Stock Review: National Hydro Power Company (NHPC)

At a time when thermal power companies continue to grapple with unavailability of fuel, staterun hydro power generation company National Hydro Power Company (NHPC) presents an opportunity for investors as it has no fuel risk and can produce cheap power.

The company has posted betterthan-expected earnings performance for two consecutive quarters and its stock is available at a discount of 25% to its initial public offer price. Concern over the company's execution ability is the key reason for the underperformance of its stock. Most of the company's projects have missed the guided timelines and cost overruns for these projects are huge. At a price of . 25 per share, NHPC is trading at a price-tobook value of 1.2x. Being a hydro power company, it can generate power at a much lower cost. It can produce per unit of power at a cost of less than . 2 compared with more than . 3 cost incurred by its thermal peers.

Though the company sells power at a regulated return-on-equity of 15.5%, its current return on equity is below 10% as it has a large amount of capital blocked in construction of upcoming projects, many of which have missed commissioning deadlines. Hydro projects generally have a gestation period of nearly eight years compared with five years for thermal power projects, and hence capital is blocked for a longer period.
NHPC has lined up capacity addition of 500-720 MW this year. In the past one year, its capacity has increased by 120MW to 5,295 MW. Power generation has risen 10% to 6,284 units. This has contributed to a growth of 14% in net sales. However,total revenue increased 40% to . 1,430 crore, which includes . 280 crore non-recurring income from previous period. Its operating margin decreased due to higher depreciation and maintenance cost, while net profit increased 46% to . 780 crore.

Though the company performed well in the past two quarters, over a period of about three years its performance has been disappointing. The company's generation capacity has remained almost flat in the past three years, except for 120 MW that was added last year. It expects to add at least 500 MW in the current fiscal. A timely commissioning of the guided capacity would be critical for restoring investor's confidence. If it succeeds, it will be a catalyst for the stock.

Stock Review: UNITECH

The stock of Delhi-based leading real estate company Unitech has almost fallen by three-fourth in the past one year, thanks to the company's consistent poor performance in the past four quarters. This is partially explained by high debt and poor sales in these quarters. The company has remained underperformer among its peer group when compared with the financials.

For the quarter ended June '11, Unitech recorded a 28% decline in the topline on a consolidated basis, which is higher than the quarter ended March '11. With lower sales and high operational cost, it also witnessed contraction in operating margin by 32%, which is lower than 37% in the quarter ended June '11. On the non-operational cost front, the company has recorded moderation in interest cost, even though erosion in net profit can't be contained, resulting in a fall almost by half to . 98 crore.Unitech is not able to record reasonable net sales despite sustainable momentum in residential sales in the past one year, which accounts close to 80% of its business portfolio.

Unitech has not been able to contain its debt despite raising funds from QIPs and better sales in the past fiscal. It has been sitting on high debt cycle of 246 days for the current fiscal against 158 days in the past fiscal, which is putting pressure on its lenders. On the filip side, the company has recorded its operating cash flow of . 45 crore against . 1,340 crore in the past one year.

Its quarterly earnings are below analyst estimates. And its debt worries will remain as topline growth looks bleak due to its involvement in the 2G scam, but with a positive business impact in coming quarters. In addition to revision in interest rate, high inflation cost will affect sales in the coming quarters.

 

Stock Reivew: Hindalco

HIGH aluminium prices saved the day for Hindalco. Although aluminium production was slightly down at its Indian operations, the average London Metal Exchange (LME) prices were up 24 per cent year-on-year at $2,603 per tonne in the June quarter. This, along with other higher incomes, helped Hindalco post a20 per cent rise in standalone profits. While the standalone numbers were in line with analysts' expectations, its global subsidiary Novelis, reported above-expected results.

Going ahead, given the prevailing global scenario, Hindalco is likely to face some challenges. The declining LME aluminium prices (around $2,412 at present) do not bode well. Analysts were concerned on Novelis, as demand for its automotive and electronic segment may get impacted in the near term. Due to the near-term concerns, analysts felt the stock (down 14.3 per cent over the last one month) may continue to remain under pressure. They, however, believed that given the ongoing expansions at Novelis, as well as at Hindalco's Indian units, will help drive the company's growth from the next year. Long-term investors could use this opportunity to buy the stock on dips. At present, 78 per cent of analysts (based on Bloomberg data) have a buy rating on the stock.

HIGH REALISATIONS, OTHER INCOMES

Hindalco's standalone sales were largely driven by high LME prices, as volumes remained flat during the quarter. While aluminium prices were up, copper treatment and refining charges (TcRc) also saw a rise of 22 per cent yearon-year. However, due to the cost push – led by rising coal prices (up 30 per cent), crude derivatives (more than 20 per cent higher) and currency fluctuations – overall margins slipped. Other high incomes came to the rescue. It increased by `109 crore because of improving treasury yields and dividend from Hindalco's Australian subsidiary.

Aditya Birla Minerals (a subsidiary), having interests in Mt Gordon copper mines in Australia, reported a 28 per cent decline in copper grade output. The decline, however, had been anticipated (due to production issues), said DBhattacharya, managing director, Hindalco. He said production ramp-up is in process.

However, analysts felt the cost of mining had increased due to the strengthening of the Australian dollar against the US dollar (in which it gets paid for the produce) and that could keep a tab on margins. For Novelis, though better product mix, better product premiums and higher base metal realisations helped post a 16 per cent rise in profits in the quarter, volume and margin pressure could be seen in the near term.

ONGOING EXPANSIONS

The smelter expansion work at Hirakud from 155,000 tonnes per annum (TPA) to 161,000 TPA was completed in the March quarter. Further capacity expansion to 213,000 TPA will be completed by FY12-end. Eight projects of Hindalco and Novelis are in various stages and are expected to be commissioned between end-2011 and 2014. These should help the company sustain healthy growth in volumes in the coming years.

OUTLOOK

In light of global headwinds, profitability in the aluminium business remains a concern. Though copper prices were also down, the company said the copper concentrate business remains secured at least till January 2012, and thus, TcRc margins may not take a major hit, moving forward.

Analysts are also concerned about Novelis' nearterm prospects. While shipments by Novelis stood at 767,000 tonnes, up three per cent year-on-year, on a sequential basis it declined one per cent. Bank of AmericaMerrill Lynch reports indicated that on a sequential basis, Europe had seen a one per cent decline in demand growth. Asian demand has been flat due to weaker demand from the electronics business. South American volumes have declined nine per cent sequentially, because of cold and wet weather. While North America saw volumes grow three per cent sequentially, demand is likely to come under pressure due to the slowing economic growth. In the near term, demand for the automotive and electronic segments for Novelis remains at risk, though demand for can sheets may remain unaffected

Stock Review: KINGFISHER & SPICEJET

An increasing focus on low cost-carrier model in the coming quarters will stand in good stead for airlines companies, which reported severe losses in June 2011 quarter.
Though in adopting a low-costcarrier-focus will result in a decline in revenue per km paid passenger, it will help airlines companies save rising operational costs due to high aviation turbine fuel and capacity addition.

In June 2011 quarter, the losses of Kingfisher Airlines widened to Rs 263 crore from Rs 187 crore in the previous year's June quarter. The company's earnings before interest depreciation tax amortisation and rentals —measure of an operational performance of an airline company -- declined to 13% in June 2011 quarter from 20.5% in last year's June quarter. This steep decline in the operational performance is due to the sharp increase in the fuel costs of the company, which formed around 44% of the company's net sales against 35% in a year before June quarter. This is despite the fact that the company clocked a load factor of 85% better than the industry average of 78% in the June 2011 quarter.

With an increasing tendency among corporates and ordinary travelers to opt for necessary and unavoidable travel due to increasing overall costs, it will be sensible on the company's part to promote its low-cost carrier offering: Kingfisher Red.It is expected to lease more aircraft from its present capacity of 66. This strategy will help the company to take full advantage of domestic price-conscious traffic and service its debt of around Rs 6,200 crore as of March 31, 2011.

SpiceJet, on the other hand, being a low-cost carrier, has a distinct advantage of catering to price-sensitive travellers. Experts believe that since the company follows an asset- light model — its entire fleet is at presently leased, thus helping the company conserve cash and keep its debt to a minimum level. Also, the company has single-type aircraft, which helps it maintain its aircraft efficiently. Despite the fact that high fuel costs and interest expense turned the company from profit-making entity into a lossmaking one in June 2011 quarter, it has gained around 2.2% in market share to 13%.

 

Stock Reivew: TATA STEEL

 

Tata Steel, on a consolidated basis, grappled with a rather difficult operating environment in the June 11 quarter given rising cost of key inputs, coupled with sluggish demand conditions at its key European operations. As a result, the company's consolidated operating profit margin declined 290 basis points YoY to 13.4% in the first quarter of FY12, despite its net sales that improved nearly 21.4% in the quarter.

At its European operations, which accounted for nearly 62% of its consolidated net sales in the first quarter of FY12, steel sales volumes fell 2.2% YoY to 3.5 million tonnes in the quarter. And despite a strong improvement in its realisations on a per tonne on a YoY basis, it was not sufficient to cover the purchase of key inputs at considerably higher prices from third parties, for iron ore and coking coal. The company has also highlighted a weakening in its core EBITDA margins on a YoY basis in the June '11 quarter at its European operations. In its standalone operations also, which relates to steel sales and exports from its domestic production facilities, operating margins also weakened on a YoY basis in the June '11 quarter, given a higher cost structure.

However, Tata Steel's consolidated net profit jumped nearly 193% YoY in the first quarter, helped by a surge in other income. This growth in other income was due to the company tendering its entire stake in Riversdale Mining, coupled with selling part of its stake in Tata Refractories In the March '11 quarter as well. Tata Steel had also grappled with a fall in its consolidated operating profit margin on a YoY basis, given a rising cost structure. The Tata Steel stock declined 1.7% to . 476.4 on Friday, and is also hovering just above its 52-week low reached recently, given an uncertain outlook. The underlying operating environment at its European operations remains rather difficult, given the sovereign debt crisis there. Also, analysts remain concerned about the prices of key raw materials for its European operations. And despite some correction, these key input prices remain at elevated levels. In the domestic market also, the first signs of slowdown in key user industries of steel, like auto and housing, has taken some sheen off the growth prospects. However, analysts are carefully optimistic of a pick-up in steel demand in the post monsoon season. The stock trades at a consolidated P/E of 3.7 times on a trailing four-quarter basis and we are neutral on the stock.

 

Stock Reivew: KEC INTERNATIONAL

 

KEC International is one of the leading players in the power transmission EPC business. The RPG Group company also has a presence in other infrastructure-related businesses such as power systems, cables, railways, telecom and water. The company's business is diversified not only across these commercial segments, but also across various geographies including the Middle East Nations (MENA), Africa, Central Asia, South Asia and America. Despite this, its reliance on its core power transmission business is significantly high. The segment accounts for more than 72% of the company's total revenue and is one of its most profitable ones.

FINANCIALS

KEC has made a decent start to the financial year, with a 21% growth in revenues and a 25% rise in net profit in the first quarter. It is likely to do well this fiscal given its strong unexecuted order book of over 8,100 crore. The current order backlog gives the company revenue visibility for about two years subject to timely execution.

Even as the top line posted a healthy growth, pressure on margins was clearly visible during the quarter. The company's EBITDA margins fell by about 60 basis points as the share of some of its upcoming, low-margin businesses has been increasing steadily. These businesses include railways, cable and telecom where margins are expected to improve only by next fiscal.

Another concern for the company in the near term is its strong presence in the Midde East. Some MENA countries have been facing political turbulence for a prolonged period. These nations account for about 8% of the company's total order book and a slow execution of the orders could dent KEC's top line in the near term.

OUTLOOK

The recent acquisition of USbased SAE Towers — one of the leading manufacturers of lattice transmission towers with a strong presence in Brazil and Mexico — is expected to give KEC a stronghold in the West and provide exposure to new territories.

At home, the company is gradually expanding its footprint in the railways, cable and telecom businesses. A new plant for manufacturing cables is coming up in Baroda and is likely to commence trial production in the first quarter of the next fiscal. This plant is expected to boost margins in the cables segment.

VALUATION

KEC's stock currently trades at around 63- 70. At these levels, the stock is quoting at near its 52-week low, commanding a trailing 12-month price-earnings multiple (P/E) of about 8. Given its strong order backlog and global business presence, the stock is an attractive buy at these levels.

 

Stock Review: Ansal Properties

This is a contrarian buy from a sector which is currently out of favour, from a sector which has virtually been written off by most investors. That is the reason you are getting this stock not just close to its 52-week low, but very close to its five-year low.

The reasons are many. One is that the interest rates are almost at their peak, which is hurting not just home sales, but also hurting the debt servicing capacity of the companies. The other thing is that there is a lack of transparency and corporate governance in the sector as a whole. The other part is that most real estate companies are carrying huge inventories as on date, and most of them are finding it difficult to sell those.

Coming to Ansal Properties, this is a 40-year old company almost as old as Unitech and DLF. It has been credited with developing more than 3,000 acres of land in Gurgaon alone, leave aside other developments. The company has got current land bank of about more than 7,000 acres out of which 3,500 acres is in Lucknow, and Megapolis, Greater Noida is about 2,500 acres. Ansal is doing a 200 acre township in Gurgaon and currently has got about 19 townships under development.

 

Stock Review: Surya Roshni

Till about a year ago, the promoters of the company were holding just 29% stake in the company. Today, their shareholding stands at about 62%. What has happened is that promoters in the first tranche converted warrants at Rs 59, thereby, taking their shareholding up from 29% to 39%. Thereafter, they converted warrants at Rs 83 and subsequently came out with an open offer at Rs 111. By virtue of all these things, the promoter shareholding has gone up to 62%.

Even though the open offer was for 20%, the shares tendered in the open offer by just about 7% which shows the optimism of the investors in the future of the company.

After six months the stock is down roughly 50% from a high of about Rs 125 which it touched up when the open offer was on, and currently trades at about Rs 60-62.

Talking about business, Surya Roshni has got two divisions, lighting division and steel pipes division. Though lighting division contributes roughly 35% to the revenues of the company, the profitability it enjoys is much more. It has got two plants and makes GLS lamps, CFL lamps, metal halides and other tube lights and other electrical lighting products. This company claims to be the only one which has a 100% backward integration as far as lighting products are concerned.

The steel division of Surya Roshni manufactures various kinds of pipes starting from GI pipes to ERW pipes. A 54% subsidiary of the company has just set up a plant in Gujarat for manufacture of spiral pipes, which is going to add to the revenues and profitability of the company in the times to come.

Talking about financials, FY11 sales were about Rs 2400 crore with a profit after tax of about Rs 67 crore. EPS was close to Rs 15, so at the current price of about Rs 60-62, this stock trades at PE multiple of about four times.

In Q1FY12, sales are higher by about 15% to about Rs 590 crore, and profit after tax is also higher by about 15% to close to Rs 10 crore. The company provides very high depreciation and cash profit for the company for FY11 was about Rs 120 crore. Market cap of the company at current price is about Rs 270 crore. So you have a business which is available at roughly 2.5 years of its cash flow, market cap-to-cash profit is less than 2.5. The company enjoys very high sales-to-market cap of more than 10, and it has got an uninterrupted 20-year track record of payment of dividend.

So you have a business which is available at very attractive valuations at a steep discount to the price which the promoters have paid to increase their stake in the business. From a level of Rs 60, I don't see too much of downside going forward in this stock.

Stock Review: Kalyani Steel

Though it is marred in controversies because of their mines in Bellary, Kalyani Steel is a good bet. If you see their business model, they are making the alloy steel for the auto, for forging, and for diesel engine makers and they have a very robust performance. 18 months back, they have hived off one of their investment to a separate company, and this is one of the best things about the company. Earlier, the equity base of the company used to be at Rs 46 crore but the company was never getting the valuations of the investment in that proportion. Now, the paid up equity of the company has been reduced to Rs 23 crore.

Going by the financial performance for FY11, the company reported a topline of Rs 1200-1250 crore with EPS of Rs 12.50 on a face value of Rs 5. Q1 performance obviously has not been good because of all this controversy, but I don't think that they have much iron ore requirement because they are making their pig iron and using it for their end products. So I don't think that they should be any problem in obtaining the raw material or iron ore to the extent of about 7-8 lakh tonne which is their annual requirement.

Currently, the promoter holding at Kalyani group stands at 60% and HNIs hold about 15%. The book value of the company is Rs 75-76. So the company should be able to post an EPS of double digit in FY12 and that gives a valuation of about 4.5-5 times to the stock. So again looks very good, could move to about Rs 75 in next 6-8 months time.

Stock Review: Thomas Cook

Tours and travel companies like Thomas Cook have recently been in the lime light. If you see the price movement of Cox & Kings , Thomas Cook is directly comparable with that. It may be smaller in size than Cox & Kings, but it has always ruled at a high PE multiple.

For December 2010, the company posted a top line of Rs 310 crore with EPS close to Rs 2.25. Looking at their first half results, they have posted a topline of Rs 185 crore. So I think the company should be able to post an EPS of Rs 3 plus this year, which translates into a PE multiple of about Rs 16-16.5. Apart from this, the company is debt free which is a very good point.

Another thing with this stock is that we have been hearing about the possibility of delisting at frequent intervals. Overseas promoters hold 77% stake in the company, so that is an extra trigger. Another factor is that the stock has corrected a lot in the last six months. It used to rule at Rs 70-75, but is now ruling below Rs 50, close to about Rs 46.

So if somebody buys this stock at current levels, he can expect the price to go up to Rs 60-65 on a pure fundamental basis. If we have the delisting news getting triggered again, the share can move to Rs 75. So it is a very good stock with a time horizon of 6-12 months.

Stock Review: RALLIS India

Stock Review: RALLIS India

 

The Tata Group agrochemicals major, Rallis India, stands to benefit from growing demand for crop protection products, thanks to its capacity expansion, strong balance sheet and entry into seeds business. Long-term investors should hold this scrip. The significance of agriculture is rising the world over as growing population and changing demographics are raising demand for food grains, while the limited availability of land is a key constraint. In this scenario, demand for the crop protection industry is growing strong to improve farm productivity. The trend, which visibly benefited Rallis in the past few years, is set to continue in foreseeable future as well.

GROWTH DRIVERS

Rallis has recently commissioned its Dahej unit at a capex of 150 crore operating with an annual capacity of 5,000 tonne. The plant will primarily cater to export markets, increasing the share of international business in the overall revenues to nearly 35%. According to the company, this new capacity will bring an average of 100 crore of revenue every year for the next five years. The company entered into the seeds business — another key growth area essential for boosting the farm productivity — through an acquisition. The acquired company, Metahelix, is likely to launch its BT cotton hybrid seeds in the next two years that will add to the company's revenue. The seeds business is already profitable as was seen in the June 2011 quarter results. Further, the company is looking for inorganic growth opportunities in the domestic and global agrochemicals market especially in the chemicals space. Globally, Latin America, Asia and Africa are the key regions witnessing strong agrochemicals demand growth with Indian demand rising at 12-15% annually.

FINANCIALS

The pesticides maker has posted healthy financial growth over the past several quarters. During the June 2011 quarter, it reported a 50% rise in topline at 292 crore against the year-ago period. However, the numbers are not comparable as the revenue growth was driven mainly by the company's seeds business — Metahelix alone posted net sales of 59 crore during the quarter. On the operating margin front, driven by the high margin seeds business, Rallis reported a 140 basis points jump to 13%. The company's bottom line grew over 50% to 23 crore.

VALUATIONS

The stock is currently trading at 24 times its earnings for the trailing 12 months which is higher compared with its peers such as Bayer Cropscience and United Phosphorus that are trading at a P/E multiple of 20 and 11, respectively.
However, this appears justified as rising Metahelix business, continued momentum in the company's core business and incremental revenue contribution from the Dahej facility are expected to drive the company's future performance.

 

 

Stock Review: Relaxo Footwear

 

North-based Relaxo Footwear is one of the largest footwear manufacturers in India. With a production of 90 lakh footwear per year, it is second only to Bata India, and will benefit from the declining rubber prices. Investors with a medium to longterm investment horizon can consider buying this scrip.

BUSINESS

The company operates through brands Relaxo, Sparx and Flite and a majority of its sales are through a distribution network of retailers. The company also has 130 retail outlets, mainly in North India.

It plans to add 15-20 retail outlets every year.

Relaxo is also trying to expand geographically by trying to market aggressively in south India and also export its products to Europe, Africa and other Asian countries. Exports were just 3 % of the total sales last year.

FINANCIALS

In the last five years, Relaxo's net sales have grown at a CAGR of 29%, while its net profit has grown at 49%. But FY11 was not a good year for the company. Net sales grew by 23% to Rs 686 crore, but its profit after tax declined by 29% to 26.7 crore.

The profitability decreased due to high raw material prices, and higher depreciation and interest outgo. Its debt to equity ratio was 1.2 as on March 31, 2011.

INVESTMENT RATIONALE

Prices of rubber, which is one of the most important raw materials, rose by 100% in the last fiscal. As a result, Relaxo's operating margin declined from 14.5% in FY10 to 10.5% in FY11. However, the rubber prices seem to have softened now and are on a downward trajectory.

The company has hiked prices across products. This will boost overall margins. The company is also working hard to bring down its working capital cycle by taking higher advances from the distributers. Working capital increased in FY'11 due to higher capital blocked in raw material inventory. All these steps should help to improve profitability and thus the return on equity.

VALUATIONS

At the current market price of 300, the company is trading at a price to earning multiple of 12.4 on a trailing twelve-month basis. This looks very cheap when compared to its peer Bata India which is trading at multiple of 35.

 

 

Stock Review: Mahindra & Mahindra (M & M)

Stock Review: Mahindra & Mahindra (M & M)

   Mahindra & Mahindra (M & M) is the largest player in the domestic utility vehicle (UV) segment and a global leader in the tractor business. It has been able to grow its operations over the past several quarters despite the strong headwinds that the broader auto industry has been grappling with.

That's largely due to the strong rural demand for the company's tractor and allied portfolio, coupled with buoyant demand for its light commercial vehicles or LCVs. In addition, its UVs like Scorpio and Bolero have strong recall in urban markets and have helped the company to deal with rising auto finance rates.
M&M has also been able to manage rising raw material costs better than its domestic peers for the trailing 12 months ended June 2011 quarter. The stock has also outperformed the Sensex over the past six months.

BUSINESS

M&M is present across different auto segments. In utility vehicles, the company competes with models like Scorpio and Xylo. In the LCV segment, it offers models like Maxximo. Apart from that, its farm equipment division includes tractor and allied machinery. M&M controlled 42% of the domestic tractor market at end of FY11. The company also has a presence in defense-related businesses.

M&M had grown its total vehicle sales, including exports, by nearly 24.9% y-o-y to 5.9 lakh units during FY11. However, during the June quarter, growth in total vehicle sales moderated to 22.6% y-o-y.

In a significant thrust to its overseas plan, M&M had announced the acquisition of majority stake in ailing Korean SUV maker Ssangyong Motor in August 2010. During the first six months of calendar year 2011, Ssangyong's vehicle sales are up 53% y-o-y, and it also exited court receivership in March.

FINANCIALS

The company's standlone net sales improved 30.5% on a y-o-y basis in the first quarter of FY 12, but its operating profit margin weakened by 170 basis points to 13.3%. This pressure on margins was due to a jump in the purchase of traded goods. The rise in costs offset the near 6.3% improvement in average realisation per vehicle in the quarter under review. And net profit grew by just 7.6% in June 11 quarter.

At M&M controlled Ssangyong Motor, sales revenue grew 42.9% y-o-y to approximately $1.3 billion in first half of CY 11, while net loss halved during this period. This was thanks to strong demand for SUV models.

Also, for trailing 12-months ended June 11 quarter, M& M has been able to manage commodity input costs and growth in sales far better than its peers.
For example, M & M posted standalone operating margins of 14.3% for 12-months ended June quarter, a fall of 170 basis points, while net sales grew 28.4% to 25,067 crore during this period. In the case of Tata Motors, its standalone operating margins were broadly flat at 8.9% during this period, while net sales improved 25.1 %.

GROWTH DRIVERS & CONCERNS

The company should benefit once again from a reasonably strong monsoon this year and rural demand for its tractors portfolio. It is also looking at launches in its utility vehicle and commercial vehicle segments over the next 12-15 months. Rising auto finance rates coupled with high commodity input costs continue to be a cause for concern.

VALUATIONS

M&M trades at a standalone P/E of 17.4 times on a trailing four-quarter basis. The company has an array of businesses and the Street values them appropriately. Tata Motors trades at a consolidated P/E of 5.2 times, while Ashok Leyland trades at 11.3 times. Investors could consider M & M on a long-term basis.

 

Stock Review: ONGC

 

 

All analysts tracking it have a strong 'Buy' call on it, but that didn't prevent the country's largest oil producer ONGC from underperforming in the past three trading sessions even as overall equity markets recovered. It was ironic since the company had held its ground for more than a month when the overall markets were tumbling. Interestingly, it was the news of its long awaited follow-on public offer (FPO) that caused a selloff.

ONGC's FPO has been talked about for almost a year now and was postponed atleast twice before. In February '11 the company also issued 1:1 bonus shares and halved the face value to . 5 in a bid to make shares more affordable to retail shareholders. Still, the share price has not gone anywhere since then.

For investors, if an FPO is just round the corner, which in all probabilities will be priced at a discount to the market price, it makes little sense to buy the shares from open market. They would rather wait and buy in the FPO at the discounted price. This is what caused the 4.3% fall on Tuesday.

The investors have long been avoiding the company for more than last three months now. Since May 2011, the average monthly turnover in the ONGC scrip has been steadily declining. For August, the average turnover in the scrip was less than half of that in May. The price that the government sets for the FPO will be disclosed just a couple of days prior to the opening of the issue, which should happen sometime in September. However, that leaves little time to straighten out the key issue of subsidy sharing. Moving on to a formula-based subsidy sharing rather than the current ad-hoc system was considered essential for obtaining a better valuation at the FPO. In its absence, the government will have to settle for a compromisingly lower pricing.

Nevertheless, the second problem that needed to be fixed before the FPO has been solved favourably. The Cairn Group has indicated that it will submit to all the government covenants and share royalty burden with minority partner ONGC for the Rajasthan oil fields. This certainly has a positive impact on the ONGC's future earnings.

If the fundamental analysts held the company undervalued earlier, it is more so after the recent fall. A flat share price since February means even the potential benefits of reduced subsidy burden in Rajasthan haven't been priced in yet. In other words, ONGC's FPO has every reason to be successful whenever it opens.

 

Stock Review: L&T

Stock Review: L&T

 

Engineering and construction, power and hydrocarbons, machinery business, industrial products, electricals, heavy engineering, technology and ship building — L&T's range of activities covers them all. For sheer size, no rival can match India's biggest engineering firm. This behemoth with a Rs 1,00,000 crore market cap has seen quite a bit of action over the last few decades: corporate raiders in a period of stagnating profits, engineers bolting to the hot IT sector, and battles with the government for licences. Having weathered many storms, today L&T is a force to reckon with in the engineering and infrastructure space.

 

Sources of moat

Scale and technology. L&T's main competitive advantage stems from the scale it has developed over the last few decades and the technology that it has acquired through alliances with the likes of Mitsubishi, Rolls Royce, Boeing and Westinghouse, among many others. Today L&T has an envious track record under its belt: it has built India's first nuclear powered submarine; Asia's highest viaduct; the world's largest coal gasifier (equipment used to convert carbon fossils into carbon monoxide, hydrogen, carbon dioxide and methane); India's largest range of switchgear; terminal 3 of Indira Gandhi International airport, Delhi; the Dhamra port; and launch and tracking systems for India's space vehicle, Chandrayaan I. These are just some of the milestone projects that the company has completed over the years. Today L&T has acquired such an iconic status in Indian minds that whenever it takes up a landmark project, there is little doubt that it will execute it well.

A.M. Naik — bulldozing L&T to new heights. Since December 2003, when Naik took over as chairman, the L&T stock has created enormous wealth for its shareholders — upwards of 700 per cent. Over the same period, the BSE Sensex has gained around 250 per cent. Over the same time period, revenue and profits have grown at an annualised rate of 25 per cent and 29 per cent respectively.

Of course, the huge pick-up in infrastructure projects over the last decade also helped, but that still does not take away from L&T's accomplishments under Naik.

 

Growth drivers

L&T has a number of growth drivers — nearly all focussed on infrastructure and engineering. These include the following:

Infrastructure. This segment includes roads, bridges, ports, harbours, airports, railways, buildings and factories, urban infrastructure and water. This segment constitutes 36 per cent of L&T's current order book. Airport modernisation projects, metro rails in tier II cities, and ports are the major growth drivers here. L&T recently bagged the `5,900 crore Metro rail project in Hyderabad.

Power. This segment includes generation, equipment, electrification, transmission and distribution. It is the second-largest segment accounting for 32 per cent of the order book. The huge capacity additions planned in the 12th and 13th Plan are expected to keep the growth momentum strong for the company over the next several years as a large number of new power projects get underway.

Hydrocarbons. This segment focuses on upstream, mid- and downstream projects, pipelines, fertilisers and valves. Hydrocarbons currently constitute 12 per cent of the order book. With crude still hovering at near $100 per barrel, offshore E&P activities has picked up steam, throwing up opportunities for L&T. The company recently bagged a `1,450 crore order from Gujarat State Petroleum Corporation (GSPC) for building an offshore process platform in the latter's Deen Dayal West Field in KG Basin.

Process. This segment includes minerals and metals and bulk material handling and accounts for 16 per cent of the order book. Opportunities in this segment come from capacity addition in the ferrous metals sector and industrial capex. Material handling demand is driven by railways, mining, ports and power sectors. L&T recently won a `625 crore balance of plant order from Tata Steel for its plant in Kalinga Nagar, Orissa.

Other smaller verticals. These include shipbuilding, defence and aerospace, construction and mining equipment, electrical and electronic products, and technology services. Together they account for 4 per cent of the current order book. In spite of their current low contribution, defence and aerospace will be humungous opportunity areas when they are eventually opened up more for the private sector.

 

Concerns

Organisational restructuring. Naik retires on September 2012. Before he goes, he has set for himself one final task that promises to change the face of L&T as we know it today. L&T is not a monolith. It operates 25 companies in 152 lines of business and Naik is stitching them up together. When he finishes up, L&T will be a significantly leaner machine with only nine verticals. Smaller companies with revenues of less than Rs 500 crore will either need to scale up or will be sold off. And all of this will happen in the next 15 months before Naik leaves. What L&T will look like after the split remains to be seen. Naik is betting that more focus (by splitting L&T into these verticals) will produce better results. However, corporate history is littered with examples of companies where such drastic organisational exercises have not worked out. Only time will tell whether several baby L&Ts are better than the single behemoth.

Macro headwinds. The macroeconomic problems that the country is facing currently are likely to have an impact on L&T's performance. Being an infrastructure company, it is vulnerable to a slowdown in GDP growth rate. The slowdown of 2008-10 had, for instance, seen incremental orders dry up as the industry refrained from capital spending till the outlook improved. A similar slowdown in capex is being witnessed currently. High inflation, high interest rates, high commodity and crude prices are some of the key macro issues that could slow down the company's revenue growth and margins.

Overseas competitors. In the power segment, L&T has to contend with Chinese and Korean players which are currently giving domestic players tough competition.

Difficulties in land acquisition. Land acquisition for mega projects is a thorny issue that has the potential to slow down the implementation of major infrastructure projects.

MENA crisis. The political turmoil in Middle East and North Africa has created a lot of uncertainty for the hydrocarbon segment. Several mega oil projects could get postponed.

 

Financials

In the most recently concluded financial year (FY11), the company reported 18.8 per cent revenue growth while its adjusted PAT grew 13 per cent year-on-year. Order backlog for FY11 stood at Rs 1,30,217 crore. Order inflows were up 15 per cent during the year, but much lower than the management's guidance of 25 per cent. The company has given a revenue guidance of 25 per cent for FY12, which appears optimistic, given the slow growth that the global economy is expected to see this year.

Even in India, which accounts for 90 per cent of L&T's FY11 order book, GDP growth estimates are being revised downwards.

Over the last five years, the company's revenue has grown at a compounded annual growth rate (CAGR) of 25.76 per cent. Over this period its profit after tax has grown at 34 per cent. Debt-equity ratio stands at 1.26. Over the last five years, the company has clocked a high average return on equity of 27.9 per cent.

Valuation

Currently the stock is trading at a 12-month trailing PE of 24.8, which is lower than its five-year median PE of 32.6. This number, however, does not capture the recent slowdown in the sector (post recession). PAT growth, for instance, in the last three years at 24 per cent annualised is lower than that over the last five years (28 per cent). Similarly revenue growth in the last three years (FY08-FY11) at 21 per cent is slower than the 26 per cent the company witnessed during the last five years. What this means is that EPS growth may remain lower than that seen in the pre-2008 market. The stock is currently trading at price-earnings to growth (PEG) ratio of 0.82.

In view of the slowdown, wait for the stock to correct before investing in it.

 

 

Stock Review: Jindal Saw

Jindal Saw is an interesting play. In fact, saw pipe makers like Welspun Corp and Jindal Saw seem to have taken a lot of beating, but both have seen better-than-expected correction. Jindal Saw is one of the largest saw pipe makers, they make a wide variety of pipes- seamless pipes, saw pipes, arch welded pipes etc, which are used by the oil and gas industry. Their present book value is more than 150 on a historic basis.

The company's top line is close to about USD 1 billion for FY11 and the company has posted an EPS of Rs 16 for FY11 on a face value of Rs 2. So it gives a PE multiple of close to about 8 times and the price-to-book will be about 0.8 times. The company has three plants- one is in Mathura, second in Gujarat and third in Maharashtra. So, the company is in a position to cater to the western parts, and also to the other parts of the country with a good order book and good financials. 

Moreover, the promoters are quite experienced in this line for over 15 years. If one can keep a view of about 10-12 months, he can expect a return of about 30% from here on.

 

 

Stock Review: Dhanlaxmi Bank

Since the time the RBI guidelines for private sector banking was released, we have been seeing renewed interest in many of these stocks. In fact, Bajaj Finserv and L&T Finance. have seen a rise of Rs 1000 crore in their market cap, and even in some other prospective companies, we have seen a rise in market cap by about Rs 300-500 crore.

So, identifying one bank from the lot that is likely to benefit, also given its quite a tech-savvy bank, is Dhanlaxmi Bank.

They have 275 branches with ATMs more than 450. The equity base is quite low at Rs 85 crore. In July a year ago, they made the private placement of about Rs 380 crore at Rs 181 per share, and if you see the present price-to-book, it is ruling at 0.75 times. I don't think that on a historic book value-basis even some of the bigger public sector banks must be ruling at that kind of valuations. So I think this is quite a good investment.

In fact, the bank has decided to issue shares at Rs 140 but one of the investors who has already invested in the bank did not get the permission from their country's regulator and that preferential allotment has been kept on hold. However, that is very much on card because the bank is intending to mobilize close to about Rs 1000 crore in their second round of fund raising plans. If that happens, it is likely to be made at about Rs 130-140. Since now the share is ruling at quite a low valuation at about Rs 78, if someone can really take a call, their share can easily give a return of about 35-40% if caped with a view of 12 months.

Stock Review: ITC

 

Gold Flake Premium, Navy Cut, 555, Ashirvaad, Sunfeast, Candyman, Bingo, Aashirvaad, Wills Lifestyle, Fiama di Wills and Vivel — these are some of the more than 30 brands owned by the Rs 21,000 crore cigarette to FMCG behemoth, ITC Ltd. Each of these brands, from Gold Flake to Aashirvaad atta, occupies its own distinct place in the Indian consumer's mind. Traditionally a cigarette company, ITC has moved into many other businesses as it seeks to put its cigarette profits to good use. In each of the businesses it has entered, the competition has had to give way. In fact, today ITC commands so much financial muscle that if it announces its foray into any business, the news rattles the incumbents.

 

 

A government-mandated moat. Whatever its reasons, health or ideology-related, the Indian government is reluctant to allow foreign cigarette majors such as a Rothmans or a Benson & Hedges to come into India and start manufacturing and sale s. ITC's other Indian competitors are too weak and small to offer effective competition. So between bidis at the lower end of the market and imported cigarettes at the premium end, ITC has a large chunk of the cigarette market to itself.

A smoky affair. Cigarette smokers smoke — no matter the health risk — and they will continue to do so. The smokers know this and so does ITC.
ITC understands the addictive nature of its product better than anyone else. For a long time now, ITC has monopolised Indian smokers. Even today it has an estimated 85 per cent market share.

It has further cemented its position by establishing a powerful distribution network that covers more than 20 lakh retail outlets. So strong is its hold over the market that it promptly collects payments from retailers for the goods it sells to them, something that few other companies can afford to do.
Moreover, no other player has the financial strength to invest Rs 1,000 crore over the last six years on technology and products.

The best part of being in this business is that ITC can raise its price without unduly worrying about consumers bolting to a competitor. Two things work in the company's favour. One, as cigarette smokers will tell you, they are addicted to their brand and will not shift to another just because its price went up by a couple of bucks. Second, customers don't have too many choices here in India.

Deep pockets. Cigarette is a big money spinner that throws out a lot of cash. In FY11, for instance, cigarettes yielded a return on capital (before taxes) of more than 180 per cent. All that cash needs to be put to good use. After diversifying into hotels, paper, branded apparel and agriculture, among others (all of which it still is present in), ITC decided to foray into the Indian FMCG business.

FMCG foray. The current market for FMCG goods in India is estimated at Rs 29,000 crore. The prospect of being a significant player in this vast market was too alluring for a deep-pocketed player like ITC to pass up. The company entered into the FMCG space in 2001. Revenues from this business are now near the Rs 4,500 crore mark and it accounts for 17 per cent of ITC's net revenues.

In this short period ITC has managed to grab significant market share from competitors. In biscuits, its share is estimated at 11 per cent. In atta it has decimated HUL's Annapurna atta, taking the leadership position in the organised atta market. Bingo chips is estimated to have cornered 9 per cent. In soaps ITC has captured 6 per cent of the market, and in shampoos its share is estimated at a little less than 3 per cent.

What makes ITC's FMCG foray different?

 

 Can you think of many companies that can afford to splurge over Rs 2,000 crore just to position themselves in a business? That's ITC's cumulative losses in the FMCG space in the last 10 years. Losses are diminishing with each passing year: in FY11 they stood at Rs 331 crore, down 12.8 per cent compared to the previous year.

Being present in the Rs 29,000 crore Indian FMCG business is a high stakes proposition. The company knows that it is up against competition that has taken over a century to build its brands (like Britannia) or players deeply entrenched in the Indian psyche (like HUL). This battle for market share will not be decided in a hurry.

ITC has set its goals high. From being totally absent from this space only 10 years ago, it now wants to be number one in this space (displacing HUL). Getting to the summit will take many years, huge investments and patience — all of which ITC is willing and able to put in.

 

What could cause moat to be breached

In its cigarette business, ITC doesn't face a serious threat from any of the domestic players. The only international player that could pose a threat to ITC could be Philip Morris of Marlboro fame. Philip Morris is much bigger than ITC. It is present in India through its stake in Godfrey Philips. However, it will take a number of years even for this global major to acquire the distribution reach that ITC has built up across India. Battling against an interest play like ITC will also require massive deployment of resources.

 

Growth drivers

Still many puffs left. According to ITC, 48 per cent of the adult male population in India consumes tobacco. Of this only 10.3 per cent smokes cigarettes (16 per cent smoke bidis while 33 per cent consumes smokeless tobacco). Thus, there is a lot of scope to improve the penetration of cigarettes.
Even if rising health awareness eventually leads to fewer people taking up the stick in future, the sheer scale of opportunity leaves enough room for ITC to multiply its revenues. Growth will also come from the conversion of bidi smokers to cigarettes. Currently the consumption of bidis outpaces cigarettes by 10 times. Big opportunity here.

Other growth drivers. ITC has a host of other non-cigarette businesses that bring in about half of its revenues (albeit at a lower profitability). All of them, with the exception of FMCG, are doing well.

Its agri business (contributes 18.5 per cent to topline) saw sales growing 23 per cent in FY11. Profits were up 26 per cent, driven by higher soya sales.
Paperboard (topline contribution 13.6 per cent) saw sales grow 14 per cent in FY11 while profits were up 20 per cent. In this segment, ITC is the market leader with a value market share of about 26 per cent.

Hotels (topline contribution of 4 per cent) saw an improved business environment, which helped the company post revenue growth of 18 per cent in FY11. Profits were up 23 per cent. ITC Gardenia, launched in Bangalore, added around 20 per cent to the company's total room count and made money for the company in the first full year of operation itself.

 

Concerns

Price hikes could deter uptrading. The string of price increases taken by the company means that the price of the cheapest cigarette in ITC's stable (excluding micro filters) is now 10 times the price of a bidi. That is a huge price differential for any bidi consumer and may dissuade him from uptrading.

When will FMCG business break even?

 Analysts following ITC are of the consensus view that its FMCG business may break even by FY13. New product launches like Yippee Noodles and aggressive brand building activities for gaining market share, as in shampoos, may however push the break even date further ahead.

Delay in GST implementation. Currently the VAT on cigarettes differs from state to state. Gujarat, for instance, has a VAT of 25 per cent on cigarettes. Rajasthan has set it at 40 per cent, Maharashtra at 20 per cent, Himachal Pradesh at 16 per cent, and so on. A uniform GST will be positive for ITC as it will rationalise the taxation rate across the country. Implementation of GST has been delayed a number of times. It is now expected that it will be rolled out in FY12. If it isn't, then individual states may continue to hike VAT arbitrarily.

 

Financials

For the financial year FY11, ITC reported a 17.5 per cent growth in revenues at Rs 21,167 crore. PAT came in 22.8 per cent higher at Rs 4,987.6 crore. During the quarter ended March 2011, cigarette volume declined 2 per cent which was attributed to pipeline corrections. ITC took an overall price hike of 5 per cent in February 2011. The FMCG (non cigarette) business grew 17 per cent y-o-y. Improving sales and better mix resulted in margin expansion to the extent of 180 basis points (y-o-y) in this segment.

Valuation
At the current market price, ITC trades at 30 times its FY11 earnings. This is higher than its five-year median PE of 25.3. Over the last five years, the company's EPS has grown at a compounded annual rate of 16.71 per cent, which gives it a PEG ratio of 1.79. Thus the stock is trading in the expensive zone. Wait for it to correct before you buy.

Stock Review: MPHASIS

Stock Review: MPHASIS


With flat revenue and declining profits, MphasiS continued to post subdued numbers for the third quarter in a row. Pricing pressure from the company's parent and largest client, Hewlett Packard (HP), and lower volume growth in comparison with the other industry peers are major concerns for the country's seventh largest software solutions provider.

HP's new strategy of increased focus on IT services and enterprise solutions and exit from its PC business could prove to be positive for MphasiS in the future.
For the July 2011 quarter, the Bangalore-based player posted a 2.9% sequential growth in its topline at . 1,293 crore. This was on the back of a 3% volume growth, of which only 1.3% is from the direct operations while the remaining accrued from several one-off items booked in the revenue. Business from HP, which contributed over 65% of the overall revenues, showed a 5% drop in net sales against the previous quarter.

MphasiS reported an operating profit margin of 22.9% during the quarter – the lowest in the past 12 quarters. The company has been facing margin pressure on account of price cuts on the technology services it provides to HP. Besides, employee expenses in relation to net sales have increased substantially over the past several quarters. This further led to a 10% drop in the company's profit to . 195 crore.

MphasiS plans to take strong cost-control measures such as limiting pricing pressure from HP and other direct channels customers so as to offset margin pressure. Also, it is trying to increase its non-HP revenue. The company added 18 new direct channel clients during the quarter with 13 from the emerging industries segment.

With a cash balance of . 286 crore on its balance sheet, the company is considering inorganic growth options. MphasiS expects to consolidate Wyde Corporation, acquired earlier this year, from September onwards, which will add to the company's topline in the coming quarters. At the current market price of . 354.7, the stock trades at eight times its earnings for the trailing 12 months, which is on a lower side of the P/E range of 10-15 for other industry players of similar size.

Concerns on growth in the HP business and an uncertain macro environment, particularly in the banking and insurance segment, continue to loom over the company's future performance. Various leading brokerage houses have downgraded their rating on the stock, indicating a long-term downtrend. In this scenario, what offers some solace to the investors is the company's renewed focus towards direct business, increased diversification and strong cash position.

 

Stock Review: Eros International

 

Cost-effective studio business model continues to secure sustained investor interest in the stock of entertainment company Eros International Media. The company's stock in the past six months has gained more than 50% against a decline of around 8% in the benchmark Sensex.

In the June 2011 quarter, the Mumbai-based company reported a net profit of . 20 crore, a growth of around 50%, against a net profit of . 13.8 crore in the corresponding quarter last year. The company's net sales also grew to . 139 crore, up around 20% year-on-year. Strong theatrical and cable & satellite revenues aided this growth in the company's revenues. At present, around 35% of the Eros's revenues come from the theatrical segment, followed by 30% from cable & satellite segment and remaining from international sales of its product offerings. A substantial portion of the theatrical revenues came from the film the company distributed: 'Zindagi Na Milegi Dubaara'. The film made revenues of . 110 crore from the Indian market. It earned a total of . 145 crore which included sales in the overseas markets.

The company has lined-up five big releases in the coming quarters --Mausam, RA.One, Rockstar, Desi-Boyz and Agent Vinod. These films cater to a wide range of audiences and belong to all the three categories of films -- big, medium and small-budget. Directors associated with these films have a bright and convincing track record. Further, a few of these films such as RA.One, Rockstar and Mausam have already created tremendous viewer interest, considering the star cast and directors associated with it and also because they fall under the big-budget category. Eros derives 50-60% of its overall revenues from such bigbudget films. Hence, the second half of this fiscal will be lucrative for the company in the theatrical segment. Recently, the company entered into pre-licensing deals with prominent broadcasters such as Star Network, Zee TV and Sony as part of its de-risking business model. Various satellite deals with these broadcasters help the company recover over 40% of its cost of production. In the coming quarters, this will strengthen its overall de-risking business model and help in a swift breakeven on its projects.

Stock Review: TVS MOTOR

TVS Motor, the smallest of the three listed players in the twowheeler market, has carved out a niche for itself in this intensely competitive market, with its mopeds and Scooty Pep models. The company also has a presence in the fast-growing motorcycle market, but its market share in this segment is much smaller than larger rivals Bajaj Auto and Hero MotoCorp.

TVS Motor, like other players, is also expanding its presence in rural markets at a time when the broader two-wheeler market is grappling with higher auto finance rates. However, the company's ability to manage rising commodity input prices over the past several quarters has been quite mediocre compared to Bajaj Auto, which enjoys the highest operating margins.

BUSINESS

TVS Motor is present across different segments of the two and three-wheeler market. Its popular model in the scooter segment is Scooty Pep, while in the motorcycle segment it competes through models like Max, Centra and Victor. In addition, the company has a strong presence in the moped segment with its TVS 50 model.

TVS Motor's total vehicle sales during FY11 amounted to nearly 2.05 million units, a rise of 33% y-o-y. Bajaj Auto sold 3.8 million units during FY11 and Hero MotoCorp 5.4 million units.

FINANCIALS

The company's operating profit margin was broadly flat on a yo-y basis at 7.2% in the June 11 quarter. Net sales grew 25.3%, and net profit improved 45.5% y-o-y in the quarter.

Its average realisations improved nearly 8.4% y-o-y in the first quarter of FY12, while volumes grew 15.6%. This helped it deal with rising commodity input costs to some extent.

TVS Motor's operating margins are mediocre compared to its peers. For the trailing 12-months ended June, its operating margins improved nearly 200 basis points y-o-y to 6.3%. Bajaj Auto's operating margins were at 19.5% in this period, a decline of 110 basis points.

GROWTH DRIVERS/CONCERNS

Many states across the country have allowed fresh permits for three wheelers. This should benefit TVS Motor. Three wheeler vehicles enjoy comparatively higher margins, point out analysts. Key commodity input prices have shown signs of easing, but they remain at elevated levels. The company's ability to manage this cost will be crucial. Also, auto finance rates are on an upward trend and are likely to impact vehicle sales in the short term.

VALUATIONS

TVS Motor trades at a P/E of nearly 11.4 times on a trailing four-quarter basis. Bajaj Auto trades at 12 times, while Hero MotoCorp trades at 20 times. Rather than TVS Motor, investors should consider Bajaj Auto which has posted superior operating margins.

 

Stock Review: Ashiana Housing and Finance

 

 

Ashiana Housing and Finance is a small-sized real estate company based in Delhi. It has strong fundamentals, good projects and no leverage. The company mainly develops group housing, and nearly 15% of its projects constitute of apartments for active senior citizens. Ashiana is strong in facilities management. This helps it to get more customers through referrals.

GROWTH DRIVERS & CONCERNS

Ashiana has saleable area of 72 lakh square feet (lsf) across ongoing projects in cities like Bhiwadi, Jaipur, Jamshedpur and Jodhpur. It has also entered into a hotel management agreement with Hyatt Place for developing the Marine Plaza hotel & retail area in Jamshedpur with 1.8 lakh square feet of saleable land. The company has been steadily increasing its booked area, and its average realisation for the June quarter was Rs 2,187 per square feet. Among its future projects, the company has 57 lsf of estimated saleable land in Bhiwadi and 4.7 lsf in Jodhpur.
One of the company's major concerns is its stalled project for seniors at Lavasa, which is awaiting environmental clearances. The company has a saleable land bank of 6.8 lakh square feet in Lavasa facing uncertain prospects. This project constitutes 10% of its current project portfolio.

FINANCIALS

The company's consolidated performance in the June quarter was subdued. Operating profit dropped by 12.5% y-o-y and net sales fell by 8%. This was on account of no contribution from the Lavasa project and non-recognition of revenues from joint ventures.

 
The company has targeted booking of 16 lsf of land in FY12. With almost one-fourth of this being booked in the June quarter, the company appears to be on track to achieve its target for this fiscal. It is expecting average realisations to be around Rs 2,000-2,100 per square feet.

The company's stock is fairly priced at six times its last twelve months earnings. Ashiana's market cap of 284 crore is a little over twice its last twelve months consolidated net sales. In the last three months, while the ET Real Estate Index has depreciated by 16%, the company's stock has appreciated by 25%. Investors interested in value buying in the real estate space can consider this small-cap stock.

 

Tata Motors DVR: Steep discounts

TATA Motors' differential voting rights (DVR) shares are currently quoting at a steep 45.5 per cent discount to the ordinary shares of the company. In other words, at `181, the ordinary shares are trading at a premium of `82 a share, compared to the DVR shares. Typically, DVR shares trade at lower prices as these have limited voting rights but enjoy higher dividends visa-vis ordinary shares. In the case of Tata Motors' DVR, the holders have a tenth of voting rights but enjoy an additional five per cent dividend, compared to holders of ordinary shares.

While there are no benchmarks, at what price should they trade? In the case of Tata Motors DVR, since its listing in December 2008, the discount on an average has been 34 per cent. However, in the last three years the discount has never breached the 46 per cent level, which is where its DVRs are now trading. If this historical trend holds, either Tata Motors' share price will fall, or the DVR share price will rise from current levels to narrow the gap. It has happened in seven to eight occasions in the past, and every time the discount has touched 46 per cent, the DVR share price has recovered. Even if the gap has to reduce to its historical average of 34 per cent, the DVR share price should move up by at least 21 per share from the current `98.80. In terms of valuations as well, analysts believe that there is enough room for the DVRs to appreciate, and the risk-reward equation is favourable currently. "Considering the fundamentals and the current valuations, there is not much downside for the Tata Motors' share price," says Deven Choksey, managing director of K R Choksey.

Moreover, at the current levels the DVR is offering good dividend yield. In FY12, analysts are expecting a dividend of `4.40 per share for the ordinary share; the company paid a dividend of `4per share (adjusted for stock split) for FY11.

Considering the five per cent additional dividend, DVR holders should get `4.5 per share, which translates into a dividend yield of almost 4.55 per cent as against the dividend yield of 2.43 per cent, in case of ordinary shares.

In terms of price to earnings, DVRs (at four times of the estimated earnings for FY13) are available at half the valuation of ordinary shares. For those considering Tata Motors as an investment, DVRs could be a good option. Even for those holding ordinary shares, switching to DVRs should prove rewarding. In both cases, it becomes risky if the discount widens beyond the 46 per cent level.