Bhushan Steel

Company's Fundamentals Have Changed & Warrant A Higher Valuation Than Current P/E Of 11.8
BHUSHAN Steel, a major secondary steel producer in the country, saw its scrip outperforming the Sensex as well as the Metal Index in the past six months besides other blue-chip stocks such as Steel Authority (SAIL) and Tata Steel.

Bhushan Steel’s backward integration plan has been critical to its performance. The company has already completed phase I of its expansion plan and phase II is expected to get completed by this year-end. The partial impact of its integration plan is clearly visible in its operating margin. During the September 2009 quarter, Bhushan Steel reported more than a 300-basis point sequential improvement in its operating margin. The margin will improve further when the company starts commissioning different projects in phases. The recent run-up in its stock price seems to be in anticipation of future improvement in margin as well as topline.

The last time when the Sensex was close to 17,000, Bhushan Steel’s stock was trading at a trailing price-earnings multiple of 11. Now, when the Sensex is again hovering close to the 17,000-mark, the stock is trading at around 11.8. This is despite the fact that the fundamentals of the company changed significantly during the time period. It has reported strong numbers in the first half of FY10. The half-year earnings per share (EPS) stands at Rs 85 and we expect this to be higher for the second half. Assuming a conservative growth of 10% in EPS in second half, the stock is currently trading at a forward price-earnings multiple of around 7.5. This appears to be low considering the fact that the stock has always been traded at a P/E multiple of 13-17 in good times.

Apollo Tyres

Putting the slowdown blues behind,Apollo Tyres has acquired companies overseas and is investing to tap the domestic market which is on an uptick

APOLLO Tyres, the secondlargest player in the tyre industry, (in terms of revenues) is likely to overtake MRF to become India’s largest tyre-maker after the recent acquisition of Dutch company Vredestein Banden BV. Inorganic growth, expansion in domestic market and improving operational efficiency make Apollo Tyres a good long-term bet for the investors.

BUSINESS:

Apollo Tyres (ATL), the flagship company of the Raunaq Singh Group primarily engaged in manufacturing of automobile tyres, tubes and flaps had consolidated revenues of Rs 4,984 crore for the year ended March ‘09. It has production capacity of around 850 tonnes/day in the domestic market and 300 tonnes/day from international operations. The company is a dominant player in the commercial vehicles segment. Till FY09, the company had a 27.3% market share in truck & bus tyres and 24% share in the domestic light commercial vehicle tyres. Introduction of radial tyres in the passenger car category helped the company to increase its presence in the car segment in the recent years. The company is building up capacity for radial tyres for trucks, thus readying itself for the next generation trucks.

GROWTH PLANS:

The company has undertaken couple of overseas acquisitions in the last one year. This is as per its strategy to diversify its presence globally and generate nearly 60% of its revenues from the overseas market.

Recently in May this year, Apollo announced the acquisition of Dutch tyre-maker Vredestein Banden BV for Rs 1,200-1,500 crore. Apollo Tyres plans to fund this acquisition with a mix of internal accruals and debt financing. Vredestein Banden BV has a strong sales and marketing network besides a production unit in Enschede, The Netherlands with capacity of 55 lakh tyres. It will give Apollo access to the challenging European market. Revenues from Vredestein Banden BV will be reflected in Apollo’s accounts from the current quarter of April – June 2009. The company is also planning a greenfield unit in Hungary. But this project has now been deferred due to global economic slowdown, which has hit the auto sector badly.

However, the company is bullish on the domestic demand and is making investment also expanding to tap the market in the country. To increase its presence in the radial tyres segment of commercial vehicles, Apollo Tyres has made an investment of about Rs 1,300 crore in Chennai for a greenfield project, which is likely to be operational by the end of this year. This plant, with facilities to make radial tyres for both trucks and cars, is going to have capacity of 180 tonnes/day, which can be augmented, to 450 tonnes/day depending on the demand. On a consolidated basis, Apollo Tyres’ turnover is projected to reach around Rs 7,500-8,000 crore for the year ending March ‘10, making it the largest tyre company in India in terms of revenues. In 2006, Apollo Tyres had acquired Dunlop South Africa. The acquisition gave the company a strong foothold in the African continent including a sales network of branded Dunlop Zones, besides two manufacturing units in Durban and Ladysmith.

FINANCIALS:

The year ended March ‘09 had been a challenging year for the company. Sales growth slowed to 6% from compounded annual growth (CAGR) of 18% in the previous three years on the consolidated basis. But the positive news is that rubber price has come down and is expected to get reflected in the financials in the coming quarters. Further, with demand for automobiles improving, the company is expected to register reasonable sales growth in the coming quarters. The industry, which registered a growth of only 2.2% for nine months ending Dec’08, has since recovered and is estimated to have recorded better demand as auto sales have improved. During the latest quarter ended June ’09, Apollo Tyres topline rose 10% to Rs 1,180 crore from the year-ago level on the standalone basis. Operating profit grew 75% to Rs 194 crore, while net profit nearly doubled to Rs 94 crore.

VALUATIONS:

At its current market price, the stock is trading at 13.78 times its earnings per share (EPS) for the yearended march ‘09 on the consolidated basis. In contrast its closest competitor, MRF is trading at a price-to-earnings (P/E) multiple of nearly 24. Assuming a modest 12-15% annual growth in revenues and continued improvement in operating margins, Apollo Tyres oneyear forward P/E ratio works out to around 9.4, which provides ample upside potential to long-term investors. Besides, Apollo Tyre has a dividend yield of 1.2%, which will only improve as profit grows.

Buyback & how it’s done

THE TERM literally refers to a company’s move to repurchase its own shares. By doing so, the company reduces the number of its shares available in the open market.

This will lead to the rise of earnings per share (EPS) and the return on assets of the company, indicators on the balance sheet of an improvement in the performance of the company. As an investor, it will mean an increase in his/her stake in the company. A stock buyback is also sometimes referred to as share purchase and it is generally considered to signal a potential increase in share price.

How is it done?

A company can buy back shares either using tender offer or in an open market buyback. Under the first method, the company issues a tender offer with details regarding the number of shares that the company plans to repurchase and indicates their price range.

An investor keen on accepting the offer needs to fill the form mentioning the number of shares that he/she wants to tender and the price desired and send it back to the company. In most cases, the price in a tender offer buyback is higher than the price in the open market.

According to Sebi guidelines, if the company has decided to accept your shares, then it needs to intimate you in 15 days after the closure of the offer. The other route available for company is where they slowly buy back their shares from the open market.

Where can you find out?

Details regarding buybacks are available from the stock exchange as it is mandatory for the companies to intimate them of such resolutions. Details of a buyback offer are also available on the Sebi website.

Why are companies currently going for a buyback?

There are multiple reasons. Sometimes, companies generally indulge in a buyback when they feel that their share price in the market has fallen drastically.

At other times, it may simply be a way of using excess cash. However, there are also cases when this may be an attempt at preventing a takeover of the company.

Stock Views on Indiabulls Real Estate, OnMobile Global

Deutsche Securities on Indiabulls Real Estate - TARGET PRICE: RS 300

Deutsche Securities has initiated coverage on Indiabulls Real Estate with a ‘hold’rating as it feels the company has limited track record in execution. Weakness in the Mumbai office market for highend office properties, and a large free float — which allows much larger head-room for “borrowing” and selling short — are downsides for the stock. According to a Deutsche Bank note, Indiabulls’ revenue growth would be driven by volumes and stake sale of associate and/or subsidiaries. “We expect a revenue CAGR (compound annual growth rate) of 41% over FY08 to FY11 (estimated). We expect EBITDA margins to drop from 72% in FY08 to 55% in FY11 (estimated), mainly driven by higher costs (land, construction, employees, SG&A). Further, we expect the tax rate to increase from around 28% in FY08 to nearly 30% in FY11 (estimated). Thus, while we expect volume growth (around 40%), we expect PAT (profit after tax) to grow by only a 19% CAGR over FY08-11 (estimated),” the note to clients said. However, the Deutsche Bank note added that the demerging and listing of its forays in power and retailing would drive growth and shareholder value in the near term. Meanwhile, SEZs, townships and annuities from com-pleted projects will drive long-term growth, it added.

Citigroup Global on ONMOBILE GLOBAL - TARGET PRICE: RS 630

Citigroup Global Markets has initiated coverage on OnMobile Global with a ‘buy’ rating saying OnMobile Global is India’s largest VAS (valueadded services) operator (35% share) in a rapidly growing market [FY08-11 (estimated) CAGR at 51%. The estimated 36% EPS (earnings per share) CAGR over FY08-11 (estimated), was due to the company’s increasing international presence, said Citi. “Though it ap-pears high in the current environment, we believe our target PE (price to earning) of 25x Mar-10E is justified by OnMobile’s strong growth prospects and is in line with the multiple for comparable peers,” the note added. According to the Citi note, the domestic VAS has gradu-ated from being a glorified sub-set of p-to-p SMS to a well-demarcated segment.