Stock Review: PI Industries

 

PI Industries is likely to fare well in future on the back of robust demand for agri inputs and growth in the synthetic chemicals business

 

UDAIPUR-BASED PI Industries is an agrochemicals company that provides inputs and solutions to farmers in key areas of crop protection chemicals, specialty products and plant nutrients. Incorporated in 1947, the company has a significant focus on contract manufacturing of fine chemicals (CRAMS – contract research and manufacturing services). While agri-input accounts for over 60% of the company's total business, CRAMS forms the rest over 30%. Till December 2010, polymer compounding segment used to form the balance of the total business, which has since been divested.

   With a pan-India presence and over 25,000 retail points, PI has a vast distribution network. The company has three formulation and two manufacturing facilities and four multi-product plants under its three business units in Jammu and Gujarat. Also, PI has an agro-chemical research and development facility in Rajasthan.

   Globally, PI offers end-to-end solutions in the fine and specialty chemicals space to the multinationals in Japan, the US and Europe. The company looks to expand its overseas business in the coming quarters.

GROWTH OUTLOOK

In December 2010, the company sold off its polymer compounding business to France-based chemicals major Rhodia. The deal is likely to complete by the end of March 2011. The transaction will enable the company to focus on agri-inputs and custom synthesis segments, which together form a major chunk of PI's revenue. Also, the company is expected to witness improved profitability on the back of the divestment of the polymer business, which was highly working capital intensive. The company looks to use the proceeds to bring down its debt-equity ratio from the current level of almost 1 and the balance to fund its inorganic growth in the near future.

   Recently, PI has opened a research centre in partnership with Sony in Udaipur, PI-Sony Research Centre. The partnership looks to develop synthetic organic chemicals for applications in the electronic industry. While the high technical capabilities of Sony and large chemical manufacturing facilities of PI would help the venture develop the synthetic organic chemical produce in a cost-effective manner, the joint patenting will benefit PI to improve on its profitability.

   Going ahead, the company aims at 40-45% growth from its current businesses in FY12. Also, the company has lined up a capex of 125 crore for the next two years to boost capacity and inorganic growth.

FINANCIALS

During the September 2010 quarter, the company posted a nearly 45% growth in the top-line against the previous quarter. The agri-inputs business, which forms over 60% of the company's total business, continues to be the major growth driver. The next major business segment, custom synthesis, posted a somewhat subdued performance during the quarter. During the December 2010 quarter, the company expects the agri-inputs business to continue posting healthy set of numbers. Moreover, it expects a significant ramp up in the CRAMS business in the coming quarters owing to the delivery schedules of various customers.

   Over the past four quarters, the company has posted an operating profit margin in the range of 15-18%. Going ahead, on account of the divestment of its polymer centric business, the company expects an improvement in its profitability driving the operating margin to 23-24% in the next two to three years. The current institutional shareholding in the company is around 2.5%, with promoters holding around 71.3% stake.

VALUATION:

The stock of PI Industries has almost trebled against the benchmark Sensex over the past one year. At the current market price of 572, the stock trades at a price-to-earnings ratio of 13.3 for the trailing 12 months. Given the robust demand for the agri-inputs business and anticipated growth in the synthetic chemicals business, the company is expected to fare well in the coming quarters.

 

Stock Review: Balmer Lawrie

Kolkata-based Balmer Lawrie (BLL) is a miniratna state-run company that operates in eight strategic business of industrial packaging, greases & lubricants, logistics services, engineering & technology, travels & tours, logistics infrastructure, leather chemicals and tea. It has been a debt-free company with dividends rising every year and a healthy record of sales and profits growth that makes it an ideal investment candidate for long-term investors. The scrip, which was doing well until recently, seems to have fallen out of market favour during the past five months.

   At its current market price of 546, it is trading close to its 52-week low of 538. Balmer Lawrie has a strong record of steady growth with revenue at 10.7% cumulative annualised growth rate (CAGR) over the past five years and net profit by 23.5%. The dividends have grown at 33.4% during this period. The scrip, which is trading at P/E of just above 7, offers a dividend yield of 4.2%.

 

Stock Review: Orient Paper & Industries

Orient Paper & Industries has a presence across different segments such as cement, paper and electrical consumer durables. However, the cement segment is its key division. The company's major markets for cement include Andhra Pradesh and Maharashtra. Cement prices in the south have been declining since March as producers in the region are grappling with substantial cement capacity coming on stream when demand is falling. In its electrical consumer durables unit, the company has benefited from a broad revival in demand especially from the residential sector. Its loss-making paper division has been a drag on the company's profitability. However, the company's performance in the quarter ended December has indicated a turnaround in this division. Its paper division has posted profits after eight quarters and its cement realisations have also improved. The stock is trading at 7.8 times its earnings on a trailing 12 month basis. It has been falling steadily since November last year. Given its low valuations, investors can look at buying the stock ahead of a full recovery in its cement and paper businesses.

 

IPO Review: INNOVENTIVE Industries

 

INNOVENTIVE Industries was founded by first generation entrepreneurs, who left their job with Bajaj Auto to develop innovative engineering steel products. They have developed certain products which used to be imported for the oil & gas and power sectors. Its products, which are developed through in-house R&D and find applications in critical application, are the key advantage or differentiator for the company. Successful product development also enabled the company acquire major clients like BHEL, Thermax, Alstom Projects and Bajaj Auto.

GROWTH, BUT WITH HIGH DEBT

Backed by its focus on value-added products, ability of the management, demand from user industries and, to some extent, the low base, the company's net profit has grown six-fold in the last three years — from `8crore in financial year 2007-08 to about

`50 crore in 2010-11 (based on annualised net profit for the nine months to December 2010). High growth, coupled with the niche product profile, also attracted investments from private equity players. The latest PE investor is Standard & Chartered Private Equity, which has invested `30.4 crore, at `117 a share or, at the IPO price. However, growth also brought with it the heavy burden of debt. Due to lack of own funds, the company relied on banks for funds, thanks to which its debt-equity ratio stood at 4.2 times at the end of December 2010. In fact, the company paid 56 crore in interest expenses during April-December 2010, wherein it reported net profit of `34 crore. However, it has maintained decent interest coverage, given its operating profits have, at most times, remained over two times the interest cost. WHAT TO EXPECT?

The company is expanding its capacities (capital expenditure of `163 crore). It will be spread over the next one year. In 201112 though, revenue growth of 25-30 per cent (or, turnover of `750800 crore) will come from higher utilisation and launch of new products. With the commissioning of new capacities, the major gains will come in 2012-13. For instance, on the current `385crore gross block of assets, the company generated revenue of 457 crore for the nine months ended December 2010. Additionally, considering the expected profit generation in 2010-11 and 2011-12, and the increase in net worth due to the IPO and private equity placements, its debt-equity too should come down to near one-time by the end of 2011-12. Higher sales (increase in capacity), lower leverage (lower interest costs), along with the expected improvement in the margins (due to high margin products), will help the company report strong profit growth over the next two years. The key risk to the IPO is that on absolute numbers, the debt will still remain high.

 

Stock Review: NIIT Technologies Limited (NTL)

 

NIIT Technologies Limited (NTL) is a leading information technology (IT) solutions organisation. It offers services such as application development and maintenance, managed services, IP asset or platform solutions and business process outsourcing. Its clients belong to sectors such as financial services, travel and transportation and manufacturing .

 

Strengths
Healthy topline and bottomline: During Q1FY11, NTL had started executing the Border Security Force (BSF) project. The initial phase involved building the infrastructure. This was partially carried out in Q1FY11 and Q2FY11. For the purpose of subsequent revenue analysis, bought-out elements in the projects have been excluded.
In Q2 FY11, revenues, excluding BSF bought-out elements, grew at the rate of 19.7 per cent y-o-y and 9.9 per cent sequentially. Net profits grew 35.6 per cent y-o-y and 6.6 per cent q-o-q.
Broad-based growth: During the second quarter, the company posted sequential growth in all its verticals. According to a recent report from Kotak Securities, "What is encouraging is that revenue growth was experienced across clients, geographies and verticals."
Macro environment improving: The company witnessed an improvement in the macro scenario, especially in USA and India. "Overall spending on IT is on the rise, buoyed by the release of pent-up demand of the past few quarters," says the Kotak Securities report.
Fresh order intake: The company received orders worth $60 million during Q2FY11. It added three significant customers, two in the travel industry and one in insurance. Over the next 12 months it has to execute orders worth $141 million.

 

Opportunities
Capex: In FY11 the company plans to undertake capital expenditure worth Rs 60 crore. Of this Rs 25 crore has been earmarked for developing a special economic zone (SEZ). It has received permission for starting an SEZ unit in its campus which is being developed in Greater Noida.
Non-linear initiatives: The company's initiatives on the non-linear side include infrastructure management services, platform-based services and managed services. According to the Kotak Securities report, the company plans to introduce ROOM's platform in the US market. In FY10 the company had announced a partnership with Hitachi Information Systems Ltd. of Japan for offering cloud services. Revenues from this partnership are expected to begin from the second half of FY11.

 

Concerns
The current economic scenario poses fresh challenges for the industry in the form of currency volatility. In future, the company will have to carefully manage currency risk.
A good part of the revenues in Q2 came from the infrastructure delivered to BSF. Revenue from this source is likely to decline considerably in the third quarter of FY11. However, revenues, excluding those from BSF, will continue to grow.

 

Valuations
The stock is currently trading at a 12-month trailing price-to-earnings (PE) ratio of 10.9 (as on December 10, 2010), which is lower than its five-year median PE of 11.73. The company's price-earnings to growth (PEG) ratio is 0.6. Given its attractive valuation and sound growth prospects, you may buy the stock with at least a three-year investment horizon.

 

Stock Views on PETRONET LNG, TULIP TELECOM, MONNET ISPAT

UBS INVESTMENT on MONNET ISPAT

UBS maintains the `Buy' rating on Monnet Ispat with a price target of 730. Monnet Ispat is an integrated steel and power company; it has access to captive coalmines that provides it the cost advantage over its competitors. Monnet is expanding its steel capacity from 0.8 mtpa to 1.5 mtpa; the production is to start in phases starting June 2011. It is also expanding its power capacity from 150 MW to 230 MW by April 2011, and further by the addition of a 1050-MW power plant that is expected to commission in March 2013. The company has acquired land and approvals required for the expansions and has ordered equipment as well. The company has three captive coal mines: The mines in Angul district will fire the 1050-MW plant. UBS estimates operating cash costs to be 0.7 per unit of power produced. The low cost of power drives high RoE for the project. The company has also raised private equity funding for Monnet Power-it has raised 275 crore for the 12.5% stake in Monnet Power.

HSBC on TULIP TELECOM

HSBC recommends `Overweight' rating on Tulip with a target price of 235. Tulip has acquired 100% share of SADA IT Parks for a consideration of 230 crore to strengthen its data centre capabilities ten-fold. The acquisition will be funded through cash and internal accruals. The data centre is spread across an area of about 0.9 m sq. feet in Bangalore. The acquisition has been done with total investments estimated at $200 million over the next three years. The company plans to spend 60% of the investments within the next year, of which $50 million has already been spent, implying incremental capex of about $70 million over the next 12 months. To finance the incremental investments, management indicated the possibility of a strategic partner at the SPV level and suggested the company would maintain net debt/equity at 1.25x. However, in a steady state, the data centres should impact margins positively and this will be driven by the pace at which capacity utilisation picks up. Moreover, the offerings should allow the company to create stickiness as the contract period on average is about three years.

CITIGROUP on PETRONET LNG

Citigroup reiterates the `Buy' rating on Petronet LNG. PLNG reported a PAT of 171 crore, up 105% y-o-y and 30% q-o-q and ahead of consensus estimates. Profits were boosted by a sharp increase in re-gas volumes to 111 TBTU. Citigroup raises the target price to 150 from 135 on higher near-term volume forecasts. The company bought about five spot cargoes in Q3 vs. about two in Q2 and provided regassification services for another about four. Better-than-expected volumes and pricing power were the main drivers of the excellent results reported by the company. PLNG will continue to benefit from limited availability of domestic gas in the near term, with KG gas production having reportedly declined from about 58-59 mmscmd earlier to about 52-53 mmscmd currently and the continued lack of clarity on its ramp-up timelines. This makes PLNG the best-placed gas stock in the near term.

Stock Review: Patni Computer

 

Patni Computer is expected to benefit from its integration with iGate. At current valuations, its stock looks attractive from a long-term perspective

 

AFTER its sluggish performance in the past two years, Patni Computer Systems once again looks poised to grow. iGate, which acquired a majority stake in Patni, will integrate operations in the next four quarters. The exercise is expected to bring benefits of synergy and cost rationalisation. This will also make the combined entity one of the top tier IT exporters in the country.

LATEST DEVELOPMENT:

iGate has entered into an agreement to buy a 63% stake in Patni from the current promoters and a private equity investor. It will pay 503 per share, which values Patni at 10 times its 2011 estimated earnings. The deal will also trigger an open offer wherein iGate will offer to purchase up to 20% stake from the existing shareholders of Patni.

FINANCIALS:

Patni, the country's seventh-largest IT exporter, offers services in the areas of applications development and maintenance, product engineering, infrastructure management and business process outsourcing (BPO). The company's sales fell 1.8% in the 12 months ended September 2010 to 3,155.5 crore from the previous year. However, net profit, recovered by 48.7% to 654 crore. iGate is a mid-tier IT player listed on Nasdaq in the US. It provides applications development and maintenance, business intelligence, ERP, data warehousing and BPO services. During the four quarters to September 2010, its revenue rose 31% to 1,145 crore. Net profit grew 71% to 207.5 crore.

GROWTH INDICATORS:

After the completion of the integration process, Patni will get a better exposure to fast-growing banking and financial services vertical, while iGate will get an advantage of Patni's scale and size of operations. Patni is three times bigger than iGate in revenue and profits.The demand traction is back in the banking and finance vertical. But with just over 11% share in the total revenue, Patni's exposure to the sector is limited. This could be one of the reasons for a slump in its growth in the recent few quarters. On the other hand, its larger peers have reported a double-digit growth partly boosted by the buoyancy in the banking and finance segment.

   iGate generates nearly half of its revenue by selling its services to global banks and financial institutions. After the integration, Patni will be able to derive benefits from iGate's capabilities in the domain. Also, the client overlapping issues do not exist since both of them have just two clients in common. This raises the opportunity for cross selling of services to a wider set of clients.

   On a strategic front, the deal has resolved Patni's leadership issue. The stake sale by its promoters was long pending and this could have

impacted the strategic initiatives at Patni over the past few years. However, iGate comes into picture with an experienced leadership, which should provide the right strategic direction to Patni's future plans.

INVESTMENT RATIONALE:

The stock of Patni is available at a P/E of 9.4 based on the trailing four quarters earnings. With P/Es of more than 24, its top tier peers command a much higher valuation. Patni's cheaper valuation is due to its lower earnings growth rate so far. Now that its leadership issues are behind, the company may see a turnaround in the operations once its integration with iGate is complete. Further, the valuation accorded to Patni by iGate is also on the lower side given the risks involved in integrating a bigger company. But, given the maturity and experience of both the management teams, integration of the operations may not raise a major concern. Hence, long-term investors may hold on to their stake in Patni post iGate's open offer.

 

Stock Views on BHEL, MOSER BAER

CITIGROUP on MOSER BAER

Citigroup maintains `Sell' rating on Moser Baer. Moser Baer Projects Private Ltd (MBPPL), promoted by the founders of Moser Baer India Ltd (MBIL, the listed entity), has announced a fund raising of 580 crore from Macquarie SBI Infrastructure Fund. The investors have taken a significant minority stake in MBPPL's 2,520-MW thermal power project at Anuppur in Madhya Pradesh. The first phase of this project with capacity of 1,200 MW will cost 6,240 crore and is fully funded, according to press reports. This recent round of fund raising comes on back of MBPPL having raised 1,350 crore from US-based private equity firm Blackstone in August 2010. Simply put, they are not related at all. MBPPL's principal investors are the promoters of MBIL with the firm managed by professionals. The listed entity MBIL has only a less than 0.1% stake in MBPPL. The news of fund raising may have a positive rub-off effect on the stock price of the listed entity.

BANK OF AMERICA on BHEL

Bank of America reiterates the `Buy' rating on BHEL after 16% underperformance over the last six months. BoA raises the order inflow for FY11E by 8% and reiterates the 8%-above consensus EPS for FY13. The price target is 2,960 and offers 35% potential upside. In this report, BoA evaluates BHEL's long-term structural business case and addresses key market myths, on which they draw five conclusions: (1) BHEL's business case is intact with 10% higher FCFE (Free Cash Flow to Equity) vs Chinese BTG on 24% lower auxiliary consumption and heat rate. (2) It has multiple margin levers till FY13E, securing vendor price cuts on bargaining power, economies of scale and labour productivity. (3) It has made strides in localising SC tech to support margins even after lower pricing, which should be reflected in a flurry of new orders in 2011. It should also prove that ASPs of Chinese orders were a 'noise'. (4) Its work on the next level of technology (ASC) should improve long-term competitiveness . Its focus on railways, T&D, nuke and solar will de-risk dependence on thermal power. (5) The real risks are waning government support on lobby by foreign majors, Chinese/JVs undercutting, a materials spike, delay in levelling the playing field, push-back of railway/nuclear orders, and weak SEB finances.

Stock Review: SBI

STATE Bank of India may have beaten average earnings estimates of . 2,578 crore of five broking houses and the ET Intelligence Group, but the latest quarter numbers signal that higher provisions for bad loans could well dent its profitability down the line.

   Over the past seven quarters, the bank's provision coverage ratio has hovered at close to 60%. This is way below that of peers who have reported a provision coverage in excess of 70%, which is the minimum mandated by regulator Reserve Bank of India. Of the total loan loss provisions of . 1,632 crore in the quarter to December, almost a third was utilised to achieve a provision-coverage ratio of 64%. If not for this, profits would have been much higher at . 3,280 crore instead of . 2,828 crore which the bank posted in the December quarter. Clearly, excess provisions are eating into profits.

   There could be further headwinds ahead. State Bank has sought extension of the deadline of September 2011 imposed by the Reserve Bank for achieving a provision coverage of 70%. If this request is declined, it could imply that the bank would have to do provisioning more aggressively — a move which could be a drag on its bottomline over the next few quarters.

   It is not just this that is weighing high on the minds of investors and analysts. The loan-loss provisions don't include the additional provisions mandated by the banking regulator on its fixed-cum-floating loans or what is popularly called teaser loans. The Reserve Bank of India had increased the provisions coverage for loans extended under the dual scheme to 2%, from 0.4%, in December. State Bank has written to the central bank saying that its dual-rate loans don't fall under teaser-loan category. If the case built by the lender is rejected, there could be an additional outgo of . 350 crore, going by the calculations of a few analysts, which could impact its profit.

   There are positives too. One being the expansion of margins. Despite a 50-150 basis point rise in its deposit rates across maturities, State Bank managed to reduce its overall cost of deposits both sequentially and on a YoY basis, thanks to its high share of CASA balances that constituted 48% of its total deposits. Its net interest margin — the difference between the average cost of funds and the yield on loans or advances — rose 79 basis points from a year ago.

   There have been improvements on the assetquality front too. While the past quarter saw fresh slippages or bad-loan additions of . 3,153 crore, the net addition after recoveries, upgradations and write-offs was only . 233 crore. This is much lower than the net adition figures of . 1,290 crore and . 2,380 crore reported in the June and September quarters, respectively. Bad loans formed 1.6% of net advances compared to 1.9% reported a year ago.

   While asset quality is on the mend, what is of concern is the fact that bad loans are still higher compared to its peers. For instance, its closest peer in the PSU banks segment — Punjab National Bank reported a net NPA ratio of only 0.7% in the December quarter.

   It may perhaps be a bit of an unfair comparison given State Bank's size, but investors are bound to be wary on this count for a while.

Stock Review: Jubilant Lifesciences

 

If demerging of Jubilant Lifesciences agri and polymers business had raised investors' hopes in the company, its December quarter performance dashed them. With lower-than expected performance of its service business, the company is yet again a 'wait and watch' for investors. On a like-to-like comparison, Jubilant Life sciences reported flat revenues and a drop in operating profit. The operating profit margin stood at 15.3% — significantly lower than 24% posted a year ago.

The company, which is engaged in contract-manufacturing and services business, earns 70% of its revenues from outside India. Thus, rupee appreciation during the quarter hit the company's realisations. The company's products business contributing 80% to the total revenues did well, registering a growth of 13%. However,the margins from this business were affected due to strengthening rupee and pricing pressures.

Its services business, constituting the remaining 20% of the revenues, proved to be the major spoilsport. Revenues from this business dropped by 32% YoY. With orders for the high margin H1N1 vaccine not repeating, the company had to de-stock the inventory of the swine flu vaccine due to a falling demand.

There have been deferrals and slowdown in order flows in this business segment. The drug discovery business also suffered delays in get-ting order approvals from the customer and postponement of milestone payments. Due to this, there was non-alignment between costs and revenues. Terming it as short-term volatility in the business, the management expects the situation to improve and is confident of registering growth in the quarters, going ahead. A healthy order book, capacity expansion and new product launches in the products business are likely to be the growth drivers. In case of the services business, some of the delayed orders and milestone payments are likely to be registered in the current quarter and the first quarter of the next fiscal. The company wants to improve profit margins in the coming quarters. Towards this, it's taking price increases on certain products and aligning costs with revenues.

 

Stock Review: Hotel Leela

Since last week, trading volumes in the stock of Hotel Leela Ventures has doubled. Media reports on the company's plans to repay a portion of its debt by selling its land bank in Chennai could have been a major trigger for renewed investor interest in the scrip.

The Mumbai-headquartered hospitality player plans to raise over . 950 crore by selling its land in Chennai. It is also likely to earn . 350 crore by developing properties in Pune, Hyderabad and Bangalore. This would help it to almost halve its existing debt of . 2,878 crore.

This should offer some solace to investors who have been worried over the burgeoning interest costs of the company over the last few quarters. Its December 2010 quarter performance, for example, was dismal despite improved demand, since higher interest outgo eroded profit.

In the last two quarters, interest charge as a percentage of sales has shot up nearly three-folds to 14% over the year-ago levels. In the December 2010 quarter, the company's net profit dropped by 23% to 22 crore on a year-on-year basis.

The company had raised debt to invest in its Udaipur hotel and to buy back its foreign currency convertible bonds. With the expected cash flows in near future, its debt burden and interest cost would decline significantly.

The company's interest burden would also come down as loans for hotels would not be put under the classified real estate category, according to Reserve Bank of India. This would cut down the interest rates on loans by 1.5%. This should boost its profitability in the coming quarters.

The company looks well set on the operational front, too. Given the buoyancy in foreign tourists' arrival, which rose 10% in January on a year-on-year basis, the company is likely to see increased earnings. Around 70% of its earnings are from business hotels. Also, the occupancy level at its Bangalore and Mumbai properties is over 70%, suggesting a higher inflow of business tourists.

The company's upcoming properties in Delhi and Chennai, along with the recently launched properties in Gurgaon and Udaipur, will help it reduce its dependence on the Mumbai and Bangalore properties. The impact of these properties in terms of improved net profits would be visible by the first half of the next fiscal.

 

Stock Review: Dena Bank

Despite an impressive financial performance in the last few quarters, Dena Bank's stock has underperformed. The depressed stock movement can be attributed to the recent market turmoil, which saw most smaller bank scrips fall rather sharply compared with their bigger counterparts.

The government's recent decision to infuse fresh capital would help Dena Bank grow its credit base, which should help it sustain the current growth momentum in its earnings in the near term.

The government recently announced that it will infuse . 539 crore of equity capital into Dena Bank. This should help the bank restore its Tier-I capital adequacy ratio to the mandatory 8% from 7.2% in FY10. In FY10, its loan assets grew faster than its equity base, thereby hampering the future growth potential. Its leverage shot up 22 times by March 2010, which necessitated an expansion of the equity base.

The government's initiative to infuse fresh capital will enable the bank to contain its leverage, without affecting its loan book growth. The growth in Dena Bank's advances and deposits was better than its peers during the December 2010 quarter on a year-on-year basis. The Net Interest Margin (NIM) of the bank improved by 80 bps year-on-year to 3.3% in the quarter. This is better than the average NIM of 3% for other banks.

Dena Bank has a high current and savings account ratio (CASA) and is, therefore, well placed to deal with the rising interest rate regime. Further, it has maintained a high asset quality over the last 10 quarters. In the last four quarters, it has trimmed its assets by aggressively writing off bad debts from its balance sheet. As a result, its gross non-performing assets have fallen from 2.5 % to 1.9%
At a price-to-book value of 0.9, the bank's stock trades cheaply, given the average P/B of 1.5 for its peers. The return on asset (ROA) of the bank is 1%, which is in line with most other Indian banks. The only concern for the bank is the relatively lower capital base and its inability to raise capital from other sources. This is expected to improve given the recent capital infusion and the budget announcement of an additional infusion of . 6,000 crore in public sector banks in FY 12.

 

IPO Review: Innoventive Industries

 

The strength of Innoventive Industries lies in its ability to change product mix, if required. Its IPO move may just pay off long term

IPO details

Company Name: Innoventive Industries Limited (IIL)

Issue Date: April 26-29, 2011

Issue Size: 219.58 crore

Price Band : 117-120 per share


INNOVENTIVE Industries Limited (IIL) has evolved into a multi-product engineering company from an auto component provider. To grow its operations further, the company is approaching the capital market to raise an estimated 219.58 crore from its initial public offer. The issue opens on April 26 and closes on April 29 for retail investors and is priced between 117-120.

BUSINESS:

Innoventive Industries has six facilities in Pune and Silvassa and services clients in the transportation, farm equipment, oil and gas, and power industries. It has limited exposure to variations in demand and supply in its user industries as it does not use any special purpose machinery and can easily change its product mix if required.

   As the name suggests, the company is continuously innovating within the space it operates. With its combination of low-cost inorganic growth strategy and indigenously developed state-of-the-art technology, IIL has a significant edge over its competitors.

   In a move towards forward integration, the company has invested in an auto component manufacturer, another investment in a steel wire producer and has acquired stake in an oil well-drilling ancillary. To achieve backward integration, IIL acquired a 51% stake in Saicon Steels Private Limited, which converts hot-rolled coils into cold-rolled ones.

GROWTH DRIVERS:

With a growth rate of 16% compounded annually, the Indian precision tubes industry is expected to grow to over 7,500 crore by FY15. Given IIL's strong presence and expansion plans, it is wellplaced to capitalise on this growth.

FINANCIALS:

IIL's consolidated net sales have grown 30% in the past two years. For the nine months ended December 2010, the company's net sales were 453.16
crore, higher than its FY10 sales of 421.50 crore. Operating profit margin increased to 26% in FY10 from 17% in FY09. Despite high interest payments, its earnings have been steadily rising.

INVESTMENT RATIONALE:

At the upper price band of 120, the stock is available at a 9-month (annualised) priceearnings ratio of 9.4 times. This is significantly cheap compared with Tube Investment of India which is quoting at 143 with a 12-month price-earnings ratio of 14.

CONCERNS:

The company is very highly leveraged with a debt of 355 crore on its books as of December 2010.

 

IPO Review: Paramount Print packaging

 

 

Revenues and profits may be rolling for Paramount Print packaging. But scratch the surface, the weak financials show up as absolute profit stays really lean

IPO details

Company Name: Paramount Print packaging

Issue Date: April 20-25-2011

Issue Size: 41.6 - 45.5 crore

Price Band : 32-35 per share

STARTED as a stationery printing business, the Mumbai-based Paramount Printpackaging (PPL) is now into manufacturing of folding box carton packaging material. The company is planning to diversify operations to manufacture high-end duplex board cartons, shippers and printed corrugated box and raise funds through an initial public offer.

   The total issue represents close to 48.7% of the post-issue of the company. Around 70-75% of the issue proceeds are likely to be utilised for setting up a new facility in Gujarat for manufacturing the new product line. An analysis of the company's business and valuations indicates that the issue is priced expensively, given the weak financials of the company and the presence of better performing companies to invest in the packaging sector. The company has the capacity to produce 20 lakh cartons daily at its fully automated manufacturing plant in Navi Mumbai. However, its top 10 customers contribute over 80% of its revenues.

FINANCIALS:

The company's revenues have grown at a compounded annual growth rate (CAGR) of 20% since fiscal year 2006 to 46.5 crore in FY10. Profits have grown at a CAGR of 76.5% since FY06 to hit 1.6 crore at the end of FY10. Despite the impressive growth rate, the profit in absolute terms is still quite meagre and given the company's expansion plan, it is likely to remain so in the short term on account of interest costs and depreciation. Being in an expansion mode for the last couple of years, the company has never paid dividend in the past and does not have any stated dividend policy.

   The new manufacturing facility — estimated to be completed by the third quarter of FY12 —is going to augment the capacity to 15 lakhs of high-end cartons, 5 tonnes of corrugated shippers and 7 tonnes of printed corrugated cartons daily. It is likely to increase revenues steadily every year. However, it will not necessarily translate into good earnings growth due to high interest costs and increased depreciation.

   Post issue, the promoter stake in the company is going to drop to 40%, hinting at a lack of confidence in the company's growth.

VALUATIONS:

On a post-issue basis, the company's stock is valued at 38 to 41.7 times of its estimated full-year earnings of FY11. This is a high price to earnings multiple by any industry standard. Large packaging industry players such as Paper Products, U-flex and TCPL Packaging are trading at a trailing price to earnings multiple ranging between 5 and 10. Investors eyeing the growth of packaging industry can look at investing in other larger and financially more stable players.

 

IPO Review: Servalakshmi Paper (SPL)

 

IPO details

Company Name: Servalakshmi Paper (SPL)

Issue Date: April 27-29-2011

Issue Size: 60 crore

Price Band : 27-29 per share


THE Coimbatore-based Servalakshmi Paper (SPL), which is into manufacturing of printing and writing paper and newsprint, is raising funds from public to augment its second phase of capacity building. Of the total project investment of 340 crore, the company has already spent 280 crore in the first phase, leading to capacity generation of 90,000 tonnes per annum.

   In its second phase, the company is looking at expanding its manufacturing capacity by 18,000 tonnes per annum. The company has installed a co-generation power plant with a capacity of 15 mw to cater to the power requirements of its plants. The company generates income from selling surplus power of 3 mw to the Tamil Nadu Electricity Board. Some 90% of the paper manufactured by the company is eco-friendly as it is recycled from imported waste paper. SPL intends to earn 20% of its revenues from exports and steadily increase this to 30-40% of revenues over the next two years. However, there are some concerns which investors must take note of before investing in the issue. The company is part of the Servall business group which has had presence in the paper industry over the last four decades. However, in the last five years of its incorporation, there is hardly any earnings visibility. Rather it has piled up a debt of 261 crore on its books. While the commercial production of paper and power has begun since April 2010, the company has posted revenues of 39 crore, an operating profit of a mere 1.7 crore and a net loss of 14.9 crore in the first seven months of operation. Whether raising funds aggregating 60 crore could lead to a reversal of the fortunes of the company is a moot point. It is difficult to envisage the company achieving break even by the fiscal 2012, given the huge debt to be serviced and high interest and depreciation costs. Any turnaround in the bullish paper cycle may significantly curtail estimated future earnings of the company.

   The public issue of company's shares, though fairly priced at a little over one time of price to book value, appears to be expensive in view of its weak finances. Moreover, the fact that the promoters are diluting half their stake does not reflect very well their confidence in the company's growth.

   The firm trend in paper prices and the recent acquisition of Andhra Pradesh Paper Mills at high valuations by a global firm have triggered a bullishness in the domestic paper industry. However, investors need to be wary of investing in such companies without any proven track record of growth. With no clear visibility of earnings, investors could expose themselves to a significant execution risk. They would be better-off opting for other companies in the paper industry with a proven track record of growth.

Stock Review: Wipro

THE leadership overhaul in Wipro comes at a time when the performance during the past four quarters of India's third-largest IT exporter has lagged behind its bigger peers — TCS and Infosys.

   The improved global IT demand is yet to reflect in Wipro's trailing
four-quarter incremental operating profit. It fell by 21% YoY against the sharp growth reported by TCS and Infosys. For the new management led by TK Kurien, it is clear that the top priority will be enhancing the nature of engagements with its larger clients and on strengthening its presence in the banking and finance domain.

   Wipro's top 10 clients account for just over 19% of total revenue, compared with 25-30% for both TCS and Infosys. They have also added three and five clients respectively in the $100-million billing category. Wipro has only one such client.

   In the past six quarters, growth in the Banking and Financial Services, or BFSI, segment has outpaced other verticals due to the recovery in the financial sector in the West after the subprime crisis of 2008. Wipro, on the other hand, has traditionally focused more on embedded technology and communications domains, which are yet to see a revival. This is another reason why Wipro has not been able to take full advantage of the revival in outsourcing demand.

   But improving the BFSI play is easier said than done, since most of the other top IT companies enjoy a strong presence in the vertical. For instance, TCS grosses nearly half of its revenue from clients in this segment.

   Mr Kurien will also have to address issues pertaining to the declining quality of profit. Though the number of days Wipro takes to collect outstanding sales (receivable days) is not higher than its peers, the proportion of receivables in its net profit is rising.

   In the past, Wipro tried to create a business model, which would ensure growth without a proportionate increase in its headcount. But this nonlinearity has so far eluded the company. The fallout is that even though demand has picked up, its employee addition remained lower than its peers in the past four quarters. Mr Kurien will have to make a tough choice between the headcount driven growth and nonlinear approach, which would demand a higher intellectual property component.

   While the challenges are too many, Mr Kurien can employ Wipro's few unique strengths. In the past, Wipro has successfully traversed inorganic growth strategy across verticals. Its experience in integrating external capabilities can be utilised to enhance its BFSI skills through acquisitions. In that, Wipro's cash balance of . 2,600 crore could come in handy.

   Wipro also enjoys exposure to the fastgrowing domestic IT market unlike some of its peers. Wipro's stock has underperformed its peers and the sector indices over the past year. For investors, it could be a long wait before they can see a major turnaround since Wipro is expected to lag behind the average industry growth in the next two quarters.

Stock Review: Siemens

 
Siemens is a provider of industry and infrastructure solutions with operations in three core business areas — energy, healthcare and automation. Besides, the company also makes small light bulbs, lighting for stadiums and railway electrical and controls such as safety relays. It also plans to build metro coaches.

   The company has not seen its topline growing much since it has been in the range of 9,200 to 9,600 crore over the past three years. However, operating profit margin has expanded during this period by almost 300 bps to 14.5% in FY10 on account of profit generated by the power transmission business. For the year ended September 2010, Siemens received fresh orders worth 12,430.4 crore, a jump of 41% from the year ago. However, execution still remains a problem as sales growth has been much lower during this period. Though the company stands to gain from industrial recovery and increased government focus on power in the forthcoming Five Year plans, the company's slow execution might restrict its profit growth. At 30 times its earnings for the 12-month period ended September 2010, the stock looks expensive compared to peers such as Crompton Greaves, which is trading at a consolidated P/E of 19. Investors can wait for the scrip to correct further before buying it.

 

Stock Review: MAHINDRA SATYAM

Mahindra Satyam, erstwhile Satyam Computer Services, has started showing signs of gradual recovery in its performance. Its stock movement has been stable overall in the past three months despite the volatility in the broader market. Improved margins, healthy cash position and renewal of projects that were on hold earlier, are key positives for the company.

In the December 2010 quarter, the company's topline rose 3% to . 1,280 crore against the previous quarter, helped by a 2.5% volume growth. Its operating profit margin improved 90 basis points to 3.4%. The encouraging performance was led by a growth in the BFSI, healthcare and manufacturing verticals. In the near term, maintaining the margin could be tough given the supply-side pressure due to high attrition, which has been hovering around 25% over the past few quarters.

The company plans to hire 3,500 freshers in the next fiscal and laterals depending upon its needs. This is likely to swell the company's operating expenses, which are already as high as 70% in relation to net sales, further. However, if the revenue growth continues, higher fresher intake may optimise the employee pyramid and fuel margin improvement in the coming quarters.

The company has a strong cash balance of . 3,000 crore. This should support its plans to grow inorganically and meet the capex target of . 200 crore for the next six months. The company has witnessed business traction in most verticals across geographies. However, a lack of scalable clients and low-ticket size deals limit its ability to compete with larger peers.

A 50 bps increase in MAT, as announced in the FY12 Budget, is likely to have a marginal negative impact on the company's profitability. At the current market price of . 62.3, the stock trades at 9.6 times its earnings for the trailing 12 months. The future trend in valuations depends upon the extent to which the new management can infuse the growth.

Stock Review: Kemrock Industries

 

Vadodara-based Kemrock Industries continued with its impressive financial performance in the December 2010 quarter after equally impressive June and September quarters. It posted more than 50% jump in net profit while the revenues almost doubled from the year-ago period. A sharp jump in interest and depreciation costs and higher tax rate were the main factors responsible for the slower growth in bottomline compared to the topline. Kemrock Industries is India's largest producer of fibre-reinforced polymers (FRP) and derives two-thirds of its revenues from exports. The company became the first in India when it commissioned a 400 TPA carbon-fibre plant in May 2010 with a capex of 200 crore. In June, it went on to acquire 80% stake in an Italian company Top Glass. In FY10, it had also doubled its resins and quadrupled its FRP capacities. Recently, it signed an MoU with Swiss company DSM Composite Resin to manufacture saturated polyester and other specialty polymers in India.

Last few quarters saw the company benefiting from its mega-investment cycle. Kemrock's December 2010 quarter net sales crossed 200 crore. Interest and depreciation costs more than doubled while the tax rate at 29% was higher than 25% in the year-ago period.

The heavy capex has resulted in the company doubling its gross block between March 2009 and June 2010. This trend seems to be continuing since then. The value of net assets as on December 31, 2010 at 946.6 crore was around 15% higher from June 2010. Pursuing a high-paced growth within a short-time span has resulted in a heavy debt burden, a series of equity dilution and promoter stake in the company coming down. Since the start of 2008, the company's equity increased 58%, while the promoters' stake dipped to 26.9% from almost 38%. The debt-burden at 1,056 crore was its highest ever as of December 2010 end. Still, a higher growth in earnings of past several quarters meant that the debt-to-equity ratio has not gone up. From 1.9 as of end-FY09, the debt-equity ratio has come to 1.77 by end December. Last year, its scrip was highly volatile on bourses, though it outperformed the Sensex by a wide margin. Considering its current market valuation and the earnings for December quarter, its valuation has dipped to 15.5 times its earnings for the past 12 months

Stock Review: RURAL Electrification Corporation (REC)

 

A steep fall in REC's stock in the past three months makes it an attractive bet given its good asset quality and better growth

   RURAL Electrification Corporation (REC) is a non-banking finance company catering to financial needs of the power sector. It is the nodal agency for the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGYV), which aims to provide power supplies to rural areas of the country. The company has reported a high profit growth in the past four quarters along with an excellent asset quality. Growth in the power sector and its infrastructure finance company (IFC) status show that the company might grow at a fast pace in future.

BUSINESS:

Incorporated in 1969, REC is a navratna public sector enterprise. Its main objective is to finance and promote domestic rural electrification projects. It provides financial assistance to state electricity boards (SEB), government departments and rural electricity cooperatives for rural electrification projects. The state project offices coordinate financing of SEBs or state power utilities, facilitate formulation of schemes, loan sanctions and disbursements. It also helps in implementing those schemes.

GROWTH PROSPECTS:

The company was accorded the IFC status in September 2010. This has provided it with greater access to banks and overseas funding and also enables it to raise funds through issuance of long-term infrastructure bonds. Moreover, it is present across the value chain of the power sector from generation to transmission and distribution. This helps it to capitalise on growth in all three areas.

   The government's RGYV scheme intends to electrify the rural parts of the country. Being the nodal agency, all the financing needs for such projects would be routed through REC. Also, the government would refund 90% of the costs. This would lead to high disbursement growth. The company would receive a processing fee for all such projects (1% of the cost of project).Its subsidiaries would also receive commissions, thereby stepping up its other income. REC and National Highways Authority of India (NHAI) are the only two companies allowed to issue capital gains tax exemption bonds. Under section 54 EC of the Income-Tax Act, capital gains arising from the transfer/sale of longterm assets can be invested in long-term bonds to claim the benefit of exemption. These bonds cost the company anywhere between 6% and 6.5%, which is 100-150 basis points lower than its average cost of borrowings. These bonds formed around 15% of the company's borrowings. This would help the company in keeping cost of borrowing low even when interest rates rise.

FINANCIALS:

The company's net profit grew 33% in trailing 12 months over the year ago backed by 27% increase in the net interest income . Net interest income is the difference between interest earned and interest expense of the company.

   Its asset quality has been exceptional. Net non-performing assets have been almost nil for the past seven quarters. On the margin front, the company's spread of yield on advances over cost of borrowings has been in the range of 3.2-3.5% for the past seven quarters. In fact, for the quarter ended December 31, 2010, when most companies' profitability hurt due to rising interest rates, the company managed to expand margins by around 20 basis points sequentially. Almost 80% of the company's assets are floating and a similar amount of liabilities are fixed. This should help n a rising interest rate scenario.

   Disbursements, however, has not grown at a similar pace. For the past two quarters, the company's disbursement was flat compared to a year ago due to delay in new power projects. However, there could be a spurt in the disbursement growth as many projects are likely to be awarded by March 2011.

VALUATIONS:

At a price-tobook value (P/BV) of 1.9, the company's stock is trading marginally higher than its peer, Power Finance Corporation's (PFC) P/BV of 1.8. However, the current valuations do not fully discount its growth potential. Its dividend yield of 2.6% is much higher than PFC's 1.8%. Besides, the scrip has fallen by almost a third in the past three months. This represents a good opportunity for investors to buy the stock with a medium-tolong term perspective.

 

Stock Views on Ultramarine & Pigments, Paper Products, PSL

PSL

PSL is one of the country's largest pipe manufacturers with a production capacity of one million tonnes. It caters to the demands of the oil & gas and water transportation industries. The company has been a regular dividend payer with a yield of 5.2%. It also has strong cash reserves to fund its expansion plans, if any. The pipes industry has under performed the market in the current fiscal on account of order backlogs due to a slowdown in advanced economies. PSL has also got adversely impacted. Based on its performance so far, the company's FY11 earnings are likely to be lower than FY10. Despite its poor show, one could expect a dividend payout of around 25% of profits.

 

Paper Products

Manufacturer of corrugated cardboard products, Paper Products is the Indian arm of Finland-based Huhtamaki Group, a global packaging company. With negligible debt on its books, the company has been paying dividends consistently. The company follows the calendar year as its financial year and has a history of steadily growing revenues. Its annual revenues dropped for the first time in 2009 although the profits remained unaffected. It has posted a smart recovery in revenues in 2010. The company typically maintains a dividend rate of 90% of equity. 2009 being a platinum jubilee year, the company paid 150% of equity as dividend. If the company reverts to paying dividend at the rate of 90%, it will amount to a payout of 23% of its profits. This is quite likely as the company has paid more than 40% of its profits as dividends.

Ultramarine & Pigments

Ultramarine & Pigments is diversified into sectors such as pigments, surfactants, wind power and IT enabled services. It has a history of healthy operating cashflows, is debt-free and has not missed a dividend in the past two decades. The company's growth has been on a decline for the past four years. Its net profit fell from Rs 20 crore in FY07 to Rs 10.8 crore in FY10. It reduced its normal dividends from Rs 3.5 per share in FY07 to Rs 2 in FY10. A special dividend of Re 1 per share in FY10 meant that the company paid out almost all its profit of that year as dividend. In FY11, the company has recovered substantially to post a 110% profit growth in the first half of the year. This makes a convincing reason that it can sustain its last year's dividend of Rs 3 per share even for FY11. At the current market price of Rs 39.8, this works out to an attractive yield of 7.5%

Stock Views on Navin Fluorine International, Mac Charles India, LKP Finance, Kothari Products

Kothari Products

Kothari Products is a EBIT:81cr diversified trading company engaged in the import and export of various products, commodities, and minerals petroleum , metals (%) products. It is Dividend 16.4 real also estate involved devel in - Interest Tax 2.3 17.9 Retained Earning 63.4 opment. Kothari is a zero-debt cash-rich company paying dividends at an average rate of 100% of the equity. Its net sales for the first half of FY11 increased four fold. However, its profit during the period halved over the previous year. Considering its dividend history and reserves, the likelihood of the company maintaining its dividend rate is high.

 

LKP Finance

LKP Finance is a non-banking finance company offering wide range of services from equity broking to fixed income securities, commodities and merchant banking. The company has started paying dividends from FY08. It has paid around 9 crore each as dividends in the past two years — at a time when most companies refrained from paying dividends. Considering LKP's good performance for the first nine months of FY11, it is likely to pay dividends for this T fiscal year. The Interest 22.7Retained Earning 31.1 company's stock has fallen by almost 28% in the past three months. It may be a good opportunity to invest in the stock, but an advice of caution is warranted here. LKP derives its income mainly from capital market businesses. Hence, a 10% fall in benchmark indices in the past three months and the current negative sentiment could affect the company's profitability.

 

Mac Charles India

Bangalore-based Mac Charles India is a profitable hospitality company that pays consistent dividends.

   Despite the capital-intensive nature of hotels business and a small-size hotel, the company, , which is known for Le Meridian brand, has maintained a healthy net profit margin of 22.6% during the 12 months ended September 2010. In the past five fiscals, the company maintained an average pay-out ratio of over 22%. As the hotels industry regains momentum on the back of a rise in business travel, Mac Charles would benefit from its presence in Bangalore. It is expected to end the fiscal with a net profit of more than Rs 30 crore. With almost no debt to service, the company is likely to maintain its dividend rate at 100% of the equity.

 

Navin Fluorine International

Navin Fluorine is one of the largest producers of fluorochemicals, which are mainly used as cooling agents in refrigerators and airconditioners. A chunk of its revenues is generated from carbon credits. The company has turned debt-free last year. It has been paying dividends consistently for the past seven years and has never reduced it. It paid Rs 14 per share as dividend in FY10. In FY11 so far, the company's financial performance has been weak with profits falling 57%. In spite of lower profits, a dividend of Rs 14 would need the company to raise its payout to around 45%. Considering the company has increased its payout in excess of 50% in the past, it appears feasible for the company to maintain its dividend even in FY11. At the current market price of Rs 270, the yield comes to 5.1%.

Stock Review: Hinduja Global, Chennai Petroleum, HCL Infosystems

Hinduja Global

Hinduja Global is a solutions provider to the outsourcing industry. The company's business witnessed a turnaround during the September 2010 quarter. Its topline, which was more or less stagnant till the June 2010 quarter, surged 17% in the September 2010 quarter on account of the consolidation of its latest acquisition — Careline Services. The company collects 75% of its revenue in the US dollars, 13% in pounds and the balance 12% in rupees. Its domestic revenues continue to be 102.8cr impacted due to pricing pressure while the rupee appreciation has adversely affected its revenues from business international . It Tax k _{6 . 8} ;nd4o: follows a strategy Interest 7.4 Retained Earning 45.7 of shifting facilities to low-cost centres to improve profitability. Margins are likely to improve in the coming quarters as new centres at various cities have started to ramp up and the existing centres have yielded new businesses. The management expects a robust demand momentum in the coming quarters. With new facilities becoming operational, the company is likely to fare well. One can expect the company to pay dividend at the rate of 100% of its equity.

 

Chennai Petroleum

Chennai Petroleum Corporation (CPCL), a subsidiary of Indian Oil, is engaged in refining of petroleum with a dominant presence in South India. It has had a long track record of paying healthy dividends. Except for FY09, when it suffered losses due to volatile crude oil prices, the company has paid dividends since its incor-FY poration 10 its . dividend For [BIT: 711.5cr stood at 12 per share, which translates in yield of 5.7% at its current market price of 210. (Tax x wnteback writebad NA 

   In view of the Dividend 25.1 decline in its profits during the first Interest 19.4 Retained Earning 55.5 nine months of FY11, the company may not be able to maintain its dividend run-rate of the last year. However, considering its dividend payout of 33% during the past five dividend-paying years, the company is expected to pay dividend of 8 per share, resulting in a yield of 3.8%. Considering the company's low valuations and improving outlook for the refining industry, the scrip could also see some capital appreciation in the coming quarters.

 

HCL Infosystems

quarters since to business distribution telecom integration like due during However products The The be systems company to a the company a laggard the faster . continues , and past However it second . expects operates few is growth mainly 's half , to 4 in witness on of into the its lower fiscal distribution higher a margins margin Dividend year margin ending EBJT EBIT improvement business of 43 ^: : ² . businesses 1 ^- ) ³ 395 395 June %. ..99 of cr cr ^IT automated a recent 250 billing crore Interest Tax 129 28.3 Retained Earning 15.7 deal from BSNL takes its order backlog to 4,250 crore. Though HCL has been sustaining a huge order book size since June 2010 quarter, not much has got reflected in its topline during the subsequent quarters. The company expects system integration, office automation and digital entertainment businesses to drive growth in future. In the past five fiscals, the company has been consistently maintaining a healthy dividend payout of more than 300%. Considering this, it is expected to give at least 300% dividend this year as well.

 

Stock Review: Hinduja Global Solutions

 

Hinduja Global Solutions is expected to fare well on the back of its new units and capacity additions in the coming quarters

 

HINDUJA Global Solutions has recorded a healthy growth in the December 2010 quarter against the previous quarter. Its North America business recorded an 8% volume growth on back of the holiday season, while Manila continues to contribute to its growth significantly following the stabilisation of the new delivery centre.

   The company has chalked out plans to set up delivery centres in new geographies through acquisitions or joint ventures to cater to the growing demand in various industries, including telecom, health insurance and consumer electronics across the globe. Moreover, with the ramping up of newer centres, the company is on a hiring spree. This improves its revenue visibility in the coming quarters.

BUSINESS:

A company from the Hinduja Group, Hinduja Global Solutions is a Bangalore-based business process outsourcing company. Incorporated in 2000, HGSL offers outsourcing solutions, including back-office processing, contact centre services and customised ITES solutions. The company has adopted an inorganic route to expand its global presence and enhance its solution offerings in various industries including insurance and telecom. In 2003, it forayed into international markets with its Manila centre. HGSL acquired a UK-based customer relationship management company, Careline Services, in June 2010.

   Today, the company operates from 30 delivery centres spread across the US, Canada, the UK, Mauritius, Philippines and India.

GROWTH DRIVERS:

The company has been shifting facilities to low-cost centres in tier 2 and tier 3 cities to reduce costs. During the December 2010 quarter, HGSL opened new delivery centre in Siliguri, West Bengal. Internationally, the company has chalked out plans to set up a centre in tier 3 city in Philippines. It plans to enter into joint ventures in China and Latin America at 500 seats and 300 seats capacity, respectively. During the quarter, the company has observed decent growth coming from telecom and technology, health insurance and consumer electronics segments. It expects the momentum to continue in the coming quarters as well.

   The company hired 2,000 employees during the quarter on the back of increased demand during the holiday season bringing the total employee base to 18,730 at the end of the quarter.

   On the back of the capacity expansions, ramp up of new centres and acquisitions in the coming quarters, the company expects to double the number in next twothree years.

FINANCIALS:

The company posted healthy growth numbers during the December 2010 quarter. Its topline grew 8% to nearly 290 crore over the previous quarter on account of healthy growth recorded from North America and Manila businesses. Moreover, the recently acquired Careline Services contributed significantly to the growth recorded by the company.

   Over the past two quarters, HGSL's operating profit margin has been hovering in the range of 13-14%.

   However, during the December 2010 quarter, the margin surged 120 bps to 15% against the previous quarter on account of reduced operating expenses relative to net sales. Improved sales and reduced operational costs led to a 10% sequential growth to 28 crore in its bottomline during the December 2010 quarter.The company takes nearly 55 days to receive payments from its clients that helps it to maintain healthy working capital. Historically, HGSL has maintained healthy cash and cash equivalent on its books, which has aided in upholding its debt-to-equity ratio at as low as 0.12.

VALUATION:

At the current market price of 314, the stock trades at 6.3 times the earnings for the trailing 12 months. Healthy cash flow from operating activities indicates the traction in the company's business across the globe over the years. Given its expansion plans, HGSL is expected to fare well going ahead.

CONCERNS:

The US business continues to form a major chunk of the company's total revenue thereby exposing its to currency risks. However, the Careline acquisition has helped in diversifying HGSL's operations to a certain extent.

 

Stock Review: Marico

If the last few quarters are anything to go by, the FMCG sector will see volumedriven growth. And Marico is no different if one looks at the company's quarterly performance, which saw the top line grow 10 per cent yearon-year, despite cost pressures. While the FM's Budget proposals for FY12 may not have yielded great gains, except bringing more acreage under cultivation for palm oil, the company seems to be working towards a brand strategy that can capitalise on the consumption cycle.

With the recent acquisition of ICP, a hair care and cosmetics company, Marico is working towards building regional brands as against global brands in the near term. And it is present in all the exciting markets in the region, Sri Lanka, Bangladesh, Vietnam, Malayasia and MENA. The company has decided to focus on three verticals — hair care, skin care and health care. In each of these categories, the company will only be present in sectors where it sees the potential of becoming either the number one or number two player. Clearly, it's going to be a volume game.

Thanks to the numerous companies it has acquired over the last few years, almost 26 per cent of Marico's total sales are global. Marico expects skin care (under Parachute and Kaya brands) and health care (through brands like Saffola and Sweekar) to drive growth. The company is running various pilots in different parts of the country, with different brand extensions of Parachute and Saffola.

Marico expects skin care to contribute eight per cent of sales, health care 22 per cent and personal care the remaining 70 per cent. While the share of skin care and health care will grow, personal care will still be the largest chunk of the portfolio.

Despite the pressure of rising input prices, the company is not too concerned. Given that India's GDP is expected to grow between 8.5 and 9 per cent, the sector is expected to see the top line grow by a healthy 20 to 25 per cent. With such scale, the company believes maintaining margins at 13 per cent is possible, especially since Indian companies are known to respond rather well to such cost pressures.

Top line growth to be in the region of 20 per cent and margins will settle around 13 per cent