Stock Review: Adhunik Metaliks

 

The glut of selling in the market since the beginning of August shaved off 24% of the market capitalization of Adhunik Metaliks. Though the stock is now available at a price to earnings ratio below its historical valuation, going by the company's performance over the past two quarters, investors should wait for some operational improvement before entering the stock.

During the first quarter of FY12, the company's consolidated net sales grew a mere 9% over the yearago period to . 467.72 crore, the slowest growth in four quarters. This was mainly on account of the 6% degrowth in its mining subsidiary — Orissa Manganese & Minerals (OMML) and on account of lower volumes in the steel business on account of maintenance shutdowns. The sharp rise in key inputs resulted in operating profit margin contraction of 500 basis points to 31%. Moreover, the higher interest burden led to a 50% fall in net profit to . 28.25 crore.

Since January, the cost of key steel making ingredients has been rising. Contract prices for iron ore and coking coal touched a peak of $171 per tonne and $330 per tonne, respectively, during the April-June quarter, 40% and 65% higher than they were last year. But steel prices did not rise on similar lines on account of sluggish demand. Currently, contract prices for both iron ore and coking coal have marginally decreased, but not enough to have a significantly positive impact on operating profit margins of steel makers.

Adhunik Metaliks's captive iron ore mine at Keonjhar with reserves of 25 million tonne should ease the pressure on its margins to some extent. However, the benefit of this integration is not expected till the end of the year.

For the second quarter, some improvement can be expected as the recommencement of operations at certain facilities will increase steel sales volumes, which contribute about 70% to the company's total revenue. For its mining business, the surplus in the manganese ore market is likely to keep prices low hence realisations are expected to be low as well.

At . 55, the stock trades at a price which is 5.2 times its trailing 12 month earnings per share.

Stock Review: Hero MotoCorp

HERO MotoCorp continues to lead the two-wheeler pack on sales. In August, the company reported 18.6 per cent year-on-year growth in volumes to 503,654 units, led by strong momentum across all product segments. Going by the strong demand for two-wheelers, the company is targeting sales of six million units this financial year. The first quarter also saw several product launches and refreshed product ranges, which helped drive the volume performance.

Despite this strong volume growth, analysts are sceptical about the company's ability to deliver on profitability. The last few quarters have been challenging for the company as far as profit margins are concerned. In the first quarter, input cost pressure continued to pinch, with raw material costs as a percentage of sales rising 190 basis points sequentially to 74.7 per cent (highest ever increase). Other expenses were also high at 11.5 per cent of net sales, on account of IPL spend. As a result, operating profit margin declined 80 basis points sequentially to 11.3 per cent. While many analysts argue that commodity cost pressure is softening, the company may be hit by an additional one-time cost of rebranding and research and development expense at 1-1.2 per cent of sales. According to Standard Chartered Equities Research, the Hero group will continue to be in investment phase over the next couple of years, to develop products on its own, establish its brand without Honda, spend on capacity addition and establish its presence in export markets, which are likely to hurt return ratios.

However, the management believes margins bottomed out in the June quarter and should expand, driven by the price increases undertaken in June, softening of commodity prices and higher operating leverage. While the company will spend on brand transition, the management has conveyed its plans to replace some of its existing advertisement, and therefore, the impact on margins would be limited. The company also plans to focus on reducing input cost pressures by restructuring its supply chain. Motilal Oswal believes margins can expand by 200-300 basis points over the next two-three years, driven by price increases and input cost savings. Additionally, what some analysts are excited about is the opening of export markets after Honda's exit. Hero MotoCorp has plans to target new markets like Africa, Southeast Asia and Latin America for exports, and expects to start exporting to some countries in Africa by December.

Stock Review: Zylog Systems

 

Zylog Systems has been reporting decent growth in its financial numbers over the past few quarters. Its focus on the inorganic strategy and various expansion plans offer a positive outlook for the company, going ahead. Its scrip has remained more or less stagnant over the past six months in an otherwise volatile market. The ET Infotech index has fallen over 20% during the period.

The company earns over 60% of its revenue from IT services while the balance comes from the products and solutions business. The company has traditionally adopted inorganic route to expand its market reach and product portfolio with over five acquisitions in the past three years. During the June 2011 quarter, the company's topline grew 2.5% sequentially to . 514 crore due to business traction in healthcare and e-governance verticals. The operating profit margin grew 80 bps to 17.1%.

During the quarter, Zylog's bottomline grew over 30% to . 45 crore. The jump was largely due to . 8.5 crore of other income incurred during the quarter against sale of 1.7 acres of land in Chennai. Excluding this one-time income, net profit would have rose 17% to . 39.8 crore. Zylog plans to use the proceeds to build office property in more costbeneficial geographies such as Malaysia and Dubai.
With a strong order pipeline of more than $200 million to be executed within the current fiscal, the company has a cash balance of . 310 crore on its books. It plans an acquisition in the range of $75 million to $100 million targeting enterprise applications players.

Currently, Zylog is offering Wi-Fi services in six states and plans to expand its footprint in Haryana and Rajasthan in the coming quarters. It expects e-governance and Wi-Fi to be the key growth drivers in the domestic market, going ahead. At the current market price of . 402.5, the stock trades at 4.3 times its earnings for the trailing twelve months. Given the company's appetite to grow inorganically and demand traction in various business areas, Zylog is expected to fare well in the coming quarters. However, with over 90% of the revenues coming from the US and Canada, any slowdown in demand from the region and currency fluctuations may act as a headwind. The company does not expect the contribution from these geographies going down below 75% in the near term.