First Leasing Company

 

 

This is a very old company. It's a 35 year old company, which was incorporated in 1973. True to its name, it was the first leasing company in India and they were the one who introduced the concept of leasing in India. The business of this company is primarily focused at the corporate sector. They are involved in various financing deals including different types of leases like operating lease, short-term lease, sale and lease back arrangements and also hire purchase and consumer credit. 

This company has got credit rating ranging from high safety, which is AA and AA+ to highest safety which is PR1+ for different debt instruments, which they have issued. This rating is from CARE and company has got a capital adequacy ratio of about 16.45 as against 12% which is stipulated by Reserve Bank of India (RBI). The net non-performing asset (NPA) of the company as on March 31, 2009 is zero. If you look at the financials of the company for FY10, the total income is about Rs 187 crore which is almost same as last year, profit after tax is about Rs 35 crore and the company has got equity capital of close to Rs 23 crore, which means earnings per share (EPS) of about Rs 15. 

At the current price of Rs 55 this stock is traded at a price to earning multiple of less than 3.5. The good thing about this company is that this company has got track record of an interruptive dividend for the last 35 years, right from its inception and right from the first year this company has been paying dividends and at the current price of Rs 55 it is a safe stock to invest. This is a stock which won't give nightmares in case the market falls. At a PE of 3.5 and as against the book value of about 110 the stock price is just about 50% of the book value. Dividend for this year is about 18%, which means a dividend yield of close to 3.5%. 

The best part is that the profit of Rs 35 crore is understated to the extent of about Rs 9 crore because they have provided for a deferred tax of about Rs 9 crore. The deferred tax is okay in case of manufacturing companies but in leasing companies where they are incurring capital expenditure on a monthly basis, this doesn't make sense but as per accounting standard 22 they have to provide for it. 

So if you include that back into the profit, you are getting a stock at a price to earning multiple of about less than 3. From these levels, I do not see investors losing much. Even though this may not be a multi bagger, it may give you returns which are linked to the market. This is a one for one who wants an exposure in equity but doesn't want to take much risk this is a stock for that profile of investor. 

 

Stock views on INFOSYS TECHNOLOGIES, STATE BANK OF INDIA

MERRILL LYNCH on STATE BANK OF INDIA

Merrill Lynch reiterates the `Buy' rating on SBI with a target price of Rs 2,800. Merrill Lynch believes NPL (non-performing loan) accretion in this quarter may be about Rs 2,500-2,700 crore versus estimate of Rs 3,000-3,500 crore. Moreover, this includes an estimated Rs 700-800 crore of agri related NPLs arising from the agri loan waiver scheme that expires on June 30, '10. NPLs from the restructured loans in this quarter may be less than 3% versus the expectation of 5%. Last year SBI had a negative carry on almost Rs 70,000 crore of funds that is not there this year; and CASA is sustaining at 47%. Hence, margins may be up +45-50 bps y-o-y resulting in a topline growth of +40% supported by 20% loan growth. Finally, opex may also be under control and credit costs may also be lower. SBI is a key beneficiary of the loan uptick, driven by infra loans and housing loans. Further, it's leveraged to rate hikes, likely by September '10. Earnings are expected to rise +7% for a 50 bps hike in rates. Merrill Lynch's FY11/12 earnings growth estimates of 23/40% are led by the core business. RoE is estimated to be 20% by FY12.

CITIGROUP  on INFOSYS TECHNOLOGIES

Citigroup maintains `Hold' rating on Infosys. Infosys reported Q1 revenue of $1,358 million, EBIT margin decline of about 200 bps and net profit of Rs 1,490 crore. Volume growth was strong at about 7.6% q-o-q while pricing declined about 60 bps. For FY11, Infosys raised the revenue growth guidance to 19-21% growth and EPS guidance to Rs 112-117. Implications for the sector: (a) Supply side issues increasing - Infosys, despite being proactive with wage hikes, has seen a uptick in attrition - margin management could be a challenge; (b) Europe's outlook continues to be challenging; (c) Pricing uptick could take more time than anticipated. A large part of the management's EPS guidance upgrade was due to currency. Citigroup believes EPS upgrades, if any, are unlikely to be seen until the September quarter results, and with valuations of about 23x FY11E Citigroup sees the upside as limited.

Kesoram Industries

Kesoram Industries has expanded capacities to take advantage of growth opportunities in its product segments. The stock looks attractive

   KESORAM Industries, the flagship company of the BK Birla Group, is one of the leading players in the domestic tyre industry. The company also has a cement division, with a prominent presence in the southern market. We had recommended this stock in our issue dated July 6, 2009, and since then the stock has gained barely 11.6% as compared to a 28% rise in the Sensex. While Kesoram's stock has so far lagged the returns of the broader market, it is expected to see momentum in future. It has aggressively expanded its capacities to take advantage of the growth opportunities in its product segments over the next few years.

   The veteran industrialist BK Birla willed this company to his grandson Kumar Mangalam Birla, while the nonagenarian's daughter Manjushree Khaitan would take an active role in the day-to-day management of Kesoram Industries.

CAPACITIES:

The company's installed cement capacity was 7.25 million tonne at the end of March 2010, a rise of 59% from three years earlier. The company's plants are located in Karnataka and Andhra Pradesh. As part of increasing its cement capacity, Kesoram had brought on stream 1.65 mt capacity in August 2009 in Karnataka.

   Kesoram Industries, like other players in the southern region, has been grappling with sluggish realisations on a per tonne basis, due to rapid capacity expansion in the region, and weak demand conditions. The cement division contributed 38.1% to the company's total segment sales of Rs 5,020.6 crore for its year ended March 2010. The company's tyre division's capacity was 12.1 mt at the end of March 2010, and it had more than quadrupled from three years earlier. The company's tyre division's capacity is amongst the top five players in the country, and Birla Tyres is also among the largest players in the truck tyre segment.

   This growth in capacity was due to the start of commercial production of truck radial tyres at its unit three at Haridwar, Uttarakhand, in March 2010, and the start of commercial production of unit four at Haridwar for LCVs and motorcycle tyres. The tyre division contributed 56.8% to the total segment sales for the year ended March 2010. In addition, Kesoram's viscose filament rayon yarn capacity was 6,500 tonnes at the end of the previous financial year.

EXPANSION PLANS:

The company's board, in a recent meeting, approved plans to instal a clinker plant of 1.71 mt and captive power facilities, at its plants at Karnataka. In addition, the company plans to set up a cement grinding plant with a capacity of 2.5 mt at Sholapur, Maharashtra and the capex involved for these projects is estimated at Rs 925 crore.

   The company has also got board approval to set up a waste heat recovery system to generate captive power at different units of its Vasavadatta cement section, Karnataka, at a cost of Rs 200 crore. These expanded facilities are expected to be broughton-stream by September 2012.

   This expansion plan would be financed via a combination of internal accruals and debt. Kesoram had invested Rs 3,357.5 crore during the period March 2007 and March 2010, while its operational cash flow during this period was just Rs 1,274 crore. As a result, its leverage ratio was 1.9 at the end of March 2010, as compared to 1.4 times, three years earlier. However, the company's recently expanded capacities in the tyre and cement divisions are expected to provide healthy cash flows over the medium term and help to keep Kesoram's leverage ratio in check, going forward.

FINANCIALS :

The company's operating profit margin fell 780 basis points y-o-y to 10.2% in the March 2010 quarter. This is despite the 12% rise in net sales at Rs 1,274.2 crore in fourth quarter. In the company's cement division, realisations declined nearly 7.9% y-o-y to Rs 3,439 per tonne given sluggish demand conditions in the south, while dispatches grew 2.7% to 1.51 million tonnes. Segment profit of the cement division also fell 39.6% y-o-y to Rs 96.8 crore in the fourth quarter.

   In its tyre division too, Kesoram was adversely impacted by higher prices of the key input price of rubber. For instance, the average price of this input was Rs 142.7 per kg levels in the March 2010 quarter, a jump of nearly 71% y-o-y. As a result, in the tyre division, there was a segment loss of Rs 3.87 crore in the quarter under review. Also, for the year ended March 2010, Kesoram's operating profit margin declined 100 basis points y-o-y to 14.9%, despite its net sales that grew 21.8% to Rs 4,804 crore.

VALUATIONS:

The stock trades at just 0.9 times its book value for year ended March 2010. During the period March 2006 and March 2009, it had traded in a range of 0.4 and 2.4 times trailing book value.

   Kesoram Industries, at Rs 299.8 per share, trades at 5.8 times its trailing four-quarter earnings. Other diversified players like Century Textiles and Industries trades at 12.6 times, while Orient Paper & Industries' P/E is 6.8. Kesoram Industries is expected to benefit from its capacity expansions given an uptick in industrial demand. Investors can consider Kesoram Industries as a long-term investment given its growth prospects.