's future revenue.

   The company is planning to sell its property in Hyderabad, and Vizag. Considering the property prices in these regions of Andhra Pradesh, Megasoft hopes to mop around Rs 70 crore from this transaction. It plans to deploy the cash to pay its long-term debt. Over the last few years, the company has used operating cash to reduce its debt. The property sale should help it pay a major chunk of the outstanding debt of Rs 90 crore. This will also result into substantial reduction of its borrowing cost, which stands at 10% currently.

   The company posted net loss in the last twelve months. This renders an equity valuation based on price-earnings ratio useless. Going ahead, it expects to maintain the revenue growth rate of 30% year-on-year at an operating margin of around 30%. This looks possible given the higher potential from the US market and reduction in debt burden once it sells proeprties.

 

Stock Review: Tata Chemicals

 

 

The new gas pricing and utilisation policy and higher global demand for soda ash augur well for Tata Chemicals

 

AGOOD monsoon has led to a spurt in fertiliser stocks. Given the anticipated increase in the allocation of natural gas from the government, they are expected to perform well in the coming quarters.

BUSINESS:

Tata group firm, Tata Chemicals (TCL) was incorporated in 1939. It is ranked as one of the leading players in the agribusiness sector with a strong presence in crop nutrients and crop protection products. The company operates in industrial chemicals, crop nutrition and consumer products and serves a wide customer base spread across five continents. TCL has manufacturing facilities across four continents including North America, Europe, Africa and Asia.

   TCL is the world's second-largest producer of soda ash with a total capacity of 5 million metric tonne per annum of which more than 60% is attributed to natural soda ash. It is a market leader in the Indian branded iodised salt segment under the brand Tata Salt. In the private sector, TCL is one of the country's leading producers of nitrogeneous and phosphatic fertilisers and offers a wide range of crop nutrition products under Tata Paras brand.

   Under the Tata Swach brand, TCL offers the world's lowest cost house-hold water purifier.

   Tata Chemicals has adopted a strategy of global acquisitions to expand its product and customer base. In 2008, it bought US-based General Chemical Industries Products (GCIP) which increased the company's global soda ash capacity to 5.5 mt per annum. This was followed by the buyout of UK-based Brunner Mond Group in early 2006. Recently, TCL increased its stake in another group firm Rallis India by nearly four percentage points to 50.6% by buying shares of worth 89.03 crore on preferential basis. The deal is expected to benefit TCL in future.

GROWTH DRIVERS:

Going ahead, the company is expected to benefit from the improving soda ash demand across the globe. The pricing mechanism looks to be stable in most of the markets but Europe which continues to put pressure on the company's performance.

   The company's water purifier business under the name 'Tata Swach' recorded strong sales during the quarter. The company aims to sell a million units in the current financial year. Further, the company plans to roll out the business nationwide and eventually enter into the next line of product offerings through various technology enhancements. The company has lined up a capex of around 500 crore for the next 2-3 years. It intends to commission a customised fertiliser plant at Babrala, at a capacity of 1.32 lakh tonne per annum, by this month end. It plans to further increase the number of such units to 10 in the next three years. Given the new pricing and gas utilisation policy, the company is expected to increase the urea capacity of the Babrala plant two-fold at a capex of 4,000 crore. This would depend on the allocation of natural gas from the government.

FINANCIALS:

The company posted strong results for the quarter ended June 2010. This was mainly on account of one-time changes. During the quarter, the company's topline grew 5.6% to 2,477 crore against the corresponding period last year. This was on the back of a demand improvement witnessed in the domestic as well as the inter-national soda ash market. The inorganic chemicals segment which attributes to 51% of the company's net sales posted a nearly 6% fall in its revenue to 1,299 crore for the same period due to the pricing pressure in some of the markets. While the revenue from the fertilisers segment remained more or less stagnant during the quarter, the agriinput segment registered a huge increase in its revenue to 238 crore from 27 crore in the June 2009 quarter. This was mainly due to Rallis India becoming a part of the company.

   The company's bottomline rose more than five-fold to 216 crore against the year-ago period. This can be attributed to two reasons. In November 2009, Tata Chemicals increased its stake in Rallis India to over 50%, the numbers of which were included in the June 2009 quarter. Also, in the June 2009 quarter, company had incurred one-time expense of 87 crore against the restructuring costs of its Netherlands unit of Brunner Mond. Despite higher traded good costs, lower input prices led to a spurt of 610 bps in its operating profit to 20.2%. Also, a proportionate decrease in the other expenses as a percentage of the net sales contributed to the same.

VALUATION:

At the current market price of 418.7, the scrip is trading at 22.1 times its earnings for the yearended June 2010. Given the encouraging demand environment in the domestic and international soda ash market and newer capacities coming in place, the stock looks attractive in the coming quarters.

CONCERN:

The slowdown in the demand and weak pricing mechanism witnessed in the geographies of Europe continue to be a concern for the company stressing the performance of the Brunner Mond plant.

 

Stock Review: Escorts

After cutting financial and operational excesses, the company will look at expanding its market share

The North India-based tractor and construction equipment manufacturer, Escorts, has been steadily tilling the fields of productivity and is set to reap the harvest. Making the company lean and mean seems to be the mandate. A younger management and trimming of costs have been contributing to the growth.

The third-largest tractor manufacturer, with a 13 per cent market share, will be looking at growing its market share by around one per cent. This will drive tractor revenues, which contributes 76 per cent to total, at a compounded rate of 16 per cent, higher than the industry's expectation of 12 per cent.

The construction equipment segment, which accounts for around 15 per cent of revenues, is also set to pick up with the railway and auto components business.

However, Escorts gains from the fact that it has shed its non-core businesses and reduced debt. Analysts at Daiwa Capital Markets point that after divesting telecom and hospital businesses and merging the loss-making Escorts USA subsidiary with itself, the company reduced its debt from `1,550 crore in FY03 (September-end) to `400 crore in FY09. Its net debt to equity fell from 340 per cent to 14 per cent during the period. They expect the company to be in a net-cash position by FY11 due to low capacity expansion and strong operating cash flow.

The company has also trimmed its regular labour to 80 per cent of the total, say analysts. Escorts has implemented processes like multi-machining, which led to a significant improvement in productivity. Having cleared the ground for sound operations, the company will be looking at new launches, especially in the lower horse power segment, which is being targeted by Mahindra & Mahindra with its 'Yuvraj'. Analysts expect Escorts to cross the critical 100,000-tractorunit mark in September this year. Therefore, valuations are expected to be relooked at.

NRIs’Tax Liability Is linked to their Stay in India

   DOMESTIC households savings contribute significantly to India's overall domestic savings rate. The credit goes to the Indian tax laws to a certain extent, as they provide tax incentives to individuals to invest in some specified tax-saving instruments. Section 80C of the Income Tax Act (Act) provides for a deduction of 1 lakh in certain investments (tax saving instruments)/payments made during the year. The various investments which are eligible for deductions under Section 80C are equity-linked savings schemes (ELSS) offered by LIC and mutual funds, unitlinked insurance plans (Ulips) for self and/or spouse, children, life insurance policies for self, and/or spouse, children, employees' contribution to recognised provident funds (PF), approved superannuation fund, contribution to public provident fund (PPF); deposits in post office schemes such as National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), if it applies and the post office five-year time deposits, term deposit with a scheduled bank for a period of at least five years, investments made in bonds issued by the National Bank for Agriculture and Rural Development (Nabard) and debentures issued by specified companies,

   In addition to the above investments, the following payments also qualify for deduction under Section 80C: payment of tuition fees for full-time education in any Indian university, college, school, educational institution (available for any two children), and repayment of the principal portion of a housing loan.

   Besides Section 80C, one can also make an investment up to 20,000 in specified infrastructure bonds to save tax. Further, an individual gets a deduction of up to 15,000 (20,000 where the individual is a senior citizen) for the health insurance of self and his family. There is an additional deduction of 15,000 where the health insurance is taken for the parents (20,000 where any of the parents is a senior citizen).

   However, the situation may undergo dramatic changes after the Direct Taxes Code (DTC) comes into play. DTC, 2010, proposes to restrict the deduction of 1 lakh only to some approved fund(s)—such as an approved provident fund, pension fund, super-annuation fund, PPF among others. However, an additional deduction of 50,000 has been proposed to cover payments such as life insurance premiums (premium not to exceed 5% of sum insured), health insurance premiums and the tuition fee. That means an individual won't get any tax incentives for existing tax-saving instruments other than those covered in the DTC.

   Non-resident Indians (NRIs) visiting India, will need to be more vigilant, post the DTC regime. Under DTC, if their stay in India exceeds 60 days during a year and 365 days for the past four tax years, then they may be considered as residents of India. Currently, they become residents only when their stay exceeds 182 days. Once they become a resident, they may have to pay tax on their global income, if their stay in India for the past seven tax years exceeds 729 days and if they are residents in two out of the past 10 tax years. In a nutshell, NRIs run the risk of triggering worldwide taxation soon if they spend a significant time in India.

   The DTC proposals relating to individual taxation have undergone significant change since the DTC was proposed in August 2009. One will really need to wait for the final bill, which will become operational from April 1, 2012.

 

Stock Review: Crest Animation Studios

 

 

THE stock of Crest Animation Studios has seen a wide fluctuation in the past five trading sessions. The stock touched its 52-week high of Rs 129 on September 8 before crashing to Rs 111 in next three trading sessions.

   The stock has gained momentum following the company's restructuring announcement, which will bring more clarity on its consolidated operations. In the next few quarters, the stock may see some buoyancy based on the success of its three new movie releases.

   Crest's scrip has outperformed the broader market in the past one year. Its price nearly trebled, while the benchmark Sensex gained 20% during the period. Under the restructuring exercise, Crest will consolidate all its three subsidiaries with itself. Since the subsidiaries play key roles in the company's operations, the consolidation will present a better picture of its financials. Crest Animation makes animation films, while its US based subsidiary looks after the preand post-production processes.

In the short run, the success of its animation film 'Alpha & Omega' to be released on September 17, could influence its stock movement. It is one of the first three movies, which Crest is scheduled to produce for the US-based distribution company Lionsgates Films.

Crest has floated a special purpose vehicle (SPV) to produce the movies. It owns 17.5% in the SPV. A major benefit of this arrangement is that the company would not only get paid for producing the movies but also have a share in the post-release profits if the movies are successful at the box office.

   Crest's revenue and net profit over the past six quarters do not exhibit a clear trend given the rough nature of its business. Its quarterly revenue has hovered between Rs 6 crore and Rs 14 crore during the period. Going ahead, the SPV strategy holds a promise to boost its performance significantly. It will be, however, a while before investors can see the benefit of this arrangement since it generally takes more than 90 days to ascertain the actual box-office collections of a film.

Stock Review: KEC International

Acquisition and consolidation in the tower business will help the company enhance footprint as well as profits

India's leading tower company, KEC International, has signed an agreement to acquire SAE Towers for $95 million, estimated to be 14 per cent of the company's (KEC) enterprise value. On the face of it, the deal looks like a win for the company, as it is well-priced at around seven times the net earnings. It is expected to contribute positively to the earnings of the parent company within the first year of acquisition, reckon analysts. And, of course, KEC gets an opportunity to expand operational footprint across North and Latin America.

The management has indicated that the capacity utilisation of SAE Towers is expected to increase from 60 per cent to 100 per cent in next three to four years on the back of strong demand in the US. Earnings before interest, tax, depreciation and amortisation (Ebitda) margins are expected to increase to 12-14 per cent from the 10 per cent levels after the integration. Though it sounds too good to be true, the acquisition is most likely to go through, as KEC had a closing cash balance of around 70 crore at the end of March, reckon analysts. The company might have to raise around `300-crore debt, but that should not be a concern.

The company had suffered losses on account of its merger with the loss-making RPG Cables. This move may help correct the situation. KEC's order backlog has grown at a compounded rate of around 15 per cent over the past two years. It may rise further, as the company builds more telecom towers and margins stabilise.

A good news for investors who can buy into a secondary-level business dependent on growth of power and telecom sector — the return-on-equity for the combined entity is expected to be around 20 per cent.

Stock Views on INFOSYS, KEC INTERNATIONAL, TATA SPONGE IRON, SHRIRAM TRANSPORT FINANCE

CITIGROUP on SHRIRAM TRANSPORT FINANCE

Citigroup recommends a 'Buy' rating on Shriram Transport Finance (STFC). The management sees longer-term loan growth at 20-25%, lower than the 30% RoE it believes it can maintain. STFC is launching its equipment financing business in this month, through a 100% subsidiary. The management expects to build this portfolio to about 6,000 crore over the medium term, and the 1,000 crore capital needed for this will be self-funded. This is one of its key growth and value-enhancing measures. The management expects asset quality to show steady signs of improving, with net NPL (non-performing loan) likely to further fall from its 0.44% level. Potentially, there could be some eventbased pressures - about 700 trucks have been impacted by the ban on mining in Karnataka, but remedial measures have already been taken, and management remains optimistic on asset quality direction. While expected IFRS (International Financial Reporting Standards) norms could lead to greater capital requirements for the large off-balance sheet portfolio that STFC manages, management believes the upfront recognition of income that this portfolio would generate under IFRS will more than offset the increased capital requirement.

IIFL on TATA SPONGE IRON

IIFL recommends a 'Buy' rating on Tata Sponge Iron with a price target of 413. Sponge iron prices have commenced their ascent over the last two months led by an uptick in scrap prices globally and rising input costs. Over H12010, the spread between scrap and sponge iron widened to about 5,000/tonne; this is expected to decline going ahead. Following the rise in Chinese domestic steel prices, scrap prices too have moved higher over the last one month. IIFL estimates average sponge iron prices to be about Rs16,500/tonne in FY11 and FY12. Tata Sponge has three sponge iron kilns of 0.13 mtpa each and two waste heat recovery power plants with a combined capacity of 26 MW. Over the last two years, it has sold about 69% (125 million units) of total power produced to the grid. IIFL expects average power realisation of 3.5/unit and revenues of 45.1 crore in FY11 and 49.1 crore in FY12. With steady cash flows, cash per share is to rise from 60.5 in FY10 to 145 in FY12. With raw material linkages already established, TSIL should post profit CAGR of 11% over FY10-12E. At the CMP (current market price), the stock is trading at 2x FY12E EV/EBIDTA and at a FY12E P/B of 0.9x, which is at a steep discount to its peers.

HSBC on KEC INTERNATIONAL

HSBC initiates 'Neutral' rating on KEC International with a target price of 595. KEC International has signed an agreement to acquire 100% stake in SAE Towers, for an enterprise value of $95 million. This proposed acquisition is strategically compelling due to: 1) Deal at attractive price 2) Deal likely to be earnings accretive with about 15% estimated incremental earnings in first 12 months post closure 3) Access to new geographies 4) Synergies arising from technology and process sharing deal likely to be earnings accretive. The management has indicated that the capacity utilisation of SAE Towers is expected to increase from 60% to 100% in the next three to four years given the strong demand expected in American markets. Further, EBITDA margin is expected to be sustainable at about 12-14% with PAT margin at about 7-8%. HSBC estimates the acquisition to be earnings accretive as SAE is likely to provide incremental earnings of about 15% in first 12 months post deal closure. The transaction would provide access to KEC in North and Latin America and would also lead to KEC becoming the largest lattice tower manufacturing company globally. Further it would also help both companies, which are leaders in their respective markets to draw synergies from each other in terms of technology and processes.

CLSA  on INFOSYS

IT spend at Infosys' top clients is on the rise even as an increase in discretionary spend and deal sizes indicates greater confidence in Infosys' clients. US continues to lead this uptick with Europe lagging a tad. That said, Infosys is keenly watching the negative macro data points in the US for potential adverse impact on its order book. Challenges on the supply side are abating and attrition numbers should head down through H2CY10 driving fuller harvesting of the demand. FY12 is unlikely to be an encore of FY09. While acknowledging potential impact to growth in FY12 from another economic slowdown, Infosys' COO highlighted three key differentiators. European trends are looking good in the retail and manufacturing verticals. Banking and capital markets remain the key drivers of overall optimism with useful boosters from retail and healthcare as well. Importantly, Infosys maintained that M&A integration spend in financials has gone down and has been replaced by other discretionary elements. Infosys remains satisfied with the growth in its top clients and also highlighted the increasing revenue per client as a key indicator of Infosys' mining ability as well as greater confidence at the client's end. Infosys does not see any one-off element in FY11 growth and believes current revenue trajectory can sustain in FY12 in absence of a Lehmanlike catastrophic event.

Stock Review: Mcnally Bharat Engineering Company Ltd. (MBE)

 

 

 

Mcnally Bharat Engineering Company Ltd. (MBE) is a leading engineering company whose principal activity is to provide turnkey solutions. It provides solutions in areas such as power, steel, alumina, material handling, mineral beneficiation, coal washing, ash handling and disposal, port cranes, and civic and industrial water supply.

 

The company has aggressive expansion plans through joint ventures, strategic partnerships and collaborations across the globe, hence its revenue is expected to increase in future. This global diversification is expected to strengthen the firm's product business by adding new product offerings. The company also plans to focus on high-margin segments like power, mineral processing, port handling and infrastructure. This will further improve its margins.

 

Besides, being in the infrastructure segment, the company is likely to benefit from high government expenditure in the infrastructure space. Among its weaknesses, the company is highly exposed to the government's industrial capex cycles. This means that any decrease in government spending or capital expenditure by the industrial sector, or delays in execution of projects would affect the company's revenue.

 

The company's sales have grown at a compounded annual growth rate (CAGR) of 37.70 per cent and PAT at 86.80 per cent between FY04 and FY09. MBE has been able to reduce its debt:equity ratio over the past two years from 1.38 in FY07 to 0.77 in FY09. But if we keep in view its future expansion plans, the debt:equity ratio could increase once again in future. This will lead to higher interest payments which will, in turn, affect the company's net profits.

 

Although the company has increased its net profit margin (NPM) from 0.76 per cent in FY04 to 3.5 per cent in FY09, this is low relative to that of its peers.

 

The company's return on capital employed (ROCE) for FY09 (5.36 per cent) saw a significant decline of 9.16 percentage points compared to the previous year (14.52 per cent).

 

The stock is currently trading at a PE of 21.79 which is below its five-year median PE of 27.5. The company has an attractive PEG ratio, which is 0.36 currently.

 

Since the stock's valuation is attractive and the sector that it operates in has bright prospects, you may buy the stock. However, you must have an investment horizon of more than three years.