IPO Review: Timbor Home

 

Gujarat-based Timbor Home, a furniture manufacturing and retailing firm, is launching an initial public offer aggregating 36,90,000 equity shares to raise around 23.2 crore at the upper price band. The fresh issue is equivalent to 25% of the company's post-IPO equity and will lead to the promoter's holding falling to around 50%. There are other private investors who hold the remaining 25% shareholding. Of the total issue proceeds, the company will use 2.6 crore for capacity expansion, 4 crore for establishment of stores, 13.2 crore for working capital requirement and the remaining amount for other corporate purpose. Considering its aggressive valuation and weak financials, investors can give this IPO a miss.

BUSINESS & INDUSTRY

The company operates as a manufacturer and retailer, having 80 stores of kitchen, door and furniture. It also operates on a franchise model. It has three manufacturing units — two in Ahmedabad and one in Anand in Gujarat.The company believes that the total Indian furniture market is worth 36,000 crore with the organised sector accounting for only 15% and is growing at 30% CAGR. The big players in this segment include Pantaloon, Shoppers Stop, Trent, Godrej, Durian and Lifestyle.

FINANCIALS

The company's net sales in FY10 were 51 crore. It grew at a compounded annual growth rate of 65% in four years. During the same period, the company's net profit has grown to 1.8 crore from 10 lakh. The company has very thin margins with a very volatile history. It operating margin in FY10 was 10.7% and net profit margin was 3.5%. After the IPO, the debt-equity ratio of the company would be around 0.3. For the first nine months of FY11, the company's working capital requirement has gone up drastically. Its working capital days have increased to 217 days from 184 days in the past one-year. Its sundry debtors have almost doubled for the first nine months of FY11 as against FY10. Also, the cash flows from operating activities have been negative over the past six years as the company is in a growth phase.

VALUATIONS

The company has given the profit before tax of 3.06 crore but not given the profit after tax for first nine months of FY11. Assuming a tax rate of 33%, the company-annualised profit is 2.73 crore. This gives an earning per share of 1.9. At the upper price band of 63, the company demands a priceearning ratio of 33.3, post dilution. There are not many comparable listed peers in this category. Acrysil, which is in the manufacturing and retailing kitchen products, is trading at a multiple of 5.7. Given this, the company has priced its IPO very aggressively and investors can avoid it.

 

IPO Details

Company: Timbor Home

Issue Date: May 30 – June 2 '11

Issue Size: 23.2 crore

Price Band : 54-63 per share

Stock Review: Supreme Industries

 

Mumbai-based plastic goods maker Supreme Industries faced a temporary phase of margin pressure as raw material costs shot up during the March 2011 quarter. Overcoming this and a few other challenges, the company went on to post a respectable profit growth for the March 2011 quarter. The scrip, however, took little notice of the results and maintained its level.

It was mainly the strong sales growth that enabled Supreme Industries to post a 12.2% consolidated net profit growth to . 48.3 crore during the March 2011 quarter. The challenges that the company faced included margin pressure, no sales from its commercial building, a fall in other income and rising interest pressure. Still, the 29% revenue growth aided by a 32% volume growth and a 50% jump in its share in Supreme Petrochem's profits propped up the bottomline.
Rising crude oil prices and the disaster in Japan led to a spurt in the company's raw material prices, which it couldn't immediately pass on. As a result, the operating profit margin shrank 180 basis points to 12.6%. With its . 275-crore capex plan for FY11 continuing and no revenues coming from property sales, the interest burden soared 60% to . 12.9 crore. The company's debt-equity ratio rose to 0.93 by end-December 2010 from 0.72 in June 10.

Considering the strong demand for its products and a robust volume growth, the margins are expected to return to normal levels for the June 2011 quarter.
The company has constructed a 10-storey commercial complex with 2,75,000 sq ft saleable area on its land in Andheri. So far, it has sold around 40,000 sq ft for . 60 crore, which translates into an average price of . 15,000 per sq ft. The company expects to sell off the remaining property by end-2011 and realise . 350 crore.

Since the stock split in October 2010, the share price of Supreme Industries has remained in a tight range disregarding the strong bearish sentiments in the first couple of months of 2011. Between January and February 2011, when the Sensex lost over 13%, the Supreme scrip actually gained slightly. The scrip is trading at a price-to-earnings multiple (P/E) of 10.5, considering its consolidated net profit for trailing 12 months.

While the strong 20% plus volume growth continues to support the company's steady growth, unlocking the value in commercial property remains a key growth driver for the company in coming quarters.

Stock Review: Sterlite Industries

Sterlite Industries' shares, which underperformed the broader markets for most part of 2010, jumped 4.4 per cent to `183 (up 7.5 per cent in last one week) on Monday, backed by a good set of results for the March quarter. The company reported a strong 37 per cent y-o-y jump in consolidated net profit to `1,951 crore on the back of a 40 per cent rise in sales at `10,000 crore in the March quarter. With the performance significantly above expectations, the stock could get re-rated as a result of upgrades in the company's earnings (EPS) estimates.

While the analysts were expecting an EPS of `13-13.5 for Sterlite in 2010-11, the same came in at `15.2 (16-17 per cent higher than expectations), helped by the strong March quarter performance. In fact, after the results, analysts have already raised their earnings estimates for Sterlite for 201112 and 2012-13 by 7-10 per cent and their stock price targets to 206-220. They now expect its EPS to grow an average 33 per cent annually over the next two years, aided by gains from ongoing expansion, contribution from power business and firm metal prices. The company's huge net-cash equivalent in the books worth `11,000 crore or 32 a share and strong operating cash flows provides comfort and should come handy in funding future growth.

BEATING STREET EXPECTATIONS

Sterlite, largest non-ferrous company in India with interests in aluminium, copper and zinc, benefited during the quarter on account of higher metal prices on the LME. Copper, which accounts for 48 per cent of its consolidated revenues, gained from a 33 per cent y-oyrise in average LME prices (at $9,639 a tonne) during the quarter. Similarly, aluminium and zinc prices were up in the region of 4-15 per cent. Importantly, the company produced 50,000 kg of silver in the quarter, which yielded an average realisation of $31.9 an ounce compared to $16.9 an ounce in the year ago quarter.

However, more than the price, volumes in the zinc and power (1,200-Mw capacity put into operation) businesses have contributed to strong growth in revenues. Revenues from zinc, lead and silver (40 per cent of revenues) were up 62 per cent y-o-y. Contribution of international zinc operations and strong performance of Hindustan Zinc (a 64.9 per cent subsidiary of Sterlite) helped the company post better than expected growth in revenues. In totality, the production of refined zinc, which during the Q4 and 201011 was at a record 194,000 tonnes and 712,000 tonnes, was up 29 per cent and 23 per cent, respectively, compared with the corresponding periods.

These helped it overcome the subdued performance in the aluminium and power businesses. Aluminium business reported decline both in revenues and volumes. In the power business, while revenues were marginally up by 8.4 per cent, profit before interest and tax nosedived 47.2 per cent. The latter is attributed to decline in demand and lower realisations (down 15 per cent at `3.02 per unit).

GOOD VISIBILITY

The company closed 2010-11 on a good note with net profit growing by 36.9 per cent to `5,057 crore, 12 per cent higher than estimated by analysts. From here on, barring near-term issues, including volatility in nonferrous metal prices, regulatory risks attached to its Tuticorin copper project and Vedanta Aluminium project in Orissa (where Sterlite holds 29.5 per cent stake), analysts expect strong growth in Sterlite earnings over the next two years.

However, even if the metal prices were to remain at the current levels, the boost is expected to come from the energy business. The full impact of the recently synchronised two units of 600-Mw each in the March quarter along with expected synchronisation of balance two units of 600 Mw each in September and December 2012 quarters will be felt over the next two years. That apart, the ramp up in silver production to 500,000 kg in 2011-12 from 180,000 kg last year should also add to the total. The contribution from the international zinc business and expansion of aluminium capacities at Balco should also help drive growth and expansion in operating margins.

 

Stock Review: Container Corporation Of India

The Concor scrip dipped nine per cent over the last week on results that were below expectations due to a fall in domestic volumes and over concerns of a margin squeeze. Analysts are worried that its margins on the back of competitive pressures and higher costs, especially in the domestic segment, are likely to fall. That apart, they also expect volume growth to remain low in the near-to-medium term.

Mukesh Saraf of Spark Capital believes the company is expected to report a 100 basis point fall in Ebitda margins from FY11-13 due to its inability to pass on cost increases, tepid volume growth and higher volume-driven discounts to shipping lines. One percentage point is 100 basis points.

Concor's realisations may also get impacted as trade traffic shifts from JNPT in the Mumbai to Gujarat-based ports. Since a significant chunk of Concor's EXIM trade is around the Mumbai-Delhi corridor a shift to Gujarat-based ports will reduce the lead distance for rail transport services, and will impact its topline, believe analysts. Despite the correction, stock valuations at 17.5 times its 2011-12 estimated earnings per share of `68 are not considered attractive given the volume growth, competition and margin concerns.

VOLUME CONCERNS

Concor is expected to record 810 per cent of growth annually in revenues over the next two years on the back of a similar growth of volumes in the EXIM (export-import) segment. The worry for the company is the domestic segment, which accounts for a quarter of Concor's revenues and volumes, where freight rates have been increased by 45-100 per cent since December. The freight rate rise coupled with social disturbances in Rajasthan led to an 8.5 per cent year-on-year drop in its domestic volumes. IDBI Capital's analyst, Chetan Kapoor, believes domestic volumes for 2011-12 are likely to remain flat.

REALISATIONS, MARGIN WORRIES

Concor's EXIM business could see average realisation fall on account of traffic moving towards Mundra and Pipavav ports, believe analysts. This shift is consequent to frequent congestion at JNPT port, thanks to insufficient capacity and inadequate infrastructure.

Average lead distances for Concor have already fallen six per cent year-on-year in 201011. Its share of EXIM traffic at JNPT has come down from 74 per cent in 2009-10 to 64 per cent in 2010-11. Thus, while volume growth in the EXIM segment was six per cent yearon-year in the March quarter, it was flat sequentially. While Ebidta margins grew 26 basis points year-on-year to 23.4 per cent in the quarter, they were down 548 basis points sequentially, as discounts to clients for the full year are recognised in the fourth quarter of the financial year. In addition, what hampered margin growth was the domestic business margins which saw a 769 basis point year-on-year dip (down 303 basis point sequentially) to 8.4 per cent, as the company was unable to pass on the rise due to severe competition.

OUTLOOK

A majority of analysts have a 'hold' or a 'sell' on the stock consequent to higher haulage charges and inability of the company to pass on the same due to competition from the road sector and other private container logistics players. Further, the capacity constraints at JNPT could hurt volume growth for Concor.

Despite the competitive edge on account of its mammoth infrastructure of wagons, container freight stations and inland container depots, the company has been unable to maintain pricing power. While the company believes it will be able to grow its revenues at 10 per cent and sustain Ebidta margins of 26 per cent, its strategy of higher volumes through discounts to maintain market share and secondly, higher competition could lead to a drop in profitability. These events are likely to keep Concor's stock under pressure, wherein valuations are not cheap.

Stock Review: BHARTI AIRTEL

 

Bharti Airtel's stock fell by over 3% after it reported lower-than-expected growth in its bottom line in the March quarter. As anticipated by this column earlier, telecom operators have started reporting interest expense on 3G-related loans now that these services are rolled out. This finance charge restricted Bharti's sequential net profit growth to 7.5% during the fourth quarter even though its operating profit grew 9%, the fastest rate in at least 10 quarters. While its bottomline will be under pressure until the 3G segment starts adding to profits, what could offer some relief is the streamlining of its African operations.

Bharti Airtel operates in 16 African nations after acquiring Zain's telecom business in the continent last fiscal. The operating profitability (before accounting for depreciation) of the African business reached the three quarter high of 26.4% in the three months ended March 2011, much to the surprise of analysts.

The 560-basis points sequential improvement in the margin was due to lower operating costs relative to sales. Bharti's management has indicated that even though the telecom cost structure is steeper in Africa compared to India, per minute costs have begun to drop. It expects African operations to become more affordable in the next six quarters.

With a trimmed cost structure, the African operations should be able to not only drive Bharti's topline growth but also support its overall profitability in the coming quarters. To further increase its presence in the continent, the company has earmarked a capex of over $1.2 billion for FY12.

Bharti's domestic business is yet to report a remarkable shift from the sluggish trend that has been prevailing for the past six quarters. Bharti's per minute revenue fell by another 2.5% sequentially in the March quarter, while minutes of usage per head stagnated at 449 minutes for the second straight quarter. What could provide comfort, however, is the fact that total minutes on its network have started growing again in tandem with subscriber growth.

To maintain its domestic profitability, Bharti will have to aggressively roll out its 3G services in the near term. .

Stock Review: TATA CONSULTANCY SERVICES

The sales and profit growth reported by Tata Consultancy Services (TCS) for the March 2011 quarter was more or less in line with the Street's expectations. Its stock, however, fell by over 2% on Thursday in an otherwise bullish broader market on account of lower than expected momentum in its quarterly business volume.

The country's largest IT exporter reported far better performance than Infosys, the second in order, sequentially as well as annually. HCL Technologies — the fourth in rank, which declared results on Wednesday — has also surpassed Infosys in terms of growth momentum. What this means is even though global demand scenario looks firm, it will benefit those players most who have invested in expanding reach and improving deliverables in the past.

So far, TCS has been the biggest beneficiary of the rebound in outsourcing demand. Over the last five quarters, it has garnered the biggest share of incremental revenue when compared with Infosys and HCL Tech (see graph). TCS contributed more than 40% to the aggregate incremental revenue on trailing 12-month basis in each of the five quarters ended March 2011. Further, the share has gradually expanded in each quarter to as much as 48% for the March quarter, which means TCS now accounts for nearly half of the additional revenue that the sample companies garner in a year.

TCS has also emerged as the most profitable among the three. For the March 2011 quarter, TCS earned 33% operating margin on its incremental revenue in the last 12 months; it was 15% for Infosys and just 1.3% for HCL Tech, which has been striving hard to improve margins.

However, the margin is fast declining. It almost halved when compared to the year-ago figure of 61%. While this reflects the impact of escalated wage bill during the said period, it may also hint at the possibility that the company is finding it difficult to increase billing rates to fully compensate for salary increases. The broader outlook remains robust as reflected from the proposed headcount addition by the sample companies. TCS and Infosys together expect to add over a lakh employees in FY12.

Stock Review: ACC

WITH input costs rising and demand staying lukewarm, the market was not really expecting fireworks from cement companies. However, ACC has managed to pull off decent numbers for the first quarter of calendar year 2011. For the quarter ended March 31, 2011, its realisation jumped 11.6 per cent quarter-on-quarter to 3,893 a tonne, thanks to price increases across the country. Sequentially, total volumes rose 9.8 per cent and 10.4 per cent year-on-year.

Total revenues were up by 16 per cent sequentially, at 2,420 crore, and 13.4 per cent year-on-year. Volumes grew by 10.4 per cent on-year to 6.1 million tonnes in the first quarter, as against 5.5 million tonnes in the year-ago period. Analysts believe these numbers are very positive, as the industry has been facing pressures due to deceleration in construction activity and slowdown in infrastructure. Even though the March quarter is the best for the industry, a 14 per cent growth in sales implies the sector is seeing growth despite challenges. On the earnings side too, analysts were expecting earnings per share of `15. However, the company has managed an EPS of `18.5 in Q1. The good news, however, is not just limited to sales and volume growth. Overall, the cost per tonne has declined 4 per cent sequentially, pushing up EBITDA/tonne by a staggering 142 per cent. As the cost of raw material per tonne rose 33 per cent sequentially and freight rate jumped 5 per cent, these were offset by a decline in power and fuel cost. The company's low-cost coal inventory and increased use of captive power plants has improved efficiency.

Factoring the 30 per cent increase in the cost of domestic coal and 16 per cent sequential increase in that of imported coal, Edelweiss expects power and fuel cost to be 892 a tonne for CY11, up 15 per cent from the first quarter. Going forward, an increase in coal prices, as announced by Coal India, will start reflecting in the company's books from the second quarter. However, analysts are optimistic about a recovery in the demand environment as infrastructure and construction may well revive.

Stock Review: Kanoria Chemicals

 

The scrip of commodity chemical manufacturer Kanoria Chemicals hit the upper circuit of 20% on Monday in the wake of its decision to sell its chlor-alkali chemicals business for . 830 crore to Aditya Birla Chemicals. The sum will not only retire its entire debt, but will leave it with around . 375-400 crore to invest in its other business for organic and inorganic growth. The deal appears exceedingly positive for the company, but what the retail shareholders will derive out of it will depend on how the company utilises the funds.

Chlor-alkali and their derivatives have been a growing business for Kanoria Chemicals, contributing nearly three-fourth of total revenues during the 12-month period ended December 2010 from just about twothird in FY08. The deal will cover 115,000 tonnes per annum (TPA) caustic soda plant with associated chlorine derivatives, 50 MW captive power plants with coal linkage and salt works at Gandhidham, Gujarat. The deal values the fully integrated chlor-alkali business at about 2.1 times its revenues for the 12-month period ended December 2010. However, considering the just 11.1% PBIT margins, the deal size is 18.8 times the profit before interest and tax, which appears expensive.

Post the deal, Kanoria Chemicals will be left with its alcohol derivatives business in Ankleshwar, which manufactures products such as acetic acid and pentaerythritol. During the 12-month period ended December 2010, this business generated revenues of . 140 crore with profit before interest and tax at . 6.1 crore.

The company recently set up a 105,000 TPA formaldehyde plant in Vizag based on imported methanol and is in the process of setting up a 5,600 TPA hexamine capacity as forward integration.

While the deal is set to complete by end of next month, Kanoria Chemicals is yet to decide on what to do with the money. Earlier examples of companies selling chunks of their businesses on a slump sale basis such as Gwalior Chemicals or Piramal Healthcare show that retail investors do not benefit much out of such deals.

It needs to be seen if Kanoria Chemicals will reward shareholders directly or by creating a larger assetbase for higher future profits. The last thing a shareholder would like to see . 400 crore invested in liquid instruments earning 8% a year is.

 

Stock Review: Larsen & Toubro

 

The Larsen & Toubro stock moved up nearly two per cent after the company decided to seek shareholders' approval for the transfer/sale of its electronics and automation (E&A) division. According to various estimates, valuation of the E&A deal (if the sale comes through) has been pegged at `10,00014,000 crore, three-five times the division's annualised revenues in the first nine months of the financial year 2011 (9MFY11). This is much higher than the `7,500-8,000 crore ascribed by analysts in their sum-of-the-parts estimates. Sharekhan analysts believe any strategic premium attached to the E&A business would be value accretive for L&T. The division has been facing tough competition in the domestic market from multi-national companies and has reported falling margins for the nine months ended December. The latest move, to separate the E&A division, is part of L&T's restructuring exercise to exit non-core businesses, where the company is not a clear leader or returns are dilutive.

FUNDING INFRA DEVELOPMENT

If L&T manages to get a premium from the sale, the money will be useful in funding the capital guzzling infrastructure development business, which has become a key focus area for the company. L&T has lined up a capex of `61,300 crore for it, which will require an equity contribution of `18,400 crore ($4.2 billion), considering a 70:30 debt to equity ratio.

Considering the average valuation of `12,000 crore ($2.6 billion), the deal will partly help in funding of the infrastructure development business. This will put less pressure on the balance sheet and lead to a better control over interest costs, finally resulting in better earnings growth or profitability and upgrades to core business valuation due to improved prospects.

UNCERTAINTY, RISK

In terms of financial performance, the sale is not expected to make much of a difference to overall revenues, as it contributed less than 10 per cent of L&T's total revenues (seven per cent to be precise) in 9MFY11 and made similar PBIT margin as its core engineering and construction (E&C) business. Thus, any loss of revenues and profit due to the sale of E&A is expected to be compensated by the engineering and construction division, given the mammoth opportunities (especially roads and power), which have gained pace recently. Questions, however, remain according to Sharekhan analysts as to the timely completion and returns from the development projects that are likely to add a bit of uncertainty to the stock. Though the business logic seems to be sound, analysts such as Bharat Parekh of Bank of America Merrill Lynch are not optimistic about the company's move to exit E&A and particularly the products business, which is less risky (less lumpy and volatile) and does not need as much capital compared to the projects business. "We are not convinced that the new infra assets of L&T could create higher value versus its asset light E&A business," he says.

CONCLUSION

The company will become a pure projects company and hence a risky bet (in terms of investment) if it follows the sale of E&A with machinery and industrial products division (again seven per cent of total revenues), which makes almost double the OPM of E&C—around 19 per cent in 9MFY11. Further, the entire infrastructure space has become competitive over the years, as other relatively smaller players are also exhibiting new capabilities in various infrastructure segments for fuelling future growth. Hence, the company is better off having a good mix between products and projects businesses, feel analysts. However, in the short term, all eyes are pinned on the company's ability to achieve 2010-11 order inflow growth prediction of 25 per cent (target of `87,000 crore), given muted growth of eight per cent in the same at 49,450 crore in 9MFY11. Till that time, the view is cautious, despite the stock providing return potential of 34 per cent considering an average sum of the parts target of `2,285.

 

Stock Views on SUN PHARMA, PETRONET LNG

DEUTSCHE BANK on PETRONET LNG

Deutsche Bank is reiterating the `Buy' rating on Petronet LNG, with a price target of 150. PLNG's greenfield 5 mmtpa LNG terminal at Kochi and its capacity expansion at Dahej are on track for completion within the next 30 months. This should increase its capacity from 10 mmtpa currently to 15 mmtpa in FY13 and 18 mmtpa by FY14. PLNG is evaluating further capacity expansion. Deutsche Bank estimates PLNG's EBITDA to rise at a CAGR of 28% over FY10-14, driving its RoE from 19% in FY10 to 28% in FY14. GAIL's evacuation pipeline connecting the Kochi terminal is expected to be commissioned in time for the start-up of Phase I of the terminal. The contract for a new jetty at Dahej has also been awarded and is expected to be completed by June 2013. PLNG is evaluating setting up a greenfield LNG terminal on the east coast of India as well as further expanding its existing Dahej terminal.

CITIGROUP  on SUN PHARMA

Citigroup maintains the `Hold' rating on Sun Pharma. Sun and MRK has formed a JV to tap the emerging markets with new combination drugs and formulations of incrementally innovative, branded generics. This is separate from Sun's current branded generics biz in these markets and upside appears a few years out. While Citigroup does not see any material impact on valuations in the near term, this is positive for the margin as it adds a revenue stream over the long term. The JV seeks to leverage MRK's front end in emerging markets, its strong regulatory expertise and clinical excellence as an innovator while Sun will bring in manufacturing and product development capabilities. However, in the absence of additional information, Citigroup is unable to quantify the incremental revenues and profitability for Sun. The target price Rs 480 is based on a sum-of-the-parts approach, valuing the base business using a P/E and ascribing an option value for its patent challenge pipeline. However, Sun deserves a premium, given its consistent track record, high profitability and return rations, as well as the potential upside from the deployment of idle cash in the business.

Stock Review: Tata AutoComp Systems (TACO)

 

The Tata group is planning an initial public offering (IPO) of its auto component manufacturer Tata AutoComp Systems (TACO). The latter has filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). According to the DRHP, the company plans to raise Rs750 crore through a combination of fresh issue of shares and sale of stake by promoters. The biggest stake in this company is held by Tata Industries (34.40 per cent). Its other major shareholders include Tata Motors (26 per cent), Tata Capital (24 per cent), Tata Sons (14.25 per cent) and Tata Investment Corporation (1.35 per cent).

 

TACO manufactures and supplies a variety of components, assemblies and aggregates primarily to original equipment manufacturers (OEMs) in the automobile sector. Some of the notable names include Tata Motors, General Motors India, and Mahindra & Mahindra.

 

Objectives of the issue

The company plans to use the amount raised through the IPO to expand its business and to repay its loans. As per the DRHP, TACO intends to spend Rs87.67 crore for capacity expansion and modernisation of its existing plant belonging to the interior and plastic division (IPD). Another Rs70.35 crore will be spent on building a manufacturing unit for TACO Composite (TACOCL), one of it subsidiaries. Around Rs284.9 crore will be spent on repayment and prepayment of loans. Currently the company's outstanding debt amounts to Rs386.09 crore.

 

Fast-growing industry

The auto component industry's prospects are closely tied to those of the automobile industry. The Indian auto component industry's turnover was approximately Rs11,580 crore in FY10 and is expected to grow to Rs22,400 crore by FY15.

Demand from OEMs is estimated to grow at the rate of 17-19 per cent in FY11 and thereafter at a compounded annual growth rate (CAGR) of 15 per cent till FY15. Exports of auto components are estimated to grow over the same period at the rate of 20 per cent.
Total domestic automobile production grew by 25.85 per cent year-on-year in FY10.

Between FY05 and FY10, the domestic consumption of auto components grew at a CAGR of 18 per cent (6 per cent in FY09 and 12 per cent in FY10).
The auto component industry's current asset base is worth Rs7,000-7,500 crore. According to estimates, it will require investments worth another Rs6,000-6,500 crore by FY15.

 

Strengths

Backed by Tata Group: TACO is part of the Tata Group of companies. Hence it is expected that it will share the attributes that the Tata Group is known for. Being part of a larger group should also ensure that investors are protected from business malpractices of any kind.

Diversified product portfolio: The company has a diversified product portfolio. It manufactures and supplies products for interiors (door trims, cockpit, dashboard, etc.), exteriors (bumpers, front grills, side mouldings), engine cooling systems, batteries, seating and suspension systems. It meets the requirements of all the major segments such as passenger vehicles, commercial vehicles and tractors.

The company operates its businesses through four subsidiaries and five joint ventures. It has three divisions: IPD (manufactures cockpit, door panel, bumpers), supply chain management (provides logistic support) and TACO Engineering Centre (which develops automotive systems and is also into component design).

 

Concerns

Fluctuations in raw-material prices: Since it is a manufacturing company, it depends heavily on raw materials like steel, copper, and aluminum. Raw materials account for around 72 per cent of its net sales. Increase in the cost of raw materials has the potential to affect its bottomline.

Customer concentration: The company's primary customer is Tata Motors. For the six months ended September 30, 2010, it contributed 48 per cent of its total income. The next four largest customers accounted for 21.6 per cent of its total income. Furthermore, as stated in the DRHP as well, TACO will continue to depend on Tata Motors for a substantial portion of its sales. So if Tata Motors faces adverse circumstances, TACO's prospects will also deteriorate. Furthermore, as Tata Motors has a say in the company's management, it could potentially influence TACO's decision making for its own benefit. For instance, it could compel TACO to sell auto components at a lower margin in order to boost its own profits. This could lead to lower profitability for TACO.

 

Poor margins compared to peers

The company's close peers include Amtek Auto, Bharat Forge, Motherson Sumi System and Sundaram Fasteners. In FY09, when all the auto ancillary companies were facing the heat due to the slowdown in the auto sector, TACO was able to increase its net sales by 29 per cent. On the other hand, net sales of Amtek Auto, Bharat Forge and Motherson Sumi System declined by 17.93 per cent, 6.28 per cent and 0.63 per cent respectively. Again, on a y-o-y basis TACO posted the highest growth compared to its peers in FY10.
However, if you look at profitability, the company's net profit margin is the lowest among its peers in FY10. In FY10, Amtek Auto, Bharat Forge, Motherson Sumi and Sundaram Fasteners' net profit margins were 27 per cent, 22.39 per cent, 13.69 per cent and 12.56 per cent respectively. Tata Auto Comp had a net profit margin of 7 per cent only.

 

Financials

In FY09, which was a difficult year for the entire auto component industry, TACO suffered a net loss of Rs192.47 crore. But in FY10, its net sales bounced back to Rs938.55 crore. In the last three years, the company's net sales have grown at a compounded annual rate of 29.96 per cent while its PAT has grown at a CAGR of 9.85 per cent.

But over the past few years the company's profit margin has been on the decline. From 21.59 per cent in FY06, its net profit margin declined to 7 per cent in FY10.

At the end of FY10, the company's total debt stood at Rs386 crore and its interest coverage ratio at 1.9. Its average interest coverage ratio over the last five years has been 3.71.

Although TACO is backed by the Tata brand name, the company's financials are not very sound. While its sales have been on the ascendant, both its profit margin and operating margin have been declining. This raises a question regarding whether the company will be able to provide good returns to its investors. Let the company list, let its fundamentals improve, and only then invest in it.

 

Stock Review: RELIANCE INDUSTRIES

Reliance Industries signed off an eventful FY11 in style with its last quarter net profit from operations jumping to its highest-ever level. But the scrip is unlikely to react much to the results on Monday, as the numbers were slightly lower than expected.

The company had grow its net profits by nearly 30% in the first three months of FY11, but the pace of growth slowed down to 14% in the last quarter. The healthy growth during the year was mainly due to the increase in its overall volumes thanks to the new refinery and KG basin gas, which were ramped up last year.

In comparison, the growth in the last quarter was mainly due to higher oil prices and higher refining margins.

The $9.2 per barrel refining margin RIL reported for the March quarter was much below market estimates of an average above $10. However, they were boosted mainly due to temporary phenomena like maintenance shutdowns and disruptions in Japan and Libya. Going forward, the overall refining margins scenario is likely to stagnate or even weaken to a certain extent as global supply of refined products grows.

The company's gas production is down to 52 million metric standard cubic metres per day (MMSCMD), from where it is unlikely to grow for a while, and the petrochemical segment is already facing margin pressure due to capacities coming up in Middle East and China. In this scenario, a slowdown in refinery margins could be a major worry for the company. It will be interesting to watch the company's results for the June quarter and onwards.
The company also witnessed pressure on its operating profit margins, which dropped 240 basis points to 13.5% during the last quarter. Amongst the segments, petrochemicals managed to maintain the margins, while refining improved slightly. It was mainly the oil & gas segment that saw margin erosion. For the whole year FY11, RIL's turnover was 29% up at . 258,651 crore. Increase in volume accounted for 11% growth in revenue and higher prices accounted for 18% growth in revenue. The net profit was 25% higher at . 20,286 crore as against . 16,236 crore for the previous year.

Ahead of the results, the stock inched up 1.4% to . 1,040, which discounts the total earnings for FY11 by 16.8 times.

Stock Views on BHARTI AIRTEL, ESSAR OIL, TUBE INVESTMENT OF INDIA

NOMURA on TUBE INVESTMENT OF INDIA

Nomura continues to maintain `Buy' rating on Tube Investment of India due to the strong competitive position of its businesses, good return ratios, high quality of management and attractive valuations. While the growth may slow down in FY12E as compared to that in FY11, it is still likely to be upwards of 15% as per current indicators and estimates. The company has been able to pass on the increase in raw material prices and is likely to maintain margins at least in the next one-two quarters. Oneyear forward P/E multiple of 13.5x on a standalone one-year forward EPS of 11.08 gives a value of 150/share. The one-year forward P/E multiple of 13.5x for the standalone business is justified as it is a highquality and high ROCE business where the company has dominant market share. Nomura has not assigned any value to the general insurance business, in which the company holds a 74% stake and held a market share of 2.3% in FY10.

CREDIT SUISSE on ESSAR OIL

Credit Suisse upgrades Essar Oil's rating to `Outperform' with a target price of 155. Essar Oil reported Q4FY11 EPS of 2.35, up 18% Q-o-Q and 57% Y-o-Y. ESOIL has booked sales tax deferral benefits of $2.86/bbl in Q4, supported by high product prices. Adjusting for this, Q411 GRM (gross refining margin) stands at $5.3/bbl, up $0.5/bbl Q-o-Q. The refinery upgrade project has been delayed due to fabrication issues at some units. These have reportedly been fixed, and ESOIL now believes it will be able to complete the upgrade by Q3/Q4 FY11. Trail production and sales have commenced at the Raniganj CBM block. Commercial production is expected to commence as some pending approvals are obtained. FY12/13E EPS increases by 8%/6% to 6.9/22.3 respectively. Completion of the upgrade should materially increase ESOIL's EPS/cash flow.

HSBC on BHARTI AIRTEL

HSBC upgrades Bharti Airtel to `Overweight' and raises target price to 425 as Bharti benefits most from weakening of competition. The stock underperformed after the launch of GSM services by Tata Teleservices and the entry of a range of new greenfield operators that led to irrational price competition. However, in the last six-nine months, the stock has bounced back as new GSM operators have become defensive in terms of pricing and rollout of services. In fact, Bharti won back about 100 bp of its revenue market share in the June quarter, a clear indication of its dominance in the Indian wireless space. Bharti is well positioned in the Indian market with the largest block of 900 MHz spectrum and 3G spectrum in 13 circles that cover 68% of India's population; the largest amongst all operators. HSBC believes FY12E will be a year of consolidation for both voice and data. With 3G launch to gain traction in the next 9-12 months and focus on voice improvements to be more visible in FY13E, investors should now be looking at FY13E.

Stock Review: Bharat Heavy Electricals Limited (BHEL)

 

Negative business sentiment mostly explains why BHEL is trailing Sensex despite sizzling sales numbers and a decent margin play. But order flow and strategic collaborations may just save the day

 

   CAPITAL goods major Bharat Heavy Electricals Limited (BHEL) has underperformed the Sensex over the past 1 year despite a robust growth in sales and operating margins. The decline in stock price seems to be driven by the negative sentiment prevailing in the sector amid a slowdown in investment growth. The company, which recently announced its flash results for financial year 2010-11, looks set for a strong growth track. Beating its own guidance of order inflow of 60,000 crore for the year, Bhel secured orders worth 60,507 crore. Its total outstanding orders at the year end were 1,64,130 crore, which is nearly four times its provisional FY11 turnover, giving it a reasonable revenue visibility over the next few years. The company also entered into various strategic tie-ups during the year, including a manufacturing co-operation agreement with GE India Industrial Private, a pact with Abengoa, Spain, to develop state-of-the-art Concentrated Solar Power Projects in India and a collaboration agreement with Nuovo Pignone for manufacturing of centrifugal compressors. It has also formed a joint venture with the government of Kerala to manufacture alternators and other products like LT motors and traction equipment for Indian Railways.

FINANCIALS:

BHEL's revenues grew about 25% y-o-y while net profits were up 37% for the trailing 12 months (TTM) ended December 2010, which is quite impressive. While the dent on interest expense is clearly evident as the same has risen by about 77% during the period on account of hardening interest rates, the same does not have a significant impact on the financials in absolute terms. Given its extremely low debt equity ratio of about 0.01, BHEL is relatively less sensitive to interest rate movement vis-àvis peers. Raw material, the major cost item, grew by about 18%, which is justified, given the rise in commodity prices. The company is, however, relatively insulated to the rising material costs as it maintains an average inventory pileup of about two quarters.

VALUATIONS:

BHEL is currently trading at TTM price earning multiple (P/E) of 21, which is quite reasonable in the current market scenario, especially when compared with peers. Weakness in the capital goods sector has already pulled down the stock price which was trading at a TTM P/E of 30 a year ago. The company's strong financials — as reflected by the flash results — the robust order book and a revenue visibility for the next 3-4 years make it a good buy at the current levels.

Key factors


Positives


• Strong order book. Outstanding orders in hand for execution in 2011-12 and beyond stand at 164,130 crore

• Several new strategic business tie-ups been entered into last year

• Impressive sales growth and steady operating margins despite bottlenecks such as hardening interest rates and rising raw material costs

Negatives


• Slowdown in the investment activity in the capital goods space - environmental clearances being one of the major issues

• Cautious outlook for company's international business as many companies, especially in the oil & gas sector, have announced cutbacks in the capital spending

• Threat from Chinese suppliers and easier Chinese financing

 

Stock Review: MRF

THE MRF stock was down about one per cent after the company last week reported a six per cent year-on-year fall in profits for the quarter ended March. Profits were down to `90 crore on the back of doubling of natural rubber prices last year. Sequentially, natural rubber prices, currently at `230-240 a kg, have risen 16 per cent.

Despite the robust demand, companies have not been able to increase their prices to reflect the jump in the raw material costs due to competitive pressures. High raw material prices and inability to completely pass on the rising costs have meant falling margins for MRF.

HIGH RAW MATERIAL COSTS

Raw material costs as a percentage of sales for MRF increased from 67 per cent a year ago to 76 per cent in the March quarter, resulting in a fall in operating profit margins by 260 bps to 9.2 per cent. With raw material costs at over three quarters of sales, the rise in natural rubber prices as also synthetic rubber and of carbon black on the back of rising crude oil prices will continue to keep margins under pressure.

DEMAND STRONG

While cost pressures are a key worry, revenues, supported by a surge in volumes as well as a rise in prices, jumped 34 per cent to `2,383 crore. Auto volumes for 201011 in key segments such as commercial and passenger vehicles have jumped 20-30 per cent over the previous year. With auto volumes expected to grow 12-15 per cent on a higher base for 2011-12, demand from auto manufacturers as well as the replacement market is likely to remain strong. This should keep the revenue momentum going. However, any further increase in interest rates and weak industrial activity will be key risks to demand, especially, for the commercial vehicle sector, and would impact tyre sales.

FINANCIALS

While the high raw material costs are likely to be an issue, ajump in revenues has helped the company keep staff costs and other expenditure as a percentage of sales under control, as compared to the year ago quarter. The challenge for MRF will be to maintain operating profit margins in double digits in 2010-11 (financial year ends in September). While it closed 2009-10 with a margin of 11.1 per cent, for the first six months of the current financial year, the company has just about managed to maintain margins at 10 per cent. At the current price of 6,519, the stock trades at 7.2 times its annualised 2010-11 earnings per share.

 

Stock Review: Essar Oil

 

The quarterly results of domestic refiners are likely to be excellent, notwithstanding the rising trend in the crude oil prices witnessed throughout the quarter ended March 2011.

An extended winter till January and the Japanese earthquake in March ensured a strong demand for refined products, while the early year refinery maintenance schedules of European refiners resulted in supply staying low. This, besides the inventory gains on rising prices, pushed up refining margins in Q4 to their best levels in FY11.

The refinery marker margin benchmarks, as published by global petroleum giant BP, soared to $11 per barrel in the March 2011 quarter from around $4-5 in the first three quarters of FY11. "The regional benchmark, Reuters Singapore GRM, increased 35% Q-o-Q and 51% Y-o-Y to $7.3/bbl in 4QFY11," noted a research report by Motilal Oswal.

The margin improvement has been especially good for middle distillates, such as diesel or gasoil, but has been stagnant for lighter products such as gasoline. "Refining margins for Dubai crude oil in Singapore gained support from the record-high middle distillate crack spread, which was able to more than offset the loss in the weaker naphtha and fuel oil cracks, allowed refinery margins to show a sharp rise of $0.8 per barrel in March," wrote OPEC in its monthly report for April 2011.

Essar Oil's results earlier last week underlined this trend. The company reported its highest-ever quarterly net profit of . 321 crore – up 78% on a Y-o-Y basis – on the back of a gross refining margin (GRM) of $8.15 per barrel. The profit for the last quarter was almost equivalent to its profits in the previous three quarters. At 654 crore for the entire FY11, the company's net profit recorded a 23-fold jump over FY10. Its other domestic peers are also expected to post similarly exciting results for the March quarter.

The market performance of the standalone refiners reflects this optimism. The scrips of Essar Oil and MRPL have gained nearly 10% so far in April, as against a flat Sensex. Chennai Petroleum, which is the smallest of the lot, also performed better than the market by gaining 3%. Although it derives its largest chunk of revenues from refining, Reliance Industries underperformed the markets mainly due to worries over its KG-basin gas output.

Stock Review: HDFC BANK

HDFC Bank, which has been reporting a net profit growth of around 30% Y-o-Y for the past several quarters, finished yet another quarter on similar lines. Its net profit for the March 2011 quarter rose by 33.2% Y-o-Y. The continuous improvement in asset quality and the increasing CASA mix seem very positive for the bank's long-term growth. The company managed to beat street estimates due to a 32% increase in other income, including fees, commissions and foreign exchange revenues and trading profit.

In the quarter, the bank increased its ATM networks by 30% to 5471. It grew its loan book by 27% compared with 21% growth at the industry level. However, on a sequential basis, it has seen a fall in advances. This though seems a strategic call by the bank to pull down its credit-to-deposit ratio to 76% this quarter compared with 82% Y-o-Y. Retail lending accounts for almost 50% of the loan book. This is a clear shift for the bank, which was earlier cautious on retail lending to maintain its asset quality.

The bank has been proactive not just on the asset side of the retail business, but also on the liability side. It improved the share of low-cost current account and savings account (CASA) deposits to 51% in the March 2011 quarter. This is highest among its peer group. This helped the bank maintain its net interest margin (NIM) on a quarter-on-quarter basis at 4.2%. However, this trend may not continue as 50-60% of the banks fixed deposit (FDs) are expected to mature next year. This will lead to re-pricing of the cost of funds in the coming year.

The surge in the loan book has not come at the cost of its asset quality. In fact, the asset quality has improved substantially. Net non-performing assets (NPA) came down to 0.2% in the March quarter compared with its yearago levels of 0.3%. Not surprisingly, the provisions and contingencies, which mainly comprise loan-loss provisions, have come down by about 2%.

HDFC Bank also announced subdivision of one equity share into five shares. This is positive for investors as it will improve the liquidity of the scrip.

Given the good performance and the management quality, the bank seems fairly valued at a price-toearning ratio of 27.4 times.

Stock Review: Manaksia

 

From bottle crowns to steel products, Manaksia has come a long way. The sheer diversity in offerings makes it immune to sectoral upheavals, if any

 

MANAKSIA has evolved from a bottle-caps and crowns manufacturer into a more diversified company over the years. After building its expertise in metal packaging industry, the company has branched out into manufacturing of steel and aluminium products. With operations in India, Africa and West Asia, the company is well-placed to take advantage of the growth in consumerism in emerging markets. Though the stock has underperformed the market over the past few months, given the company's expansion plans and restructuring initiatives, it currently offers value for long-term investors.

BUSINESS:

Manaksia earns revenue from manufacturing packaging products, value-added steel and aluminium products as well as mosquito repellent coils and vaporisers. Its packaging division contributes 12% to its overall business. Its clientele list includes Dabur India, Jyothy Laboratories, Eveready Industries, and McDowell Group, among others.

   Manaksia's metal product division is the principal contributor to its revenues and profits. Its product offerings include aluminium alloy ingots, rolled sheets and coils, galvanised steel sheets and coils and colour-coated metal sheets. Manaksia's other business includes manufacturing of mosquito repellent coils under the brand Mortein and the production of paper.

GROWTH DRIVERS:

With diverse product offerings, the company is in a better position to withstand downturns. Its geographical spread enables it to capitalise on growth in construction, engineering, and transportation in emerging markets. This is visible from expansion in its balance sheet and steady cash flow over the years, which is expected to continue. The company has achieved vertical integration across a number of products, which has further resulted in lower manufacturing costs. Once the management's restructuring plans take shape, operating efficiencies are expected to improve even further.

FINANCIALS AND VALUATIONS:

Over the past three years, the company's consolidated net sales grew by 12% and net profit by 10% when compounded annually. Sales from its metal products division, which contributes about 80% to its topline, grew 11%. The management has efficiently used its strong cash flows to reduce its debt burden. With 75.77 crore cash on its books and a debt equity ratio of 0.3, the company has ample room for fund raising to support expansion plans. It gives a return-on-capital of 12% and a dividend yield of 2.94. During the four quarters ended December 2010, Manaksia

reported a sales growth of 15% over the same period a year ago. Unlike most pure play metal companies that suffered due to high input costs, Manaksia's operating profit was up 20% y-o-y. At 83, the stock trades at 4.1 times its 12-month trailing price-earnings ratio. Given its promising growth prospects, it looks attractive over a horizon of two years.

 

Stock Review: DISH TV

 

Two things are going in favour of Dish TV: A shift in its subscriber base to HD services and lower content costs due to a new biz model

 

DISH TV, India's first direct-to-home satellite TV with the biggest market share, is seen benefiting from the shift in its subscriber base to high-definition services that will boost average revenue per user. Investors are recommended to accumulate the stock at current market price of 67.

BUSINESS:

Dish TV is part of business conglomerate Essel Group that has business interests ranging from media to packaging. The company was the first to enter the DTH industry in 2004. Currently, it has the largest market share of 31%, with a subscriber base of over 1 crore. It offers 250 video channels and 21 audio channels through a network of 1,400 distributors and 51,000 dealers.

GROWTH DRIVERS:

The growth prospect in DTH is likely to be one of the key drivers for Dish TV, which has a dominant market share in the segment. Cable and satellite subscription market size is seen growing at a compounded annual growth rate (CAGR) of 17% to 41,600 crore by 2015, a FICCI report said. User base in the DTH segment, one of the fastest growing in the cable industry in the past five years, is expected to more than double to 7.1 crore by 2015.

   The company is also seen benefiting from recommendations of the Telecom Regulatory Authority of India (Trai) to digitise all cities having a population of over 1 million by 2013. Its user base is estimated to increase to 1.5 crore over the next 2 years from the 95 lakh now.The company would also benefit from migration of subscribers to high-value packages. Among the six DTH operators, Dish TV has been consistently innovating product offerings. Apart from products such as payper-view movies, matrimonial service Shaadi Active and job-search service Monster Active, the company has launched 30 channels in the high-definition format against a mere six channels offered by its peers. Currently, average revenue per user (ARPU) for high-definition services is over 400 while for the regular DTH services, it is 142. More and more users are seen opting for high-definition services in the near future, thus boosting the ARPU. The company is also seen gaining from its shift in business model from persubscriber to fixed-fee model, which has led to a decline in content cost —the amount that is paid from subscription revenue. Content cost as a percentage of subscription revenue has fallen to 39% currently from 55% in FY09.

FINANCIALS AND VALUATION:

Dish TV reported net sales of 372 crore in October-December compared with 277 crore a year ago. The company has been making losses over the past 16 quarters. Being the only listed player in the industry, its valuations are not comparable. The next two fiscals are seen crucial. Long-term investors may accumulate the stock at the current market price.

 

Stock Review: ZEE ENTERTAINMENT

Zee Entertainment Enterprise has had yet another quarter of strong profit growth due to the frenzied pace of digitisation and its leadership position in the general entertainment channel segment. It posted a consolidated net profit of . 191 for the March 2011 quarter — a growth of about 50% over the year-ago period. The company's quarterly revenues also grew 22.8% to . 797 crore.

The growth was mainly from advertising revenue, which jumped 36% to . 479 crore. Subscription revenues grew by 23% to . 310 crore during the quarter. On a full-year basis, the company's advertising revenues grew by 60% to . 1,708 crore, while subscription revenues increased 14% to . 1,127 crore. This underlines a great improvement in the advertising situation, helping revenues grow by 37% to . 3,011 crore. But, the net profit for FY11 was almost flat at . 623 crore as growing programming and content costs related to its sports channels impacted margins.

In the last few quarters, the pace with which subscribers have been adopting digital services has been swift. It is estimated that every month one million subscribers are being added to the present total subscriber base of 34 million. Also subscribers increasingly prefer high-definition premium content. Zee Entertainment Enterprise, being the market leader in the general entertainment segment, would continue to benefit from this trend.
The company's key entertainment channel Zee Cinema continues to be the leader with more than 32% market share, followed by Sony Entertainment's Max and other film channels such as STAR Gold and UTV. Even its regional offerings such as Zee Marathi and Bangla continue to have high viewership with gross rating points of more than 250 each. In the coming quarters, considering the rapid adoption of digital services, the company plans to sell advertisements separately for digital consumers and consumers having premium content. By doing so, the company can cash in on the rising base of premium subscribers and also plain vanilla digital subscribers. The only concern for the company is its loss-incurring sports business. Analysts believe that the business would take at least a few more years to break even.

Stock Review: OnMobile Global

The cut-throat competition in the domestic circuit is pushing OnMobile Global more and more to foreign shores. The share of overseas revenues is creeping up, thanks to a higher exposure to exports and deeper push into newer markets

 

Telecom value-added service provider OnMobile Global, which has been grappling with the sluggish trend in the Indian telecom sector, is stepping up its exposure to exports in an effort to cope with the depressed trend in the domestic market. Exports contribute nearly onethird of the company's total revenue and are seen rising in coming quarters, taking into account its increasing presence in other emerging telecom markets. Also, its content innovation, particularly in the third generation (3G) space, makes the stock attractive for investors with over a 2-year horizon.

BUSINESS:

OnMobile Global offers value added services such as mobile commerce, streaming video, music, interactive television, and social networking to over 105 million mobile telephone users across 52 countries. In the year ended December 2010, its revenue stood at 527 crore. On-Mobile's business model is non-linear and revenue growth is independent of employee addition. In the past two years, its net sales grew around 30% when staff base expanded by a mere 12%. This implies that the company's incremental revenue growth improved utilisation of existing employees and to some extent, shields the company from cost escalations related to new hiring.

FINANCIALS: OnMobile's revenue grew at a compounded annual growth rate (CAGR) of 52% in the past three years. Its net profit grew 58.2% year on-year to 19.9 crore in the quarter ended December, on revenue growth of 28.7%, to 148.6 crore. The enhanced focus on exports has helped the company improve profitability after a span of four quarters. In March, the company announced a 1:1 bonus share issue.

GROWTH PROSPECTS:

OnMobile's overseas operations are growing fast, though its domestic business is expected to remain sluggish for a few more quarters as the Indian telecom sector continues to be weighed down by tariff war. It plans to increase penetration in its six existing Latin American markets to 10% in the next five years from 2% now.

   In October 2010, the company acquired Dilithium, which is the leading global provider of mobile video infrastructure solutions, enabling multimedia services from any network to any device. Dilithium acquisition has enabled OnMobile to access 21 new countries and makes it well-positioned to expand in India's 3G market. The company has reported traction in Europe, Asia and Africa. This, along with its fast-rising presence in Latin America, will reduce its dependence on domestic market.

VALUATIONS:

At the current level of 264, the stock trades at a trailing 12-month price-to-earnings (P/E) ratio of 21. The company sees year-on-year sales growth of 25% in the next 12 months due to an expected 150-basis point increase in margin to 14.5%. The stock trades at a 1-year forward P/E of 16.3, much lower than its historical P/E of over 30. It looks attractively priced at the moment with an investment horizon of two years.

 

Stock Review: Future Capital Holdings (FCH)

KISHORE Biyani is hoping to recreate the Big Bazaar magic in the world of financial services. With the launch of financial superstores this week, Future Capital Holdings (FCH) intends to offer financial services ranging from loans, equity broking, insurance to wealth management. Analysts say the company may have started out as a player in the unsecured consumption-lending space, but is now morphing into a player in the secured loans segment.

Over the next one year, the company intends to lend 1,000 crore to the retail segment (against gold) and to the small and medium segment (against property). India's gold loans market is estimated to be between $25 billion and $50 billion. While FCH's loan against gold portfolio is miniscule at present, it is expected to be between 9per cent and 10 per cent of the total loan portfolio by FY13E with `600-700 crore in assets under management.

Even though the company will continue its consumption lending business, the idea of secured lending appeals analysts as it will result in optimal utilisation of capital. In the wholesale credit segment, the focus will continue to be on medium-term loans to promoters (against liquid shares) and project financing with defined takeout by escrow of project cash flows.

Emkay Securities estimates loan against property market size to be approximately `20,000 crore and the competition level in this segment is relatively low, as it is mostly done by few NBFCs and banks. "We expect FCH's loan against property portfolio to grow at a compounded annual growth rate (CAGR) of 100 per cent over FY11-13E to `3,700 crore," says Emkay's research head Ajay Parmar. Analysts like the company's strategy of growing its book entirely through secured lending with spreads of 4.55per cent.

In the past, the company's retail loans largely comprised of unsecured personal loans (now discontinued) and consumption loans. Future Capital had followed the subsidiary route for its retail loans business and the parent company had to give guarantees (Rs 670 crore in FY10) for the subsidiary's borrowing. Due to this, analyst believe, there was a sub-optimal utilisation of capital. The recent merger of the subsidiary with the parent will release capital, as guarantees will no longer be required. Also, with the company shifting its focus to secured loans, the company will save on provisioning.

In the last one year, FCH has already grown its loan book by 60 per cent to `2,400 crore. The loan book is expected to touch `5,000 and `7,000 crore, respectively, over FY12 and FY13. Approximately, 62 per cent of its loan portfolio is expected to be retail, while the remaining 38 per cent would be wholesale loans.

Stock Review: Core Projects and Technologies

 

The Mumbai-based Core Projects and Technologies is busy reworking its revenue model. The focus is clearly shifting to the domestic market. The government's commitment to the sector will act as a catalyst

 

CORE Projects and Technologies, which has so far generated over 90% revenue from overseas markets, is focusing on increasing its presence in India to tap the domestic growth potential. The company has entered into pacts with some state governments to incorporate its computer learning and training modules in educational institutes.

BUSINESS:

The Mumbai-based Core Projects and Technologies offers technology-based education solutions to government organisations and schools in the US and the UK. The company has acquired nine companies in the UK and the US in the past five years in an effort to expand its global reach. The company raised $150 million through foreign currency convertible bonds to fund the acquisitions. It plans to buy another company in the UK in next 2-3 quarters.

GROWTH OUTLOOK:

The company is currently in the process of expanding its presence in emerging markets such as India, South-East Asia and Africa. It has entered into strategic pacts with Microsoft, Oxford University and NASA for the same. The company plans to increase the share of domestic business in total revenue to over 25% by FY13, from less than 10% now.

   The company recently bagged a project worth 295 crore from the Haryana government to incorporate and maintain information and communications technology laboratories in 2,622 government schools in the state over the next five years.

   Also, the company is planning to foray into skilled development that includes vocational training. The company is in talks with the Maharashtra government and is likely to sign a memorandum of understanding by the end of the first quarter of FY12. It expects to draw nearly 20% of its education revenue from vocational training in coming years.

   The education space in India offers huge opportunity for private players. India requires nearly 20,000-25,000 quality schools, according to a study by NCERT.

   Moreover, the Union Budget for FY12 has proposed an increase in the amount of funding for education sector by 24% to 52,057 crore, thus creating suitable scope for private players to tap the sector.

FINANCIALS:

In April-December 2010, the company's net profit grew 30% year-onyear to 155 crore while net sales also grew 30% to 794 crore. Its operating profit margin has remained in the range of 35-37% over the past four quarters. The company sees operating margins remain steady in the coming quarter.

VALUATIONS:

At the current market price of 319, the stock trades at 16 times its earnings for the trailing 12 months. Given its initiatives to expand footprint in the domestic market coupled with the government's proposal to increase spending towards vocational training, the company is likely to post robust performance, going ahead. However, high client concentration makes the company vulnerable to any change in education model in the US and the UK.