Stock Review: Maruti Suzuki

Maruti Suzuki's February sales figures have surprised the Street.

A 15.5 per cent year-on-year growth in volume and 1.7 per cent month-on-month to 111,645 units clearly reiterates the company's stronghold over the passenger car market. For awhile now, analysts have believed, the company would not be able to hold on to either margins or marketshare due to increased competition. As sales figures show, the company has not suffered as far as marketshare is concerned.

Interestingly, Maruti is going to be the only beneficiary of rising oil prices. Analysts believe, Maruti sells more units under such circumstances, as its vehicles are more fuel efficient. While Maruti has held on to marketshare, margins have fallen by 5-10 per cent, primarily due to forex volatility. Given that the company pays for imports in Japenese yen and exports to Europe, the rise of the yen and fall of the euro has affected the company's margins. It is, therefore, not bad news that the company's exports have been coming down. The company believes India will be a key piece of its global strategy as sales in Europe have started to decline. The company's share of European exports will fall from 78 per cent to 50 per cent this year.

The management believes it has managed to hold on to the marketshare as it understands Indian consumers. The company's focus on the youth by associating with motor sports events has paid off and struck a chord with consumers. The company has a product roadmap till 2018, which includes new launches and refreshments of existing lines.

One of the major issues Maruti has addressed is debottlenecking production. It has improved productivity and production efficiencies by 30 per cent without making any extra capex. By next month, the company will have a runrate of 1.4 million cars per annum. By the first half of FY12, additional capacity of 250,000 cars will come up in Manesar and another 250,000 by FY13. While the going looks rather good for the company, the usual risks of increased cost of ownership and rising raw material costs will continue to be a key short-term risk. In the long term, if the government reduces import duty on completely built units, as is being discussed, then Maruti faces a much larger risk.

Debottlenecking of capacity will start showing from April as the annual run-rate will go up to 1.4 million

Stock Review: Reliance Power

First the good news, Reliance Power has a commissioned capacity of 1,000 Mw. The company's power plant in Rosa, which it acquired from group company Reliance Infrastructure, is operational and in the first phase has a capacity of 600 Mw. RPower, which won three ultra mega power projects — Sasan in Madhya Pradesh, Krishnapatnam in Andhra Pradesh and Tilaiya in Jharkhand — is expected to add 36,000 Mw by 2017. While the Sasan and Tilaiya projects are pit-head plants having assured coal linkages, the Krishnapatnam will have to depend on imported coal. The company has announced a financial closure of this 4000-Mw ultra mega power project, with a 75:25 debt equity ratio. However, the Street is jittery over the pace of execution, since the company has never executed such large scale projects before.

While the company has taken several measures to fasttrack the projects, it has not worked for the market. RPower has tied up with Chinese equipment makers for its plants, but the experience of other power producers hasn't been too good with these suppliers. Other power producers that took a similar approach are still struggling with plant stabilisation.

In addition, it is widely perceived that since the Sasan UMPP has captive coal linkages and price of power has been pre-determined, the company is dragging its feet on the project and pushing the nearby Chitrangi project, which plans to use coal from Sasan's mines. Analysts allege that the company is probably doing this so that it can use coal from Sasan to feed Chitrangi, as power tariffs of this plant are not fixed.

While the matter is in court, the market isn't very sure about how RPower is progressing in Sasan. As an analyst says, when a company is delivering returns, the Street tends to forgive certain transgressions. But, in this case, the market is extremely concerned about the company's project execution capabilities. Abhishek Khosla, Associate MAPE Advisory Group, believes the company's total fund requirement is to the tune of `140,000 crore (2012-14), out of which equity requirement would be around 42,000 crore. To make matters worse, the company's third quarter results have been below expectations. Profit before tax for the third quarter stood at `77.9 crore. The reported profit after tax is higher at 140 crore, due to tax benefits of `54. 4 crore and lower depreciation on account of change in depreciation accounting norms.

Stock Review: ABB

It's often said there is an opportunity in every threat, but in the case of ABB, the threat has emerged from an opportunity. For long analysts believed, ABB was the best play in the power equipment sector as the company not only enjoyed technological superiority and had quality management. Given that India's power transmission and distribution (T&D) systems are likely to be overhauled, the sector is likely to see investments for several years to come. Keeping this in mind, ABB was probably a stock one could not go wrong with.

However, a report by Citi says: "Competition and oversupply has derailed the story. Quality management and technological superiority can only help so much in the face of overcapacity/competition. Industry dynamics and the business cycle generally tend to be more powerful than management ability." The company's fourth quarter results clearly establish how the company has gone wrong. ABB India's fourth quarter results in calendar 2010 were abysmal. The company's revenues stood at Rs 2,070 crore (up 10 per cent year-on-year) and above analyst estimates of Rs 1,870 crore. At 0.6 per cent, earnings before interest, taxes, depreciation and amortisation (Ebitda) margins were way below consensus estimate of five per cent and net profit fell 92 per cent annually to Rs 6.8 crore.

ABB India's performance in the fourth quarter of CY10 was impacted by provisions for exit costs on rural electrification projects, increased competition, execution headwinds and pricing pressure.

Also, orders from central utilities have also been delayed due to non-availability of land in the second half of 2010. The number of 765kV projects decided in 2010 is less than 50 per cent of 2009. Ordering from state utilities remained flat in 2010 compared to 2009. Industry and infrastructure sectors are yet to show positive growth in capital expenditure and this is likely to continue till the first half of FY12.

Analysts claim, delays in ordering by both state and central utilities have led to the Korean and Chinese suppliers quoting very aggressive prices in transformers in the second half of 2010.

Rural electrification drive and competition from Korean and Chinese manufacturers hit the company hard

Stock Review: Maharashtra Seamless Limited (MSL)

 

Maharashtra Seamless Limited (MSL) is the country's largest manufacturer of seamless steel pipes. The D P Jindal group is its promoter. It has the capacity to produce 3.5 lakh metric tonnes (MT) of seamless pipes annually. These pipes are used by sectors such as oil and gas, hydrocarbon industry, boilers and heat exchangers, automotive, bearing and general engineering industries. Its plant for manufacturing these pipes is located in Raigad, Maharashtra. The company has a technical collaboration with Mannesmann Demag Huttentechnik of Germany.

 

The company also manufactures another category of pipes called ERW pipes. It has the capacity to produce 2 lakh MT per annum of these pipes. ERW pipes are used mostly by industries such as drinking water and sewage treatment. The company also has a power division which produces 7 MW from 20 windmills. This plant is located in Satara, Maharashtra. All the power that is produced is used for captive consumption.

 

Sectoral outlook

The international demand for pipes is beginning to revive. Another positive development for Indian pipe manufacturers has been the imposition of anti-dumping duty on seamless pipes from China by US and Europe. This has improved the prospects of Indian manufacturers. India is also considering the imposition of a duty on seamless pipes from China. If this happens, it will benefit MSL.

Moreover, the price of oil has risen to around $88 per barrel. This could encourage exploration and production (E&P) activities in the oil and gas sector and will help improve MSL's order book. Similarly, the demand for ERW pipes is also improving as a lot of water-related projects are coming up within the country (especially under the government's JNNURM programme).

Strengths

Large order book: The company has an order book worth approximately Rs 415 crore.

Growth initiatives: The company has upgraded its plant (that manufactures seamless pipes) so that it is able to produce pipes of diameter ranging from 1 inch to 7 inch, which are most in demand. For the first time in India the company has begun to manufacture pipes of 14-inch diameter. In the case of ERW pipes also, the company has upgraded its capacity and is now able to offer pipes ranging from 8-inch to 20-inch diameter.

 

Threats

As an investor you should watch out for the following potential threats. If the price of crude oil declines drastically (say, $30-40 per barrel, as in 2008) then E&P activity becomes unviable. This in turn affects the demand for seamless pipes adversely.

The rising prices of inputs such as iron ore, coal and steel have the potential to affect its margins.

 

Valuations and financials

Between FY05 and FY10, the company had a high return on capital employed (RoCE), ranging from 17.64 per cent to 24.46 per cent.

The stock is trading at a 12-month trailing price to earnings ratio (PE) of 8.61, which is lower than its five-year median PE of 9.79. Over the past five years its earnings per share (EPS) has grown at a compounded annual rate of 21.6 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.40x, which is quite attractive. You may invest in the stock with at least a three-year investment horizon.

 

Stock Review: Unitech

On the face of it, Sanjay Chandra's Unitech has done it all. But, the Street is not convinced. Though, it has reduced its net debt from `5,850 crore in the second quarter to `5,150 crore in the third quarter, thanks to proceeds from customer advances and sale of assets, analysts are concerned about the large promoter stock that is pledged (65 per cent of promoter holding). Thus, while the stock appears attractive from a valuation perspective, performance in the near-to-medium term may be affected by non-business factors such as developments on the 2G case.

On the revenue front, too, Unitech disappointed the Street with revenues of `660 crore, which was significantly lower than the estimated `750 crore. The revenues were flat due to continued labour shortage during major part of the quarter, claims the company. Earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, too, declined 760 basis points q-o-q due to non-operating loss of `37.6 crore on account on sale of aircraft. Due to one-time Ebitda loss and high effective tax rate of 40 per cent for the quarter, the company reported PAT of `110 crore that was significantly below the street's estimate of `150 crore. In terms of debt maturity profile, debt repayment of `1,000 crore comes up next financial year. However, the interest cost is expected to be 12.5 per cent — an increase of 50 basis points. This may be offset by purchase of new land in Noida, which the company has acquired to develop middle-income housing projects.

CLSA's report on Unitech says: "Following weak launches/sales by Unitech over the past few months and lower pricing assumptions in Gurgaon for FY12, we cut its earnings by 11-15 per cent for FY11-13 and cut March 2012 NAV by 13 per cent to 110/share."

The market is concerned about slowing home sales and pledging of a substantial portion of promoter stake

Stock Review: OnMobile Global

 

The stock of OnMobile Global has fallen by 8% since its third quarter results in late January. The market cap of mobile value-added services provider has fallen by over one-third in the past three months. Its latest announcement to offer bonus shares could give an immediate sup-port to the stock. But in the long term, its progress in international markets and domestic 3G opportunities are critical to its performance.

OnMobile has proposed to issue one bonus equity share for every existing share. If approved by shareholders, the decision will double its equity base to nearly. 118 crore. Since it will also halve the earnings per share, the stock price would fall by an equal measure after the listing of the bonus shares to retain the current stock valuation.

The depressed movement in the company's stock price is due to a stagnant domestic business, which contributes more than two-third to the total revenue. During its third quarter analyst call, OnMobile stated that the value-added services (VAS) revenue, excluding SMS, roaming and mobile internet usage, had not seen improvement for domestic telcos.

The picture is not expected to change soon since operators are currently focusing more on issues such as tariff cuts, mobile number portability and 3G investments that have impacted their growth. What could, however, trigger growth for OnMobile is its faster expansion in overseas markets. The company launched its services in three Latin American markets during the December quarter taking the total number of markets in the region to six. The current penetration rate of less than 2% is expected to increase to 10% in the next five years. It has also seen traction in Europe, Asia, and Africa.

The launch of its products in overseas markets has increased the share of its international revenue to 31% in the past four quarters from 23% a year ago. This is expected to improve further thereby reducing its exposure to the subdued Indian telecom market.

OnMobile's acquisition of USbased Dilithium Networks in October 2010 has added 3G-based products to OnMobile's repertoire. This should help in taking advantage of the proposed 3G launch by domestic telcos.

At the current price of . 223, the stock trades at a trailing P/E of 18, which is much lower than its historical P/E of above 30. The traction in its overseas operations may offer some trigger to the stock in the coming quarters.

 

Stock Review: IDEA Cellular

IDEA Cellular surprised the Street on Monday with a high single-digit sequential growth in revenue and net profit during the third quarter. Also, the rate of decline in its average revenue per minute was the lowest in at least the last six quarters. This should hearten investors. This could also mean that the impact of cut-throat tariff rates is now behind the company. But given its heavy 3G investments, future growth will depend heavily on how well it takes advantage of the 3G opportunities. Things look positive for its 2G business. Network utilisation in Idea's nine new circles has increased. Revenue from the new circles has grown twice as fast as from older circles. Also, operating loss in these new areas reduced marginally from the previous quarter.

   But it is still too early to consider this as a reversal in the subdued trend in its key mobile segment. The robust 19% sequential growth in its earnings before interest and taxes (EBIT) is due to increased contribution from the other divisions, including long distance telephony and tower infrastructure.

   The company has started incurring interest costs on the loan it had raised for the 3G auction fee. However, its impact was not felt on the bottom line in the December quarter because the company realised the outgo of 124.2 crore on its balance sheet. Had that not been the case, its net profit would have fallen sequentially by over 29%.

   The company would start reporting the interest outgo pertaining to the 3G auction fees once it launches these services. This means its future profit growth, to a large extent, depends on how fast and how well it serves the 3G opportunities. The company has stated that it would launch 3G services in the 11 service areas in the next few months. Given this, the higher interest expenses are expected to put pressure on its net profit in the next few quarters until the 3G launch stabilises.

   The countrywide launch of the service to change the mobile operator without changing the mobile number, or mobile number portability, would be another key concern. The new facility is expected to escalate advertising and promotional budgets of operators as they try to retain existing customers and also attract those their rivals seeking change.

   For instance, Idea's subscriber acquisition costs relative to sales rose by 2.5% sequentially in the December quarter. This was largely offset by lower staff costs and network expenses, but the company may find it difficult to squeeze these costs further.

   Given these factors, the performance of telecom players is expected to fluctuate in the near term, which means investors may have to wait for a while to see a turnaround in the telecom stock valuations.

Stock review: Marico

Marico's annual sales growth of 22 per cent at `818 crore was mainly supported by price rise in the domestic consumer products business (about 70 per cent of overall sales) translating to revenue growth of 19 per cent. International business also clocked a healthy growth of 33 per cent (28 per cent adjusted for the exchange rate).

Volume growth, the company's key focus and growth strategy, however, remained steady at 15 per cent. Domestic volumes grew at a lower rate of 10 per cent (compared to 11.5 per cent in the September 2010 quarter) as business was impacted by price rise —24 per cent and 13 per cent in Parachute and Saffola (more than 50 per cent of domestic sales), respectively. However, international business clocked a higher volume growth of 25 per cent.

Operating profit margin tanked around 260 basis points (bps) to 12.2 per cent primarily due to a 742 bps jump in raw materials and packaging costs. Prices of copra (40 per cent of total raw material costs) witnessed a jump of 62 per cent. Plus, rises in prices of sunflower oil (3 per cent), rice bran oil (25 per cent) and HDPE (4 per cent). However, net profit margin declined only 80 bps to 8.5 per cent due to higher income, lower depreciation and taxation.

The outlook for the domestic business is cautious as volume growth is at downside risk in case of further price rise (8-9 per cent planned in Parachute) on account of rising raw material prices. Analysts expect continued pressure on margins though the company expects these to come to normal levels soon as input prices, mainly copra, are expected to ease in the next financial year.

Meanwhile, performance of the international business and skincare business segment (Kaya) is encouraging and likely to support overall business growth. Key geographies namely Bangladesh, West Asia, North and South Africa in a addition to new acquisitions (Code 10 and Ingwe), are doing well.

Kaya is showing signs of recovery and there has been sequential improvement in performance.

It recorded better annual sales growth of 11 per cent (excluding Derma Rx acquisition), same clinic growth of 10 per cent (helped by Indian operations despite closure of six clinics) after a decline for past few quarters and significant decline in losses at 0.9 crore (sequentially down for a consecutive quarter).

Analysts have a neutral rating on the stock and prefer to see the impact of price rises on volumes.

The strategy of targeting volume growth is at risk due to price rise

Stock Review: Amara Raja Batteries

 

 

Amara Raja Batteries Ltd (ARBL) is the country's second largest battery manufacturer after Exide with a 27 per cent market share. Johnson Controls, one of the world's largest battery manufacturers, holds a 26 per cent stake in it.

 

Strengths and growth initiatives

Strong demand from auto segment: The demand for batteries from the auto segment continues to grow in double digits. Analysts at Angel Broking expect the company's revenue to grow at a compounded annual rate of 19.3 per cent over the next couple of years, owing to around 21 per cent growth in demand from the auto segment between FY10 and FY12. OEM demand (demand from car and two-wheeler manufacturers) is expected to be robust owing to an expected 12 per cent growth in new vehicle sales. Replacement demand is also expected to remain healthy. Moreover, organised players are expected to enhance their market share at the expense of the unorganised segment.

Demand for UPS intact: Analysts at Angel Broking estimate that revenue from industrial segment will grow at a CAGR of 11.1 per cent between FY10 and FY12. Within this segment demand for UPS and inverters continues to be robust.

Capacity expansion: The company is spending Rs53 crore on expanding its capacity for car batteries by 8 lakh units to 60 lakh units and two-wheeler battery capacity by 18 lakh units to 50 lakh units.

 

Weaknesses

Margins affected by higher lead prices: Lead prices have firmed up. The company's raw material costs as a percentage of sales rose 777 basis points y-o-y in Q2FY11 owing to higher lead prices (the average this quarter was $2039 per tonne, up 6.1 per cent y-o-y).

Slowdown in telecom demand: The telecom segment contributes 30 per cent of the company's revenue. Both realisations and volume demand from this segment were low in the Q2FY11. Realisations from the industrial segment tend to be higher than from the auto segment. Subdued realisation therefore affected the company's operating profit margin.

According to analysts at A C Mehta Investment Intermediates, margin pressures from the telecom segment will continue for the next two to three quarters. However, the management is optimistic that replacement demand from telecom towers will be substantial.

While analysts at Angel Broking expect the company's revenues to grow at the rate of 19.3 per cent, they expect its profit after tax to grow at only around 7 per cent annually owing to these two factors.

 

Financials

Debt-equity ratio: It has a low debt:equity ratio of 0.17.
Return on capital employed: The company's RoCE is not as consistent as one would have liked it to be. It ranges from a poor 3.6 per cent in FY05 to a high 25.53 per cent in FY10.

 

Valuation

The stock is currently trading at a 12-month trailing PE of 10.97. This is only slightly higher than its five-year median PE of 10.11.

Over the last five years the stock's earnings per share (EPS) has grown at a compounded annual growth rate of 70.5 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.16. While the stock's valuations are attractive, there is a question mark on its ability to grow its earnings at a high rate. Wait for an improvement with regards to these issues before buying this stock.

 

Stock Review: Indraprastha Gas

 

Started with the objective of supplying natural gas to New Delhi, Indraprastha Gas (IGL) has grown to become India's leading natural gas distributor. Now, in addition to Delhi, it also supplies gas to neighbouring townships such as Noida and Ghaziabad. Two large public-sector companies — BPCL with 22.5 per cent stake and Gail also with 22.5 per cent stake — are its main promoters while Delhi government holds a minor 5 per cent stake. At the end of FY10 IGL earned 86 per cent of its total revenue from the distribution of CNG to vehicles in Delhi and the NCR.

 

Strengths

Strong volume growth: Volume growth is the key driver of IGL's revenue. CNG sales touched a record high in Q2FY11 at 155.6 million kg while increased offtake from industrial customers boosted the sale of PNG. According to a recent Edelweiss report, IGL is expected to post volume growth of 24 per cent in FY11E and 19 per cent in FY12E.
Expanding network: IGL plans to invest approximately Rs 400 crore each in FY11 and FY12 to expand its presence in the NCR. As it expands its distribution network into townships such as Greater Noida, Sonepat and Panipat, its volumes are expected to rise.
Monopoly: It enjoys the first-mover advantage. IGL has built the pipelines required for distribution of natural gas. This network exclusivity will remain with IGL for another 25 years after the expiry of its marketing licence in 2011. This will handicap its competitors whenever they enter the markets where IGL is already present. Moreover, IGL gets gas from Gail under the administered price mechanism (APM) at a discount to the market price, hence it can to some extent undercut its competitors.

 

Risks

Inability to pass on price rise: As volumes rise, IGL will have to look elsewhere (besides GAIL) for meeting its demand. It will then have to buy gas at market price from suppliers such as RIL & BPCL. If it is unable to pass on these costs to consumers then IGL's margins will take a hit. Till now it has maintained a stellar operating margin of 30 per cent, but doing so in future may not be easy.
Increased competition: Heavyweights like RIL and Gail (its promoter) are set to enter natural gas distribution. Unlike IGL they will have the advantage of in-house gas supply and in the long run, they will be able to nullify it's first-mover advantage.
Run-in with regulator: IGL's exclusivity is being questioned by the new regulator, Petroleum and Natural Gas Regulatory Board (PNGBR). PNGBR relented when the courts intervened. But IGL's run-in with the regulator has the potential to hurt its chances of winning bids in other cities. PNGBR plans to call for bids for gas distribution licences in eight cities.

 

Valuation

In the past three years the stock has turned in a stellar performance — an annualised return of 49.47 per cent. As a result the current price of the stock is close to its three-year peak.
The stock is currently trading at a PE of 20.17 (December 2). This is much higher than its five-year median PE of 12.84. Over the last five years the stock's earnings per share (EPS) has grown at a compounded annual rate of 18.7 per cent. This gives it a price-earnings to growth (PEG) ratio of 1.08.
While the company's outlook is positive, valuations appear to be stretched. Buy only when the stock price corrects.

                                               

Stock Review: Corporation Bank (CB)

 

Corporation Bank (CB) is a mid-sized public sector bank, with 1,000-plus branches in the southern and western parts of the country. It has the reputation of being one of the best-managed public sector banks in India with a relatively clean balance sheet and an impressive track record.

 

Strengths

Operating efficiency: The bank's operating efficiency ratios have improved markedly over the past three years. Its employee cost as a percentage of income has come down from its peak of 11.37 per cent in FY06 to 7.45 per cent in FY10. But on a quarter-on-quarter (q-o-q) basis the company's operating cost has been rising: its cost-to-income ratio stood at 39.1 per cent in Q2FY11, compared to its own eight-quarter average of 35.3 per cent.
Strong NIM levels: The bank has historically (over the past five years) had net interest margins (NIM) in the range of 2.9-3.8 per cent. But analysts expect that NIM will decline to the 2.3-2.5 per cent range due to incremental cost pressures and its bias towards lending to large corporates (38 per cent of total loan book). Even though this ensures quality, it lowers the margins.
Safe loan portfolio: Till Q2FY11 its exposure to real estate compromised 4 per cent of its total advances while just 4 per cent of its total advances underwent restructuring. In Q2FY11 it had provision coverage ratio of 78.5 per cent, up from 76.7 per cent in Q1FY11. Hence any potential downside from risky (real estate) assets is unlikely to have much of an impact on the bank's balance sheet.
Well capitalized: Though the minimum capital adequacy ratio (CAR) that banks have to maintain is 12 per cent, CB is well capitalised with a 14.5 per cent CAR at the end of Q2FY11. Moreover, the high stakes held in the bank by government and LIC ensure that they will be able to infuse capital whenever the need for more funds arises.

 

Weaknesses

Low CASA growth: A high percentage of total deposits mobilised by the bank comes from term deposits. This is also responsible for its low margins. In Q2FY11 the bank's term deposits grew at 30 per cent plus y-o-y vs 25 per cent growth in overall deposits. In Q2FY11 the bank's CASA ratio stood at 25 per cent, up from 24.1 per cent in Q1FY11. The bank aims to raise the percentage of its CASA deposits to 26 per cent.
Limited reach: The bank is present predominantly in western and southern India, but its branch network in tier II and III cities and in the rest of the country is limited. This hinders the bank's further growth and limits its ability to expand its CASA ratio.
Low fee income: The bank's level of fee income is not high. Though its has made various attempts to raise it, such us by offering cash management service to LIC, so far it has not been able to fully exploit the potential of this area.

 

Valuation

Over the last three years CB has maintained an average return on equity (RoE) of 18 per cent. Analysts expect this ratio to rise further to an average 19 per cent over the next three years. According to their estimates, the bank is likely to post an EPS growth of 14 per cent between FY10-13 (not a high number).
The stock is currently trading at 1.16 times price to book value. The three-year median P/BV of the stock is 1.12. Thus it is trading close to its historic trading level. Investors with at least a three-year investment horizon may buy the stock on dips.

 

Stock Review: ITC

 

ITC Ltd put up a strong show in the December quarter, with sales growth of 20.4 per cent year-on-year (y-o-y) to `5,514 crore compared to 16 per cent in the first half of 2010-11. The cigarette business bounced back, with volumes rising around two per cent compared to a decline in the first half. This, along with the earlier price increases, resulted in gross sales growth of 18.4 per cent (highest in any quarter for the last four years) to `5,236 crore. The non-cigarettes FMCG business ( `1,104 crore) continued to report robust performance, with the branded packaged foods business pushing up revenues by 24 per cent. The agri business registered 18 per cent growth in sales due to higher realisation in soya and coffee, followed by higher leaf tobacco exports. Sales in hotels and paper segments increased at lower-than-expected rates of 14.3 per cent and 8.5 per cent, respectively, courtesy moderate improvement in average room rates as well as occupancy and packaging inventory depletion due to uncertainty around the pictorial warning.

Profitability has been in line with expectations. The operating profit margin has been maintained at about 37 per cent, helped by almost all businesses and benign tobacco prices (biggest raw material). The net profit margin has been flat at 25 per cent due to a 15 per cent increase in interest, depreciation and taxation (cumulative `833 crore, or 15 per cent of revenues).

Though the uptrend in volume growth in the cigarette segment is expected to continue, analysts are waiting for the announcement on taxes in the upcoming Union Budget.

The non-cigarette business is expected to benefit from new launches in biscuits (Sunfeast Dark Fantasy variants), noodles (Sunfeast Yippee), skincare (fairness cream and winter care soap) and shampoos. Hotels and paper businesses will also improve performance on the back of upcoming sports events (IPL and ICC World Cup) and clarity on pictorial warning, along with strong growth in the stationary business. Margins are likely to be maintained, even though the company is witnessing cost pressures, especially in agri-based raw materials (except tobacco).

While volumes in the cigarette segment bounced back, hotels and paper performed below expectations

Stock Review: Religare Enterprises

 

The performance of Religare Enterprises in the December quarter was disappointing. However, its recent acquisitions are expected to drive its growth in the coming quarters. The strong 74% growth in the consolidated revenue did not trickle down to profits since the company did not get support from its asset management and investment banking business segments. Its lending business, which drives almost half of its consolidated revenues, saw the interest yields contracting. Coupled with rising interest rates, this led to a 42% fall in the net profit for the segment. Further, its subsidiaries re-ported a combined loss of . 87.4 crore. Therefore, the company re-ported a loss of . 98.5 crore against a profit of . 21.5 crore a year ago on a consolidated basis.

However, the company is taking various initiatives to drive business growth. Its key global asset management and investment banking divisions have seen a spate of acquisitions. For instance, the global asset management business acquired Northgate Capital and Landmark Partners in 2010. This has given the company access to assets under management of $11.3 billion (. 56,000 crore) along with greater capabilities in primary and secondary private equity, venture capital and real estate segment.

Its investment banking business acquired three companies in the December quarter. Besides providing geographical diversification, these acquisitions would help in reducing the turn around time in the regions. Investment banking business is relationship driven. Once the integration with the target companies completes, the company would be able to fully capitalise on the target's relationships. This would help the company in generating profits at a fast pace. Moreover, the effect of rising interest rates on its lending business would fade away, as almost 62% of its financing book is floating rate in nature. Hence, the increase would be passed on to the borrowers. While the company has invested heavily in its key driving businesses, the future growth depends upon how fast the company finishes the integration with the acquired companies.

 

Stock Review: TATA CHEMICALS

Tata Chemicals posted a subdued performance for the December 2010 quarter on a consolidated basis. Although the domestic business flourished during the quarter, lower sale volumes recorded by the subsidiaries on account of adverse climatic conditions, unplanned plant shutdown and high input costs pulled down the overall growth.

The company's December 2010 quarter consolidated sales rose 9% to . 2,860 crore, thanks to a 18% growth in the fertiliser segment to 1,200 crore recorded. The operating profit margin fell by 490 basis points to 15.4% due to higher raw material prices.

 

Compared with the year-ago period, input costs in relation to net sales were higher by 690 bps to 43.7%. This resulted in December 2010 being the second consecutive year of net profit falling on a year-on-year basis. In the past few quarters, the company has witnessed high volatility in profits, which have been alternately recording a rise and fall on a year-on-year basis. The main reason is that the company's domestic and overseas businesses have hardly grown in sync. When domestic business performs well, the overseas doesn't and vice versa. The quarters when both these businesses did well — June 2010 and December 2009 — the company posted healthy profits of around 250 crore.

This was the case with its December 2010 quarter numbers, when domestic business registered a healthy 30% profit growth, but overseas profits nearly halved.

The company's US-based subsidiary General Chemicals is seeing strong soda ash demand locally as well as in export markets. TCL intends to raise the soda ash capacity at its GCIP plant by 4-lakh tonne in the coming quarters. Moreover, it has lined up various other capacity expansion plans for the next two years, including salt and fertiliser plants.
The recent 20% subsidy reduction announced by the government on DAP and complex fertilisers from April 2011 makes the company's outlook on the complex fertilisers cautious. Moreover, rising demand for phosphoric acid is putting upward pressure on its costs. In view of the challenges ahead, the scrip's valuation has come down to just 10 times its earnings for the trailing 12-month period.

Stock Review: Hindalco

The markets are not known to reward managements for their long-term vision. In 2007, Kumar Birla faced the wrath of the stock market when he took a $6.2 billion call on Novelis, the Atlanta-based producer of rolled aluminum products. The markets questioned his assumption that more aluminum would be consumed by automobile, transport, electronics and cola companies.

He has been proved right three years hence. Not only are shipments up this financial year, Novelis expects transport and electronics sectors to be global demand drivers and clock 20-25 per cent growth in 2011, as developed markets revive. Rolled product shipments are up eight per cent year-on-year (y-oy) in North America due to growth in can, automotive and industrial products. Europe has seen y-o-y volume growth of 10 per cent.

Novelis posted a net loss of $46 million, while the adjusted net profit was $52 million. The loss is mainly due to a one-time charge of $74 million for refinancing its $4 billion debt. Both Citi and Edelweiss Capital expect FY11 earnings before interest, taxes, depreciation and amortisation to be $1.08 billion as against the initial estimate of $1 billion.

If international operations have given traction in the finished products side, the company is on an expansion spree in India too. Hindalco is among the largest producers of aluminum in India with a capacity of 500,000 tonnes, with backward linkages in alumina at 1.5 million tonnes per annum and bauxite reserves of 65 million tonnes. The company is planning to increase alumina capacity five-fold to five mtpa and aluminum to 1.7 mtpa in the next five years with a total capital outlay of `40,750 crore.

The green field phases of these projects, which are back-ended, are expected to come on stream in the beginning of FY12. Being one of the lowest cost producers of aluminum at $1,450 a tonne, Hindalco is well placed to capitalise on the growing demand for aluminum and value-added products. However, given that the company is in the metals space, it does face the usual risks that commodity companies do.

The company expects shipments of flat rolled products to grow around 20 per cent in 2010-11

Stock Review: GLAXOSMITHKLINE PHARMA

Despite posting a modest performance for its fourth quarter ended December 2010, GlaxoSmithKline Pharma closed the year 2010 on a positive note. The company has grown across all its business segments and is on track to maintain its target of growing at close to 12-13% annually. The company's net sales for the quarter grew at a modest rate of 10.4% while its net profit rose by 11.7%. Higher raw material and employee costs ate into the operating-profit margin leading to its drop by 90 bps to 30.7%. In the quarter, GSK's core pharma business grew 11.4%. The company registered good growth in its mass market, mass specialities and specialities businesses such as oncology, dermatology and cardio-vascular; with the launch of new products into the branded generic segment and increase in footprint in rural areas and hospitals.

Its vaccine business, which contributes 8% to total revenues, grew the fastest at 24%. The 2,100-crore company is now the number three player in the Indian pharma market. Its pharma business, though, continued to grow below the industry growth rate.

The company functions as a pure generic company and is not restricting itself at launching the products of its parent company. It is in-licensing products of other pharma companies, too, and has plans to introduce 5-6 products in the current year. GSK is also investing in beefing up its field force. The company expects to increase the contribution of its high-margin vaccine business from the current 8-9% to around 15% in the next two years.

This move will help maintain its margin despite its proposed in-vestment in product launches and increasing field force. GSK already enjoys one of the highest profit margins of 35% in the industry.

The company's stock is trading at a trailing price-to-earnings multiple of 32.5. These are premium valuations the company well deserves, considering its growth trajectory, parentage and strong product pipeline.

Stock Review: RELIANCE COMMUNICATIONS

No relief seems to be in sight for investors of Reliance Communications, India's second-largest listed telecom operator. Its revenue declined for the sixth consecutive time in the December 2010 quarter on falling network utilisation.
In the coming quarters, the completion of the GSM rollout and stabilising per-minute revenue may offer some cushion to margins. But what would hold the key to its growth is the extent to which the company can leverage its existing network and the success of its 3G services.

In the December 2010 quarter, the company's net revenue dropped 3% to . 4,865 crore sequentially, following a 9% drop in the wireless MoU. This was despite the 7.1% increase in the company's total subscriber base. On the positive side, average revenue per minute was stable at 44 paise per minute from the previous quarter's level.

The company reduced the number of free minutes on the network from the past quarter. It plans to use the freed minutes for data services on CDMA platform. Even though, this led to a marginal drop in the wire-less revenue during the quarter on sequential basis, it will help in improving the quality of revenue in the coming quarters.

The company witnessed a 5% growth in the global segment on the back of a decent growth recorded in the ILD and NLD minutes during the same period. Better operational efficiency in the global business led to a marginal jump of 90 basis points to 33.3% in the company's EBIDTA margin for the quarter against the previous quarter.

Since RCOM's GSM rollout is over, network operating costs are expected to lower in the coming quarters resulting in easing out of the pressure on the company's operating margin. Moreover, settling of the promo-tional costs at the current levels is likely to improve the operating margin in the coming quarters.
Also, the business restructuring is likely to stabilise the falling MoUs in the coming quarters. However, given the high debt on the books and the legal inquiry pertaining to a probable higher-than-prescribed holding in Swan Telecom poses a challenging situation.

At the current market price of . 100.7, the company trades at nearly 8.9 times the earnings for the trailing twelve months. Though its valuation is the cheapest among its peers, its stock price may remain rangebound in the absence of a major growth trigger.

Stock review: ONGC

ONGC's December quarter performance was boosted by receipt of `1,898 crore from the gas pool account, as gross realisation from crude oil sales improved to $89.13 a barrel, an increase of 16.3 per cent year-on-year. However, rising oil prices led to a higher subsidy burden of `4,222 crore compared to `3,497 crore a year ago.

Nevertheless, net realisation at $64.8 a barrel was higher than $57.7 in the corresponding period a year ago and $62.8 a barrel in the September 2010 quarter. The top line grew a robust 34.2 per cent year-on-year and 12.9 per cent sequentially to

`20,804.15 crore. Improved realisation and gas pool receipts helped earnings before interest, tax, depreciation and amortisation grow 45 per cent year-onyear to `13,531.62 crore, while margin expanded 484 basis points to 65.04 per cent. Net profit surged over two fold to `7,083.23 crore compared to the corresponding quarter a year ago.

Going ahead, analysts expect rising output from marginal fields to more than offset any decline in production from the ageing ones. Its subsidiary, ONGC Videsh Limited, is also expected to report a jump in volumes by 2013 at around 12 million tonnes, as incremental production from Myanmar, Sakhalin-1 and Venezuela comes onstream, states a report from Angel Broking.

Analysts at Elara say the stock price factors in the delay in diesel deregulation as well as the higher under recoveries of `750 crore expected in 2011-12. Thus, any positive news flows now should help the stock rise. Moreover, the government plans to divest five per cent stake by March, with the management indicating that the process has already been initiated. Analysts say one should stay invested to reap rich dividends.

Improved realisation and higher receipts from the gas pool account boost overall performance

Stock Review: Axis Bank

 

Axis Bank is India's third-largest private sector bank. It is reputed to be a well-managed bank.

 

Strengths

Large branch network: It has a large network of 1,027 branches.
Fast-growing loan book: The bank has a track record of expanding its loan book faster than the industry. In Q2FY11 its loans grew at the rate of 36.5 per cent, propelled by loans to large-and mid-sized corporates.
Strong margins: The bank enjoys high net interest margin (NIM). In Q2FY11 it stood at 3.68 per cent, which was up 16 basis points (bps) y-o-y but down 3 bps q-o-q. The bank's high NIM is the result of a strong CASA (current account savings account) ratio, which stood at 41.5 per cent in Q2FY11. This gives the bank the advantage of low cost of funds.
Fast growth in net interest income: In Q2FY11 its net interest income grew at 40.5 per cent y-o-y.
Stable fee income: In Q2FY11 the bank's core fee income grew 18 per cent y-o-y, led by high growth in corporate banking and capital markets. With corporate loan growth reviving and the capital markets going strong, analysts at Angel Broking expect the bank's fee income to grow at a compounded annual rate of 30 per cent per annum between FY10 and FY12.
Strong capital adequacy ratio: It has a healthy CAR of 13.7 per cent and tier-I capital of 9.8 per cent.
Purchase of Enam: The bank's recent acquisition of the sell-side businesses (institutional and retail broking, distribution and advisory businesses) for Rs 2,067 crore in an all-stock deal has been seen as a positive for the bank due to the right strategic fit. It gives it an entry into equity capital market related businesses. The valuation of Enam's business, according to analysts at Prabhudas Liladher, was slightly higher compared to peers, though they concede that such acquisitions usually happen at a premium of 10-20 per cent. The share-swap deal will result in a 3.3 per cent dilution of Axis's equity base.

 

Weaknesses

Lower trading gains: In Q2FY11, the bank's trading gains stood at Rs 108.4 crore, which was down (-)51.6 per cent y-o-y.
Rising operating expenditure: In Q2FY11 its operating expenses were up 27.8 per cent y-o-y, chiefly on account of costs arising out of expansion of branch and ATM network and higher wages.
High provision expenses: At Rs 321 crore, the bank's NPA provisions remained high sequentially. It was up 5.6 per cent q-o-q (though 24.1 per cent lower y-o-y). However, analysts do not see this as a cause for much concern. As the loan book grows, they say, the amount of provisioning is bound to increase.

Slippage ratio in Q2FY11 was 1.7 per cent, marginally higher than the 1.6 per cent in Q1FY11. However, the slippage rate has been declining — it stood at 2.2 per cent at the end of FY10.

 

Growth drivers

High loan growth: Analysts expect the bank to clock a loan growth rate of 25 per cent in FY11 as a whole.
Network expansion: The bank aims to add 200 branches in FY11. This is expected to lower its cost of funds and help it maintain its net interest margin (NIM).

 

Valuation

Axis Bank is currently trading at a trailing P/B ratio of 3.3. This is exactly at par with its five-year median trailing PB ratio of 3.3. Investors should gradually accumulate this fundamentally sound stock whenever its price dips.

 

Stock Review: Blue Star Limited (BSL)

 

Blue Star Limited (BSL) is a leading central air conditioning and commercial refrigeration company. Its other businesses include marketing and maintenance of imported professional electronic and industrial systems and execution of industrial projects. The company has three business segments: electro-mechanical products and packaged air conditioning systems, cooling products, and professional electronics and industrial systems.

 

Strengths

Preferred vendor: The company's strength lies in its superior execution skills compared to that of its competitors. According to a recent Angel Broking report, "With a 30 per cent market share in the central air-conditioning systems segment, the company is the preferred vendor for institutional clients. Its list of national account customers provides repeat businesses."
Healthy order book: BSL's order book on September 30, 2010 increased to Rs 1,998 crore compared to Rs 1,815 crore on September 30, 2009, a growth of 10 per cent. Order inflow increased from Rs 642 crore in Q2FY10 to Rs 715 crore in Q2FY11, representing an increase of 11 per cent.
Presence in high-margin segments: BSL is a diversified player in the air-conditioning industry. However, it focuses on high-margin segments such as commercial refrigeration, cold storage and central air-conditioning. Its margins have improved following an increase in the average ticket size of orders.

 

Concerns

The company is exposed to operating risks arising out of rising input costs, changes in technology and customer preferences, increasing size and complexity of contracts, and growing competitive pressures within the industry. BSL's borrowings have gone up three times during the course of the first half of FY11, owing to an acquisition and the stretching of its working capital cycle. Hence its interest costs have gone up four times.

 

Opportunities

The company has received orders from sectors such as healthcare, education, hospitality, power, steel and transportation. It has also witnessed some revival in the flow of orders from real estate. According to the Angel Broking report mentioned earlier, "The company expects the information technology segment to revive from Q2FY12."

The report further adds that the surge in demand for commercial space and increasing corporate and government thrust on setting up an efficient cold chain infrastructure in the country will trigger demand for centralised air-conditioning and cold storage systems in India. BSL's cold storage division too has high growth potential with the aggregate cost of providing a nation-wide cold chain infrastructure estimated at more than Rs 15,000 crore.

 

Valuations

Over a period of five years, Blue Star has registered a robust average return on net worth of nearly 44 per cent. The stock is currently trading at a 12-month trailing price-to-earnings (PE) ratio of 20.58 (December 14, 2010). This is slightly lower than its five-year median PE of 22.05 times. It has posted a five-year earnings per share (EPS) CAGR of 34 per cent. This translates into a price-earnings to growth (PEG) ratio of 0.61. Given the strong growth prospects across the three segments and a healthy order book you may buy this stock with at least a three-year investment horizon.

 

Stock Review: Graphite India Limited (GIL)

 

Graphite India Limited (GIL) operates in four major areas: graphite and carbon, power, steel and other segments. The company is a leading producer of graphite electrodes and accounts for approximately 6.5 per cent of global electrode capacity.

 

Strengths

Good Q2 numbers:The graphite and carbon segment reported a growth of 19.2 per cent y-o-y in top line, mainly due to higher graphite electrode volumes. The power segment's revenue grew 64.1 per cent y-o-y. In Q2FY11, operating profit declined 16 per cent y-o-y but grew 58 per cent q-o-q.This sequential growth was due to improved volumes and higher capacity utilisation.

Strong entry barriers: The global graphite electrode industry is characterised by a high level of consolidation: the top six players account for over 70 per cent of total global installed capacity. The balance capacity is owned by a few small players. According to a recent report from Angel Broking, "The highly consolidated nature of the industry is owing to the barriers for new entrants."

 

Opportunities

Optimising costs: To optimise costs at the Bangalore plant, the company is implementing a voluntary retirement scheme. The scheme cost the company Rs 12.7 crore in Q2FY11, but is expected to save approximately Rs 6 crore annually.

The new 50 mega watt (MW) power plant is progressing on schedule. It is currently awaiting environmental clearance from the government. The project is expected to be commissioned by Q4FY12.

According to the Angel Broking report, the graphite electrodes industry is expected to grow faster, compared to electric arc furnace (EAF) steel production over the next few years, as the de-stocking of graphite electrode inventory by steel manufacturers is expected to reverse. "We expect graphite electrode volumes to register a 17.2 per cent compounded annual growth rate (CAGR) in CY10 and CY11. GIL plans to expand its capacity from 78,000 MT per year to 98,000 MT per year. This will be completed by FY12. Hence, it is well poised to reap the benefits of growth in demand," says the report.

 

Concerns

The company's main raw materials are either petroleum based or coal based. As the price of crude and coal rise, the price of derivative materials like needle coke, pitch, furnace oil and met coke all tend to rise. Thus, rising prices of these two commodities threaten to raise the company's input costs drastically. In addition, the company exports, imports and has also incurred foreign currency debt. So volatility in the foreign currency market directly impacts its bottom line.

 

Valuations

GIL has been able to bring down its debt-to-equity ratio from 1.16 (in FY06) to 0.2 (in FY10). Moreover, the company's net cash per share has risen to Rs 13.1 per share in FY10 as compared to Rs (-) 7.8 per share a year before. The stock is currently trading at a 12-month trailing price-to-earnings (PE) ratio of 8.8 (as on December 7, 2010). This is slightly above its five-year median PE of 7.6. It has registered a five-year CAGR of nearly 29 per cent in earnings per share; hence its price-earnings to growth (PEG) ratio is 0.8. Given a reasonable valuation and sound growth prospects, you may accumulate the stock on dips.

Stock Review: State Bank of Bikaner and Jaipur’s (SBBJ)

State Bank of Bikaner and Jaipur's (SBBJ) rights offer appears attractive for existing shareholders, as they can earn a return of close to 13% on their additional investment. However, it would not be profitable to make any fresh investment in the counter at the prevailing stock price.

To augment its tier-I capital base, the Rajasthan-based bank's board approved a rights issue of . 780 crore, featuring an offer for two shares for every five existing shares at 390 per share.

Once the new shares are listed, the bank's earnings per share will be diluted by 28.6% to . 75.7. Based on its Tuesday's closing price of . 617.8, the scrip is trading at 5.8 times its trailing twelve months, earnings. Its peers such as State Bank of Travancore, State Bank of Mysore and Bank of Maharashtra are trading at similar valuations. To retain the current valuation, the SBBJ scrip is expected to fall to around . 440 after the rights offer. This would still be at a premium of over 13%, or . 50, more than the rights issue price.
There would be no dilution in percentage stakes if all the existing investors apply for the rights issue. Its parent State Bank of India controls a stake of 75% and is likely to buy the shares at the discounted price to improve the equity capital base of its subsidiary. In case the other shareholders don't opt for this, the relative shareholding of the non-promoter group in the bank will come down by 5.8%.

For the nine-month period ended December 2010, the net interest in-come of the bank rose by 47% year-on-year and net profit went up by 26%. With the share of NPA at 1% of net advances, the bank's asset quality is better than its peers, which have NPAs of over 1.7%.

It makes sense for the shareholders to opt for the rights issue, given the attractive return. However, itwill not be attractive to buy the shares now to participate in the rights issue since this might result in a loss of 20% on overall investment.

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 Review: Yes Bank

After dumping the bank's stock, initially, on fears of its exposure to some telecom companies (named in the 2G scandal) and microfinance institutions (one per cent exposure), Yes Bank has become a darling of most research houses. Most brokerages have revised their view on this private bank, which is one of the top five private sector banks in India. The total balance-sheet of the bank is Rs 52,000 crore with a total business (advances & deposits) of Rs 70,000 crore, as of December 31.

However, since inception, the bank has only opened 185 branches and, therefore, its current account savings account (CASA) deposit accounts for only 10 per cent of its total deposits. The bank intends to change this and open at least 750 branches by 2015. This retail drive should help the bank garner low-cost deposits and also enter the lucrative retail lending market.

So far, the bank has primarily focused on corporate clients and this reflects in its loan book, too, which has 70 per cent exposure to corporates. This strategy has helped the bank maintain margins of over three per cent, as it has successfully managed to pass on increased interest costs to the borrowers, claim analysts.

Aalok Shah of India Infoline believes, they have the best in-class asset quality, which is why the bank's gross non-performing assets were contained at 0.8 per cent even during the bad years. The management has guided its loan growth to be around 2x the industry's loan growth.

The bank's total business is also estimated to increase at a CAGR of 35 per cent till FY15 with a total business size of Rs 2.25 lakh crore. Analysts believe the bank is following the same path as Axis and HDFC Bank did in the initial years. What the Street also likes is its focus on niche growth sectors, which were not a major focus area for other banks. The key knowledge sectors that Yes Bank focuses on include, food and agri business, media and entertainment, information technology, telecommunications, infrastructure, engineering and healthcare.

The bank's focus on corporate clients has helped it maintain margins of over three per cent

Stock Review: Birla Corporation

 

 

Birla Corporation Ltd (BCL) was established in 1919. The MP Birla group is its promoter. It manufactures cement, jute products, synthetic viscose and cotton yarn. Cement manufacturing accounts for the predominant 85 per cent of its revenue. The company's seven cement plants are situated in states such as Rajasthan, MP, UP and West Bengal. It caters mainly to north and central India. It is among India's top 10 cement producers with current capacity of 7.5 million tonnes.

 

Strengths

Cash rich: Between the FY10 and FY12 the company is expected to generate free cash flow (after accounting for capital expenditure) of Rs350 crore. So it will be able to fund its expansion plans largely through internal accruals.
High returns ratios: Between the FY05 and FY10, the company has maintained a high return on capital employed (ROCE) ranging from 17.76 per cent to 41.23 per cent.
Low debt: Birla Corporation is a low-debt company. At the end of FY10 it had a very low debt-to-equity ratio of 0.36.

 

Weaknesses

Realisations under pressure: In Q2FY11 the average realisation was Rs3,119 per tonne. This was 13.9 per cent lower than the realisation in Q2 FY10.
Rising expenditure: In Q2FY11 the company's total expenditure was 30.59 per cent higher than in Q2FY10. Its raw material costs increased because it had to purchase clinker as its Satna unit was shut down. Higher cost of imported coal was also responsible for rising expenditure.
Lower realisation and higher costs are expected to result in lower profit after tax in FY11. According to analysts at Motilal Oswal, profit after tax in FY11 will be to almost 23.9 per cent lower than in FY10.

 

Opportunities and growth drivers

Higher demand: The government is expected to give a major push to infrastructure development. In the 12th five-year plan total investment on infrastructure will be double the expenditure during the 11th five-year plan. Demand from real estate (especially housing) is also set to increase. All these factors are expected to drive the demand for cement. Moreover, most of the ongoing capacity expansion initiatives will get completed by FY12. The industry is likely to see very little capacity addition after FY12. Hence, overcapacity is likely to end while realisations are expected to improve in future.

Capacity expansion: One of the major growth drivers for the company will be expansion of cement capacity. The company plans to invest Rs2,300 crore to augment its total capacity to 13.8 million tonnes by FY14.

 

Threats

Delay in expansion: Any delays in capacity expansion plans will cause cost overruns. The expected benefits from selling higher volumes will then not accrue to the company.
Higher fuel costs: High cost of coal also has the potential to affect the company's margins.

 

Valuation

The company is trading at a 12-month trailing PE ratio of 6.55. This is slightly above its five-year median PE of 5.55. Its five-year compounded annual growth rate in EPS is 38.6 per cent. This gives it a PEG ratio of 0.17 which is quite attractive. You may buy the stock with at least a three-year investment horizon.