Stock Review: National Securities Depository

 

 

On our final list of 20 is also National Securi ties Depository Limited (NSDL). India's first depository, it ushered in a paperless format of equity transaction. Today it has 11.1 million demat accounts. A keeper of all securities-related data, NSDL has made possible T+2 settlement in the share market, putting India ahead of other global peers. It is now almost ready to move over to T+1 settlement. Lately it has applied its expertise in database management to other domains. For example, it provides solutions for PAN and TIN registrations on behalf of the income-tax department, SEZ registrations for the commerce ministry and skill registration for Nasscom.

 

Stock Review: Steel Authority of India (SAIL)

 

After correcting 32.55 per cent from the closing high of 256.35 on April 6, Steel Authority of India (SAIL) touched a 52-week low of 159.65 on Friday as investors dumped the stock on the back of weak December 2010 quarter results reported after trading hours on Thursday.

The company reported a33.9 per cent annual drop in its net profit for the third quarter ended December, at 1,107.47 crore. Raw material costs (per tonne) spiraled 32.7 per cent and dented Ebitda (earnings before interest, taxes, depreciation and amortisation) margins that came in at 15.87 per cent, much lower than 26.1 per cent recorded in the previous corresponding period.

Net sales at `11,312.84 crore (up 4.7 per cent sequentially and 14.5 per cent annually) were, however, helped by a sequential growth of 7.3 per cent in volumes to 3.25 million tonnes (MT) though realisations remained soft. Blended realisations at 34,809 a tonne declined 2.4 per cent sequentially. According to analysts at Edelweiss Research, the spread of SAIL's realisations over hot rolled coil (HRC) prices declined to `2,100 a tonne during the third quarter as compared to `3,820 a tonne during the second quarter and `4,980 a tonne during the first quarter of the current year.

The company has also witnessed a steady increase in coal costs in the current financial year. In Q3, coal costs stood at `1,093 crore in comparison to `368 crore in the first quarter and `939 crore in the second quarter a of the current financial year, a company release said.

The planned expansion of the 2 million-tonnes-per annum IISCO plant has also been delayed and is expected to be completed by December 2011. The company's debt levels have increased from `13,400 crore at the end of the second quarter to `16,500 crore at third quarter end, says an IIFL report.

While the stock has underperformed peers during the current financial year and is now trading at 52-week lows, the upside may remain capped looking a at proposed follow on offer (FPO) next month, analysts say. The FPO would be carried on in two tranches of five per cent divestment by the government and five per cent through the issue of fresh shares.

Also, financial year 2011-12 is likely to see improved realisation with a rise in steel prices. Further, with the reduction in semis and increasing production of value added products, the improving product mix is also likely to benefit. The stock ended 6.7 per cent lower on Friday at `161.35 and trades 13.9 times estimated yearnings for financial year 2010-11 and 8.9 times estimated yearnings for financial year 2011-12.

 

Stock Review: Gail India

Gail India (Gail) has reported a 12.7 per cent jump in net profit for the quarter ended December 2010 to Rs 968 crore due to a 51.38 per cent rise in other income and a lower tax provision. Net sales increased 35 per cent to Rs 8,365 crore. However, the operating margin was dented by the petrochemical segment, which saw lower volumes (102 TMT) due to shutdowns at the company's plant in Pata in Uttar Pradesh. Therefore, petrochemical revenues fell 29.9 per cent to Rs 571.30 crore,. According to an Edelweiss report, sales fell 37.7 per cent to 81 mt.

Natural gas transmission volumes rose 10.2 per cent to 120.2 mmscmd, while LPG transmission volumes surged 11.6 per cent to 893 KT. Transmission services revenues reported 14.27 per cent growth and natural gas trading revenues ( `6772.80 crore) increased 49.6 per cent. Ebdita margins witnessed a compression of 480 basis points on higher operating expenditure and lower profitability of the petrochemical business. LPG production volumes declined 28.6 per cent to 265 TMT due to 15-day shutdowns of compressors at Vijaipur and Gandhar. Higher conversion costs due to a rise in natural gas prices also dented margins.

However, analysts are positive on the company due to the likely boost to natural gas transmission volumes on the back of expanding transmission infrastructure and robust gas trading margins. Analysts at Motilal Oswal expect near-term volume growth to be propelled by re-gasified LNG imports due to delay in the KG-D6 (RIL's gas block) ramp-up. With ongoing expansions, the capacity of the Dahej-Vijaipur pipeline has increased from 24mscmd to 35mscmd. Further, the company plans to add 1,500 km of pipelines in 2011 and raise its transmission capacity from 180 mscmd to 230 mscmd.

Analysts at Anand Rathi estimate 14 per cent compounded annual growth in net profit over FY11-13. At CMP, the stock trades at 16.3xFY11E and 14.3xFY12E earnings estimates.

Results hit by worse-than-expected performance of the petrochemical segment

Stock Views on SHIV-VANI OIL & GAS, SINTEX INDUSTRIES

BNP PARIBAS on SINTEX INDUSTRIES

Sintex operates in three main segments - building materials, custom moulding (42%) and textiles (8%). The building-materials segment is witnessing strong growth on new low-cost housing orders and prefabricated structures, which primarily targets government programmes. An order book of 26 billion in monolithic provides high growth visibility as execution is being strengthened. Bright Autoplast (India) continues to benefit from strong domestic auto sales and timely capacity expansion, which has increased revenue from 404 million in 2008 to 2,840 million in 2012. Wausaukee has been the key drag among all of Sintex's acquisitions, due to the lack of wind-turbine orders, which will recover only by FY13. The company remains geared to government impetus on low-cost housing, rural education and increasing adoption of composites. BNP finds the stock attractive at a FY12E P/E of 8.1x, compared to the market P/E of 15.6x, on BNP estimates.

IIFL on SHIV-VANI OIL & GAS

IIFL retains `Buy' rating on Shiv-Vani Oil & Gas but has cut the target price to 480. Shiv-Vani Oil & Gas, a leading domestic player in onshore oil and gas exploration, has made aggressive investments to capitalise on the about $4 billion pa onshore opportunity in India, but new order wins have been rather lean in the current fiscal. While current capacity utilisation levels is close to 100%, IIFL has pared down the revenue growth estimates for FY11-12 to 10-12%. This translates to an 18-26% downgrade in the FY11-12ii earnings estimates. Lower capex assumptions mean leverage should reduce. Also, the current valuation of 7.1x FY11ii EPS remains attractive. The revised revenue expectations and higher-than-expected interest cost levels cause us to cut the earnings estimate by 18% and 26% for FY11 and FY12 respectively. The target price of 480 is based on 8x FY12ii EPS. Leverage is likely to fall over the next two years on account of reduced capex.

Stock Views on JSW STEEL, ABAN OFFSHORE, BIOCON

DEUTSCHE BANK on BIOCON

Double blind placebo controlled trials were done in India on 264 patients, whose diabetes is poorly controlled on metformin. While all patients continued on metformin, one group was on placebo. Deutsche Bank global pharma team indicates that (a) Clearly the drug has failed to meet the primary endpoint and this is disappointing, but; (b) placebo benefits suggest a failed trial and not necessarily a failed drug. Biocon has also not described the manner in which they carried out the post ad hoc analysis, which indicated that primary end point was met in several sub-groups. (c) However, without knowing the baseline HbA1c, failing to meet the threshold 0.7% reduction appears disappointing for an oral anti-diabetic drug. Out licensing may be difficult without further studies, unless Biocon can provide compelling details as to why post ad hoc analysis showed a benefit against the failed primary endpoint.

UBS INVESTMENT on ABAN OFFSHORE


UBS Investment assumes coverage of Aban Offshore, with a positive view as: 1) oil prices will remain high; 2) oil companies' E&P capex will rise; and 3) oil service companies' margins will improve on higher demand for oil services at a time when costs are not the primary concern of oil companies. UBS views any equity offering to deleverage the company as a key catalyst for the stock. Aban is well positioned to benefit from this trend, with 55% of its rigs capable of reaching water depths of 350 ft+ and the second-youngest jack-up fleet in the world. There is an increasing preference for newer rigsthe global utilisation of jack-ups built before 2000 is 70%-but 90% of post-2000 jack-ups are deployed. The stock is attractive, as it is trading close to the estimate for Aban's replacement cost of 700/share. Aban's strategy is to concentrate on revenue consolidation and strengthening its balance sheet. However, jack-up rig oversupply could be a short-term overhang on the industry.

RBS on JSW STEEL

RBS maintains `Sell' rating on JSW Steel with a target price of 850. JSW Steel announced it will acquire a 41.3% controlling stake in Ispat Industries for 2,160 crore ($ 475m) by subscribing to a fresh equity issue. Ispat has a capacity of 3.3 mt and operates at less than 85% capacity. According to JSW Steel, there should be significant savings stemming from freight transportation costs, common sharing of rolling facilities, state sales taxes, common purchase of raw materials, JSW's expertise and experience in turnaround companies, etc. While there would certainly be savings, substantial investments would be required to address Ispat's core issues of 1) high-cost power, 2) investment towards coke oven batteries, and 3) lack of raw materials, etc. Ispat's strong and experienced management team would be a positive for JSW Steel. With a cash infusion by JSW Steel and resumption of Ispat's operations, Ispat is to report EBITDA/tonne of $100 and volume of 2.5 mt for FY12-13. Based on these assumptions, this could add $100 million to JSW Steel's EBITDA for 2012-13. RBS factors in 5% higher coking coal price of $230/tonne and $216/tonne for FY12E and FY13E, respectively, and cut the FY11-13E earnings by 11-16%.

Stock Review: 3i Infotech

 

IT has been quite a while since the Mumbai-headquartered IT player, 3i Infotech, reported meaningful improvement in sales and revenue despite the overall recovery in global IT demand. The mid-tier company's topline growth has been in the lower single digits for the last five quarters. In contrast, its larger counterparts have reported a double-digit growth during the period.

   To accelerate growth, the company is focusing on its business in the emerging markets, where the growth has been faster than in its traditional markets in the developed economies, including the US and Europe. The strategy is expected to put 3i Infotech back on the growth track in the next two years.

   The company has historically earned nearly two-thirds of its revenue from the developed markets. But its growth in these markets has remained sluggish since the subprime crisis two years ago. One reason could be the fact that the bigger IT companies have been quick to take advantage of the demand revival in these markets due to their multifold offerings and ability to scale up fast.

   Due to the stagnant performance in its key developed markets, 3i Infotech's quarterly revenue has hovered between . 610 crore and . 650 crore over the last five quarters. This has also curbed the growth in its earnings and has impacted its performance on bourses. The stock has underperformed the ET Infotech index over the past six months.

   The company is now concentrating on the emerging market business, which has shown demand traction. The region, which includes countries in Asia-Pacific, West Asia, and Africa, contributes over 40% to the total revenue. The verticals, including banking and retail lending, Islamic banking and insurance, e-governance, and enterprise applications, are the key growth drivers in these markets.

   According to Pankaj Chawla, who heads the emerging market operations at 3i Infotech, billing rates and volumes have grown by 5-10% year-on-year in the region.
   Improving political stability and increasing integration with global economies due to higher technology adoption are expected to maintain the tempo in countries such as Vietnam, Kenya, Tanzania, and Ethiopia, feels Mr Chawla.

   The benefit of the growth in its emerging market business will, however, be felt only gradually. The company's management has guided for a flat revenue for the second half of the fiscal.

   At the Wednesday's close of 57, its stock trades at an estimated FY11 P/E of 4.3. This is at a discount to the valuations of other tier-II IT players, which command P/Es in the range of 6-10. A significant improvement in 3i Infotech's valuation will require a higher growth visibility.

 

Stock Review: HCL Technologies

 

HCL Technologies has reported a 4.9 per cent quarter-on-quarter (q-o-q) increase in revenue to `3,888.4 crore for the quarter ended December 2010. Ebitda (earnings before interest, taxes, depreciation and amortisation) margins remained flat sequentially at 16.3 per cent, despite a 2.4 per cent currency appreciation. The net profit grew 20 per cent to 400 crore. The common currency revenue growth was an impressive 7.5 per cent to $864 million and came off a 6.7 per cent q-o-q increase in volumes and a one per cent positive impact of foreign currency movements.

The company saw nine per cent q-o-q growth in infrastructure and custom application services. Revenues from Europe grew seven per cent while those from the US rose six per cent. Revenues from other geographies saw a14.5 per cent jump. Financial sector (five per cent q-o-q) and manufacturing (seven per cent q-o-q) revenue growth paralleled peers while retail sector revenues saw a15 per cent rise.

While attrition was higher than normal at 17.2 per cent on the last 12 months basis, it has come down in absolute terms. However, lateral employee attrition continues to be a concern. Utilisation was at 96 per cent for onsite employees and 75 per cent for offshore ones.

The business process outsourcing revenues rose marginally (0.4 per cent q-o-q) with losses at the earnings before interest and taxes level falling, after struggling for the last few quarters. The management has guided for continued losses at the net level with profitability returning in January-March 2012. It has also indicated that revenue growth will parallel the industry's figure with margin expansion being a key focus (it is targeting a 250-basis-point improvement to the 18.6 per cent levels seen in April-June 2010 in common currency terms).

The stock ended 3.97 per cent higher at `507.9 on Wednesday over its previous close and trades at a price to earnings valuation of about 16.5x consensus FY12 (June-end) earnings per share estimates, while Tata Consultancy and Infosys are at 21x and 23x levels, respectively. The growth impetus and valuation discount make it a preferred pick in the information technology space.

Growth impetus and valuation discount make the stock a preferred pick in the IT space

Stock Review: Tulip Telecom

THE stock of Tulip Telecom, an enterprise data connectivity service provider, gained 2% in the last two trading sessions in a flat broader market. The momentum in Tulip's stock was on account of its acquisition of data centre assets in Bengaluru.

    Tulip Telecom offers enterprise communications connectivity, network integration, and managed services. In a move to expand its end-to-end data services offerings, Tulip has bought a data centre facility for . 230 crore. The centre would be owned and operated through the company's wholly-owned subsidiary, Tulip Data Center.

    This is the company's fifth data centre and Tulip plans to move the other four centres as well under the same subsidiary. The company expects a total investment of . 900 crore in the facility over three years. Tulip has already invested . 230 crore funded through internal accruals. The company intends to raise . 250-300 crore through an equity partner at the subsidiary level and fund the balance . 370 crore via debt raising and internal cash generation in the subsidiary.

    Tulip plans to recruit nearly 200 people for the new facility and service the balance human resources requirement through internal transfers. The centre is expected to operate at an operating margin of 50% once it starts functioning at its peak capacity. The facility is expected to start generating revenue in six to nine months with a break-even period of four years.

    The arrangement is a strategic fit making Tulip an integrated service provider in the enterprise connectivity and managed services space. The enhanced services portfolio will help the company to win a larger wallet share from its existing customer base. Moreover, the buyout, coupled with the increasing demand for data centre services, is likely to expand the company's addressable market by more than half to $3 billion in the next four years.

    At the current market price of . 168, Tulip's stock trades at 8.5 times the earnings for the trailing 12 months. Given the increasing demand for data centre facilities, the company is expected to benefit from the buyout in the coming quarters.

    The facility will start generating revenue in the next three quarters. However, it will take a while for the benefits to get reflected in the bottom line.

Stock Review: TATA STEEL

Tata Steel stands apart from its peers due to integration initiatives at its European operations and strong domestic performance. Fully-integrated Tata Steel is somewhat shielded from input price fluctuations. Its recent decision to sell Teesside Cast Product for $ 500 million will help in reducing its liquidity concern and lower interest payments. It is also integrating its European operations by taking stake in New Millennium's direct shipping ore (DSO) project, which will supply cheap iron ore to it. It plans to source coking coal from its Benga project in Mozambique. At the current market price of 658, the stock is trading at around eight-and-a-half times of its FY11 expected EPS of 76.8, which is lower than all its peers in steel industry.

Stock Review: Sintex Industries

THE Ahmedabad-based plastic goods manufacturer, Sintex Industries, came out with another strong result on the back of improving performance of its subsidiaries. The consolidated net profit for the December 2010 quarter jumped 55% to . 112.8 crore, as its subsidiaries more than doubled their profits to . 35 crore. For the first time, the subsidiaries contribution to the company's net profit was more than 30%.

   The company mainly operates in three business verticals — building products, custom moulding and textiles. The building products business, a relatively new segment, represents monolithic and pre-fabricated structures and is proving to be a great revenue growth driver for the company. During the quarter, the segment became the company's single-largest revenue generating centre with 76% jump to . 609.5 crore against the year-ago period.

   The custom-moulding business, which caters to industries such as automobiles, pharmaceuticals and packaging, posted a 15% revenue growth to . 459.4 crore. The margins of the plastic products — custom moulded as well as building products — widened during the quarter, as the segment's profit rose 67%. The company's textiles business also did well to record a 148% jump in its preinterest-and-tax profits to . 16.1 crore.

   For future growth, the company is betting heavily on its plastics business. In the building products segment it is carrying an order book of . 2,600 crore, which is nearly a whole year's revenue for the segment. The company is expanding geographically and introducing new products. It recently acquired 30% stake in a construction company to benefit from the execution skills in building activities.

   The company had faced stagnation in profit growth during FY10 as its overseas subsidiaries as well as textiles business suffered. But with these businesses back on track and the building products business achieving a sizeable position, the company has done increasingly well during the first three quarters of FY11. The company's net profit in the nine-month period ended December 2010 has jumped 52%. Despite this, the scrip has, so far in FY11, failed to match the kind of returns it gave in FY10. The scrip had doubled between April 2009 and March 2010, but has hardly gained since then. In fact, the Thursday's closing price of . 167 is just 3% higher than its April 2010 level.

   The scrip's recent underperformance on bourses has lowered its valuations considerably. Its current priceto-earnings multiple of 10.6 appears low on a historical basis, considering the company's consolidated profits for the past four quarters.

SUM OF ITS PARTS

The building products business, a relatively new segment, is proving to be a great revenue growth driver for the company.

In the December

quarter, the segment became the company's singlelargest revenue generating centre with a 76% jump

 

Stock Review: Bank of Baroda

   STATE-OWNED Bank of Baroda (BoB) is among the few banks that have implemented the centralised banking system in almost all of its branches in India. The bank has also set up footprint overseas with its operations extending to 26 countries. As such the bank has a significant overseas portfolio too.

BUSINESS:

BoB operates primarily in Gujarat and Maharashtra with the two states having almost a third of its total branch network. However, it is increasing its presence in other parts of the country as well. The bank has a network of 3,200 branches and intends to add another 300 to its kitty by the end of the current fiscal. BoB's loan book is mainly driven by large corporate loans. The management has indicated that loans extended to retail, small and medium enterprises and mid-corporate segments would be the growth drivers in future.

   Apart from the core operation of lending and borrowing, BoB also derives its income from other sources. It provides guarantees and letters of credits and earns commissions on it. Besides, the bank also sells third-party products and gold coins. It was, therefore, able to report a 14% rise in other income even when other banks reported lower other income on account of mark-tomarket losses on government treasuries.

FINANCIALS:

BoB's net profit has grown at an average 31% y-o-y for the past four quarters. This was on the back of high net interest income growth. Net interest income, which grew by an average 32% in the same time, is the difference between interest earned and interest expended by the bank. The bank has managed to maintain its net interest margin at 3% for the past three quarters. This even after the banking regulator raised rates at which banks borrow from the RBI, or the repo rate. The bank was able to do this as almost 96% of the bank's assets are of floating rate nature. Any rise in the borrowing costs, therefore, is passed on to borrowers.

   Due to liquidity constraints, most banks raised their deposit rates to attract funds to meet their lending pace. BoB grew its loan book by an average 28% y-o-y in the past three quarters. To meet this high growth, the bank raised its deposits by 50-150 basis points. Moreover, there are expectations of another round of rate hikes by RBI in its monetary policy review scheduled towards the end of January. The combined effect of higher deposit rates and interest rates might shrink the bank's margins. The impact, however, is expected to be short term due to the floating nature of its assets. The bank has displayed exemplary asset quality. Net non-performing assets have been hovering around 0.3-0.4% for the past eight quarters. Most PSBs are expected to report higher bad loans as they convert to system-based bad loan recognition. BoB might have limited negative surprises on this front as it has already started recognising all its bad loans through the core banking system.

GROWTH PROSPECTS:

BoB is among the nine PSBs that are expected to receive fresh capital infusion from the government. This would increase the capital adequacy of the bank, which stood at 13.2% as of September 2010. A higher capital adequacy provides a cushion for potential losses and as such protects lenders of a bank. The bank looks to be in a better position to maintain its margins as all its loans are linked to the base/prime-lending rate. Further, the bank has a 36% share of current and saving account balances. This would help the bank in lowering the impact of rising interest rates.

VALUATION:

Most banking stocks have corrected due to concerns over bribery-for-loans scam, loans given towards 2G licences, loans to the micro finance sector and a pressure on bank margins due to rising interest rates. At a price-to-book value (P/BV) of 1.8, the stock is trading at its alltime low valuations. Its peers such as Punjab National Bank and State Bank of India average 2.2 P/BV. This shows that the stock is relatively cheap. The bank has shown resilience in its core operating income or net interest income over the trailing 12-month period. The bank also has a better asset quality than most other banks. This makes it a good bet for investors, who are concerned about the uncertainty in bank stocks. Investors with a long-term perspective can consider this stock.

 

Stock Review: GAIL

NATURAL gas major Gail's stock has fallen over 3.1% after it announced results that were below the market's expectations. The maintenance shutdown of petrochemicals plant, mainly, dented profits. However, this is a non-recurring aspect and the company's future growth prospects remain robust. Hence, a further slide in its share price appears unlikely.

    Gail's 13% net profit growth during the December 2010 quarter was much below analysts' and investors' expectations. After the subsidy burden fell 8% against the year-ago period, a robust profit growth only seemed natural. However, the petrochemicals division, the second-largest profit-making unit for the company, proved to be a spoilsport with profits falling 43% while sales came down 30% in comparison with the last December quarter. A three-week shutdown at its polymer plant to add another gas cracking furnace, combined with annual maintenance, was the primary reason behind lower production, sales, revenues and profits from this business during the quarter. But, the good thing is that the company's polymer production capacity now stands 10% higher at 450,000 tonnes per annum. From the March quarter, the company can expect to benefit from higher polymer volumes.

    Another important aspect of Gail's numbers was the fall in its operating profit margins to the lowest level in eight quarters. Besides the petrochemicals division, the natural gas transmission business, which is the largest profit-making segment of the company, also witnessed margin erosion.

    Higher interest and depreciation costs also impacted the company's earnings as its capex projects kicked off.

    All this while, the company continued to expand its transmission volumes, which crossed 120 million cubic metres per day during the quarter — 10% higher than the year-ago period. The sales volume of its gas was 3% higher at 83.4 million cubic metres per day.

    Gail continues with its aggressive capacity expansion drive, which will see it invest over . 29,000 crore between FY11 and FY13, effectively doubling its gross block from the FY10 levels.

    During 2011, the company expects to commission at least 1,500 km length of new pipelines, which will be a 20% addition to its existing network.
    The addition to its transmission capacity will be much higher at 40% from around 150 million cubic metres per day today.

    The recent correction has brought down the company's valuation to 16.1 times its profits for the trailing 12 months from over 18.8 just two weeks ago. In view of the growth prospects over the next 2-3 years, the current valuation leaves scope for appreciation in the long run.

Stock Review: Glenmark Pharma

GLENMARK Pharma's stock slid by 11% in the past two trading sessions due to an unfavourable jury verdict in a patent litigation. The company's share price has dropped 20% in the past five weeks. Given the growth prospects of the company's base business, the stock is trading at an attractive price-to-earnings multiple of 18.

   Tarka is an anti-hypertension drug owned by Abbott and marketed by Sanofi Aventis with an annual sales of $58 million.

   Having the first to file opportunity for the drug's generic version, Glenmark Pharma launched the generic, at risk, in August 2010. The company had estimated to earn $5-6 million (22 crore to . 27 crore) in revenues from the sale of the drug per quarter.

A federal jury has now ruled against Glenmark's generic launch and has ordered the company to pay damages of $16 million (around . 70 crore) to the innovators for infringing the patent, which is scheduled to expire in February 2015. The initial verdict was based on some parts of the case. The final verdict on the case is still 4-6 weeks away. In case of an adverse ruling, the company is likely to go in appeal.

   Meanwhile, if the company, on a conservative basis, withholds the sale of the drug, its fourth quarter revenues and earnings would be impacted accordingly. The damages, if awarded, would also reduce the company's earnings for FY11.

   However, these are likely to have negligible impact on the company's total performance. The revenue loss stands at less than 4% of the company's annual revenues of . 2,757 crore (on a trailing four quarter basis).

   The latest fall in the company's stock price has more than discounted the negative impact of the litigation on the company's earnings.

   The stock is trading at a significant discount to its other frontline peers. Given that the growth of the company's core generics business remains promising, the current weakness in the stock offers a buying opportunity for investors scouting the mid-cap space.

 

Stock Review: INOX Leisure

 

The merger of Fame India will improve Inox Leisure's presence and pricing power. It may also boost its earnings in future

 

INOX Leisure is the subsidiary of Gujarat Flurochemicals. Over a span of around eight years, the company has expanded its reach in 25 cities with 38 operational properties and 144 screens. Besides exhibition, the company has also diversified into other businesses, such as power, distribution, and to a small extent production. Recently, the company had acquired Calcutta Cinema thereby gaining access to nine multiplexes in West Bengal and Assam. In the coming quarters, the company is focusing on expanding in location such as Jodhpur, Ahmedabad, Bhopal, Mangalore, Coimbatore, Kanpur, Hubli, and Bhubaneswar.

INVESTMENT RATIONALE:

Multiplex industry, by its very nature, is capital intensive. Even if a film doesn't release or fails, exhibition companies have to bear a constant maintenance costs, such as food and beverages, staff and other utility bills' expenditure. Besides this, there is a cost of acquiring screens. It is estimated that for one screen, an exhibition company has to shell out around 1.5 crore. This is the reason many sector experts foresee that consolidation is the only way for the industry to prosper with a better pricing power at affordable costs. Merger or acquisition ensures immediate increased presence and better pricing power. Inox Leisure's recent acquisition of Fame India is a step in this direction. Inox Leisure holds over a 50% stake in Fame India. Fame India has 25 operational properties having 95 screens and 26,487 seats in 12 cities. The combined entity would have a presence in 37 cities with around 240 screens. This would make Inox Leisure second in ranking to Big Cinemas in terms of number of screens.

   At the end of FY10, Fame India's film distribution business had revenue of 18 crore, higher than around 2 crore of Inox Leisure. This acquisition will strengthen Inox Leisure's distribution network. Fame India compensates for locations in which Inox Leisure is not present. Another strategic advantage is Fame India's location. Though Inox Leisure has a strong presence in western, eastern and southern India, it has limited presence in the North. Hence, this acquisition serves good for Inox Leisure both on exhibition and distribution fronts increasing its prospects of better earnings.

FINANCIALS:

In the September 2010 quarter, the company's net sales rose by 32% to 88 crore year-on-year. The company's net profit fell 37% on a y-o-y basis to 3.3 crore due to high interest, employee and other expenses. Its interest costs increased from around 1 crore in the September 2009 quarter to 3.5 crore in the September 2010 quarter. In the past two fiscals, the company's debt has increased to 184 crore in FY10 from 44 crore in the previous year. Besides the acquisition of Fame India, a chunk of this debt has gone into the expansion of screens and acquisition of CCPL multiplexes (both amounting to investment of around 60 crore) in West Bengal.

VALUATION:

At the current market price of 60, Inox is available at a price-earnings multiple of 11. This is much lower than its peers such as PVR, Cinemax India, which are trading at a P/E of 22 and 15 times, respectively. A strong visibility of earnings due to the acquisition of Fame India makes Inox's stock an attractive investment.

 

 

Stock Review: HDFC

Housing finance major HDFC reported a 33 per cent rise in net profit to `890 crore in the quarter ended December 2010, boosted by profit from sale of investments (Rs 167 crore). The net interest income growth was flat quarter-on-quarter (q-o-q) with spreads marginally (4 bps) lower at 2.3 per cent. It clocked net interest margins of 4.3 per cent.

The portfolio quality improved with 90 days overdue non-performing loans at 0.85 per cent (0.94 per cent in the third quarter of FY10). The higher provisions for teaser and non-individual loans (one-time expense of about

`270 crore) were met through additional reserves. This reduced the book value by 1.5 per cent without impacting the profit. The company retains excess provisions of about `300 crore.

Approvals rose 29 per cent but disbursement growth, at 21 per cent y-o-y, was lower than the 25 per cent average seen in the last few quarters. A Macquarie report suggests this may be due to lower disbursements to developers even as total loan growth is expected to come off as the strong year-end growth in FY10 is added to the base.

Demand from speculative buyers could taper off given the upward pressure on interest rates and withdrawal of the teaser loan scheme.

However, this should not impact individual demand and loan growth should remain 20-25 per cent, says Conrad D'Souza, senior general manager, HDFC.

Interest rates have increased 125 bps, he notes, and even at around 11 per cent (should there be a rate action by RBI) are not a significant deterrent for genuine home buyers. He also expects some correction in home prices as the fund crunch faced by real estate companies could push them to sell inventory.

Stock Review: Indraprastha Gas

The increase in prices of compressed natural gas (CNG) and piped natural gas (PNG) has been visible in the performance of Indraprastha Gas Limited (IGL) since the June 2010 quarter. The December 2010 quarter was no different with the company reporting 59.66 per cent growth in revenues to `457.09 crore. CNG volumes (2.2mmscmd) grew 13.7 per cent and while PNG volumes (0.47mmscmd) grew 92.4 per cent, helping total volumes (2.67mmscmd) grow 18.9 per cent.

Analysts at IIFL see a rise in use of CNG in private vehicles driving growth. The spreading pipeline infrastructure and household penetration have been helping PNG volumes.

During the quarter, average realisations from CNG (Rs 27.4 a kg) and PNG (Rs 19.4 per scm) were higher than `21.9 a kg and `16.1 per scm, respectively, in the corresponding period last year.

While average realisations were helped by price increases, revised APM (administered price mechanism) prices meant raw material costs (gas sourcing costs) rose two-fold to 259.87 crore. This led to a 842 basis point (bps) drop in earnings before interest, taxes, depreciation and amortisation margin to 28.3 per cent.

However, the net profit grew 14 per cent to `67.2 crore.

Analysts are positive on IGL in view of increasing volumes and firm prices. Conversion to CNG remains aviable option given that petrol prices have already been deregulated and diesel deregulation is on the cards.

The company has raised prices of CNG and PNG in Delhi by 4.5 per cent (Rs 1.25) and over 12 per cent (Rs 2.10), respectively, from January 1.

Analysts at Angel Broking estimate 16.9 per cent compound annual growth rate (CAGR) growth in volumes over FY10-12. Revenues are expected to grow 26 per cent CAGR, while profit growth is pegged at 12 per cent CAGR during FY10-12.

Increase in prices and volumes help the company post an impressive top-line growth

Stock Review: Indraprastha Gas

   INDRAPRASTHA Gas has posted a modest 14% net profit growth in the December 2010 quarter, despite a strong spurt in sales, mainly due to pressure on margins, higher interest and depreciation costs and low other income.

   The cost of the gas Indraprastha's sells has doubled after the government deregulated prices in May 2010. Even though the company has, to a large extent, passed the increased cost to its customers through price hikes, its margins have come under pressure. During the December quarter, while sales grew 60% to . 457 crore, the company's raw material cost more than doubled, bringing down the operating profit margin to 28.3% from 36.7% in the year-ago period.

   The Delhi-based city gas distribution company's volumes growth at 22.5% during the quarter was marginally low compared with the first half of FY11, when the growth was almost 26.5% against the corresponding period of the previous fiscal. This was, however, substantially better than the 17% cumulative

annualised growth rate (CAGR) the company witnessed between FY07 and FY10.
   On bourses, the company has consistently outperformed the overall market in the past one year. The scrip gained nearly 67% against the just 10% rise in the broader market benchmark, BSE Sensex. BSE Oil & Gas index has underperformed, remaining almost flat in the period.

   Like other companies in the natural gas industry, Indraprastha Gas has also embarked on an aggressive expansion plan. During FY10, the company added nearly . 300 crore to its gross block, the highest single-year addition in the company's history. Additionally, it has planned . 700-crore capex programme for FY11 and plans to invest a similar amount next year. As a result, the company is expected to triple its gross block by the end of FY12, compared with March 2009 levels.

   But the plans have increased the company's interest and depreciation costs, which ate into almost 39% of the company's profit before interest, depreciation and tax against the 28% last year. An over 80% fall in its other income was also one reason for this.

   The company, which was debt-free in the last four fiscals, was carrying a debt of around . 250 crore as on December 31, 2010. It paid . 4.1 crore as interest during the December quarter. Considering the heavy capex programme for FY12, which is nearly double the company's annual cash generation, the company is likely to raise further debt in the coming months.

   Indraprastha Gas is set to grow substantially in the coming years as the assets it is creating start generating revenues. The impact of its capex programme is already becoming visible in terms of higher sales volumes.

 

Stock Review: BAJAJ AUTO

 

BAJAJ Auto's results for the December 2010 quarter reflect the difficult operating environment for the broader sector due to rising input costs, despite a healthy growth in the volume of units sold. Bajaj Auto's operating profit margin fell 170 basis points year-on-year to 20.4% in the third quarter, despite a 26.8% rise in net sales to 4,177.1 crore. The company's realisations per vehicle grew nearly 8.3% compared with a year earlier, but that was not adequate to cover the higher costs of metals and rubberbased inputs. Raw material costs as a percentage of net sales in the quarter rose 260 points compared with a year earlier to 67.6%. However, a 17% rise in units sold and tight control on other costs helped the company grow its net profit 40.4% year-on-year to . 667.1 crore. The quarterly growth in net sales and profit of Bajaj Auto matched ETIG estimates. The stock was up 2% at . 1,319.9 on Wednesday, but it has under-performed the broader market over the past three months. Investors are worried over the rising auto finance rates and commodity input prices.

    Over the next few months, managing the input costs will be the biggest challenge for Bajaj Auto. The management reckons that the prices of raw materials, especially metals, have broadly peaked. Bajaj Auto is also planning to launch variants of its popular models Discover and Pulsar over the next few months, targeted at the higher end of the motorcycle segment. This should boost realisations.

    In addition, the company is expanding its dealer network in rural areas, which are booming; the impact of this move should get reflected in the numbers over the next few quarters. Also, the sale of three-wheelers, which have higher margins, should pick up over the next few months given the strong demand, especially from the overseas markets.

    Bajaj Auto trades at a P/E of 15.4 times on a trailing four quarter basis, while rival Hero Honda trades at 16.5 times. However, the operating profit margins of Bajaj Auto have been superior than its rival's. The current valuations of the two stocks suitably factor in the growth opportunities over the next few quarters.

 

Stock Review: Bharat Forge

 

 

Bharat Forge, the flagship of the $2.4 billion Kalyani group, makes the grade due to the sheer size and diversity of its operations. The company put India on the global auto component industry map. It is witnessing strong momentum in the domestic and international automotive markets with signs of recovery in the European and North American truck market. It has successfully de-risked its business by foraying into non-auto sectors like aerospace, power, energy, oil and gas, rail and marine, mining and construction equipment, among others.

Stock Review: TCS

TCS GREW faster than its closest peer Infosys yet again in the December 2010 quarter, in line with the projections made in this column last week. This was also the fifth quarter when TCS's net profit on a trailing 12 months basis outpaced that of Infosys (see graph). The global demand for IT outsourcing has recovered in the last four quarters but its benefits are not percolated evenly across the sector. Only the top-tier IT services vendors have shown improved performance. Among them, TCS has emerged as the biggest beneficiary. During the December 2010 quarter, the company's dollar denominated revenue grew sequentially faster than Infosys' for the third consecutive period.

 

A comparison of the net profit growth of the two giants in the trailing 12 months at the end of each of the eight quarters to December 2010 makes an interesting study. The period encompasses the subprime crisis of mid -2008. The graph shows the turnaround in the performance of TCS over this period. The company fared poorly when compared with Infosys in the initial three quarters ended September 2009 due to the huge exposure to loss-making forex hedges. Since the December 2009 quarter, however, TCS has been consistently beating Infosys in profit growth. It may appear that TCS has been winning new accounts aggressively, but that is not necessarily true. Infosys has added far more clients than TCS since the March 2009 quarter. Its client base increased by 33, while TCS's fell by 26 during the period. Even in the case of larger client accounts with billing above $100 million, Infosys was far more aggressive with seven new clients compared with just two additions by TCS.

   A lower growth rate in the initial phase of the demand recovery could partially explain the turnaround in TCS. But more than that, TCS improved its revenue share from its top-10 clients during the period. It remained stagnant for Infosys. This means TCS was able to leverage its top clientele, which could have helped its profits and profitability. It also means that the future growth of TCS would hinge upon how fast its bigger clients ramp up projects. This may continue in the near term given its rapidly growing consultancy function.

   Given the momentum in its volumes and the pace of project additions, TCS, the country's-largest IT exporter, is expected to maintain its growth streak in the coming quarters. What could be of interest to investors is whether Infosys, the second-biggest IT firm, does some catching up. To that extent, its stock may see some pressure on its premium valuation vis-à-vis its biggest peer.

Stock Review: AXIS BANK

AXIS Bank continued its winning streak, reporting a 36% net profit growth on a year-on-year basis in the December 2010 quarter. Although the bank's net interest income took a bit of a hit due to an increase in interest expenses, it surprised analysts with a loan growth of 46% and a 16% increase in fee income. The bank's results exceeded street estimates with a strong loan growth, higher margins and lower provisions. The bank maintained a tight control on its asset quality'; its net non-performing asset ratio, or bad debts, is at an all-time low. In percentage terms, its nonperforming assets (NPA) formed 0.29% of its advances. This has helped the lender reduce its provisions coverage ratio.

   The bank's net interest margin (NIM) — a key measure of profitability from core operations — improved 13 bps on a quarter-onquarter basis at 3.81%. The management has indicated that it expects NIM to remain in the range of 3.4-3 .6% in the coming quarter, due to high cost of funds and shrinking margins.

   Advances growth was mainly driven by a strong growth in the large and mid-corporate segment, which grew 69.5% on a year-on-year basis. In the retail loan segment, personal loans increased by 140% on a sequential basis. However, according to a Prabhudas Liladher report, the increase in personal loans is on account of certain one-off loans to the tune of . 25 billion pertaining to specific housing loan scheme applications. These are short-term loans and are likely to get repaid by the first quarter of the financial year 2012.

   The bank restructured loans of . 1.6 billion during the quarter. The restructuring has been mainly with the textile and shipping sectors. The cumulative restructured assets are now close to 1.7% of net advances.

   While its CASA ratio — an indicator of relatively low-cost deposits — increased sequentially to 42%, term deposits declined. PLR and base rate hikes, coupled with an impressive increase in CASA balances (despite rising term deposit rates), led to sequential improvement in margins. But, margins are likely to contract as the full impact of a deposit rate hike will be felt in the coming quarters.

   Axis Bank has delivered healthy core operating performance. Margin pressures are likely to persist, which is in line with the industry trend. An improvement in asset quality should result in lower credit cost. The healthy growth momentum for the bank is likely to be maintained.

Stock Review: Hero Honda

 

 

The Hero group, which began as a bicycle maker in Ludhiana, became big enough to partner with Japan's Honda Motor Company and form Hero Honda in 1984. In 2001 it became the world's biggest motorcycle maker. For nine years in a row, it has remained at the top, selling 4.6 million motorcycles in 2009-10. However, in December 2010, the partners announced a divorce to separately reap the benefits of the market. Its iconic brands, Splendor and Passion, with their many variants, remain among the top three motorcycle brands in sales in India.

 

Stock Review: KABRA EXTRUSIONTECHNIK

Kabra Extrusiontechnik is a domestic leader in extrusion machinery used for producing plastic pipes and packaging films. It has recently launched a new product to manufacture drip irrigation tube lines in collaboration with Drip Research Technology Services of the US. It is also planning to launch new high-speed multi-layer blown films plants by the end of FY11. The company has embarked on an investment plan of 85 crore, which will more than double its gross block by FY12. India's plastic consumption is likely to double within the next six years from 8 million tonne in 2009. Industry experts believe that investment of nearly $10 billion would be required in the plastic processing industry to create the necessary capacity. This investment spree in the plastic processing industry will be a key growth driver for Kabra Extrusion's machinery in future.

Stock Review: Housing Development & Infrastructure (HDIL)

The realty sector remained an underperformer in the stock market for the most part of 2010. But given the volume growth in the past two quarters, realty stocks may see an upside in the New Year. Housing Development & Infrastructure (HDIL) is expected to be a major beneficiary, given its relatively lower debt and a stronger asset portfolio. Close to 70% of its revenue comes through the sale of TDR (transfer development rights). The key factor to watch is its ambitious Mumbai Airport Rehabilitation Project (MIAL) by the end of March 2011, which is going to be a major revenue contributor in the coming years. It's currently trading at a price-toearning ratio of nine compared to the average industry P/E of 24. Investors can buy this stock for the long term.

Stock Review: VINATI ORGANICS

The specialty chemicals company Vinati Organics is the world's largest producer of isobutyl benzene (IBB) — a key raw material for widely used anti-inflammatory drug ibuprofen — and second-largest producer of specialty monomer ATBS. The company has a number of further capex plans, including backward integration, to produce isobutylene raw material of ATBS and forward integration into polymerisation of ATBS. Similarly, it is setting up a plant to produce PAP, which is required for manufacturing of another widely-used drug paracetamol. However, delays in execution of these capex plans have resulted in a slowdown in growth of the company in the past three quarters.

Stock Review: SESA GOA

Although a number of events — such as 20% stake buy in Cairn India, Karnataka's iron ore exports ban and logistic problem at Orissa — have hit Sesa Goa's stock in the past few months, the company enjoys a sound financial and operating atmosphere. Sesa Goa's production cuts in China, where it exports 70% of its output, due to energy norms and reduced government subsidy, appears discouraging. This has impacted its valuations, which at 9-10 times its annual earnings, are at a discount to its peers. Though its short-term outlook remains bleak, an improvement in iron ore prices could be the next trigger for its earning growth.

Stock Review: National Stock Exchange of India (NSE)

 

 

National Stock Exchange of India (NSE), which started operations in 1994, makes the grade, having brought about a complete change in the way shares are traded in India. It successfully expanded online trading, to all parts of the country by selling dedicated terminals against a refundable deposit. This more or less ended the hegemony of BSE cartels and ushered in transparency and efficiency. In 2000, NSE started futures and options trading. In 2009, it was ranked as the world's seventh largest derivative exchange, the second largest exchange in single stock futures and stock indices and the third largest in stock index futures.

Stock Review: JK Cement

 

JK Cement is expected to benefit from a pick up in demand during the current peak construction season

 

JK CEMENT, part of the leading business house JK Organisation, is a mid-sized player, which has recently expanded its presence beyond its home market of northern region. The company had earlier brought on stream three million tonne (mt) capacity in the southern part of the country. It appears well positioned to take advantage of growth in demand in both regions in the medium term.

   The cement sector has grappled with sluggish demand conditions over the past few quarters, but analysts are increasingly optimistic of a pick up in demand on the back of the peak construction season. Cement prices in the northern and southern region also have shown signs of a pick up towards the end of the monsoon. However, a rising cost structure, like higher freight and power & fuel costs on a per tonne basis, remain a cause for concern for the sector.

CAPACITY:

The company's total cement capacity (white and portland) amounted to nearly 7.9 mt at the end of March 2010, a rise of 80% from three years earlier. The company initially focused on northern markets, but during October 2009, it had brought on stream a greenfield capacity of 3 mt in Karnataka. In addition, it has a 50 megawatt captive power capacity there.

   The company has expanded its presence amid surging capacity and sluggish demand in the south region. The southern cement capacity is expected to rise by nearly 23% to 105 mt by FY12. The demand is likely to remain sluggish in the region due to absence of fresh, large government-funded infrastructure projects coupled with uneven recovery in the real estate sector in this region. As a result, the surplus cement production in the southern region could easily more than double to nearly 18 mt at the end of March 2012. This, in turn, could put pressure on cement realisations over several quarters. During the April-November 2010 period, southern dispatches grew 3.9% year-on-year, compared to an all-India growth of 5.4%. Despatches in the north grew 7.6% year-on-year during this period.

EXPANSION PLANS:

JK Cement plans to expand its grey cement capacity by 2.2 mt at its existing facilities in Rajasthan. In addition, it has plans for an additional 1.8 mt of grinding facilities in northern India. The capex involved is estimated at 1,500 crore, which also includes additional captive power facilities. These additional capacities are expected to come on stream over the next one-and-a-half year.

   JK Cement's debt-to-equity ratio was 0.8 at the end of March 2010, considerably lower than three years earlier. And while it had invested 627 crore during the period March 2007 and March 2010, its operating cash flow during this period was 1,093.5 crore. And given the company's healthy cash flows and low leverage ratio, it looks well positioned to finance the capex plan.

FINANCIALS:

The company's performance in the September 2010 quarter was adversely affected by a fall in realisations on a per tonne basis, given sluggish demand during the monsoon season. In addition, the company grappled with higher operational costs during the quarter. As a result, its operating profit margin declined 2,360 basis points year-on-year to 4.7% in the second quarter, while net sales fell marginally to 434.9 crore. The company's realisation fell nearly 14% year-on-year to 3,953 per tonne in the second quarter, coupled with its power & fuel cost that rose 8.4% on a per tonne basis. As a result, its net loss amounted to 20.8 crore in the September 2010 quarter.

VALUATIONS:

JK Cement, at 136 per share, trades at a P/E of nearly eight times on a trailing four-quarter basis. India Cements, a leading player in the South and with a presence in the North, trades at a P/E of more than 45 times on a trailing basis. Other mid-cap players with a focus on the North like Mangalam Cement trade at a P/E of 4.8 times.

 

Stock Review: Power Finance Corp

With loan book growing a robust 27 per cent ( `92,100 crore) and stable net interest margins (NIMs) of 4.1 per cent, Power Finance Corporation reported a 26 per cent increase in net interest income to `953 crore for the December quarter. Further, net profit adjusted for forex exchange items grew about 28 per cent to `687 crore, helped by steady operating costs.

The outlook for the loan book remains bright as generation companies (more than 70 per cent of disbursement) rush to meet their five-year capacity addition targets. It is reflected in quadrupling of approvals (Rs 17,800 crore) in the December quarter. Further, unutilised sanctions stand at `1,70,000 crore, out of which proposals of 1,00,000 crore (about 1.1 times current loan book) have already been executed.

However, analysts are wary that NIMs may come under pressure in the medium term amid rising interest rates. Liabilities of about `20,000 crore are expected to be re-priced in the March 2011 quarter, which is significantly higher than the figure of `4,700 crore in the same period last year.

The company's plans to raise capital via forex loans (besides $240 million raised in the September quarter), issue infrastructure bonds (eligibility to raise `5,300 crore) and follow-on public offer (expected in the June 2011 quarter) combined with further increase in lending rates should help maintain NIMs to some extent.

The markets have reacted positively to the company's strong financial performance and the stock ended 2.9 per cent higher at `280.35 on Tuesday over its previous close. The valuation is reasonable at 1.8 times FY12 average estimated book value and the stock remains analysts' top pick among non-banking finance companies.

Though the company provides strong revenue visibility, analysts foresee margin risks

Stock Review: Solar Industries

Solar Industries is showing good amount of promise more from the point of view of a company catering to the mining and the construction activity which is in the explosive business. They are leaders in this particular area of business.

At the same time, they are in the process of getting their coal mines allotted and that would give them a possibility to link it with some of the power plants. From that point of view, if you find, these companies getting into higher value addition activity which is very fruitful going forward.

In my view point, the stock is still available at an attractive valuation, given the kind of prospect that it holds. Currently, it trades at around 10 PE which probably would increase more because of growth itself in the base profit. We like this company from a relative longer-term investment point of view and not immediately from a one-two quarters point of view.

 

Stock views on LUPIN, LANCO INFRATECH

CREDIT SUISSE   on LANCO INFRATECH

Lanco has acquired the coal assets of Griffin in Australia from an administrator for an equity value of A$750 million. This would be financed through a mix of debt and internal accruals and would be paid in three tranches over four years. As per the management, Griffin has JORC-approved mineable reserves of 310 mmt and resources of 1.1-1.25 bmt. The mine is already producing about 4.5-5 mmtpa, of which about 1 mmtpa is exported while the rest is consumed within Australia. Lanco plans to ramp up production from this mine to 15 mmtpa by 2015. Evacuation of coal for its power projects in India would require Lanco to incur capex of A$900 million over four years towards port and railway infrastructure. This would improve fuel security for Lanco's existing and planned coal projects that are currently sourcing most of the coal deficits from e-auction. However, Credit Suisse cuts EPS by 11-26% over FY11-13E and target price to 83 (from 86), led by an earnings dilution from acquisition, lower PLF (plant load factor) and merchant tariff and higher coal costs.

RBS on LUPIN

RBS reiterates the `Buy' rating on Lupin and continues to rate it as the top pick in pharma coverage. RBS expects Q3FY11 to be a strong quarter and forecasts 21% topline growth, EBITDA growth of 19% and PAT growth of 35%. Q3 is unlikely to be any different as branded prescriptions have grown by 28%. More importantly, with the company's bid to minimise the impact of a potential generic threat, it has been able to increase the share of double dosage strength of 200 mg to 56% compared to 49% a year back. However, a key disappointment has been the delay in turning around Antara. Domestic formulations are also expected to post consistent growth in excess of 20%. The generic Lunesta settlement augurs well for Lupin which is a relatively new entrant in the high risk-high reward Para IV segment. RBS had earlier assumed an "at risk" launch by Lupin in March 2014 along with launches of other generic players as well. RBS therefore had built in a higher 90% price erosion and lower 10% market share assumption for Lupin. However, post settlement and assuming lower competition, RBS values this opportunity at 0.2/share compared to 0.1/share.

FPO Review: TATA STEEL

TATA Steel, the seventh-largest player in the global steel industry, is attempting to take advantage of strong domestic demand from user industries by expanding its capacities here. In India, the total steel output grew 7.4% year-on-year during the first 11 months of the calendar year 2010, amongst the fastest in BRIC countries, according to the global industry body. This pace of growth is expected to continue over the next few years. To part finance the expansion plan, Tata Steel is coming out with its FPO aggregating nearly . 3,385 crore (at the lower price band).

In the local markets, the company's production cost is among the lowest in the industry, thanks to its captive iron ore mines. In addition, it gets nearly half of its coal requirements from its facilities. The Indian operations contributed 24.5% to its consolidated net sales in the first half of the current financial year.

However, in the case of Tata Steel Europe, which accounted for 64.4% of its consolidated sales in the first half of the current fiscal, there is considerable uncertainty over the medium term. That's because its European facilities have practically no captive resources of key inputs, and the company purchases them from third party suppliers. Also, key raw material costs have shown an upward trend over the past few quarters, which could lead to a rise in its production costs. Besides, there is considerable uncertainty related to steel demand in Western Europe, considering the slack demand in several user industries such as auto and housing.

   As part of its raw materials strategy for European operations, Tata Steel has taken a stake in New Millennium Capital Corporation, Canada, and it is expected to start production of iron ore in 2012. In addition, Tata Steel has an interest in a coal venture being developed in Mozambique, which is controlled by Australia based Riversdale Mining. But, even when fully operational over the medium term, these facilities will only meet about 20-25% of Tata Steel Europe's raw material requirements, analysts said. It could then become difficult for Tata Steel Europe to replicate the performance recorded in the first half of the current financial year.

   Tata Steel's FPO would be at a P/E of 7.5 times (at the lower end of price band) by annualising first half earnings and adjusted for the expansion in its equity. The Tata Steel stock ended Monday's trade at . 622.9, 4.9% higher than the FPO's lower price band. Other large domestic players such as SAIL trade at a P/E of 11.9 times on a trailing four-quarter basis, while JSW Steel trades at 10.7 times (excluding the recent Ispat Industries acquisition).

Stock Review: Balaji Amines

This is a Maharashtra based company. This company manufactures various kinds of amines and derivatives of specialty chemicals and natural products. This company has got three manufacturing plants; two are located close to Solapur and one plant located in Hyderabad. This company caters to a wide range of industries starting from pharmaceutical to agrochemicals. It also caters to the chemical industry and FMCG in a small way. Almost all pharmaceutical companies whether Indian or international, the major international companies, are the customers of Balaji Amines.

If you take a look at the financials of the company, for FY10 company achieved a sales of about Rs 260 crore which was up by close to 4% compared to FY09 and profit after tax was up by about 35% to about Rs 20 crore. This company has got a small equity of about 6.5 crore. In the first half of the current financial year, sales are up by close to 35% to about Rs 170 crore. Profit after tax is up by 30% to about Rs 16 crore. Earnings per share (EPS) on an annualised basis is coming close to Rs 10, the stock is traded at about Rs 40, which means that the P/E in this case is about 4. Even assuming a conservative P/E of 8, in case they don't do the same as what they have done in the first half of the current financial year, P/E is just about 5.

Now, there are a couple of reasons why we like the stock. One is this company has been growing at between 30% and 35% consistently over the past seven years and they have almost grown their turnover 5.5 times in the last seven years. This company is one of the lowest cost producers of Methylamine in the world, this is what the company claims. This is because of in house R&D and also captive power generation which the company has. Then the company is very strong in R&D, this company has developed a few new products in the past few years, some of which are undergoing regulatory clearances. So, these are products which are import substitute, they are high margin products. Once the regulatory clearances are obtained, the stock may undergo a rerating.

The company is also increasing capacities of various products and it hopes to grow by at least 20-25% over the next few years. So, you have a company which has been growing at 30-35% over the past seven years, consistent dividend payment for the past ten years. The company's asset rate in fact the company is utilising its surplus assets to build a 100-room four-star hotel in Solapur. This move may not lead to immediate cash flows for the company, but it will definitely result in asset creation. Also, the plants, which the company has, are large sized plants given the market cap of about Rs 135 crore. Two plants are located on land size of about 25-40 acres. So, given all these factors, P/E of 4-5, which is currently being given by the market, the stock has the potential to undergo a rerating. 

 

Stock Review: Emco

This company is a sub sector to power sector. The coal mining activity, which has added into this company from this quarter, they already secured the Indonesian mines where they have stared extracting coal. So, from current quarter, maybe next quarter onwards, you should be seeing a larger effect coming into the books of the company from coal mining activity, apart from transformers rectifiers activity which is largely dependent on Power Grid where higher amount of orders are expected to come in, in this quarter.

They have this entire business which is largely transformed now with coal mining coming in to play. Probably we will see in the coming two quarters profits into the company's book where we see growth coming in. Like Solar, this company is also a relative longer-term investment, maybe in the next one full year, one could see maximum amount of benefits coming in.

 

Stock views on OBEROI REALTY, IDEA, VOLTAS

NOMURA on VOLTAS

Nomura reaffirms the `Buy' rating on Voltas, which will benefit significantly from a pick-up in capex cycle due to the nature of its businesses and its strong competitive position. As per the latest management business outlook, the current year is going to be a mixed bag, with the projects businesses (EMP) coming under pressure but the engineering and unitary cooling products businesses doing quite well. Management expects the pick-up in project business to be gradual. Organised manufacturing, a prime driver of corporate capex, registered flat to negative capex growth in FY09 and FY10. However, rising capacity utilisation in several industries is likely to result in a pick-up in capex activity. Nomura revises the price target to 271.9, from 285, following a change in FY12E EPS to 13.91, from 14.94. The revision is due to a delay in the capex cycle and a resultant cut in forecast revenue growth for the engineering products and services businesses.

BANK OF AMERICA on IDEA

Bank of America's fundamental `Underperform' rating on Idea stays unchanged despite M&A speculation. A potential sale of a controlling stake in Idea could fetch up to 35% valuation premium from current levels, on EV/EBITDA, using the Hutch-Vodafone deal as a benchmark. This implies a potential deal price of up to 115/share for Idea. However, Bank of America thinks returns for minority shareholders will likely be unexciting after factoring non-compete fee at 25% of deal price and assuming that those shares that may not get accepted in a potential open offer, trade at the price target of 65/share. Bank of America believes Idea is likely to have many potential suitors for three key reasons: 1) strong brand presence reflected in its pan-India wireless revenue market share of about 12% versus subscriber market share of about 11%; 2) access to 900 MHz frequency; nearly 50% of Idea's spectrum is in the 900 MHz band; 3) comfort with accounting and organisational practices.

JP MORGAN on OBEROI REALTY

JP Morgan initiates coverage of Oberoi Realty with `Overweight' rating and March '12 price target of 320. Oberoi Realty is well positioned as a pure play in Mumbai's high-end residential and commercial real estate. The company's portfolio of about 20 msf comprises mainly city centric developments that are largely monetisable over the next five-six years. This, in turn, gives us high confidence on its valuation estimates. Oberoi Realty is one of the few developers that was able to navigate the previous cycle well by buying bulk of its land when it was cheap (pre-2005) and raising cash (2007) well before the crisis, thereby remaining net cash all through the downturn. With its recent IPO, the company now has healthy cash on book ( 15 billion). This along with a growing rental portfolio (5.9 msf by FY14) and healthy operating cash flows ( 13 billion over FY 11/12) gives it strategic flexibility to pursue growth over and beyond the current portfolio.