Stock Review: COLGATE PALMOLIVE INDIA

Colgate Palmolive India has posted robust volume growth in January-March, but margins weakened due to rise in raw material cost and packaging charges.

The oral care major's fourth quarter net sales increased 12.6% from a year ago, but sequentially it is lower than previous four quarters. Operating profit and net profit were flat from a year ago. Raw material cost was 41% of net sales in the fourth quarter compared with 30% in the previous year. The company spent 13% of net sales towards selling and administrative expenses for its brands compared with 16% a year ago.

The company reported a marginal rise in market share for Colgate toothpaste during the fiscal, but lost share in toothpowder and toothbrush. Products in mouthwash category recorded 22% volume growth. In fiscal 2010-11, sales growth was lower than previous two years despite increase in investments towards brands.

Gross margin was flat due to decline in operating profit and net profit. The company generated . 385 crore cash from operations in last fiscal, lower than . 397 crore in the previous year.

The company experienced a slowdown in pace of sales growth. High raw material cost dented margins in the past two quarters of the fiscal. Its overdependence on flagship brand Colgate could pose a major risk as any damage to the brand will hit growth. Oral care products constitute 96% of its total revenue under Colgate.

The stock has outperformed benchmark Sensex since the middle of April. It is trading at a trailing price-to-earnings ratio of 30. Investors can remain invested in the stock, but should keep tabs on performance in coming quarters.

 

Stock Review: Glenmark

INDIAN pharmaceutical companies have been making news of late, thanks to the eye-popping valuations some companies have got. But, Indian pharma companies are not just attractive acquisition targets for mutlinationals. On Monday, Glenmark Pharma's subsidiary entering into a licensing agreement with Sanofi to develop and commercialise its molecule GBR500, a monoclonal antibody to treat Crohn's disease and other auto-immune disorders like multiple sclerosis. The total deal size would add up to $600 million, if Sanofi manages to successfully develop the molecule. Glenmark would also have exclusive marketing rights in certain geographies if the drug is commercialised a few years down the line.

There is an upfront benefit of $50 million ( `225 crore) for the company, which adds to `8-10 a share. The size of the entire deal is $613 mn, but it depends on the success of molecules. The company will use this money to repay a part of its

`1,900 crore debt. However, what analysts like is the potential pipeline of such molecules the company could have.

While many Indian pharma companies have been investing in research and development of new biological entities, Glenmark has become the first such company to take amolecule up to a stage where it can be licensed out to a foreign company for a price. So, Sanofi making an upfront payment is not only being viewed as an endorsement of sorts for Glenmark, it also means the company has reduced its R&D risks, says Sapna Jhawar, research analyst at Sharekhan.

The fact that the company is trading 12-13 times its FY13 earnings makes it even more attractive from an investment point of view. Apart from this, the analysts like the longterm prospects of this company despite some short-term pain emanating from change in accounting policy. For FY10, the company reported 12 per cent growth in its domestic formulations business. This growth number looks muted mainly due to the accounting policy change. According to Religare Institutional Research, "On a like-to-like basis, growth in domestic formulations would have been at 17-18 per cent. This momentum is expected to continue driven by new drug launches in the domestic market." Glenmark reported 16 per cent top line growth for the US generics business (sales of $182mn). Analysts say base business sales, at $40mn a quarter earlier, have now moved towards $50 mn a quarter. The company also received 18 final approvals from the US market during the year, which would augment top line growth from this segment.

Stock Review: ONGC

Government-owned ONGC reported more than 60% sequential decline in net profit in January-March as it gave away about two-third of its oil revenues to subsidise losses of retailers amid soaring crude prices, reviving memories of fiscal 2008-09 when global crude peaked pushing up subsidies on fuel.

The huge sequential fall in earnings stands in sharp contrast to private sector explorers such as Cairn India, which reported 22% growth in net profit helped by higher prices even though production fell.

ONGC's share in subsidy at . 12,135 crore in the fourth quarter was almost equal to the total of past three quarters. This took the total subsidy toll to . 24,892 crore for fiscal 2010-11, more than double than previous year.

In January-March, although ONGC earned an average oil price of $108.90 per barrel, it ended up with just $38.75 in hand as the government took away the rest. What remained was nearly 25% below the year-ago period causing a 26% fall in net profit.

State-run fuel retailers sell products such as diesel and cooking gas to end-customers at subsidised rates. The subsidy burden arising from selling the products below market price is shared between retailers, upstream companies, and the government.

The company reported net profit of . 2,791 crore in the last quarter driven by higher profits on natural gas, whose prices were revised in fiscal 2010-11, and increasing share of production from joint ventures. As there is no subsidy burden on production from joint ventures, the 60% incremental volumes helped. Although oil prices have jumped more than five times since 2004-05, ONGC's average profit growth has been a mere 6.5% per annum. The average annual growth in its market capitalisation was just about 4.5%. Every year the government has taken away a chunk of its profits to pay for losses made by oil marketing companies.

The subsidy sharing mechanism and its value-destructing impact will keep weighing on investor sentiment. The government is expected to divest its stake further in the company in early July.

This could induce the government to introduce some reforms for a better price. Investors, who are otherwise living off the annual dividend payouts, may look forward to a run-up in prices if the follow-on offer materialises.

 

Stock Review: USHA MARTIN

 

The underperformance of the Usha Martin stock since January 2011 is a reflection of the company's difficulty in running operations efficiently over the past two quarters. Though on a sequential basis, its performance has improved, higher input costs continue to put a strain on the margins.

Over the past two quarters, Usha Martin has witnessed reasonable sales growth, but higher cost of raw materials has impacted its profitability. Besides, the company also had to bear the brunt of a power plant breakdown and temporary shutdown of its DRI plant along with certain logistics related issues. The unexpected delay in orders from markets in the West only worsened the situation.

On a consolidated basis, the company reported a 34% sales growth during the March 2011 quarter. But over 30% rise in cost of raw materials, which make up half the company's total expenditure, resulted in a 300-bp decline in the company's operating profit margin. Higher interest and depreciation charges cost the company a 48% decline in net profit to . 36.15 crore. This has resulted in erosion of earnings per share of nearly 50% — from . 2.3 last year to . 1.2 in Q4 FY11.

As part of its . 1,200 crore expansion plan, the company recently raised $125 million via the external commercial borrowing route. Post-fund raising, the company's debt as on March 2011 was . 1,753.8 crore. Its interest coverage ratio, which determines the ease or difficulty with which a company can pay interest on outstanding debt, is two. It is lower than its peers and hence a cause for concern.

Despite having the largest market share in the steel ropes industry — both domestically and globally — Usha Martin has been battered down over the past two quarters. Due to unfavourable market conditions, the benchmark Sensex is 8% lower than what it was six months ago, whereas Usha Martin has lost over 20%. At . 54.8, the stock quotes at 12.2 times its 12-month trailing earnings per share and looks expensive.

Stock Review: Sun Pharma

SUN Pharma's acquisition of Israel's Taro Pharmaceutical Industries is finally paying off. The March quarter revenue of the Indian drug maker rose 35.5 per cent year on year (YoY), to 1,463.4 crore. Of this, Taro, which grew 21 per cent, contributed nearly `480 crore.

The contribution of Sun's other major subsidiary, US-based Caraco, was `187.6 crore, 25 per cent lower than that in the same period a year ago. Without Taro's contribution, Sun Pharma's revenues would have actually 13 per cent, reports Emkay Global. Going ahead, given the healthy growth prospects, most analysts are bullish on the stock.

DOMESTIC GROWTH

Domestic formulation sales, at 589 crore, marked a healthy growth of 20 per cent YoY. The quarter saw Sun launch nine key products, taking its total to 39 during 2010-11. The domestic growth for 2011-12 is likely to remain robust at 18 per cent, much higher than the domestic average, believe analysts.

ROBUST PIPELINE

On the regulatory front, the recently-concluded quarter saw the company file eight Abbreviated New Drug Applications (ANDAs), taking the total to 25 filings in 2010-11. It also received approvals for two ANDAs. Add to this the three ANDAs for which Taro received approval during the quarter. Management is set to make 25 more filings in 2011-12.

MARGIN PRESSURES

During the quarter, employee expenses and other expenses on a yearly basis grew 119 per cent to `254 crore and 62 per cent to `452 crore, respectively, accounting for the inclusion of Taro's financials, which impacted the operating profit margin (OPM), according to an Angel Broking report. OPM contracted to 30.3 per cent (38.7 per cent). The company's net profit grew 12.3 per cent to `443 crore.

STRONG GUIDANCE

For 2011-12, the management has a guidance for 28-30 per cent growth in revenue. For Taro, analysts estimate sales worth $400 million in 2011-12. The company is looking at inorganic growth and scouting for acquisitions, especially in the US and emerging markets.

Analysts at Angel estimate Sun's net sales to register 29 per cent CAGR from 2010-11 to 201213, with 15.8 per cent CAGR in earnings to `23.5 a share. At current levels, the stock trades at 26 times 2011-12 and 20.3 times 2012-13 earnings estimates.

Stock Review: NIIT Technologies

 

Growth in the travel and BFSI segments, large government engagements and revival in the US and APAC are likely to boost NIIT Tech going ahead

 

Delhi-based NIIT Technologies has reported a nearly 9% CAGR growth in its topline as well as bottomline over the past four years. During FY11, the company has witnessed improved traction in BFSI and travel and transportation segments. Strong orders intake and increased hiring reflect the growth momentum recorded by the company.

BUSINESS

NIIT Technologies was incorporated as an independent organisation in 2004 after its de-merger with NIIT. The Delhi-based mid-tier company offers IT solutions to its vast customer base spread across North America, Europe, Middle East, Asia and Australia. It offers services in application development and maintenance, managed services, cloud computing and business process outsourcing space to organisations across verticals. While the travel and transportation segment contributes 29% to the company's overall business, financial services and insurance contributes 37%. Of the balance, the government segment contributes 18%, manufacturing and distribution form 8% and the other segments contribute to the rest.

GROWTH DRIVERS

Healthy traction in the travel and transport space and the BFSI segment led the growth last fiscal. Also, improved momentum in the domestic business on account of large government engagements including with the Border Security Force (BSF), which is spread over a period of five years, was outstanding. The company expects a similar momentum to continue across geographies in the coming quarters as well.

   Also, the management expects the recovery trend to continue with the US and West Europe and the manufacturing segment going ahead. This is evident from the company's order book size that stands 15% higher at $169 million at the beginning of FY12 as against the start of the previous year. The maximum order intake was during the March 2011 quarter when fresh orders at $116 million were more than double the total number of orders during the previous quarter.

FINANCIALS

NIIT Tech has been reporting decent revenue as well as profit growth over the past few quarters. The March 2011 quarter results were also broadly in-line with the street's expectations.

   The company posted a 5% sequential jump in its consolidated revenues at 315 crore. The growth was driven by a 9% volume growth in Europe, 7% in the US and 13% in Asia Pacific.

   Geographically, APAC contribution, which account for 15% to the company's overall business, grew 12.5% to 48 crore and the US and Europe forming 35% of the total revenue together, a rise of 5% each to 110.5 crore each. Vertical wise, the travel and transportation segment, which forms nearly 34% of the company's overall business, was the key growth driver during the quarter. It reported a 12% sequential increase in the total revenues at 107 crore.

   Despite a broad-based growth, the company's operating profit margin remained more or less flat against the previous quarter at 19.9%. During FY12, a 13% offshore salary hike and a 3% at onsite are likely to act as headwinds for margins in the coming quarters.

   However, improved efficiency introduced in the system is likely to curtail margin pressure. The company operates at a utilisation level of above 80% that is on the higher side as compared to that of
large industry peers.

   During the quarter, the company witnessed a 420 bps drop at 11.4% sequentially in the effective tax rate in relation to net sales.

   This led to a 5% growth in the company's bottomline at 51 crore. However, the company expects the effective tax rate for FY12 at 26-27%, which is likely to impact the company's bottom line negatively.

VALUATIONS

At the current market price of 185, the stock is trading at nearly six times its earnings for the trailing 12 months. The valuations seem to be cheap compared to other mid-tier IT companies, which are trading at a priceto-earnings multiple of 6-8.

   Robust growth in the travel space and BFSI, large government engagements domestically as well as growth in the US and APAC are likely to boost the company in the coming quarters.

   However, since over 80% of the company's overall business comprises exports, inflation, increase in interest rates and exchange rates can act as a headwind going ahead.

Stock Review: Redington India

 

Business diversification is improving Redington India's margins and profits. Investors can consider buying this stock as the valuations are reasonable

 

Investors can consider buying Redington India's stock as the company is expected to benefit from its high-growth-high-margin non-IT for smart phone and consumer durable businesses. Its partnership with BlackBerry has been successful and with 3G services being rolled out, sales of these smart phones will drive the future growth of the company. Its recent tie-up with Dell and Apple is an indicator of the strength of Remington's retail distribution business.

BUSINESS

Redington India along with its subsidiaries is in the business of end-to-end supply chain management of IT and non-IT products in various geographies of South Asia, Middle East and Africa. IT products include desktops, laptops, servers, software packages, peripheral comments, networking equipment and storage products, while non IT products include smartphones and consumer electronics such as televisions, washing machines, refrigerators, microwaves, ovens etc. IT product distribution accounts for around 80% of Redington's India's business. In FY11, the overseas business contributed almost 52% to its total revenues while the rest came from the Indian business. However, the Indian business is more profitable as 62% of earnings were contributed by the Indian business.

FINANCIALS

Redington's net sales have grown at a compounded annual growth rate (CAGR) of 21% and its earnings or net profit has grown at a CAGR of 29%. In FY11, net sales were 17,458.54 crore and net profit was 264.8 crore. The company's business model has a very thin operating and profit margins. In FY11, these margins were 2.7% and 1.5%, respectively.

   Given these low margins, a small improvement in margins can increase earnings growth dramatically. Margins have gradually increased over the years, supported by the company's rising diversification into non-IT business. The return on equity for FY11 was 16.6 while return on capital employed was 14.6. Its current debt to equity is 0.8.

INVESTMENT RATIONALE

The company has a strong distribution network and a good execution record. Redington is focusing on the smart phone and consumer electronic business. The market for these products is large and growing. Growing contribution of these non-IT businesses will help the company boost its overall topline. Also, as the contribution from these non-IT segments increases, overall margins will improve providing an even stronger earnings growth.

   Redington's tie up with BlackBerry has been a huge success. Its recent tie-ups with Dell and Apple indicates the faith these top brands have in Redington's distribution service. Given this, Redington could add more such clients in its basket as there are hardly few peers that can offer such services.

   This will help the company participate in India's consumption story. Also, Redington India along with Ingram Micro dominates the IT distribution market.
   The IT business which represents 80% of the total revenue will at least continue to grow at industry average of 12-15% as the personal computer affordability increases.

   Besides, the company has started financing operations to provide funding to its channel partners by leveraging its balance sheet. This will shorten the working capital cycle and thus raise the return on equity. But, this can also expose Redington to interest rate risks and increase the non-performing assets on its balance sheet.

VALUATIONS

Redington does not have any listed peer to compare its valuations. The company is currently trading at a price-to-earning multiple of 15 which is slightly higher than its three-year average of 13.6 and much lower than its three-year high of 21.75. Given this, at the current market price of 83, the Redington India's stock is fairly priced. Investors can buy at these levels.

Stock Review: Dolphin Offshore

This stock has been correcting, if you see in last six months the stock has corrected from Rs 350 to Rs 120. The day before it made its 52 week low at Rs 120. This has been on our radar that the stock now looks very good.

The main reason for the fall in the share price has been the poor working for FY11. This is because in FY10 company posted an EPS of Rs 40 while in FY11 it was close to at about Rs 10.

Obviously the fall in the share price was expected. But beyond a point when you see such a steep fall, you see is the value buying coming back in these kinds of stocks. Yesterday it could be the act of the value buying, because going forward, the company has two-three notes to their accounts which they have presented.

One is in respect of the non-provisionally to the extent of Rs 40-45 crore in respect to the delay damages. But, on the other hand they have got Rs 33 crore billing for the extra work carried out as well. Apart from that, there is an equivalent amount of about Rs 40-45 crore extra billing which needs to be carried out for the work having implemented by them.

On a net basis if you see the extraordinary on account of the delays in execution as well as the extra work gets nullified, get set-off. Going forward, FY12 should be a normal year for the company. I am not saying that they will bounce back to an EPS of Rs 40 because if that happens share can easily move to Rs 300 plus. But, considering all the normal factors  the list of clientele they have, they should be able to post an EPS of Rs 20 plus for FY12.

Because gradually they may ramp up their EPS, their bottom-line in next couple of years back to about 30 plus but at least for FY12 I am expecting it to be about 20. If you take that into consideration share available at a PE multiple of 7 makes the stock a good buy. I am expecting a price of close to about Rs 200 in the next six months or so.

Stock Views on BHARAT ELECTRONICS, OBEROI REALTY

MORGAN STANLEY on OBEROI REALTY

Oberoi Realty's March 2011 quarter results were below estimates. Total income was up 58% year-on-year but it fell 33% sequentially due to lumpy recognition of the Exquisite I project. Its operating margin compressed 1,000 basis points (down 760 basis points sequentially) to 54%. Net profit was up 30% year-on-year to 136 crore (down 33% q-o-q). This was below our estimate of 150 crore (largely on account of lower sales in Splendor - six units sold in Q4 versus 91 units of unsold inventory). Splendor, Splendor Grande (28% recognised, 29% sold), Exquisite I, and investment assets were the key drivers of the topline. Income from lease assets remained flat sequentially while income from hospitality (Westin) grew 21%. We retain our 'Outperform' rating on the stock in view of its preparedness to unlock value in its quality land bank, strong balance sheet, and reasonable valuation (25% discount to estimated net asset value).

ROYAL BANK OF SCOTLAND on BHARAT ELECTRONICS

Bharat Electronics (BEL) reported a turnover of 5,630 crore in FY11. This was 5% lower than our forecast of 5,800 crore. The company's net profit for FY11 was 800 crore, up 8% year-on-year. BEL doubled its order book in the past year from 1,1400 crore to 2,3600 crore. The company's largest recent order was the 3,600 crore order for Akash missiles. BEL says it is looking for an order book worth 70,000 crore in the next three years. Even if half of that materialises, it would mean orders worth 35,000 crore over the next three years. The company expects orders of 10,000 crore in FY12, including an additional Akash order of 12,000 crore (along with an order from Bharat Dynamics Ltd, an unlisted defence public sector unit). We believe BEL is the best way to play the Indian defence story and we maintain our 'Buy' rating.

Stock Review: Raymond

 

Considering Raymond's turnaround, robust business model and strong domestic demand, the stock looks attractive

 

BETTER-THAN-EXPECTED March quarter results and a turnaround performance in FY11, may restore confidence in Raymond's retail business model. Long-term investors can consider buying the stock at the current levels.

BUSINESS:

Raymond is one of India's largest and oldest clothing and apparel companies. In the last fiscal, it exited its loss-making overseas operations and shut down its Thane plant. Its strong brand 'Raymond' has allowed it to bypass wholesalers and increase its retail presence.

   The company has built a robust distribution network, reaching out to over 400 towns. Most of these stores are franchisees and the inventory is bought out by these franchisees without any recourse to the company. This makes it an asset light model.

INVESTMENT RATIONALE

In FY11, Raymond showed a good growth momentum across segments. A strong brand and the successful opening of 104 new stores in the last fiscal helped the company post a net sales growth of 21%.

   On the back of a good response in the rural market, the company is planning to open 150 more stores in tier III, IV and V cities in the next one to one-a-half years which will boost its earnings. The monetisation of its 120-acre real estate property in Thane, a suburb near Mumbai, can be a potential catalyst, for which the management is exploring various options.

FINANCIALS:

Last fiscal was a turnaround year for the company as it reported a profit of 55 crore after two consecutive years of losses. Its net sales at 3,035.9 were also 21% higher than the previous year, but margins were a little lower than expected due to high input — cotton and wool — prices for its shirting, denim and apparel businesses. In FY11, the operating margin stood at 8% and the net profit margin was 1.8%. Due to high raw material prices, margins will continue to remain under pressure, but the management is confident that it will be able to pass on the burden to consumers.

CONCERNS:

In FY11, raw materials were more than 30% of sales. Rapid increase in prices of raw materials such as cotton and wool could increase this further. Unless the company passes on the cost immediately to consumers, margins would get squeezed in the near term. Also, Raymond has a denim manufacturing plant in Romania, which is now loss-making due to weak demand in Europe. If Europe's economic prospects continue to be weak, this subsidiary will continue to report losses.

VALUATIONS:

The stock trades at 38.6 times its FY11 earnings. Considering its turnaround, robust business model and strong domestic demand, we estimate earnings to double in FY12 from the low base of last year. This means the stock is trading at 17.4 times estimated FY12 earnings.

   In addition, the sale of its 120-acre land in Thane would bring in cash of 720 crore, assuming a conservative sale price of 6 crore per acre. This would be an additional 117 per share unlocking value.

 

Stock Views on GODREJ CONSUMER PRODUCTS, GSK CONSUMERS, ICICI BANK

BANK OF AMERICA ML on ICICI BANK

The earnings of 1,450 crore (up over 44% year-on-year) in the March 2011 quarter were in line with estimates. They were driven by a better-than-expected rebound in topline (up 23%). Margins expanded by 10 basis points (bps) year-on-year and sequentially to 2.7% due to re-pricing of domestic loans. Loan growth was strong at 19.4% from the year-ago figure (5% sequentially) led by corporate and overseas businesses. Provisions were 16% lower than estimated, as asset quality was sustained with no accretion of new non-performing assets. Current account and savings account (CASA) deposits rose to 45.1% from 44.2% in the previous quarter and 41.7% a year ago. The bank successfully leveraged its expanding distribution. Core fees were up 18% year-on-year, largely driven by corporate and international fees. We estimate earnings growth of 35% and 25% in FY12 and FY13 respectively, driven by 19-20% topline growth led by 20 bps margin expansion between FY11 and FY13, as loans would re-price and margins in overseas business would increase.

NOMURA on GSK CONSUMERS

GSK Consumers reported PAT of 111 crore for the March quarter of FY11, slightly below Nomura's expectation due to lower sales. During the quarter, the company reported net sales of 727 crore, 8.5% lower than Nomura's estimate. Nomura maintains a Buy rating on GSK Consumers Healthcare. According to Nomura, though loss of momentum in volumes is a concern, the good news is that the profitability has been stable. Gross margin improved by 143 bps year-on-year to 62.9%. Topline momentum has started to pick up as per the management and should return to a mediumterm sustainable rate over the rest of 2011. The company is guiding for an 8-9% input cost inflation for 2011, which is significantly ahead of what they saw in March quarter 2011. Going forward, the company expects to maintain gross margins at best and not improve it from 2010 levels. Nomura believes in the long-term story of GSK Consumers.

JP MORGAN on GODREJ CONSUMER PRODUCTS

JP Morgan maintains a 'Neutral' rating on Godrej Consumer Products. For the March quarter of FY11, GCPL reported net sales, EBITDA and PAT growth of 96%, 65% and 54% respectively. Given a host of acquisitions done over last year, consolidated results for the company are not comparable on a y-o-y basis. While sales growth was marginally better than estimates, EBITDA margins (- 330 bps y-o-y) came in lower than expectations. Higher other income (+195% y-o-y, includes 10 crore of interest accrued on ESOPs) led to earnings coming in 5% ahead of estimates. Domestic sales increased 17% year-on-year driven by 13%, 18% and 17% sales growth for soaps, hair colour and household insecticides respectively. Volume growth stood at 9%, 11% and 17%, respectively. Nomura has given a price target of 430 based on a oneyear forward earnings multiple of 21x, which is at a 10% premium to the historical five-year average.

Stock Review: Gujarat State Petronet (GSPL)

 

GSPL is likely to capture growing volumes once domestic gas supply improves. Long-term investors can buy the scrip

 

FLAT volumes and stagnating profits over the past five quarters and bleak outlook on the domestic gas production are key concerns for Gujarat State Petronet (GSPL). However, the strong and unmet domestic demand for gas is a reality, which will ultimately need GSPL's pipeline network to fulfil. GSPL's growing reach implies that it will be able to capture growing volumes once domestic availability of natural gas improves. Long-term investors should buy this scrip.

BUSINESS:

GSPL owns and operates India's second-largest natural gas pipeline network of nearly 1,900 km connecting 19 out of 26 districts of Gujarat. The company does not trade in natural gas and operates its pipeline grid on 'open access' basis. As a result, its entire income comes from pipeline tariffs. It is also setting up a 52.5-MW wind power capacity.

GROWTH DRIVERS:

The company continues to expand its network proactively with a capex of 600 crore annually, which it can finance comfortably through its internal accruals. With this capex plan, it aims to reach all 25 districts of Gujarat by FY14. It currently transports close to 35.5 million standard cubic metres per day (mmscmd) of gas and retains substantial extra capacity for additional volumes. FY12 is expected to add at least 1500MW gas based power capacities in Gujarat, which means higher volumes for GSPL. The GSPL-led group has emerged as the lowest bidder for three long-distance gas pipelines totalling nearly 4,500 km entailing a capex of 21,500 crore.

FINANCIALS:

At the end of September 2010, GSPL had a capital of nearly 3,440 crore invested in the business funded by debt and equity in 0.85:1 proportion. During 2010, the average tariff it earned was around 800 per thousand cubic metres, which was down from 950 in 2009. The company's quarterly net profits have stagnated at close to 110 crore since the September 2009 quarter. In the December 2010 quarter, it reduced the rate of depreciation from 8.33% to 4.75%, which boosted profit to 159 crore. This is still higher compared to Gail, which charges depreciation at 3.17% on its pipelines. The company's return on capital employed rose 27.8% in FY10 after hovering at around 11-12% in earlier years. Its ROCE is expected to remain high at around 24-25% for FY11 as well, thanks to the reduction in the depreciation rate.

VALUATIONS:

The valuations of the scrip have fallen to its lowest levels in the past five years due to the stagnation in profits and the lack of visibility over incremental gas supplies. Considering its profit for the trailing 12 months, the scrip is trading at a P/E of 11.7. This is the lowest among its peers such as Gail, Gujarat Gas and Indraprastha Gas which command a P/E between 16.5 and 18.5.

 

Stock Review: SHIPPING CORPORATION OF INDIA

Shipping Corporation of India reported a loss of . 6.17 crore in January-March amid weakening freight rates, high crude oil prices, and oversupply of vessels.

In the same period a year earlier the company had posted net profit of . 135.85 crore. Rise in crude oil prices increased fuel cost and higher commodity prices reduced overall commodity trade volumes weighing on margins. Operating margin declined to 11.6% from 17% a year ago. Surge in interest cost and depreciation, fall in other income, and increase in effective tax rate dented fourth quarter earnings.

For the year ended March, the company reported net sales of . 3,543 crore, up 2.3% from corresponding period a year earlier. Net profit was . 567.35 crore, up 50% from a year ago, helped by robust operating margin of the first three quarters. In fiscal 2010-11, SCI raised about . 2,600 crore through a combination of equity and debt to fund fleet expansion.

The company's fleet size was 79 with total capacity of 5.73 million dead weight tonne as on March 31, up 27% from a year ago. The company plans to raise $500-600 million through external commercial borrowings to fund fleet expansion. This will increase its debt-to-equity ratio to 0.95. It is currently trading at price-to-book value of 1.05 which is higher than its 15-year average of 0.78. However, its valuation in terms of price-to-earnings multiple at 7.6 is lower to than industry average of 12.

Shipping freight rates have fallen drastically since the global financial meltdown of 2008. This is reflected in the Baltic Dry Index, the benchmark for freight trade, which plummeted from a record high of 12,000 points post 2008 financial crisis.
The index, which measures the rates for chartering of carriers, fell 50% in January-March compared with a year ago, the lowest in past two years.

The company expects growth in foreign trade in the coming quarters to improve freight rates. Global economic recovery and improvement in trade volumes will be key for the company's performance going ahead.

 

Stock Review: GODREJ PROPERTIES

Worried about economic and political factors impacting the real estate sector, investors have dumped real estate stocks in the past few months. The 15-member BSE realty index is down by 40% in the past one year. The members of the index have had varying degrees of fall in their stock prices ranging between 8.5% and 81% during the same period. However, through all this, the Godrej Properties scrip has not only held its ground, but also registered 19% appreciation in price in the last one year. One of the few business houses to be in real estate, Godrej Properties is a national real estate developer with presence across 11 cities in mid-income housing development. One of the huge advantages enjoyed by the company is the equity of its Godrej brand. At a time when the sector is losing investor confidence due to some of its players' alleged involvement in corruption, having a strong and reliable brand in the realty space could not have been more cherished by Godrej Properties.

Given the regime of high interest rates, high leverage is yet another issue for real estate companies. Unlike most companies in the sector, Godrej Properties has a debt-equity ratio under 1 — thanks to its asset light model. The company develops property jointly with the landowner — thereby not locking money in buying land. The low capital-intensive model is a good change over other capital-intensive companies.

The fourth quarter ended March 2011 has been the best one for the company — driven by sales from its projects in Ahmedabad and Gurgaon. The growth momentum is likely to continue — given the pipeline of projects under construction. The company is expected to launch 4.5-5.5 million square feet area in FY12. However, one of the concerns regarding the company is the geographic concentration of the company's landbank. Around half of its current land bank is located in Ahmedabad.

Another concern is the weak demand in Mumbai market where the company's ambitious project 'The Trees' is being constructed at Vikhroli. The demand should recover over the next two years, around the time when the company is expected to complete the first of its commercial properties.

Stock Review: SpiceJet

The  times when the industry is not doing well can be seen as opportunities to buy the stock because you get the stock cheap. This is a company which has; the stock has dropped by 50% over the last seven- eight months. It is consolidating in the range of about Rs 38-45 for the past three-four months.

If you see the Q4 performance of SpiceJet this company has reported a loss of about Rs 60 crore. In spite of the loss of Rs 60 crore in Q4 the company has ended the full year with a profit after tax of about Rs 100 crore. The loss in the last quarter is primarily on account of higher ATF prices.

Looking at the business model of SpiceJet vis-à-vis the other listed aviation stocks, this is a company which follows asset like model, which means that it doesn't own aircrafts but leases them. This essentially means that the capital which the company requires for business is less which is evident from the debt in the balance sheet.

Companies like Jet Airways and Kingfisher Airlines debt to the tune of about Rs 8,000 crore to Rs 14,000 crore. In comparison to that SpiceJet has debt of just about Rs 400 crore, which is negligible when compared with other aviation stocks.

If you see the full year performance of other airlines stocks Jet recorded a profit after tax of about Rs 10 crore, Kingfisher posted a loss of about Rs 1,000 crore for FY11 whereas Spicejet made a profit after tax of about Rs 100 crore. So, the financial position of SpiceJet vis-à-vis the other listed airline stocks is substantially better.

The company has been on growth path, it has aggressive plans to expand aggressively into tier two and tier three cities where it sees good growth potential. It has plans to increase the number of aircrafts from 30 to about 70 in the next three years.

Most airline companies have been increasing their fares slightly to offset the cost of higher ATF prices but given the trade-off between higher fares and the load factors, the entire cost has not been passed on to the customer but the volume growth has been good.

As the ATF prices and the oil prices stabilise these companies will benefit. But, bad times can be seen as opportunities to buy these stock and SpiceJet looks to be the best out of the lot of aviation stocks to outperform in a good environment.

Stock Review: IndusInd Bank

 

IndusInd Bank, which was considered a laggard a few years ago, is now in the top league in terms of efficiency and financial strength. The bank's focus on a retail mix with a concentration in vehicle loans had muted its growth. However, the new management has carried out a revamp and in the process laid a strong platform to scale up its business.

BUSINESS

IndusInd Bank is one of the new generation private sector banks in the country. The bank has two main segments in its loan portfolio — corporate and commercial banking (including the SME segment) and consumer finance. The bank's retail mix is significantly different from its peers, with a negligible presence in home loans and focus on commercial vehicle loans, equipment and automobile financing. The consumer finance business is a high yielding one with yields as high as 20%.

   Back in 2008, IndusInd was battling a host of issues, such as poor asset quality, less visibility in the industry and poor quality of earnings. A new management team led by Romesh Sobti took charge of and made a huge impact in the first 3 years by revamping the bank.

   Its loan growth has stayed above that of the industry during the past eight quarters. Advances grew by a CAGR of 29%, while deposits grew at a CAGR of 25% during the same period. The bank has been focusing on boosting its current and savings account ratio, or CASA, to improve its margins. To achieve this, the bank plans to increase its branches to 550 from 300 by FY13. In the past three years, the bank has improved its CASA from 15.7% to 27.2% in FY11.

   The bank has managed to improve its NIM from 2.1% in FY09 to 3.5% in FY11. In the quarter, the NIM compressed by 11 bps due to a rise in cost of funds. Its return on asset (ROA) has improved from below 1% to more than 1.5% in two years, while most Indian banks posted an average ROA of 1%. This shows that currently it ranks high in terms of utilisation of assets. The bank has done well on quality of assets as well, as net non-performing assets (NPA) formed just 0.4% of net advances at end FY11.

   One major concern for the bank going forward could be the higher operating costs due to branch expansion. Considering that the bank is planning to grow its consumer finance business, it will have to be mindful of the fact that commercial vehicle business, which forms 49% of its portfolio, is highly cyclical in nature. Thus, any downturn in the industry may hamper its growth in the consumer finance business.

VALUATIONS

The stock is trading at 3 times its book value, which is high considering its history. However, given its robust growth and expansion plans the premium valuation is justified.

Stock Review: Lakshmi Machine

The company has posted very good results for FY11. This is one amongst the top three global majors engaged in the manufacture of textile machinery. For FY11, they have posted top-line of Rs 1,800 crore plus EPS of Rs 125. if you go by the financials the company is not a debt free but apart from that they are sitting on a cash of Rs 750 crore.

This Rs 750 crore is after initiating a share buyback which the company made last quarter. Due to which the equity got reduced close to about Rs 11.50 crore. This cash translates into about Rs 650 per share and the share is ruling close to about Rs 2,010-2,015. Looking at their order book the company traditionally has been sitting on an order book of three years plus. This is  because of the kind of demand they have for the textile machinery.

Considering the growth of the sector, the same order book is likely to continue. There they should be able to post a growth of 25% on an annualized basis. Apart from that they had the joint venture with Rieter of Switzerland.

They are buying back their 50% stake held by Rieter in the present subsidiary of the company. Going forward, the company looks to have the good plans of ramping up their top-line as well as bottom-line.

So, with all this they should be able to post an EPS of Rs 150 for FY12 on a conservative basis. If I knock of this Rs 650 per share cash the share is virtually ruling at a PE multiple of close to Rs 10 which traditionally, used to be 20 for the last many years. On the downside it has a very limited risk but on the upside one can expect a price of Rs 2,500 in the next six months or so.

Stock Review: JK PAPER

JK Paper is the largest producer of branded paper in India and a leading player in fine paper and packaging board segment. The company currently has a capacity of 2.7 lakh TPA. It plans to increase its capacity by nearly 50% to 4 lakhs TPA by the end of 2012 when its plant in Orissa will be operational.
   The company plans to raise Rs 225 crore through foreign currency convertible bonds. It also plans to build a pulp mill in South Asia, which will enable it to source raw material at cheaper rates. Capacity expansion and good demand will boost earnings. JK Paper's stock is under-valued with a trailing price-to-earnings multiple of 3.5. Its market valuation is a tad more than onefifth its annual net sales.

   With the capacity expansion of most of these players rolling out over the next couple of years, the sector is a long-term play for investors.

Stock Review: Elecon Engineering

 

Elecon Engineering, a leading manufacturer of material handling equipment, has underperformed the Sensex over the past one year. The company's stock performance, however, does not undermine the company's growth potential reflected by its performance for the year ended March 2011. Backed by a decent order backlog of about Rs 1,700 crore, which translates to about 1.4 times its standalone revenues for FY11, the company not only has revenue visibility over the near term, but is also well poised to meet its target of 25% growth in revenues in FY12.

   This order backlog, however, includes order worth Rs 323 crore relating to Brahmani Industries in the MHE segment which has been on hold for over two years now. Excluding Brahmani Industries, the company's order books aggregate Rs 1,377 crore that is about 1.2 times the company's standalone FY11 revenue.

FINANCIALS

Registering a 12% standalone revenue growth year-on-year to Rs 1,184 crore for FY11, Elecon Engineering's operating margins have improved by close to 60 basis points during the year. Its earnings per share, or EPS, will improve from Rs 7.13 to Rs 9.47 in 2010-11. The company's competence in keeping its material costs in check, despite a sharp rise in commodity prices last year, has helped in easing pressure on margins. The company's highly leveraged balance sheet is, however, a cause of concern, especially in terms of higher interest outgo in a rising interest rate regime and can squeeze margins in the near term.

   Going forward, the company is expected to benefit from its recent acquisition of UK-based Benzlers-Radicon group, both in terms of revenue growth and operating margins through cost optimisation. Benzlers and Radicon are highly recognized brands in the power transmission industry globally and the acquisition is thus expected to strengthen the Elecon's product development and engineering capabilities and widen its customer base across Europe and North America.

VALUATIONS

Elecon Engineering's stock has fallen by more than 13% during the past one year and currently trades around 67 per share. At this price, the stock commands a priceearning multiple (PE) of about 7.15, which is at a discount to its peers. While the company's stock has underperformed, the sensex over the past one year, it has, nevertheless, outperformed its peers which command a higher P/E. The current valuations appear reasonable given the revenue visibility that the company has through its existing order backlog. Moreover, the 12th Five Year Plan is expected to focus especially on sectors such as capital equipment, including those dealing with heavy electrical and earth moving equipment.

   This will benefit companies like Elecon Engineering, which are engaged in material handling business, and can expect a good share of the $ 1 trillion pie — the projected spending on infrastructure during 2012-17. We recommend a buy on the stock at current levels.

Stock Review: BILT

BILT is the largest paper company in India. A part of the Avantha group, it is the only Indian firm to feature in the list of top 100 paper companies of the world. It is the market leader in coated paper segment in India. Its margins in paper business were hit by rising cost of pulp, power and fuel. The company has raised product prices to offset rise in input cost. It has a capex plan of 1,300 crore to increase pulp capacity and lower dependence on imports by fiscal 2012-13. However, high pulp prices will continue to weigh on the company's margins in the near term. The company is planning to list its international subsidiary on the London Stock Exchange. The proceeds from listing will help fund its expansion and improve profitability. The paper industry is likely to consolidate in the near term and BILT, being the largest firm in the sector, will benefit. Long-term investors can look at accumulating the stock at lower levels.

Stock Review: Maruti

HARYANAseems to have become a hot bed of industrial action. A section of workers at Maruti Suzuki's Manesar plant have gone on strike since June 4, demanding recognition of a new trade union at the plant. Given that the new plant is critical to the company, as it produces diesel variants of models such as SX4, Swift and Dzire along with A-Star, which have a long waiting period. The strike, therefore, will start hurting the company a lot more if the stalemate continues.

Manesar employs 2,500 workers and has a production capacity of 350,000 units (25 per cent of the total capacity). By September, a second line of production is slated to come up in the same factory. Analysts believe the company cannot afford to delay this line, as it is supposed to produce Dzire and Swift diesel, which already have a waiting period of over a month.

Edelweiss Capital says the company has an option of compensating for the loss of Swift production by ramping up output at the Gurgaon plant. However, production of other models is likely to get affected if the stalemate continues. The report goes on to say that the production loss is estimated at 1,200 units a day ( `48 crore in value) and `4.8 crore in profit (0.2 per cent of FY12E EPS `82).

After terminating 11 employees on Monday, terming the strike illegal and that sufficient notice for the same was not given, the company has started negotiations with the striking employees. The company is exploring unitwise holding union model, such that unions at every plant can look into their own factory related problems.

While the impasse is expected to be resolved soon, analyst Deepak Jain, AVP (auto) at Sharekhan, believes the company probably needs to de-risk its manufacturing facilities, as Haryana has seen several such incidents in recent times.

Stock Review: Cummins India Ltd. (CIL)

 

the country's largest engine manufacturer, is on a roll. It has sold more engines in the first nine months of FY11 than it did in the whole of FY10. Earnings per share (EPS) too has kept pace. EPS for the nine months ended December 2010 has outstripped the EPS for the whole of FY10. The company is now developing additional capacity at Pune in order to take advantage of both domestic and global opportunities.

 

Opportunities

Power shortage to drive revenues: Cummins' generator sets are used in a variety of sectors: IT, hospitality, agriculture, commercial, infrastructure, residential and healthcare. This diversity provides comfort. Cummins' revenues are cushioned from the lean patches that an individual sector may go through (for instance, the realty sector currently). Hence, at a time when the Capital Goods Index is down 18 per cent y-o-y (January 2011), Cummins' domestic sales have recorded a 20 per cent y-o-y growth for the nine months ended December 2010.

Power deficit is likely to continue in India: by 2015 it is expected to be of the order of 14-15GW. This presents a huge opportunity to Cummins which generates 35 per cent of its total revenue from power generation. According to Dhirendra Tiwari, senior vice president, institutional equity research, Motilal Oswal, domestic demand is expected to grow 20 per cent in FY12 and 19 per cent in FY13.

However, Q3FY10 sales were down 6 per cent y-o-y, partly due to a maintenance shutdown in that quarter and due to a strike at its Kothrud plant. As a result, a lot of order backlogs had to be cleared in Q3FY11. This affected the bottomline to the tune of Rs30 crore in Q3FY11. However, the company's long-term growth prospects remain sound. In a recent conference call with analysts, Anant Talaulicar, managing director, Cummins India said that he expects the domestic business to grow in the high teens over the next five years.

Opportunities in the standby market: From being a prime market (where power generation is important), India is moving towards becoming a standby market (where providing backup power is important). The demand for these systems is currently in the nascent stage (it derives less than 10 per cent of its revenues from this segment) but is slated to rise in future.

Stricter emission norms: The new, Bharat Stage III, emission norms come into effect in April 2011. These norms will affect the off-highway wheeled construction equipment industry (pavers, compactors, wheel loaders, skid steer loaders, motor graders and cranes) which account for about 30 per cent of the $3.2 billion (Rs1,42,000 crore) construction equipment market in India. Cummins, which has a product line in emission technology, is expected to benefit from this opportunity.

Gas-based gensets: With gas reserves being discovered within the country and its supply increasing, a market for gas-based gensets, currently estimated at 200 MW, is developing. This has the potential to become a new niche area of growth for the company. The cost of power generated by gas gensets is significantly lower than of power produced by traditional diesel gensets, which tilts the scales in favour of these gensets. Cummins, which possesses a lean-burn natural gas product line, could benefit from the increasing use of gas for generating power.

Growth in exports: Exports account for 30 per cent of Cummins' sales and are slated to go up. Cummins Inc., the US-based parent of Cummins India (which holds 51 per cent stake in the company), has decided to make India the hub for manufacturing all sub-200KvA gensets. Barring the US, Cummins India will supply these gensets globally, focusing especially on markets such as the Middle East, Asia and Africa. From Rs488 crore in FY10, exports are expected to rise to Rs1,500 crore by FY15.

Capacity expansion: Cummins is building a new facility at Phaltan, Pune, which will involve a total capex of $500 million (Rs2,215 crore). Cummins India and its parent are both expected to invest 50 per cent each on the project. The Indian subsidiary plans to invest Rs400-500 crore as capex each year for the next two-three years out of its internal accruals. This investment will involve upgradation of Cummins' research and development facilities, a new technology centre at Pune, reconditioning of power generators and high horsepower engines, and a new corporate office.

The facility will have an initial capacity of 15,000 units (in FY11), which will jump to 40,000 units by FY13. The entire incremental capacity is expected to service exports. As a result of these capacity additions, total capacity is expected to increase by 20 per cent CAGR over the next two-three years.

Margins expected to remain steady: Cummins' EBITDA margin for the nine months ended December 2010 stood at 19.7 per cent, higher than the 18.5 per cent margin the company had reported for FY10. Cummins managed to beat its previous year's margin despite a 30 per cent increase in pig iron prices over the last three quarters owing to strong volume growth, cost cutting, and a superior product mix. Margins are expected to remain stable at around 20 per cent in FY11. If raw-material prices rise further, the company could hike prices by 1-3 per cent in the current financial year in order to preserve its margins.

 

Threats

Slowdown risk: Though Cummins' products cater to a wide variety of industries, a slowdown in the overall economy could put the brakes on its growth plans. The key sectors that it caters to include realty, infrastructure, healthcare, engineering and auto. Realty and infrastructure sectors are no longer growing rapidly and their near-term outlook remains muted. Agriculture is another key sector for Cummins. If the monsoon is deficient, sales to this sector could be affected.

Rising commodity prices: Commodity prices, especially those of steel and copper, have been firm this year. Margins could come under pressure if commodity price inflation does not cool down, and if the company is unable to raise prices materially owing to competition.

Valuation

Cummins trades at a three-year PEG ratio of 0.9. The company's revenue has grown at a compounded annual rate of 19 per cent over the last five years. The company's management expects revenue to grow annually at the rate of 20 per cent over the next five years. EPS has grown faster at around 27 per cent (over the same period) and reflects the company's strength in the Indian market. Cummins' return on capital employed (ROCE) has been in the 40 per cent range in the last two years. Moreover, the company is debt free. Cash and cash equivalents stand at near Rs800 crore (December 2010 figure).

Cummins India is one of the better plays on the Indian capital goods sector and appears to be a sound bet for investing with a five-year horizon

 

Stock Review: SmartLink Network

We are very positive on SmartLink Network. When the company has sold off its main business Digilink, eyebrows were raised wondering as to why the company never demerged its business and never sold its whole entity and made an open offer to the shareholders. At the end, the promoter Naik has not charged any non-compete fee. The brand of Digilink was in his name which he sold for Rs 1 to the company. The company has sold the entire Digilink business to Schneider for Rs 503 crore and on a post tax basis it works out to Rs 400 crore. The company was already sitting on cash of Rs 50 crore. With not much of businesses, the company is sitting on Rs 450 crore cash, yet with five units there.

Now, the company has a Digisol and Digicare business. Right now, nothing is happening in the Digicare business, but the company intends to do certain things by tying up with certain vendors. As far as Digisol business is concerned, the company will make it grow over the next one-two years. Coming back to the company's financials, its of Rs 3 crore shares, each share is of Rs 2, Rs 6 crore equity and cash of Rs 450 crore, that means the cash is of around Rs 150 per share.

The company is in such a business that it won't require much of capital. For Rs 150 per share cash, the company has declared a special interim dividend of Rs 30 per share. If one looks at the companies past track record, I am quite confident that this Rs 150 per share will ultimately be distributed to shareholders over the next one-three years. Rs 30 per share has already been distributed.

At a present price of Rs 100, you are getting Rs 30 dividend. If the share goes down on an ex-dividend basis which it will, then some further dividend will come in over the next three-six months. The company will distribute this Rs 150 per share ultimately in the form of dividends over the next one-three years because it doesn't require too much of capital.

 

Stock Review: Andhra Pradesh Paper Mills

Andhra Pradesh Paper Mills has sold a majority stake to the US paper major, International Paper, for about Rs 1,860 crore. The company could be worth investing in post acquisition due to the global expertise and brands that will come along with International Paper. Andhra Pradesh Paper's current production capacity is 2.5 lakh tonne per annum (TPA). Its productivity and operating margins are seen improving over the next two years. Increase in efficiency in operations and expansion of product portfolio will boost earnings.

Stock Review: Infinite Computer Solutions

 

Infinite Computer Solutions' double-digit profit growth in the past few quarters could not add much lustre to its stock performance over the past years. The stock earned a meager 5% return during the period compared with a 13% increase.

However, the company's decision to buy back shares is likely to bring momentum in its otherwise dull stock. The company started the share buyback, constituting 9.9% of Infinite's net worth on May 6, 2011. This will result in a cash outgo of nearly . 27 crore.

With revenues of . 883 crore in FY11, Infinite offers IT solutions in application management; infrastructure management (IMS) and intellectual property (IP) related segments to global clients. During the March 2011 quarter, the company witnessed a traction in its high margin messaging business, which added 10 basis points to its operating margin of 17.1% when compared with the previous quarter.

Its margin is expected to improve further with addition of a UKbased top-tier telecom company as a client for the messaging business. The company has increased its offshore revenue mix by 300 bps to 38% during the quarter against the previous quarter, which should support profitability.

The company's cash position fell by 8% sequentially to . 95 crore during the March quarter due to investment in Uttarakhand-based contract for Accelerated Power Development and Reform Programme. With a delay of two quarters, the project is likely to start contributing to the company's revenue by the first quarter of FY13. The company's account receivable days have reduced to 90 against 102 during the previous quarter. This should improve the company's working capital cycle in the coming quarters.

The company has provided a strong 27-30% revenue growth guidance for the current fiscal. At the current market price of . 164.2, the stock trades at 6.7 times its earnings for the trailing twelve months. The valuation seems to be at the lower end of the P/E range of 6-8 for other IT mid-tier companies. Given the buyback offer and an optimistic growth forecast, the company is likely to report a sustained momentum in the coming quarters.

 

 

Stock Review: Alok Industries

 

In the past one year, the stock of Alok Industries has gained 35%, much higher than the 3% increase recorded by the ET Textile index. The stock's outperformance reflects the company's impressive growth in the past few quarters.

The company has started benefiting from its six-year long capacity expansion. During the March 2011 quarter, the company's net profit grew by a robust 67% on a year-on-year basis to . 160 crore. The net profit for fiscal 2011 grew 52% to . 376 crore. Its net sales for the full-year grew by 47% to . 6,365 crore. The company's operating margin, however, shrank by 170 basis points to 27.8% due to higher cotton prices, the major raw material used by the company.

In the coming quarters, the company's focus on synthetic textiles, including the polyester segment, may prove beneficial in reducing the impact of soaring cotton prices. The polyester segment comprises 25% of the company's total production and it expects to increase it to 50% by FY13. By the end of June 2011, it will increase its polyester capacity to 5,00,000 tonnes from 2,00,000 tonnes. Polyester-based products yield higher return on capital employed (RoCE) of over 35% than cotton-based products, which have an RoCE of 15%. Hence, an increasing focus will be lucrative for the company in the coming quarters.

In a recent analyst conference call, the management said that it has been able to negotiate a deal for its commercial property in Peninsula Business Park in Mumbai. The company is estimated to make around . 50 crore by selling a portion of the property. It has two more commercial properties (6,41,000 sq ft and 60,000 sq ft, respectively in central Mumbai) and a residential property development in the suburbs of Mumbai. With its plans to exit the real estate business, the company will be able to reduce its mammoth debt of . 10,500 crore on a consolidated basis in the coming quarters. With an improved business scenario, the company's promoter, Niraj Realtors and Shares, has increased its stake marginally to 29.1% from 28.9% through open market purchases. Given the steps taken, the company is expected to maintain its current growth momentum in the coming quarters with stable margin scenario.

 

Stock Review: M&M Financial

This is the largest NBFC into the rural and semi-urban space with 550 branches and assets under management of Rs 14,000 crore. This is a subsidiary of Mahindra & Mahindra with 56% stake held by Mahindra & Mahindra while the total promoter stake is close to about 58%.

For FY11 they have posted an EPS of Rs 48. The company has very robust business profile in place because they are financing all type of cars, utility vehicles, tractor trucks, tractors and even the agricultural other implements and other things. So, going forward the company does not have any problem.

The company to post an EPS of close to about Rs 60 for FY12. If you take the price to book maybe on FY12 earnings they will be having a book value close to about Rs 330.

The EPS to be close to about Rs 62-63 the share is ruling at a PE multiple of 10 and the price to book it is 2. If you take these into consideration I think share is quite cheap available if you compare this with Bajaj Finance or maybe with Shriram Transport.

Lately we have seen the renewed interest coming back into these NBFCs. Apart from that the company has the highest PAT margin into the industry which is at 24% plus.

Taking all this into consideration, the promoters background, the company background, the financials, the share again looks quite good. Maybe in about next six months one can expect a price of Rs 800 with very limited downside risk from hereon.

 

Stock Review: Dish TV

 

For the March 2011 quarter, Dish TV, one of the largest and early entrants in the direct-to-home (DTH) industry, reported losses. The company reported a loss of . 37 crore in the March 2011 quarter, against a loss of . 60 crore in the same period past year.

For the quarter, the company's net sales increased 43% to . 432 crore on a year-on-year comparison. For the whole FY11, its performance was negative. The next two quarters would be crucial for the company since it seems certain that it would post positive profit.

The rapid digitisation of the industry is the key factor for the company's future growth. Currently, it is estimated that in each quarter the industry is adding around 2.5 million subscribers. Dish TV itself added more than a million subscribers in the fourth quarter of FY11, taking its subscriber base to 10 million. Being the market leader with nearly one-third market share, the company is set to benefit from this. Besides this, the company is also benefiting from its new offering — HD format (around 36 channels). The contribution of the HD offering in the past few months has increased from less than 1% to around 7% of the company's revenues. The company would benefit immensely, considering the average revenue per user for HD services is more than . 400 per month, while for the plain vanilla DTH services it is . 150. In the last few years, the company has changed its business model to fixed-fee model, which will play a key role in improving its profitability, going ahead.

Under this, the company's content cost — the amount DTH companies pay for sourcing the content — has decreased as a percentage of subscription revenues to 39%, from 55% in FY09. As the increasing subscriber base increases revenues, the company's profitability would improve substantially.

In the past one year, the stock of Dish TV India has been on constant investor radar. The company's stock in the past one year has given more than 70% returns, against a meagre 10% of the benchmark Sensex.

This continued interest in the stock is due to increasing digital subscriber base in the past one year. Being the only listed player among the six DTH operators, it would continue to generate increasing investor interest in coming quarters as digitisation gains pace.

 

Stock Review: TRIVENI Engineering and Industries

TRIVENI Engineering and Industries' move to restructure its businesses into separate entities is in the right direction. While the market doesn't seem to have taken a note of gains, given the potential shareholders should benefit in the medium term from this move.

The company, which recently got court's approval to demerge its turbine business into Triveni Turbine (TTL) (effective May 4th), has allotted one share of TTL to its shareholders for every share held in Triveni Engineering. While its share price has corrected from `104 to `40 currently (market capitalisation of about `1,000 crore) to reflect the demerger of the turbine business, analysts suggest Triveni Engineering's stock is going cheap given the value in the remaining businesses. Nonetheless, TTL's listing, expected in 4-6 weeks, should more than compensate its shareholders for the decline in the share price.

DEMERGER GAINS

After demerger, shareholders of Triveni Engineering have seen the value of their holding fall by 65 a share — excluding the allotment of one share in the TTL. This means unless TTL lists at 65 or more, shareholders will stand to lose. Analysts though believe it may not be the case.

Consider this: Turbine business' revenue in the last six years has grown at 29 per cent annually. Even at 25 per cent growth and net margin of 18 per cent, TTL is worth about `1,585 crore or `74 a share estimate analysts.

On the other hand, even at `65, the stock will trade at 12.6 times its FY12 estimated earnings, lower than about 16 times valuation its peers enjoy.

For now, the company is strengthening its turbine business, and should sustain its high growth trajectory. TTL, which has over 70 per cent market share in 30 Mw and 85 per cent market share in 20 Mw power turbine category (which mainly caters to the captive power segment), has strengthened its product capability to 100 Mw through a technology-cum-marketing joint venture with global leader, GE of USA. In light of its enhanced capabilities, TTL which has an order book of `560 crore (about 1,000 Mw or 1 times its FY10 revenue) is hoping to bag bigger orders.

VALUE IN EXISTING BUSINESSES

Meanwhile, the Triveni which is left with sugar, gear manufacturing and water businesses, saw revenues (excluding TTL) slip marginally by 6.5 per cent in the March 2011 quarter, in line with expectations. Notably, operating margins improved by about 300 basis points and helped report a 58 per cent jump in net profits.

Among the three remaining businesses, the largest namely, sugar, is being valued at one time its book value as on March 2011, which translates into a per share value of `28.5. Gear and water businesses, which have grown almost three times in revenues (Rs 262 crore in 2009-10) in the last three years, are being valued at about 12 times estimated 2011-12 net profits or `38 a share.

Additionally, Triveni holds 22 per cent stake TTL. At `65 a share of TTL, the value of its holding works out to `13 a share of Triveni Engineering. Put together, the sum of its sugar, water and gear businesses and stake in TTL works out to `79, much more than its existing price of `39.