Stock Review: MUNDRA PORT & SEZ

The June quarter result of Mundra Port and Special Economic Zone (MPSEZ), India's leading private multi-port operator, was in line with expectations on the back of a healthy growth in volumes despite a slowdown in the world economy.

MPSEZ reported a 20% rise in net profit and 27% in revenues in June 2011 compared to the same period in FY11. The company's cargo volume grew 19% to 15.08 metric million tonnes (MMT), which was lower than a 28% y-o-y growth in FY11. The growth fell on account of lower volumes in liquid and crude cargo. Crude and liquid cargo together account 32% of the total volume. The container volumes during the same period were up 23% to 3.43 lakh 20-ft equivalent units (TEU). By taking account of volumes in this quarter, MPSEZ becomes the fifth largest commercial port in India.

The company benefited from the closure of JNPT for six weeks due to equipment repairs in the June '11 quarter.

The traffic from northern hinterland, expected to move to JNPT, was diverted to Mundra and Pipavav ports during this period.

MPSEZ in the same period completed the $2-billion acquisition of Abbott Point Coal Terminal in Australia with a capacity of 50 MMT per annum. It was funded entirely from borrowed funds at interest rate of threemonth Libor + 305 basis points. EBIDTA margins saw a major drop of 1000 basis points due to increase in operating and employee expenses. Tax burden increased from this financial year since SEZ developers are now liable to pay MAT.

With capacity utilisation at most of the major ports being 100% and expansion going at a very slow pace, ports like Mundra and Pipavav are likely to benefit from the incremental growth in external trade. However, in the near future, global slowdown is likely to affect volumes.

The stock is currently trading at a price-to-earnings (P/E) multiple of 28.24. Listed peers Gujarat Pipavav Port and Essar Ports, which are much smaller in size compared to MPSEZ, are trading at a P/E of 191.62 and 37.36, respectively.

Stock Review: COAL INDIA

 

THE Coal India scrip has risen more than 30 per cent since the revision in prices in end-February. The hike has rubbed positively on its performance in the June quarter. Though offtake was slightly lower than the company's expectation of an increase of seven per cent, profits jumped and were a little short of the $1-billion mark. Analysts observe that off take has picked up in July, though availability of rakes (railway wagons) continue to be the key for this to sustain.

While raising the prices, the company had partly factored in the pay increments effective from July. Analysts say another price rise, expected by the end of the year, is likely to keep margins intact after the wage negotiations.

The combination of increase in volumes and prices will help the company sustain healthy growth, say analysts. According to Bloomberg data, 67 per cent of the analysts have abuy rating on the stock.

BETTER OFFTAKE, PRICES

The average sales price at `1,365 a tonne was higher by 12 per cent sequentially and drove up profitability, despite higher provisions (up 307 per cent at `296.5 crore). Profit also got a boost from a 44 per cent rise in other income (to `1,558 crore) due to higher interest income.

In volume terms, coal production at 96.3 million tonnes was slightly higher than the year-ago quarter's 95.15 mt. However, off take at 106 mt rose at a better pace over the corresponding quarter's 101 mt, mainly due to better availability of rakes. Average availability of rakes at 165-168 a day, though lower than the 175 rakes desired, was seven to nine per cent higher on a year-on-year basis.

Analysts observe that off take during the quarter was affected by heavy rains and logistics issues and say it would pick up. A Bank of America- Merrill Lynch report observes the July off take at 35.8 mt has already improved by seven per cent, year-on-year. However, rake availability will be key and if the same rate as July is continued through the quarter, an estimated 185 rakes a day will be required in the second half.

OUTLOOK

Going ahead, Coal India will start providing for wage revision provisions from the September quarter, as negotiations are to start soon. The earlier price rises were undertaken looking at this fact, too, and analysts at Citi say the company, after examining margins at the end of the year, may look at price revisions to maintain profitability.

What remains to be seen is the impact of the draft mining law. If passed, the company would have to share 26 per cent of its coal profits with local populations. Citi reports indicate an impact of 1011 per cent on profits, though such would help Coal India to expedite land acquisition.

Overall, analysts remain positive. Those at Prabhudas Lilladher expect its earnings to grow 24 per cent annually during 2010-13, despite increasing wage costs and an uncertain regulatory environment.

Priced at `390.70, it trades 16.7 times its 2011-12 consensus earnings estimate.

Stock Review: Hindustan Construction Company (HCC)

THE June quarter results of Hindustan Construction Company (HCC) clearly indicate that challenges in terms of execution, higher working capital requirements, and thus, higher interest outgo, haven't eased. For the quarter, HCC reported a 90 per cent decline in net profit on a marginal 6.6 per cent growth in revenues, post which analysts have lowered their earnings estimates for the current and next financial years. On the back of these issues, coupled with worries over its Lavasa project, its stock has corrected almost 60 per cent in a year, wherein most of these issues are factored in. Patient investors with some appetite for risk (given that there is some downside) can look at this stock.

DRIVING VALUE

On the positive side, the company recently sold a 14.5 per cent stake in HCC Concessions for `240 crore. This business, which holds BOT (buildoperate-transfer) road projects, is valued at `1,650 crore or almost two times its book value. HCC's remaining stake of 85.5 per cent is thus worth about `14 per share (after adjusting for a 30 per cent holding company discount). These alysts' earlier estimate of about `7-8 per share and should boost HCC's overall valuations.

HCC's current market capitalisation is`1,832 crore, which along with net consolidated debt of `6,682 crore, translates into an enterprise value of `8,514 crore. This looks reasonable, considering the company's positioning in the infrastructure space – expertise in the high margin less competitive hydro power project segment. Additionally, its order book of `17,000 crore, (four times its FY11 construction business revenues) provides reasonable visibility.

WORRIES CONTINUE

The low valuations, however, teriorating fundamentals, which are likely to take some time to stabilise and improve. Here, the biggest issue relates to HCC's high debt of `7,382 crore, largely on account of working capital arising out of its business need. Going ahead, analysts believe that incremental sales may require the company to borrow more, which could put further pressure on profitability. The company's working capital, in terms of the number of days, has shot up to almost 280 days of sales in the June quarter as against 223 days in the yearago one.

This comes at a time when interest rates are on the rise and execution has been a key challenge. The company's borrowing cost has already gone up from 8.25 per cent to 10 per cent. On the positive side, the company has set up a team to recover large dues from various government agencies, which should lower some of the pressure.

Stock Review: Power Finance Corporation (PFC)

 

RECENT developments suggest that the downtrend witnessed by Power Finance Corporation's stock (PFC) could change for the better, albeit in the medium term. From the peak level of 383 in October 2010, the stock has halved to `180.

Firstly, the company posted healthy results for the June quarter, which has somewhat eased asset quality concerns. Second is the recent decision of state governments to bring down commercial losses of state electricity boards (SEBs) via measures like annual tariff revisions, conversion of loans into bonds/equity, computerisation of accounts and so on. While the latter augurs well for players like PFC, it will take time for these steps to bear fruits— the markets will be keeping an eye on asset quality on this front.

Meanwhile, PFC's stock is valued attractively vis-a-vis peers like REC (15-25 per cent discount) so is its 5-year forward trading multiples (30-35 per cent discount). Factors like higher exposure to low-risk power generation business (85 per cent) compared to its peers (REC has 40 per cent exposure) places it better, given the concerns surrounding the power sector. Most of the analysts are bullish on the stock with average target price of `269.

MITIGATING ASSET QUALITY CONCERNS

For the quarter ending 30th June, PFC reported higher than the expected results on top-line front while the bottom line was largely in-line with the expectations. The growth in net interest income was driven by loan book growth of 22 per cent over the previous year. Notably, its fee, lease and other incomes fell by 46 per cent year-on-year to `35 crore, resulting in lower net profit growth than expected. However, excluding one-offs like forex gains and prior tax period, the net profit was up by 14 per cent year-on-year to `716 crore.

This was way-ahead of the expectations of 5-6 per cent of yearon-year bottom line growth.

Higher operating costs (up by 27 per cent year-on-year) and provisioning (up by 7 per cent year-on-year) also restricted the bottom-line growth of the company. Further, the higher cost of funds (up by 27 basis points sequentially) led to a contraction by 10 basis points in the net interest margin (NIMs) over the March 2011 quarter. Its capital adequacy ratio remained healthy at 18.9 per cent, up by 319 basis points, thanks to its recent follow-on public offer, and will provide fuel for the future growth. Interestingly, despite the burgeoning losses faced by its key clients – SEBs - that form close to 65 per cent of its loan portfolio, PFC managed to keep its net non-performing assets (NPAs) unchanged at 0.20 per cent on a sequential basis. If this trend sustains the pressure on the stocks will ease.

Meanwhile, analysts expect the company to post a 20-22 per cent annual growth in net profit for the next two financial years. This will be driven by a healthy loan book growth of close to 24 per cent as well as margin expansion of 15-20 basis points. The strong sanctions pipeline of six times its annual disbursements will drive loan growth for the company. While its credit costs could go up, access to low-cost funds through instruments like tax-free bonds and external commercial borrowings (ECBs) will support its margins. Also, favourable asset-liability management (ALMs) and recent fund raising will boost its margin this fiscal, believe analysts at Bank of America-Merrill Lynch.

 

Stock Review: L&T

A healthy order backlog puts L&T in a comfortable position to meet its annual revenue growth guidance of 25%, subject to a smooth execution of projects.

Reporting a healthy profit of about . 750 crore for Q1 FY12, the company's share was down by just about p 0.6% on the bourses even as the Sensex slid by nearly 2% on Monday. However, even as profits continue to remain healthy, pressure on volumes is visible in the backdrop of the policy paralysis and slowing investments in big ticket projects.

The revenue slowdown is more evident in the company's electrical & electronics segment, which, according to the company, is due to muted industrial demand and tight money conditions. However, its machinery and industrial products segment continued a robust growth moment, backed by strong sales growth in industrial machinery and valves.
As at the end of June '11, the company had an order backlog of . 1.36 lakh crore, roughly 4.5% higher than its order book at as the end of FY11. It has added order worth . 16,190 crore during the quarter, which is about 4% higher than its order inflows at the end of June '10. The company continues to maintain its guidance for 15% for order inflows for the year 2011-12.

While the current order backlog does give L&T a revenue visibility for about three years, it is the pace of execution of projects in hand that will eventually determine the recognition of this revenue in its books.

Many of the company's ongoing projects, especially in the power sector, are yet to reach the threshold completion levels and thus go unrecognised in the books during the quarter, thereby putting pressure on margins.

As such, the company has reported a dip of about 95 basis points in its operating margin for the quarter, which reflects the impact of not only projects under execution but also high material costs, staff costs as well as interest expenses. The company expects the margins to continue to be under pressure by about 50-75 basis points for the year. Going forward, while new orders will be instrumental for the company to maintain its order and revenue growth guidance, a smooth execution of its existing orders will be the key.

 

Stock Review: NALCO

Buoyed by stronger LME (London Metal Exchange) aluminium prices and higher alumina sales, Nalco's earnings per share rose 33% over the previous year in the first quarter of FY12. Compared with its peers, the country's third largest aluminium producer has managed the increase in input costs well, maintaining operating profit margins at last year's levels vis-à-vis peers which have not fared too well. Moreover, having obtained the necessary environmental clearances for mining bauxite, a key aluminium making ingredient, prospects for increased profitability have improved.

Nalco recently announced it received the final stage II clearance from the ministry of environment and forests for the renewal of its bauxite mining lease in the Panchpatmali South Block of Koraput district in Orissa. This is likely to benefit the PSU player, as its peers from the private sector still struggle with bauxite availability.

During the quarter under review, aluminium prices on the LME averaged $2,600/tonne. Since then, prices have declined around 5% to about $2,470/tonne following the turmoil in financial markets spurred by the debt crisis is Europe and the US. Ahead of the market slide, global mining major Rio Tinto Alcan forecast softening of aluminium prices in the near term as inventories remain high. Though Chinese demand remains strong, till the uncertainty in the rest of the world subsides, aluminium prices are not likely to see a sharp rise from here. This may impact Nalco's earnings growth to some extent. Nalco reported a 35% rise in sales, year-on-year, to . 1762.53 crore, the highest growth in four quarters. The growth was on account of the 24% increase in aluminium prices and as the company's alumina sales rose 60%. Despite a 38% rise in raw materials and 30% increase in power and fuel expenses, N managed to keep its operating profit margin at 30% by keeping other expenses in check. Its net profit was up by 33% at . 376.84 crore.

Adverse market conditions over the past three months have caused the stock to lose close two-thirds of its market capitalisation. It touched a new 52-week low on Wednesday. At the CMP of . 62, it is available at 4.2 times its trailing 12-month earnings per share.

 

Stock Review: WOCKHARDT

Wockhardt's sale of its nutrition business to Danone will fetch the drug maker much-needed cash, allowing it to pay up foreign currency convertible bondholders and reduce debt. The Mumbai-based company, which is saddled with debts totalling . 3,700 crore, will receive about . 1,300 crore from the sale. So its debt-equity ratio should halve to less than 3 from 6 a year ago.

This financial cushion comes on top of its recent corporate debt restructuring deal, which has already won it a reprieve of some two to three years before it starts repaying debt.

The company, the pioneer in diabetes therapeutic segment, is present in multiple therapeutic segments and contract research and manufacturing. It has also entered into in-licensing deals, where it helps foreign partners market their drugs in India.

Geographically, Europe accounts for 44% of its revenues, India 23%, the US 27% and rest of the world 6%.

The company wants to increase its presence in US, a market where lot of its drugs were approved last year.

Due to a strong growth in US from back-toback drug launches, the company turned around in the second half of the last financial year after making losses for three consecutive years. In the coming years, the cash flows from improved profitability and the extended period for debt repayment will put Wockhardt in a very comfortable position. In FY11,

Wockhardt's net sales were . 3,750 crore and net profit . 90.5 crore. The contribution of nutrition division to the consolidated earnings is estimated to be around 10%.

Given this, the sale of this business will reduce its earnings in the coming quarters marginally. Additionally, the interest outgo would also come down substantially, which in FY11 was three times the net profit.

In the March quarter, its earning per share (EPS) was . 15. On a conservative basis, annualised EPS would be . 54 in FY12, assuming no growth, no reduction in interest payment and a 10% earnings loss.

Assuming this, at the current market price of . 440, Wockhardt is trading at a forward price-to-earnings multiple of 8.1 as compared to peers such as Lupin, Dr Reddy's and Sun Pharma, which are all trading around a multiple of 20.

Stock Review: VA Wabag

 

While the fall in VA Tech Wabag's March '11 quarter profit came on the back of exceptional one-time expenses and weakness in Euro, it wasn't much of a surprise. Although trading below its IPO price, the scrip did not witness any sudden jolt following the announcement. With a strong order book and a war chest for possible acquisitions, the company is well placed to capitalise on growth prospects.

Wabag's consolidated net profit for the March '11 quarter fell 17.8% to . 46 crore, while revenue growth was muted at 6.4%. Its operating profits were down 4% year-on-year thanks to a 170 basis points weakness in operating profit margin. However, a steep reduction in depreciation and interest costs enabled it to report 4.3% higher pre-tax profit. It was the . 12.9 crore extraordinary expenditure towards settlement of arbitration in its subsidiaries that resulted in a net profit fall.

The company also has improved its consolidated balance sheet with a cash balance of nearly . 325 crore, which it plans to utilise for inorganic growth. After couple of quarters of negative operating cash flows, it earned around . 50 crore of cash flow from operations in FY11. In December '10 it formed an alliance with Japan's Sumitomo Corporation, which will enable it to bid for bigger projects. In January '11 it floated a subsidiary in Oman with a local partner Zawawi to bid for local operations and maintenance (O&M) jobs.

The company ended FY11 with consolidated firm order book at . 3,402 crore, which is up 20%, which is almost three times its annual turnover of FY11. In addition, there are . 1,367 crore worth of orders for which the company is awaiting receipt of advance or letter of credit to call them firm orders. Since all these projects are to be executed within 24 months on an average, the company has a strong revenue visibility. The scrip is trading at 25.8 times its consolidated earnings for FY11, has already outperformed the Sensex in the past one month, indicating a better future ahead.

Stock Review: Vakrangee

 

Vakrangee, a Mumbai based e-governance solutions provider, has caught investor attention after winning a slew of multi-year projects. The company's order book for FY12 looks strong with a potential to boost its profitability. However, at the current price level, its stock seems to fully account for the company's future expected growth.

The company offers hardware, software, and systems integration solutions to e-governance-related projects including automation of the public distribution system, enrollment facility under the unique identification (UID) programme, reconciliation of land record titles and related services. A majority of its revenue comes from such government projects. Vakrangee's revenue and sales growth in the past four years has been brisk. In FY11, its revenue doubled to . 890 crore and net profit shot up to . 48 crore from . 24 crore in the previous year.

Despite such high growth, its profitability has remained low relative to other medium and small IT companies. It earns less than 6% in net margin compared with margins of over 10% for some other IT players of similar size. According to the company's chairman and MD, Dinesh Nandwana, margins were low in the past since Vakrangee executed projects as part of a consortium. This, however, is expected to change now that the company has started bidding for projects independently. Nandwana expects to improve the company's net margin to 10% in FY12.

Vakrangee recently won the UID enrollment project where it will assist Union Bank of India to enroll over 30% of Indian citizens under the programme. Nandwana pegs the revenue potential of this project to . 1,500 crore in the next four years.

The new projects are likely to add over . 420 crore to the topline in FY12. The company has also submitted bids for 17 other projects worth over . 12,000 crore across various Indian states. Their status will be known in the next six months.
Vakrangee's stock has earned 32% return in the past six months compared with the 3.4% fall in the ET Infotech index. At Wednesday's close of . 357.2, the stock trades at a trailing P/E of 18.5, which is much higher than P/Es of 8-10 for smaller IT companies. Given this, the stock seems to be richly valued considering its future potential.

 

Stock Review: United Phosphorus (UPL)

United Phosphorus (UPL) has acquired 10 companies and 12 products in the past seven years. This has resulted in 30% compounded annual revenue growth over the past six years. UPL will continue pursuing organic as well as inorganic growth, given a healthy cash balance of nearly 1,900 crore and debt-to-equity ratio of 0.8. The company has posted robust a double-digit growth in its bottomline during the last two quarters compared to the year-ago period. The company's operating margin has been in the range of 18-20% over the last few quarters. However, despite a decent financial performance, UPL's stock has underperformed the broader market. Given the company's strong product portfolio, its current valuation provides an attractive entry point with an upside potential.

 

Stock Review: Exide Industries

 

Exide Industries posted a decline in net profit during the December 2010 quarter due to high raw material costs and moderation in sales revenue due to capacity constraints. Being the largest player in the segment, the company still has the discretion to fix prices, which helps in maintaining a higher margin as compared to its peer group. Furthermore, the continued boom in the automobile sector is going to act as a catalyst for better earnings in coming years. Investors can take an exposure to the stock in being a leader in its segment with the sustainable business model.

 

Stock Review: Vinati Organics

 

The strong growth in the past couple of quarters and further investment plans for FY12 indicate that the growth tempo for specialty chemicals maker Vinati Organics will continue. The company's two major products are doing well globally and it is now investing . 100 crore to further raise capacity through FY12.

The second half of FY11 saw Vinati Organics post a 48.8% net profit growth, which was muted at 7.3% in the first half. This was the result of a spurt in revenues supported by improved margins. The company's operating profit margin for the second half of FY11 was 23.1% against 19.6% in the first half.

The company debottlenecked its ATBS plant in mid-FY11 to add a capacity of 20% to 12,000 tonnes and is expanding it further to 18,000 tonnes. It will also expand capacities of other products — TBA from 700 to 1000 tonnes and industrial polymers from 1500 tonnes to 4,500 tonnes. In addition, it will be setting up a greenfield plant to manufacture 1,000 tonne of DAAM — another specialty chemical used in coatings and personal care industries. All these expansion plans will be completed by March 2012 at a capital cost of . 100 crore. The company has tied up $16 million funding from IFC for this — $11 million of borrowings and $5 million of FCCB — at extremely attractive rates. The rest of the funding will be through internal accruals.

The company needs to overcome a few hurdles on its way. The sales of its erstwhile main product IBB — an input for ibuprofen — could weaken due to emerging competition. Its isobutylene plant, onethird output is internally consumed, is running below optimum capacity due to weak domestic demand. Finally, the lapsed tax benefits of its Lote unit means its effective tax rate will go beyond 30% from around 17% in FY11.

From a turnover of . 317 crore in FY11, the company aims at achieving . 600 crore turnover by FY13 as the full benefits of expansions this year come onstream. The company ended FY11 with a debt-to-equity ratio of 0.54. Its interest coverage ratio too was very comfortable at 17 in FY11. The increasing proportion of high-margin products such as ATBS in total sales means its operating margins are unlikely to weaken substantially. The expansion projects offer a visibility to the company's steady growth. The scrip is currently trading around 7.2 times its FY11 earnings.

Stock Review: Shoppers Stop

 

THE Shoppers Stop stock is down by 14 per cent over the last one week on the back of a disappointing June quarter performance. While price hikes and sales growth helped it to record a 15 per cent yearon-year growth in stand-alone net sales, operating profit margins were down by 50 basis points to 6 per cent. One percentage point is 100 basis points. The decline in margins was due to a 20 per cent jump in the operating expenses on account of new stores. Losses at its Hypermart subsidiary, Hyper-City at `23.6 crore was adrag, resulting in a loss of 1.5 crore for the consolidated entity.

While the company recorded a 22 per cent sales growth in departmental stores (Shoppers Stop) due to launch of new ones, the key disappointment was poor store sales growth which stands at 7 per cent. Analysts believe that the company is likely to register a sales growth of 15 per cent over the next two years, but operating profit margins are likely to contract by about 100 bps on higher employee costs and operating expenses. They expect the same store volumes to be under pressure due to a rise in prices. Given the muted outlook and higher PE valuations of 41 times based on FY12 earnings estimates, the stock looks expensive.

SAME STORE SALES HIT

A combination of higher prices, supply issues, a slowing economy and the IPL event during the June quarter led to a deceleration in like-to-like (same store sales) volume and sales growth for Shoppers Stop. Same store sales grew just by 7 per cent compared to 21 per cent growth in previous year's quarter. While the footfalls jumped up by 26 per cent for Shoppers Stop's departmental stores, conversion rates were the lowest in the last few quarters. Conversion rate indicates how much of the footfalls translated into sales.

Govind Shrikhande, the managing director of the company, in the June quarter results conference call said price increase (due to high cotton prices and excise duty) was one of the reasons for drop in volume. Religare analysts in a recent report on the company noted that the 5 per cent fall in volume growth on a like-to-like basis was due to a12 per cent hike in prices.

HYPERCITY LOSSES

Ebidta margins for the consolidated entity stood at 2.1 per cent while losses were reported at `1.5 crore, as compared to amargin of 6.4 per cent and net profit of `9crore in the year ago quarter. However, the numbers are not comparable as last year, HyperCity numbers (among key culprits for the subdued performance) were not included in the consolidated entity. HyperCity's gross margins are down due to higher proportion of food sales (61 per cent versus 57 per cent last year). Average selling prices also fell by `3 to 67 per unit due to higher food prices.

As with department stores, conversion rates fell to 41 per cent (against 42.7 per cent last year) despite the growth of footfalls by 24 per cent. Going ahead and among various measures, the company plans to reduce the proportion of food sales to the overall sales basket and control costs to turn around HyperCity's operations. Analysts, though believe that HyperCity could breakeven by 2013-14.

Stock Review: BHARTI AIRTEL

Bharti Airtel's first quarter topline performance was a shade weaker than the impressive growth reported by its smaller peer Idea Cellular. A comparatively low momentum in the domestic business restricted Bharti's consolidated sequential revenue growth to 4.4% in the June quarter. Idea last week reported a 6.7% sequential revenue growth fueled by a strong momentum in a majority of its telecom circles.

While growth is a little sluggish on the home turf, Bharti's African business continues to show a sustained momentum and despite falling per-minute revenue, Bharti's profitability in the region is improving gradually. This and the reversal in the trend of falling tariff back home means the company may report a sustained growth in revenue at more stable margins in the coming quarters.

Bharti's African venture looks all geared up for growth. The business, which now forms over one-fourth of total group revenue, spans across 16 Afrcian nations. In the June 2011 quarter, it grew 6% sequentially, much faster than the 1.4% growth in the previous quarter.

Bharti, which leads the Indian telecom market, both in terms of revenue and subscriber base, has also started implementing its home-grown strategy to outsource network and applications maintenance in the African markets. This is reflected in a sharp fall of 350 basis points in operating expenses (excluding access charges and licence fees) relative to sales and a 17% drop in workforce.

But there are challenges. Bharti's African operations have started showing pressure on telecom tariffs owing to greater competition in most markets. Each minute on its African networks is now cheaper by nearly 17% on an average from a year-ago. However, this has not yet impacted its per-user revenue, which fell by just over 1%. This is because the company has so far been able to capture new subscribers at a more or less sustained rate in the African markets.

The competitive nature in the African operations pulled down the operating margin (before depreciation) by 80 basis points to 26.7% in the June quarter from the year ago. The fall could have been sharper had it not been for the lower cost of operations.

Bharti's stock currently trades at its 52-week high level. Its current valuations tend to fully reflect the possible uptick in its domestic business due to recent tariff hikes and, hence, a further increase in its stock price looks limited.

Stock Review: Deepak Nitrite

 

Gujarat-based chemical company Deepak Nitrite has reported double-digit growth in sales and profit in each of the last four quarters. However, its stock has not captured the strong business momentum. With a meagre gain of 2.7% in the last one year, the stock has underperformed the benchmark Sensex, which gained 6% during the period. The company's current valuation looks cheap, given its growth potential.

Deepak Nitrite manufactures organic, inorganic, fine and specialty chemicals, with organic contributing more than 50% of the total revenues. Over 40% of the company's overall revenue is contributed by its exports business.

During the March 2011 quarter, net sales surged 20% to . 190 crore, helped by 18% volume growth yearon-year. The company witnessed a growth of similar magnitude in its net profit at . 8 crore. Its operating margin fell by 110 basis points to 7.6%, on the back of higher costs. The operating margin has been hovering in the 7-9% range for the past six quarters.

Deepak Nitrite has recently made its foray into the fuel additives segment, which contributed . 63 crore, or 10%, to the total turnover in FY11. The segment is expected to be a key growth driver in the coming quarters. The company has increased focus on the Chinese market. Exports to China formed 5% of the company's overall sales for FY11 and are likely to double by the end of next year.
Given the growing demand for chemicals globally, the company has various capacity expansion plans. The recently setup fine and specialty chemicals plant at Dahej, at a capex of . 150 crore, is expected to generate revenues of . 350-400 crore by FY13. Also, increased production of inorganic intermediaries is expected to add . 120-140 crore to the company's overall revenue in the next three years at . 50-crore capex. The company expects both the plants to operate at an operating margin of 15%.

Given the growth opportunities in China and new capacities coming up, the company is likely to fare well in the coming quarters. At the current market price of . 172, the stock trades at 7 times its trailing twelve months earnings. The valuation seems to be cheap compared with larger industry peers, which are trading at an average P/E of 11.

Stock Review: Kemrock Industries

It is an integrated global leader making fibre reinforced composite products and has  wide applications in aero space, wind energy, road, waste water treatment, oil and gas, railways, defence and all the sectors that are critical in respect to quality control. It is an import substitute of very high tech products and fetches good margin for the company.

In the 9 months performance that ended on 31 March, 2011, the company has posted a rise of 72% in its top line which moved to Rs 600 crore plus and the PAT has improved by 62% in the corresponding period of the previous year.

The RPM International Inc acquired about 20% stake in the company and they are coming out with an open offer at Rs 539 per share for 22% equity of the company. If you see the present shareholding pattern of the company, about 48% are held by the depository holder and 20% by RPM International. If I presume that open offer will go through successfully because of the public holding of about 28% and even if they are able to mobilize and garner about 12% to 15% stake, they will all be ending up with an effective stake of about 64% to 65%.

The share is ruling at a PE multiple of 12, the price book too is quite attractive at 1.4 times. Generally, these products and these types of products fetch high valuation, therefore, taking that this into consideration over a period of time this is becoming a multinational company likely to get acquired, maybe in 28% held by the Indian promoter may get sold.

The core business of the company has excellent growth potentials in the next 3-5 year scenario. The share should be able to reach Rs 600 maybe in the next couple of months but if somebody can keep a view of 6-8 months, the share can easily move to Rs 750 levels.

Stock Review: Indian Metals and Ferro Alloys’ (IMFA)

 

Indian Metals and Ferro Alloys' (IMFA) acquisition of a 70% stake in an Indonesian coal mine on Tuesday failed to cheer investors as the ferro chrome producer announced a 31% drop in its first quarter net profit. Investors appeared to be more worried with near-term concerns than the benefits of this long-term acquisition.

IMFA is one of the largest ferro chrome producers in the country with a capacity of 275,000 tonnes which it uses for captive purposes from its mines in Orissa. Through its latest acquisition of a coal mine in Indonesia, the company plans to foray into coal trading in the overseas markets, as the coal from this mine has a calorific value of 6,000 kilo calories. Though the total reserves from this mine are still unknown, the company will also use some of the reserves for captive purposes which will reduce its dependency on the high cost of coking coal.

 

However, as this will only take shape by the second half of 2012, IMFA will continue to face pressures from high input costs. But the company's mine in Utkal in Orissa is expected to offer some relief from the sharp increase in procurement costs by the end of the current fiscal. According to the management, the company has received the first clearance and it is waiting for the second, which is expected by August 2011. Since the Utkal mine will be used entirely for captive purposes, it should reduce IMFA's input costs by the March 2012 quarter. In the quarter under review, the company had to shell out an additional 76% for raw materials than it did in the year-ago quarter, which amounts to 20% of its total revenue.

The company reported an 11% growth in sales to . 272.33 crore. Its operating profit margin decreased by 1,900 basis points to 27% due to input cost pressure. As a result of the 31% decline in net profit, earnings per share fell to . 14.2 from . 20.6 in the corresponding period last year.

As on June 2011, IMFA's total debt was . 570 crore, whereas its cash on books, post an outgo of . 39 crore for the Indonesian acquisition, was . 25 crore. With a debt-to-equity ratio of 0.6 times, the company is well placed to raise further debt for further infrastructural development of the mine.

At the close of trade on Tuesday, the stock was quoting at . 461, which is 8.2 times its 12-month trailing price-to-earnings ratio.

Stock Review: Indian Hotels

LUXURY hotels are doing brisk business in India. And, occupancy levels are expected to remain robust across India this year, too, thanks to steady demand from the domestic market and upswing in tourist arrivals from abroad. Analysts believe average room rates are likely to rise 5-8 per cent across luxury hotels in the second half of the current financial year.

This trend has been demonstrated in the fourth quarter performance of the Indian Hotels Company, which grew its bottom line by 55.3 per cent year-on-year (y-o-y). The stand-alone net sales of IHCL grew 19.7 per cent y-o-y to `530.9 crore (the highest revenue growth in six quarters). The growth was driven by a strong improvement in the occupancies and average room rate (ARR) during the quarter. The occupancies stood at 7080 per cent, while the ARRs improved 5-10 per cent in most of the cities.

The company is expected to add 730 rooms over two years. While the domestic market remains healthy, analysts believe a key trigger for the stock could come from news of a turnaround of US operations. Roughly 14 per cent of the total revenues come from the US, and a turnaround could help ease pressure on consolidated profit. The stock trades below its historic one-year forward EV/Ebitda of 15.5x, which leaves enough room for upsides, says India Infoline.

In recent times, the balance sheet has been strengthened with the infusion of `500 crore by Tata Sons. The infusion has happened through preferential and part-conversion of warrants at Rs104 a share, which would help lower leverage debt/equity ratio down to 1.1x from 1.5x in FY10. With a lightened balance sheet, the focus is now on turnaround of US operations, which posted cash loss of $22 million in FY11.

In its after-results meet, the company indicated Pierre, its flagship US property in NY, could have additional $200 ARR headroom above its FY11 average of $618, which would then put it at par with other comparable properties. Analysts say domestic revival will help the company improve margins. Encouragingly, the company's FY11 fourth quarter stand-alone margin of 35 per cent is the highest since the third quarter of FY09. However, if the US operations take longer to turn around and average room rates don't move up in India, then things would look very different for the stock.

Stock Review: Sesa Goa

AFTER enjoying a bull run in merchant mining for the past five years, Sesa Goa is fast realising the environment in India is not conducive for growth. Analysts believe this explains the company's acquisition of a strategic stake in Bellary Steel and Cairn. The stock has come under intense pressure since the government levied 20 per cent duty on all kinds of ore export from March this year. This has substantially hit profitability. The state governments, on their part, are also increasingly turning against export of ore when no value addition has happened. Orissa and Karnataka have been the most vocal. While the government is right in its attempt to ensure the availability of raw material for local steel makers, the timing of the clampdown is not in the best interests of the company. Globally, the demand and supply scenario for iron ore is expected to remain tight for the next two or three years.

Currently, there is a 47 million-tonne deficit in the seaborne ore market, expected to contract to 11 million tonnes by 2013. With supplies expected to ease from 2013-14 onwards, iron ore prices will correct.

Given that 95 per cent of the company's revenues come from iron ore, a change in strategy is a given, as the dream run of the last few years may not continue. Though the company has doubled pig iron production, it's still not a large contributor to overall revenues. Analysts expect earnings before interest, taxes, depreciation and amortisation (Ebitda) to grow only 16 per cent this year due to higher export duty. Also, given the global prices of ore are at a peak, realisations will come down over the next couple of years as prices soften. In addition, the failure to renew mines in Orissa will impact the FY12 volumes by 2 mt, in addition to the 1-mt loss due to Karnataka's ban on export. Analysts are betting more on the Cairn acquisition than Bellary Steel, as steel making is still not a focus area and the acquisition is rather small. From a valuations point of view, Sesa Goa is currently trading at 4.4x & 4.5x of its FY12E earnings and EV/Ebitda, respectively. While the valuation looks attractive at these levels, the company is surrounded by many uncertainties, such as the pending issue of subsidy burden in Cairn India and a lack of clarity on volume growth. Analysts believe these issues will continue to be an overhang on the stock.

Stock Review: IDEA CELLULAR

A strong growth in the 13 established telecom circles continued to boost overall performance of Idea Cellular in the June 2011 quarter. The company was also able to sell minutes on its network at a slightly higher rate after a long period of stagnation in per-minute rates.

To retain the growth momentum, the company will now have to focus on its recently launched circles and services. And whether it succeeds or not will largely depend upon how fast it turns around operations in the nine circles it added in the past two years and how quickly revenue from the newlylaunched 3G services more than offset costs involved.
The country's fourth largest telecom operator by revenue has been reporting a gradual revival in its established 13 circles. Since the September 2010 quarter, revenue from these regions has increased by nearly 22%. Not only that, the growth is accompanied by higher profitability notwithstanding the pressure on tariff rates. Its operating margin has expanded by 260 basis points to 29.6% despite a 3% fall in perminute revenue during the period.

However, the strong momentum in the relatively older circles is partially offset by its operations in the nine new circles, including Mumbai, Bihar, and TN among others. Though revenue in these circles has increased by a strong 42% in the past 12 months, it is not enough to cover operating expenses. The new operations are yet to break even. The fact that the operating loss from these operations widened to . 139.7 crore during the June 2011 quarter from . 117.3 crore in the previous quarter raises concern. This restricted the overall operating margin improvement to 124 basis points for the quarter even though older circles reported a two-fold improvement in margins. Having a firm foothold in the domestic telecom market is a big positive. The company boasts of having one of the highest proportions of active subscribers among peers.

According to Telecom Regulatory Authority of India (TRAI), nine out of every 10 Idea subscribers had an active account as defined by the regulator in May 2011. This combined with a stable trend in its per-minute revenue and the launch of new services under 3G technology puts Idea in the sweet spot. This should support its stock in the near term, which has gained 40% in the past three months.

Stock Review: NESTLE & GSK CONSUMER HEALTHCARE

The June quarter performance of multinational food companies – Nestle and GlaxoSmithKline Consumer Healthcare – warrants some correction in their valuations on the bourses. The stock prices of these companies, like most FMCG stocks, had appreciated considerably in the recent past, stretching their valuations. Nestle's 20% growth in revenues, while appearing strong, is indeed the lowest growth in revenues logged by the company in the past five quarters. Its operating profit growth of 18% has been the smallest in the past four quarters.

Raw material cost has grown at 21%, higher than the growth in net sales. It constitutes over 49.5% of the revenues – marginally higher than that logged in the June quarter last year. The prices of key commodities like milk solids, coffee, edible oil and fats have remained high during the June quarter – putting pressure on the operating profit margins. Despite this, the operating profit margin dropped by a marginal 40 bps to 19.5%, thanks to the improvement in the product mix and other cost control measures undertaken by Nestle.

Logging a revenue growth of 21.5%, the June quarter performance of GlaxoSmithKline Consumer Healthcare was better than that seen in the preceding March quarter, when the company had posted a mere 9.5% increase in sales. Price increases effected by the company during the March quarter played out in the June quarter.

However, the operating profit margins took a beating – dropping by 124 bps over the previous year. Raw material cost, again the main culprit, rose by 35% — significantly higher than the sales growth. The proportion of this cost head to the total revenues increased to 32% from 29% a year ago.
While the consumption growth story has not come to an end, consumer goods companies are grappling with challenges like input cost inflation, intensifying competition and the looming threat of a drop in consumer demand.

While one factor, ie, raw material cost, may possibly abate in the near future, the other factor — competition— is here to stay. The eventuality of a drop in consumer demand is dependent on larger economic factors like inflation and the consequent monetary policies.

Stock Review: Larsen & Toubro

Larsen & Toubro's June quarter results were in line with Street expectations. This helped its shares recover three per cent from its intra-day low on Monday. The stock finally closed at 1,629.85, a decline of `10 over its previous close as compared to a 1.8 per cent fall in the Sensex. Led by a strong order book and execution, the company reported a 21 per cent increase in revenues. These were driven by robust growth of 22-25 per cent in revenues from the engineering & construction (E&C) division, which accounts for about 85 per cent of the total, and the electronics business.

However, due to input pressures, visible across its three key businesses, operating margins fell 95 basis points, leading to slower growth of 12 per cent in net profit at `746 crore.

Analysts believe operating margins could remain under pressure for another one or two quarters but do not see major erosion, with commodity prices already cooling.

"In an environment where every other company is surprising on the downside, L&T's results, which are in line, are seen with a positive note. Our revenue and profits growth estimates (for L&T) remains at about 20 per cent and 15 per cent, respectively," says Abhinav Bhandari, analyst, Elara Capital.

The guidance looks achievable, considering that unlike other key players, L&T does not have major worries on revenue growth, given its strong order book of `1,36,172 crore (almost three times its 2010-11 revenues). Stable margins, good execution capabilities and less dependence on borrowed funds ensure better earnings visibility for the company. Analysts have a 'buy' rating on the stock and value it at `1,8502,000, based on the sum of part valuations.

ORDER WORRIES

The biggest and immediate worry remains the flow of new orders or the demand side, given that India Inc's capital expenditure cycle has seen moderation in the light of higher interest rates. The impact is already seen on engineering companies, with most of these having reported a decline in new orders. On a relative basis, though, L&T has scored well.

It reported a marginal three per cent rise in new orders at 16,200 crore, significantly lower than the trend seen last year, as well as the preceding quarter. However, the slowdown in order inflows has been an industry phenomenon recently, largely in the case of companies dependent on the flow of investments in the power sector.

L&T's order inflows, however, look better when compared to Bharat Heavy Electricals (BHEL) and Crompton Greaves, which reported a 77 per cent and 18 per cent decline in new orders, respectively in the June quarter. L&T did well, helped by two large projects in the building and road segment worth `6,700 crore. Consequently, its order inflow from infrastructure (part of E&C), 38 per cent of its order book, grew 50 per cent. New orders from the power segment grew just 22 per cent. However, again better as compared with BHEL.

BETTER THAN PEERS

Analysts believe a lot of new orders for upcoming power projects have been shifted towards the second and third quarter of the current financial year, given the macro headwinds. Despite these concerns, L&T and BHEL are relatively better placed in terms of revenue visibility, as their order books are three to four times their sales. Also, they have less dependence on international markets as compared to Crompton Greaves, which derives almost half its sales from abroad. For instance, in the first quarter, Crompton Greaves' international revenues took a hit on account of the unrest in West Asia and North Africa, and slowing demand growth in the European markets. For these reasons and the pressure of input costs, many analysts have downgraded their earnings estimate for Crompton.

For BHEL, except that the company reported a fall in order inflow, it has seen improvement in margins as a result of reduction in the cost of employees, on a 22.1 per cent growth in revenue. BHEL is expected to report about 20 per cent growth in profits in 201112 and is trading at reasonable valuations of 13 times its earnings estimate. Also, as the company is expanding its power equipment manufacturing capacity to 20,000 Mw by endFY12 compared to 15,000 mw currently, the benefits of scale will be felt in the coming years.

Stock Review: Power Trading Corp

 

 

Power Trading Corp invests in power projects. Despite losing market share during the last few years, the company has recorded a growth in the trading business. In the first two months of March 2011 quarter, the company has already traded 3,500 million units and is expected to exceed 5,000 million units as against 3,200 million units a year ago. However, its subsidiary Power Financial Services, which got listed last month, has pulled down valuations. PFS is in the business of power financing through debt and equity and PTC holds 60% in it. Though the trading business will continue to perform well, long-term investments of PFS will reduce the return on capital. Though PTC does not appear to be the best bet in power, investors can stay invested. At price to earning of 21, PTC remains a safe bet for the long term.

 

Stock Review: Jain Irrigation

 

A poor show in the December quarter and confusion over its proposed foray into unrelated business has led to a fall in Jain Irrigation's share price during the last three months. However, the worries appear overdone. The company's growth slowed down in the December 2010 quarter due to extended monsoons in various parts of the country. The sales of its irrigation products are expected to resume a normal growth trajectory in the March 2011 quarter. Its plans for preferential equity allotment and setting up a non-banking finance company (NBFC) are expected to lower its debt burden. With a vast untapped market for the micro-irrigation within India, the company's future appears bright.

Stock Review: Sutlej Textiles

Sutlej Textiles is a KK Birla Group Company. It's an old company that has five plants, they have 250,000 spindles and the company performance for FY11 has been fabulous. Their topline was Rs 1,600 crore and the company also posted an EPS Rs 105 while the cash EPS was Rs 190 and that's a reason that company has declared a dividend of 75% i.e. Rs 7.50 including the special dividend but the share has already gone ex-dividend. So, one should not play on the dividend strategy.

However, if you see the working of the companies, especially the spinning companies they have been facing many issues. Their results are likely to be bad but that may not be the case purely with Sutlej Textiles because they are an integrated company with 5 plants and hence, they should be able to at least post reasonable results. I won't say that Rs 105 EPS will get repeated but one can expect an EPS of at least close to Rs 45-50 for FY12 so that translates into a PE multiple of about 4, which is slightly lower than the comparable peers of this size and this magnitude.

The company has book value per share of Rs 225, so share is available below its book value and because of this fear, the share has really corrected in these last couple of months. I feel the share has bottomed out and if one can keep a view of about 12 month, the share has the potential to move back to about Rs 275 to Rs 300. However, it's a fundamentally strong company and I don't think that there is much downside risk from hereon.

Stock Review: Divi’s Labs

 

A slowdown in the contract research and manufacturing services (CRAMS) industry resulted in lower earnings for Divi's Labs. However, the segment is steadily recovering. Besides contract manufacturing, Divi's is engaged in manufacturing active pharmaceutical ingredients and nutraceuticals that have clearer earnings visibility. Nutraceuticals, though a small segment now, has a good growth potential. The company logged strong growth in the December 2010 quarter. Its high operating margins, strong balance sheet and debt-free status makes it an attractive player in the CRAMS segment.

Stock Review: TTK GROUP

Increasing production capacity, entry into other electrical appliances and addition of franchisee stores are likely to lend support to TTK GROUP 's kitchen appliance maker. TTK's cooker business is growing at 20%, which is higher than the industry growth rate of 10-15% as consumer preference grows towards brands. To cater to this growing demand, the company plans to almost double its cooker and cookware capacity to 80 lakh units by 2013- end. It is also planning to increase its kitchen appliances stores to 500 by FY13 from 285 through the franchisee model. Its net sales have grown at a 32% CAGR in the last three years to 776 crore in FY11. Profits have grown at 60% to 84 crore in FY11. The ROE for FY11 was 45%. The only concern is the high valuation of a P/E of 41. Investors can buy on dips

Stock Review: GRASIM Industries

Grasim Industries benefited from an improved performance in both its cement and viscose staple fibre (VSF) businesses in the June 2011 quarter. As a result, the company's consolidated operating profit margin rose 90 basis points y-o-y to 27.6% in the first quarter of FY12, while its net sales rose 16% to . 5,936.5 crore. However, Grasim's consolidated results of June '11 quarter are not strictly comparable with a year earlier, as its subsidiary Ultratech's acquisition of UAEbased Star Cement became effective from late August '10. Meanwhile, Grasim was able to offset higher operational costs like power & fuel and freight in its key cement division, with realisations improving nearly 10.7% yo-y on a per tonne basis in the first quarter of FY12. Its consolidated cement volumes also rose 5% yo-y to 10.3 million tonnes in the quarter under review.

It also made gains in its VSF business, benefitting from higher realisations on a per-tonne basis in the quarter under review, despite sales volumes weakening by nearly 19% y-o-y. As a result, Grasim's consolidated net profit increased 30.7% y-o-y to . 751.7 crore in the June '11 quarter. The company declared its results on Saturday, and by Monday, the stock gained 0.3% to . 2,199.9.

Going forward, the outlook for the cement division is rather hazy in the short term, given the ongoing monsoon season and a major curtailment in construction activity. Also, there are concerns that higher interest rates could hit cement demand from key user industries like real estate, in the short term. Apart from that, key input costs for the cement industry remain at elevated levels.

As for the company's VSF business, analysts highlight that VSF prices have shown some signs of weakness over the past few weeks, at a time when competing inputs for the textile industry like cotton, have also seen a decline in their prices. Nevertheless, Grasim remains one of the most cost-efficient players, globally in its VSF business. Also, it has enhanced its captive access to key inputs for the VSF business. Grasim recently acquiring a onethird stake in Aditya Holding which had acquired a leading Swedish pulp manufacturer.
Grasim trades at a consolidated P/E of nearly 8.2 times on a trailing four-quarter basis and appears reasonably valued.

 

Stock Review: JSW Steel

JSW Steel is in for tough times. The market hammered the companys stock down by 10.23 per cent to `695 on Monday, after the Lokayukta report, the Supreme Court (SC) imposed ablanket ban on mining in the Bellary district. This could, claim analysts, have very negative implications for the company. The company is highly leveraged to small changes in volumes/and or costs, says a foreign brokerage report. 

JSW Steel is one of Indias largest integrated steel producers, with crude steel capacity of 11 mtpa, of which 10 mtpa is in Karnataka. JSW Steel sources over 70 per cent of its iron ore form Bellary, which only underlines the magnitude of impact a blanket ban on mining in that area will have on the company. According to Citi Investment Research & Analysis (CIRA), "JSTL's 10 mpta located in Karnataka has only 15-20 per cent captive iron ore and gets 30 per cent from NMDC and 45-50 per cent in the spot market – 100 per cent from Bellary." Analysts say for its expanded capacity of 10 million tonnes in Vijaynagar, the company needs close to 16 million tonnes of iron ore – 70 per cent of this would need to be met from mines located in Bellary. According to one brokerage firm, this includes the company's captive iron ore mine in Vijaynagar Minerals, which supplied 2 million tonnes of iron ore at `600 a tonne. The apex court's order is likely to result in mining being completely stopped in VMPL, leading to JSW Steel being deprived of the benefits of its backward integration totally. The order to ban mining in Bellary means the company cannot get ore from its own mines or from NMDC. While NMDC's mines may restart after the hearing on August 5, analysts say, other mines could be closed for longer. Sanjay Jain, analyst at Motilal Oswal says: "Since JSW Steel sources nearly 70-80 per cent of its iron ore requirement from Bellary, it has been able to keep its costs under check because iron ore prices at mine mouth are at heavy discount to international prices due to oversupply in Karnataka. However, this could change and the cost of steel per tonne could go up by $100. Currently, the companys margin per tonne stands at $184." The company will have to procure this iron ore from outside, which will result in additional cost in the range of

`2,500-3,500 a tonne, depending upon the price at which it procures iron ore. In view of the above uncertainty, CIRA has cut volumes by eight-nine per cent in FY12-13. Iron ore costs is expected to go up by 24-33 per cent in, based on higher levels of iron ore purchases from non-Bellary sources. Consequently, CIRA has cut FY12/FY13 PAT estimates by 54per cent/45 per cent (Ebitda by 23 per cent).

Stock Review: Pfizer India

 

Pfizer India, the Indian arm of the US drug major Pfizer, has posted muted performance for the quarter ended June 2011. Due to the company changing its accounting year from December-November to April-March, the results of the quarter ended June 2011 are not exactly comparable to those reported for the quarter ended May 2010. Pfizer India has logged 19% growth in net profit – aided by an exceptionally higher other operating income. It posted net sales growth of 14% in line with that of logged by the domestic pharma industry.

On a sequential basis, the company's performance has visibly decelerated. Net revenues have dropped by 17%, while net profit is down 35% when compared quarter-on quarter.

The first quarter of the fiscal is typically a strong quarter for pharma companies. However, the market growth for the 12 months ended May 2011 has slowed down to around 14% compared to over 25% during the same period last year. It has been especially slow in case of the anti-infective segment. The growth in demand for anti-infectives from hospitals has been quite weak at 2-3%.
Pfizer India has a mature product portfolio comprising strong brands like Corex and Becosule. It is now struggling with the systemic challenge of slowdown in demand. In the preceding March quarter, Pfizer had outperformed the domestic market growth. However, in the quarter ended June, the company has barely managed to grow in line with the market. With growth rates in the anti-infective segment slowing down to very low single-digit numbers, the company faces a critical challenge of growing more than the market in the coming quarters. Pfizer had launched four products in the June quarter. The company is focusing on consolidating its launches in order to register growth that is higher than the market.

While the company does not provide any growth guidance for the fiscal, it expects to grow higher than the industry in the coming quarters. This may be difficult in case the current situation of slowdown in demand does not improve. Pfizer's stock price has appreciated nearly 25% in the past four months. The muted performance is likely to cause a short-term dent in the rallying stock price.

Stock Review: Lakshmi Electrical Control Systems

This stock is right now hovering around Rs 250-260 odd mark. The company charges a depreciation of Rs 20 per share. I get comfort on the cash EPS front, even if the company is able to maintain its topline growth. That means the company would still be doing somewhere around that 150 odd mark in terms of topline. On a conservative side, if I estimate because of shrinkage of margin and other execution problems, they would still be delivering Rs 28 which is 20% less than last year.

With Rs 20 of depreciation plus Rs 28 it gives you a cash EPS of close to Rs 50 on the most conservative estimates. The company would be able to do close to Rs 58-60 of cash EPS on a higher front and close to Rs 35 of EPS considering that they will be able to maintain their margins and topline, this is one stock that people can look to for good dividend yields and good parentage.

The promoters have been increasing stake slowly because 26% is what they own but I am not sure about how the close circle owns this particular stock. If 26% is owned and looking at the recent changes in norms, this can be a safe haven for investors who are looking for some momentum on the upside. I have a target of Rs 320 and Rs 380 considering the scenario the market is in right now. One should not enter aggressively into the stocks recommended today. Add small quantities and on dips for both stocks.

Stock Review: Nestle India

 

THE market gave a thumbsdown to Nestle India's stock today, after the company reported a disappointing performance for the June quarter (Q2 CY2011), especially on margins. The growth in top-line also slipped to the lowest level in five quarters. The stock fell by 2.47 per cent as compared to a 0.64 per cent rise in the Sensex today.

In the future, sales growth would be more driven by capacity expansion (or volume). Stiff competition is likely to keep a check on this, as well as on product prices. Further, the only hope for improvement in overall profitability is expansion in operating profit margin, as the company's depreciation and taxation will continue to tread higher. But it looks difficult, as a substantial correction in raw material prices is unlikely, say analysts. Though the prices of some raw materials have softened somewhat (wheat and sugar prices have turned benign), prices of milk and a few others remain high.

Says Varun Lohchab of Religare Institutional Research, "The risk-reward ratio remains unfavourable from the current levels over the next 12 months, given a slow profit after tax growth and return on equity due to high capex program and rich valuation." The stock's valuation even at 35 times on next year's (CY2012) estimated earnings look stretched, believe analysts.

PRESSURE ON PROFITABILITY

Volume growth, so far the company's focus to maintain an increased market share, is estimated to have come down to 1314 per cent from around 20 per cent in CY2010. Further, the company would have faced challenges in passing raw material escalations in the high competition category of noodles, estimates Himani Singh of Elara Securities. The trend, if it continues, is a concern.

However, analysts hope the overall sales growth momentum will be sustained, thanks to the ongoing capacity expansion and price hikes. Besides, the company's focus on augmenting its premium product portfolio will support top-line growth, points out Latika Chopra of J P Morgan, in her post-result update.

Meanwhile, operational and overall profitability slipped in the June quarter due to higher costs. Operating profit margin (OPM), though marginally down by 41 bps year-on-year to 19.4 per cent, is down by 166 bps sequentially, as raw material prices of milk solids, green coffee and oils remained firm during the quarter.

Antonio Helio Waszyk, chairman and managing director of the company, says, "Improved product, channel mix and operational efficiencies partially helped offset the higher commodity prices." But, the increased tax provision in the event of exemption limits on the Pantnagar factory coming down to 30 per cent (of profits) from 100 per cent led to a 114 bps drop in the net profit margin (NPM).

Improvement in operating profit margin (OPM) is a bigger success factor for the company's overall profitability (NPM) outlook, as increasing competition (especially in noodles) and the tax provision will put a cap on growth rates.

HIGH VALUATIONS

Given the challenging business scenario and absence of any positive trigger, analysts are cautious on the stock. A meaningful ease in the prices of raw materials is essential for boosting the volume growth and improving margins, which in-turn should rub off positively on the stock. However, the possibility of such a scenario looks bleak for now.

 

 

Stock Review: Swan Energy

This was one company which was referred to the Board for Industrial and Financial Reconstruction (BIFR) in 1995-96. Since then, the company has turned around, thanks to its real estate. Now the company knows where they want to go next. They have diversified into the power sector and all the cash that they would receive from the sale of their two real estate projects, one in Sewri and another one in Kurla, they would be channelising the entire cash flow into power projects.

They have a 49% stake in Gujarat Pipavav Power Company (GPPC). This is one stock which is a good bet because there is a limited downside. What is happening right now with real estate cum these kinds of stocks is people are using the discounted cash flow model right from 11% when it was hovering around the Rs 120-125 mark, to 18% and that is exactly where it is trending right now.

If we take a call from a four years perspective, if a stock is going to give you a discounted cash flow earnings of close to 17-18% why would you not treat it as a portfolio bet?

On a conservative side, if worse comes to worse, the stock should be hovering around Rs 65-70-72 odd mark but on the upside there could be a potential of 40-45%. For the first time, the company has actually turned back into black. This is because of their strong cash flow generations from real estate projects.

Because of this GPPC stake, they will be getting almost Rs 70-80 crore in terms of carbon emission rights over the next eight to 10 years, right from FY13. This quantum is not exactly decided by the United Nations Framework Convention on Climate Change (UNFCC). So we are still waiting on the report as to what could be the exact amount of cash flow. But before that as well, if someone wants to hide into a safe stock with good quality assets this is one stock that people can look at.

Stock Review: TAKE SOLUTIONS

Headquartered in Chennai, Take Solutions is a technology company with domain expertise in supply chain management (SCM) and life sciences. The company has a strong presence in the US and Asia Pacific. It serves over 400 customers across 16 countries.

The company has taken the organic and strategic acquisition routes to enter into new product segments or to strengthen its presence in a particular market. Recently, it acquired UK-headquartered WCI Consulting Group, which will help the company to enhance its footprint in Europe.

GROWTH DRIVERS

WCI is likely to add 80-90 crore to the company's top line and increase the overall revenue contribution from Europe to 20% over the next three years.
Take has also expanded its presence in the Middle East and Asia region, where it is witnessing healthy growth. This will help the company to diversify its client base and insulate the business from regional slowdowns. At the end of March 2011 quarter, the company held a strong order book, driven mainly by life sciences and US and Asia Pacific. SCM business has seen a slowdown with a flattish order book position over the past three quarters. But the company has a positive outlook going ahead.

FINANCIALS

The company has recorded consistent growth with double-digit rise in the bottom line over the past three quarters. In the March 2011 quarter, net profit rose by 13% at 22 crore against the previous quarter. The top line grew over 20% to 150 crore for the same period. However, its operating profit margin remained stagnant at 18.4%. This can be attributed to a huge increase of 13% in employee costs relative to sales.

VALUATIONS & CONCERNS

At the current market price of 41.3, the stock trades at nearly seven times its earnings for the trailing twelve months. Take looks fairly-priced as compared to its peers such as Polaris Software and KPIT Cummins which are trading at a P/E of 9 and 16, respectively. The company appears well-positioned to cash in on growth in industry verticals and a rise in discretionary spends. But it is heavily dependent on the US, which accounts for over 63% of its total revenues.