Friday, November 21, 2008
Brokerage and investment research firm CLSA report on Indian stocks which may head for downgrade due to stock specific reasons. This report is very helpful for retail investors who generally do not have access to research information. Thanks to Dr. Krishna for publishing this report. These and many other stocks mentioned below are likely to face severe de-rating in the coming months, as the deliberate RBI policy to keep the Rupee weak implies a permanence in FX losses
Corporates like Jaiprakash Associates have chosen not to account for losses on FX exposure in the accounts for the first half of FY09. As per current calculations, the company will lose about Rs 3 per share in earnings post-FCCB accounting. Losses of this magnitude when accounted for will make JP's result move into RED by end of FY09.
These and many other stocks mentioned below are likely to face severe de-rating in the coming months, as the deliberate RBI policy to keep the Rupee weak implies a permanence in FX losses (Accounted or not) as the Central Bank has carried out a 20 per cent competitive devaluation of the Rupee against the Dollar, just like so many South East Asian nations and those in South America.
Indian stocks: risks to valuations
Background:
Indian markets have in the last few years traded at a premium to other regional markets because of better corporate governance, superior disclosures, high management quality and better capital productivity, apart from superior and consistent earnings growth. In a scenario of rising risk aversion, investors will take a tougher view on companies that adopt 'aggressive' accounting policies, even if these are in line with prevailing accounting standards.
This will reflect in the de-rating of such stocks, relative to peers that adopt 'conservative' accounting policies. During 1QFY09 we have seen a number of companies resorting to accounting policy changes, charging FX losses to balance sheet, subsidiary stake sale to group entities and other accounting practices to buoy reported profits.
Permitted, but not best practices:
Capitalization of FX losses on FX debt, Forex contracts etc. Forex losses on translation on FCCBs not being recognised under the assumption that FCCBs will necessarily be converted.
Losses on outstanding FX derivatives, while being disclosed, have not been provided for in the P&L as per AS30 (most companies do not follow AS-30 as it becomes effective from 2011)
Transfer of assets to subsidiary companies or group companies to boost stand alone profits and without any clarity on valuation methodology or justification of the same. Increased instances of related party transactions are visible.
Companies adopted changes in depreciation policy and revenue recognition policy to buoy profits or revenues.
Fudging up Accounts, in a permitted way:
15 stocks are likely to face a severe de-rating in stock markets:
1. Anantraj Industries:
A North Indian commercial developer, transferred part of one of its projects (0.52mn sf out of 0.75mn sf in a mall in Delhi) to its wholly owned subsidiary and consequently showed equivalent revenues in its standalone results (93% of 1QFY09 revenues).
As against standalone revenues of Rs1.72bn and net profit of Rs1.52bn, consolidated revenues are Rs104.8m and net profit of Rs77.6m. Out of the consolidated revenue of Rs104.8m, Rs68.05m (65%) is from the ceramics business.
2. DLF:
DLFs non-DAL revenues declined 44% QoQ to Rs22.5bn and around 40% of sales have been to DAL, a group entity. 44% of debtors are DAL and of total debtors, the share of DAL has increased during the quarter with DAL receivables increasing by Rs14.5bn QoQ.
During 1QFY09, sales to DAL were Rs15.6bn, which is marginally higher than the increase in receivables from DAL. We would like to add that DLFs high level of transactions with group company DAL and high level of receivables has been a point of debate since it went public.
3. Dr Reddys Labs:
Dr. Reddy's has adjusted mark to market losses on outstanding US$250m of hedges in balance sheet, while P&L reflects forex gains realised. The company also reclassified its contract manufacturing business (CPS) revenues into API and Formulations, which makes it difficult to analyse its segmental performance.
4. Himatsingka Siede:
Himatsingka in one derivative contract had mark to market losses of US$41.5m as on March 24, 2008 and no provision has been made since the company has filed a case in court against the concerned bank. In case of another derivative contract, mark to market loss of Rs1.58bn as on 30th June has not been provided for since the derivative contract is still open.
5. HCL Tech:
HCL Tech has normally had a very large hedge position compared to its revenue base. While the rupee was appreciating, the company reaped benefits of this and reported US$79.2m in Forex gains in FY07. The company has always maintained that it would prefer to lock-in a constant INR/US$ rate through hedging rather than suffer from the currency volatility.
However, the company unwound US$540m of hedges in Jun-08 and booked large Forex losses. We find this change in Forex policy surprising and the company has likely brought forward its potential FY09 FX losses to 4QFY08 through this change in policy.
6. JP Associates:
Jaiprakash Associates did not provide for FX losses on outstanding FCCBs of US$400m through its P&L and plans to provide for the FX losses/ gains at the end of the year.
7. Jet Airways:
Jet Airways changed its depreciation policy from WDV to SLM, and thereby wrote back Rs9.2bn into its P&L, which helped the company to report profits during the quarter. It also helped Jet to report higher net worth, which will help in keeping reported gearing low. This is a one-time exercise. Jet also capitalised Forex loss of Rs6.2bn on Forex debt and adjusted it against carrying value of fixed assets.
8. Prajay Engineers Syndicate:
Hyderabad based developer, reported a loss in its fourth quarter results against expectations of a profit. The company "lost" records for a project worth 40% of its annual revenues at the site office.
The company in its press release said - "After the year end, basic records relating to sale agreements / revenue and construction expenses of one of the Projects of property development were lost at the site office, Vishakhapatnam. The auditors in their report have stated that they were not able to verify the books and records relating to income of Rs1437.71m and relevant construction cost of Rs752.654m. Management is making all efforts to locate/ retrieve the lost records."
9. Ranbaxy:
Pharma major has mark to market losses of Rs9.09bn on forex derivative contracts, which have not been provided for because the company believes "the gain on fair valuation of underlying transactions against which the derivative transactions were undertaken amount to Rs10.3bn." This argument is against the principles of conservative accounting wherein mark to market losses are being offset against assumed future profits.
10. Reliance Communications:
Telecom Company has adjusted short term quarterly fluctuations in foreign exchange rates related to liabilities and borrowings to the carrying cost of fixed assets. The company adjusted Rs1.09bn of realized and Rs9.55bn of unrealized Forex losses in the above manner.
In addition, the company has not recognised Rs3.99bn of translation losses on FCCBs, since the FCCBs can potentially get converted, although the FCCBs are out of money. Adjusted for all the above, the company would have virtually no profits in 1QFY09.
11. Reliance Industries:
In continuance of its policy, adjusted "foreign currency exchange differences on amounts borrowed for acquisition of fixed assets, to the carrying cost of fixed assets…which is at variance to the treatment prescribed in AS11." Had AS11 been followed, profits for 1QFY09 would have been lower by Rs9.4bn (23% of reported net profits).
12. Sobha Developers:
South Indian developer changed its accounting norms in 1QFY09 for revenue recognition which facilitates revenue being recognized earlier in a project cycle. According to its press release, if the accounting policy had not been changed, the company's 1QFY09 PBT would have been lower by 20%.
Excerpts from the company's press release: "With effect from April 01, 2008 the Company has changed its accounting policy for revenue recognition for sale of undivided share of land (group housing) on the basis of certain minimum level of collection of dues from the customer and / or agreement for sale being executed rather than criteria relating to the project reaching a significant level of completion to align it with revenue recognition policy for sale of villa plots.
This has been resulted in additional revenue recognition and higher profit before taxes of Rs321m and Rs150m respectively during the quarter ended June 30, 2008."
13. Tata Motors:
Company has transferred 24% stake in Tata Automotive Components (TACO), a company with revenue of US$675 in FY07, to Tata Capital, a group company, and booked profit of Rs1.1bn in 1QFY09. Management has declined to disclose the valuation methodology.
Senior management of Tata Motors, in a conference call with analysts, said, "I would not be able to share with you the specific valuation methodology, except to say that the things are done by an independent reputed firm and based on the company's track record and the future business opportunity."
Tata Motors has also changed its methodology for calculating provisions for doubtful receivables, which resulted in higher reported EBITDA to the extent of Rs507m (10% of EBITDA).
14. TCS:
The software major increased its depreciation policy on computers from 2 years to 4 years. As a result, 1QFY09 PBT was higher by an estimated Rs500m (c.4% of net profit in 1QFY09). TCS follows cash-flow hedge accounting and till FY08, it used to recognise hedging gains on effective hedges in its revenue line, thus boosting the reported revenue growth and EBIT margin.
In FY08, TCS had Rs4.21bn from hedging gains, of which, Rs1.37bn was included in the revenue line. However, from 1QFY09, TCS will report all Forex losses/gains below the EBIT line in other income. Thus the losses it had on its hedge position will no longer be booked in the operating line.
15. Zee Entertainment:
Media company withdrew its buyback offer "for the time being" without assigning any other reason. This happened after SEBI made it mandatory that companies will have to complete the entire buy back within the stipulated time, if the stock is trading below the maximum buy back price at the end of the buyback period and the buyback amount has not been completed.
Nothing in this article is, or should be construed as, investment advice.
Source: CLSA.
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Friday, November 21, 2008 0
Saturday, November 15, 2008
Leadership position, strong financials and sound balance sheet make Hero Honda a good investment candidate for the long term
Double-digit inflation and high interest rates are not new for the 25-year-old two-wheeler manufacturer, Hero Honda Motors. The company has been able to wade through such tough times in the past and become a leading player in the domestic two-wheeler market (current market share: over 55 per cent). When the domestic motorcycle industry declined by 12 per cent in 2007-08, Hero Honda posted positive numbers (4 per cent growth in sales). For the latest quarter of the current fiscal, its topline grew by 35.60 per cent compared to the corresponding period last year—impressive given the credit crunch in the industry.
Its strengths include strong distribution network, new models, and focus on all segments of the market, including the rural vertical. Besides, the company enjoys a debt-free balance sheet.
Business performance. Hero Honda is strong in both urban and rural markets. Its key brands continue to drive volumes across segments. The company is increasing its presence in the premium segment with brands such as Hunk and CBZ X-treme that target urban youth. For the festive season, it has already launched four new models and more launches will be seen over the next few months.
While the overall rural penetration of two-wheelers is still low (10 per cent), the company has made inroads into the growing rural and semi-urban markets to increase sales. It is formulating region-specific modules.
To address financing issues, Hero Honda has tie-ups with regional retail financiers like Shriram Transport Finance and Fullerton India Credit. It also has agreements with Grameen Bank, co-operative banks and microfinance companies that are present in smaller towns and villages and have small loan portfolios.
The company has also expanded its distribution network by over 50 per cent over the last two years to 3,000 outlets (touching 3,500 this year).
Financial performance.
Hero Honda has been a debt free company for a few years now. The unsecured loan of Rs 132 crore from the Haryana government is interest free on account of sales tax deferment.
Valuation.
Hero Honda has a strong brand name, sound fundamentals and impressive figures over the last few quarters. The recent cut in cash-reserve ratio and repo rate, which could lead to lowering of lending rates, may support volume growth. Softening in commodity prices will help maintain operating margin growth. Its net profit margin is likely to improve as the benefits from lower excise liabilities and tax savings from its capacity in Uttarakhand (started production in April 2008) have started trickling in. Excise duty as percentage of gross sales is lower at 10.24 per cent for the last quarter as against 14.43 per cent in September 07 quarter.
Hero Honda’s increasing dividend and high dividend yield (2.3 per cent) is good news. The stock has also outperformed the BSE Sensex since January this year. At the current market price, it is trading 13.03 times its trailing 12 months’ earnings. Park here with a long term-ticket.
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Saturday, November 15, 2008 0
MUMBAI: PINC has suggested 'buy' on Rain Commodity for the 12-month price target of Rs 300. The robust performance of the cement business also inspires confidence in the outlook for the company and hence PINC has revised upwards estimates.
At the CMP of Rs122 the stock is trading at an EV/EBIDT and PE of 3 times and 1.7 times its CY09E earnings. Buoyant demand for CPC coupled with stable RPC prices afford strong margin protection and provide visibility for profits in the near term.
Also Read: Rain Commodities - Multibagger stock update
While calcined petroleum coke volumes were stable QoQ at 0.58 mn mt, realisations vaulted 35 per cent QoQ to $420 per million tonne, providing a boost to revenues. Higher cement despatches of 0.61mn mt (+17% QoQ) from its new Kurnool facility coupled with buoyant realisations at Rs4k/mt (+4% QoQ) resulted in healthy jump in revenues from cement division to Rs 230 crore (+22% QoQ).
Read: Multi Bagger: Rain Commodities
Sourcing of GPC at competitive rates ($210/mt) enabled Rain to offset the dip in profitability on account of cement operations at the new facility. OPM stood at 30.4 per cent (+490bps QoQ) while operational profits rose 45 per cent QoQ to Rs 400 crore. Despite a charge of Rs 44 crore on account of M-to-M losses on restatement of forex loans, the surge in operational profits was sufficient enough to boost net profits 81 per cent QoQ to Rs 170 crore.
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Monday, November 10, 2008
| Best Long Term Stocks For Regular Investment Posted: 09 Nov 2008 11:50 PM CST Outlook have recently published best long term stocks to invest in. These are the stocks which have potential to provide good returns with 3 years on investment horizon. You are suggested to buy... Click Link To Read Article >> |
| Outlook Money Best Long Term Stock Picks - Real Estate Price Correction Posted: 09 Nov 2008 11:55 PM CST Economic statements: 1. India's GDP growth will be around 7-7.5% - PM Manmohan Singh. Centre for Monitoring Indian Economy (CMIE), estimates that GDP growth will be around 8%. Whom you believe? 2.... Click Link To Read Article >> |
Monday, November 10, 2008 0
Sunday, November 9, 2008
Methodology. The companies that have been considered for selection are the ones with a market capitalisation of at least Rs 250 crore. Among them, companies with year-on-year (y-o-y) net sales and net profit growth of more than 10 per cent for the last three years and the last two quarters were retained. From this list, only companies that were able to maintain or increase their operating profit margin (OPM) and operating cash flow in the last three years were kept. The remaining stocks were examined individually based on qualitative and quantitative measures.
Bank of India (BOI)
BOI is perhaps the fastest growing public sector bank in India. Its operating profit and net profit in FY08 grew 53.81 per cent and 78.90 per cent y-o-y, respectively. For the last nine quarters, including the quarter ended September 2008 (Q2 FY09), its net profit grew at 50 per cent plus y-o-y, which indicates its sustained growth. Because of its strong presence in the industrialised states of Maharashtra and Gujarat, BOI has given advances to more productive sectors than its public sector peers. It has reduced its dependency on low-yielding treasury income and has focused on interest income and income from fees. Its gross non-performing assets have gone down from 3.72 per cent in FY06 to 1.68 per cent in FY08. Overseas operations contribute around 20 per cent of its business. The overseas branches help BOI raise deposits at rates lower than the domestic rates. It has some exposure to derivatives instruments overseas, but all of them have highly-rated Indian companies as underlying.
Bharti Airtel
Bharti Airtel is riding high on the overall growth of the telecommunication sector in India. Mobile penetration in India is still around 26 per cent, which leaves an enormous opportunity for growth. In this growing and competitive market, Bharti has been on top, in terms of subscriber base since May 2006. It has maintained both y-o-y net sales and net profit growth at around 40 per cent in the last nine quarters. The margins have declined due to stiff competition, but the volume growth from the untapped rural market compensates that. It has outsourced its non-core operations to focus on brand building and increasing subscriber base. In January 2008, it hived off its infrastructure business into a new subsidiary, Bharti Infratel, which will share the capital expenditure burden with other telecom players.
Emami
Emami has created a niche in the market by bringing products for its consumers that combine modern production techniques and ayurvedic principles. Its brands such as Boro Plus, Navratna Oil and Fast Relief are leaders in their respective categories. Its recently launched brand, Fair & Handsome, created an altogether new market. In the last eight years, its net sales and net profit registered 19 per cent and 23 per cent CAGR, respectively. Its OPM also improved over this period due to better pricing of products and cost management. The return on equity, which increased from 10.36 per cent in FY2000 to 35.78 per cent in FY08, also reflects its rising profitability. Emami is reaching deep inside rural India, which will lead to volume growth. Modern lifestyle has increased the risk of chronic ailments and consumers will demand natural products backed by research.
HDFC Bank
HDFC Bank has seen a y-o-y net profit growth of over 30 per cent for the last 34 quarters and has maintained a high OPM of around 60 per cent during the same period. Maintaining the same momentum, it has reported a net profit growth of 43.29 per cent and OPM of 62.61 per cent in Q2 FY09. The bank's merger with Centurion Bank of Punjab has not shown any significant impact till now, but it is expected to yield robust growth for the company in the future. Banks will start showing mark-to-market gain on their bond portfolio with interest rates expected to go down in the coming quarters.
Also, funds have dried up in the global markets—this will increase demand for credit from domestic banks. This means stable business in the future.
Indraprastha Gas (IGL)
The government's thrust on environment is putting more compressed natural gas (CNG) buses on road and rising fuel prices are prompting people to fit CNG kits to their cars. This is boosting IGL's CNG distribution business. Households and commercial establishments now prefer piped gas supply to conventional LPG cylinders as it is convenient and safe. This means a huge revenue jump for IGL's piped natural gas (PNG) distribution business.
IGL has been enjoying consistently high OPM—over 40 per cent—for the last 21 quarters. As a result, its return on equity has remained higher than 30 per cent in all the financial years, starting 2003. Even if it is not able to sustain such high margins in the long term, the volume growth will more than compensate for any dip. It is unlikely to face any gas supply constraint as it gets it on a priority basis as directed by the government. The IGL stock has limited its fall to 21 per cent as against Nifty's 54 per cent in the last 12 months. It is currently trading at seven times its earnings.
KS Oils
It leads the edible oil market in the north and north-eastern part of India through brands in mustard oil, refined oil and vanaspati. Its share in the Indian mustard oil market is 7 per cent, when 75 per cent of mustard oil is sold loose. Among brands, it has captured 25 per cent of the market. The company has also entered north and central India with an aggressive branding effort and greater retail push. Its net sales in FY08 was Rs 2,044 crore, implying 91.08 per cent growth over the previous year, backed by volume and high edible oil prices. Its y-o-y net sales growth in the first quarter of FY09 remained high—at 91 per cent over the previous quarter, though the margins were flat. KS Oils has secured its raw material supply by acquiring 50,000 acres of palm plantations in Indonesia, which will protect it from any price fluctuation in oil seeds. Also, this kind of backward integration will help improve the margins over sales.
Mphasis
MphasiS derives its revenues from application services, infrastructure technology outsourcing (ITO) and business process outsourcing that span industry verticals, such as banking and financial services, healthcare, transport and manufacturing. In Q2 FY09, Mphasis reported an impressive y-o-y sales growth of 54.59 per cent. It significantly improved the OPM by 273 basis points over the last quarter and, therefore, registered higher PAT growth of 128.74 per cent during the same period.
All its three business segments are registering healthy growth with its ITO business growing at 113 per cent. MphasiS is trying to reduce its dependence on the US, which contributed 67 per cent to its revenue in FY08. The current crisis in the financial sector may impact its revenue, but it will also throw up new opportunities as ailing banks will go for greater outsourcing in order to cut costs.
Titan Industries
Titan watches have built a strong brand and its diverse product range caters to masses as well as the premium segment, which is its success formula. Titan Industries' jewellery business, under the brand Tanishq, too, commands leadership position in the organised retail segment. It is going to smaller towns and rural areas under the brand Gold Plus.
In Q2 FY09, Titan Industries' net sales and net profit rose 53 per cent and 88 per cent y-o-y, respectively. In the last six years, Titan and Tanishq recorded a compounded annual growth rate (CAGR) of around 13 per cent and 40 per cent, respectively. Risks to business growth are low. Watch penetration in India is well below 30 per cent. Growth will continue and margins should improve as it sells more watches through its exclusive Titan showrooms, which is more profitable than the dealership model. Rise in gold prices could slow down jewellery sales. But, at higher prices, consumers will become more quality and value conscious and should go to organised stores, such as Tanishq, that guarantee quality, diverse range and standard pricing.
Sunday, November 9, 2008 0
This is not a comprehensive list of "Best books on stock markets" but a list of "very good books on stock markets" preferred by many.  Good Books on Stock Markets: 1. One up on Wall Street: Peter Lynch. This is a must read to learn about stock markets. 2. The Intelligent investor: Benjamin Graham. Warren Buffett learnt a lot by reading this book. 3. Security Analysis: Benjamin graham. This book is a must read for every value investor. This is "The Bible on value investing". 4. The Best Investment advice I ever received: Liz Claman. Simple investment lessons from stock market legends. 5. All about Stock market strategies: David brown and Kasandra Bentley. 6. Your Money and Your Brain: Jason Zweig. Psychology plays vital role in stock market movements especially over short term. This book is all about brain's role over your investment decisions. 7. Common Stocks and Uncommon Profits and Other Writings: Philip Fisher. 8. Wise investing made simple: Larry Swedroe. 9. Contrarian Investment strategies: David Dreman. Contra investors always make money due to their investment style and duration. But these investors needs extreme patience to make money. 10. Buffett: The Making of an American Capitalist: Lowenstein Roger. Read this book to know about the legendary investor. 11. The New Market Wizards: Conversations with America's top traders – Jack Schwager. 12. Lessons from the Greatest Stock Traders of All time: John Boik. Good book for traders. You will continue to lose money as long as you depend on "stock tips" and other short cuts. Use CNBC to know about latest business news but not for stock tips. Never believe in broker's tips. They will give these tips to all their customers. You will never make money by following herd. WE don't know how long this bear market will last but current crisis provided long term investors "once in a life time investment opportunity". Those who will accumulate good stocks on SIP basis throughout this bear phase will get very good returns. Many good stocks will not participate in the bear market rallies but they will give outstanding returns if you invest for long term. They will test your patience. |
Saturday, November 8, 2008
Garware-Wall Rope (GRWL) provides customized solutions to the Cordage and Infrastructure Industry both in India and worldwide.
Incorporated in 1976, Garware-Wall Ropes was promoted by Garware Filament Corporation and Wall Ind. Inc, US. In 1987, Wall Ind. divested its shareholding, which was taken up by the Garwares.
GRWL is now leading provider of applications based solutions for fishing, shipping, sports, and infrastructure projects. The products are manufactured to customer’s specification with an increasing share of branded products in all business segments.
The company with its diverse product portfolio has integrated manufacturing facilities and strong R&D, which continuously brings out new products making itself a one-stop shop for the customers. The company operates under two segments: - cordage division and geosynthetic division.
Cordage Business
In the Cordage business, the company is in the manufacturing of high end ropes and nets for mechanized and industrial fishing vessels of 100HP-15000HP, for industrial applications and fabricated products..
The fishing net market in India is estimated to be Rs 120 crore, while the international market is estimated to be $500 mn. Garware - Wall Ropes Ltd. caters to the requirements of 80 countries where fishing is a major industry and has earned recognition in the international market on the basis of its proven track record.
In India it has more than 80% market share in the mechanized fishing sector and 5% market share in he international market. Mechanized fishing is different from the traditional way of fishing in the sense that huge fishing nets are deployed in water through men and machines. The quality, weight, size are far better than the traditional fishing nets. GWRL’s name is considered a synonym for quality and service across every mechanized fishing base in the country. GWRL’s strong brand equity allows the company to counter competition, particularly from the unorganized sector and also fetch a 15-20% pricing premium.
Apart from fishing, it has growing presence in industries like sports, shipping and material handling.
In sports, the company’s products are used in almost all the cricket nets, tennis courts, ski protection nets, soccer nets and every game wherever nets are required.
Of the total Rs 284 crore sales of cordage division in 2006-07, the fishery segment constitutes nearly 53%, industrial segment (Shipping, Ports, Shipbuilding Yards, Stevedoring, Defense, Material Handling, Construction, Electricity Boards and various other Industrial Applications) constitutes nearly 35% and the balance sales comes from fabrication (speicalised products for fishery, sports and industrial applications) division. Nearly 58% of the total sales come from domestic market and the balance is from exports.
Promising Geosynthetic business
Geosynthetic means planar, polymeric, permeable/impermeable material which may be used in contact with the soil/rock and /any other geotechnical material in civil engineering applications. These products have application in Coastal protection, Railways, and roads. They provide increased safety and better productivity. With the user industry expected to post a robust growth, GWRL will be one of the direct beneficiaries. Currently this business contributes 16% of the total sales, which is expected to reach 25% in the next one year due to high growth in this division.
Applications are directly linked to the growth in various infrastructure areas In roads segment the company’s geosyntheic products are used for Reinforced soil walls, Asphalt Reinforcement, Sub reinforcement, Heavy Duty Pavements, slopes, embankment
Foundations etc.
In railway segment, the company’s geosyntheic products are laid under the layers of track bed. This product when laid keeps the strength of the track intact. Major advantage is that it improves bearing capacity of the tracks, reduces maintenance of ballast and the trains can operate without speed restrictions.
One of the geosynthetic product namely, rock fall boulder nets, are laid over the rocks on the roads to prevent the rock fall. These nets improve safety and eliminate traffic interruption.
The company provides various coastal protection systems, which eliminates soil erosion problem, improves coastal safety and reduces property losses.
With large investments made in infrastructure development, a growing market has been opened up for the company’s Geosynthetic segment.
The current order book for the geosynthetic division stands at Rs 110 crore which will get executed in the next one year. The Indian Railway’s research division has approved company’s products for its application in railway tracks. It is about to secure project worth Rs 50 crore on solid waste management in UP where Geosynthetic products will be used extensively.
The geosynthetic division sales for FY’06 stood at Rs 24 crore which doubled to Rs 56 crore in FY’07. With strong order book position and new orders in pipeline and tremendous growth in infrastructure sector, there is a strong visibility for this segment.
Slated to take up Turnkey projects
The company already provides wide variety of services and solutions along with the products. Now the company plans to provide turnkey solutions in the specific areas of water resource management and landfill engineering. In water resource management, the company provides with canal and reservoir lining to channelise the water. This reduces water logging, salination and ensures proper water distribution. Landfill engineering is a unique area where the company products are used to restrict the harmful water or waste of water. It ensures optimum air space utilization and eliminates ground water contamination.
Considering the importance of water conservation, there is an immense scope and opportunity in this segment. However since most of the action needs government initiative, it is difficult to predict the pace of growth in this segment. Also the company has nearly monopoly in this segment and has technical tie up with German company for landfill engineering products. The company has orders worth Rs 25 crore in this area.
Financials are consistent with growth in Indian industry
For the first half ended Sept 2007 Garware Wall Ropes (GWRL) reported a 26% increase in top line at Rs 97.69 crore. Operating profit margins improved by 140 basis points at 12.6% resulting in the operating profit going up by 41% at Rs 14.17 crore. Interest cost for the quarter increased 86% to Rs 3.92 crore, while depreciation cost was up 19% to Rs 2.76 crore.
The higher interest cost was due to increase in working capital requirement of the company in the first half. Often in the first half of the year, the domestic market remains slower and the growth starts to picking up in the last two quarters. So, during this period, exports are more. In export market, the working capital requirement is higher and hence the interest cost. The PBT of the company was up 23% at Rs 7.63 crore while PAT was up 21% at Rs 6.99 crore. Due to higher contribution from domestic market, second half will witness lower working capital requirement and lower interest costs.
For the year ended Mar’07, the net sales and PAT stood at Rs 339.72 crore (up 28%) and Rs 22.23 crore (up 50%) respectively.
Valuation
For the year ended Mar’08, we expect the company to report net sales and PAT of Rs 435.98 crore and Rs 30.75 crore respectively. This gives an EPS of Rs 13. At current market price of Rs 178, the P/E stands at 13.7 times. As the infrastructure development picks up pace and the company’s products find increasing acceptance in varied applications, the company’s growth rate will accelerate.
Saturday, November 8, 2008 0
Genus Power Infrastructures
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs275
Current market price: Rs110
Price target revised to Rs275
Result highlights
*
The Q2FY2009 results of Genus Power Infrastructures Ltd (GPIL) were a mixed bag. While the revenue growth was lower than our estimate, the profit was above our expectation due to a better-than-expected operating performance and a higher other income.
*
The net income from operations grew by 18.6% to Rs119.5 crore as against our estimate of Rs127.9 crore. The revenue growth was slower during the quarter due to slower-than-expected execution of project orders. The sales are expected to pick up in Q3FY2009 on the back of faster execution by the company.
*
The operating profit of the company was up by 29.9% to Rs22.2 crore resulting in the operating profit margin (OPM) of 18.6% during the quarter. The OPM improved by 162 basis points on a year-on-year (y-o-y) basis mainly due to a decline in the raw material cost as a percentage of sales.
*
The other income rose by 82.4% to Rs1.8 crore on account of interest accrual on deposits by the company.
*
The interest cost went up sharply by 52.3%, as the company has Rs200 crore of debt on books. The deprecation charge rose by 11.6% to Rs1.5 crore. Consequently, the net profit of the company rose by 27.5% to Rs11.7 crore, ahead of our estimate of Rs10.4 crore.
*
The company has an order book of Rs721 crore during Q2FY2009 as against Rs645 crore at the end of Q1FY2009. The company stands “L-1” bidder in works worth Rs1,405 crore.
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We are revising our estimates for the company mainly to reflect a lower revenue growth and a higher interest cost. Consequently we have lowered our profit estimate for FY2009 by 7.1% and that for for FY2010 by 7.5%.
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At the current market price the stock is attractively priced at 2.6x FY2009 fully diluted earnings per share (FDEPS). With a book to bill ratio of 1.5x we believe the current price of the stock does not capture a compounded annual growth rate (CAGR) of 36.9% in the profits over FY2008-10E. We remain positive on the prospects pf the company and recommend a Buy on the stock with a revised price target of Rs275 per share (5x FY2010 FDEPS).
Mahindra and Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs565
Current market price: Rs384
Price target revised to Rs565
Result highlights
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The Q2FY2009 results of Mahindra and Mahindra (M&M) are better than our expectations, mainly due to a higher other income. The stand-alone net sales of the company grew by 17.4% to Rs3,066 crore in the quarter. This growth was led by an overall volume growth of 13%. The automotive segment recorded a volume growth of 18.1%; the sales volume of the farm equipment (FE) segment grew by 4.1%.
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On a segmental basis, the automotive revenues rose by 12.4% to Rs1,921 crore (adjusting for octroi refund) whereas the FE division’s revenues grew by 28.6%. The profit before interest and tax (PBIT) margin in the automotive segment dropped drastically by 800 basis points to 6.9% during the quarter. The PBIT margin of the FE division witnessed a drop of 160 basis points to 10.9%. The overall operating profit margin (OPM) declined by 210 basis points to 8.5%, leading to a decline of 7.8% in the operating profit to Rs265.91 crore.
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On account of a higher other income, the adjusted net profit grew by 9.3% to Rs237.75 crore. After taking into account the extraordinary items (octroi refund, foreign exchange loss and profit on the sale of stake in Mahindra Holding and Finance [MHFL], the reported profit after tax (PAT) declined by 35% to Rs185.69 crore.
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On a consolidated basis, the total income (including the other income) grew by only 19.1% yoy to Rs7,741 crore. The consolidated profit before tax (PBT; before exceptional items and tax) declined by 10.3% yoy to Rs623 crore and the consolidated net profit (post-minority) dropped by 4.9% yoy to Rs373.3 crore.
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We expect the growth in the utility vehicle (UV) segment to slow down till the launch of the new UV, Ingenio. Overall, sales in the automotive and FE segments will be affected by the high interest rates and increase in excise duty on UVs. M&M’s core business remains under pressure and the company has huge capital expenditure (capex) plans which will lead to higher interest and depreciation charges. Segments other than automotive and FE contribute ~44% of the consolidated revenues and ~65% of the operating profits of the company.
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We continue to value M&M on a sum-of-the-parts basis, valuing the core business at Rs314 and the subsidiaries at Rs251. We maintain our Buy recommendation on the stock with a revised price target of Rs565.
Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs985
Current market price: Rs688
Price target revised to Rs985
Result highlights
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The consolidated revenues of Bharti Airtel grew by 6.3% quarter on quarter (qoq) and by 42.3% year on year (yoy) to Rs9,020.3 crore during Q2FY2009. The revenues of the mobile business grew by 5.3% qoq while that of the non-mobile business grew by 10.2% qoq in Q2FY2009.
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The operating profit margin (OPM) at 41% dropped from 41.5% in Q1FY2009. The earnings before interest, tax, depreciation and amortisation (EBITDA) margin declined because of a quarter-on-quarter rise of 16.8% in the network operating cost to Rs1,439.2 crore due to an increase in the national long distance (NLD) carriage charges, an increase in diesel prices and rural expansion. The operating profit stood at Rs3,699.3 crore, up 5% on a quarterly basis.
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The net profit grew by a mere 1.1% qoq and by 26.8% yoy to Rs2,046.3 crore due to a derivative and foreign exchange (forex) fluctuation loss of Rs586.2 crore (v/s a forex loss of only Rs150 crore in Q1FY2009) and an increase in the depreciation charge by 15% qoq to Rs1,154.9 crore.
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In terms of operational highlights of the mobile business, the average revenue per user (ARPU) declined by 5.4% qoq to Rs331. However, the total minutes of usage (MoU) marked a growth of 10.1% qoq to 11,583 crore minutes. In the non-mobile business, the ARPU increased by 0.8% to Rs1,147.
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Bharti Airtel added 8.1 million subscribers during the quarter, taking its subscriber base to 77.48 million and overall market share to 24.8%. The company was allocated spectrum in Tamil Nadu, Bihar and Karnataka during the quarter.
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We have modified our earnings estimate a little to account for the strong subscriber additions and lower ARPU. We have downgraded our FY2009 earnings estimate by 2% to Rs44.1 but maintained our earnings estimate for FY2010 at Rs54.7. At the current market price of Rs688, the stock trades at 12.6x FY2010 estimated earnings and 7.6x on enterprise value (EV)/EBITDA. We maintain our Buy call on the stock with a revised price target of Rs985.
Corporation Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs321
Current market price: Rs210
Results in line with expectations
Result highlights
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In Q2FY2009 Corporation Bank’s net profit grew by 18.7% year on year (yoy) to Rs191.5 crore, which is largely in line with our estimate of Rs178.0 crore.
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The net interest income (NII) of the bank increased by 10.3% yoy to Rs406.7 crore during the quarter on the back of a robust 33.3% year-on-year (y-o-y) growth in advances. However, a significant 42-basis-point contraction in the net interest margin (NIM) restricted the NII growth to 10.3% yoy.
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The NIM for the quarter has come in at 2.43%, down by 42 basis points from 2.85% in Q2FY2008 but flat sequentially. The y-o-y contraction in the NIM was a result of an increase in the cost of funds that outweighed the increase in the yields on the assets.
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The non-interest income registered a paltry growth of 3.2% yoy on account of a 41.5% decline in the treasury gains. Notably, the core fee income (commissions, exchange & brokerage and foreign exchange [forex] income) increased by a healthy 34.3% yoy, mitigating the impact of the decline in the treasury gains.
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The operating expenses declined by 5.6% yoy to Rs229.5 crore during the quarter from Rs243.2 crore in Q2FY2008. The operating expenses were contained primarily due to a 24.1% decline in the staff expenses even as the other operating expenses grew by 14.5% yoy.
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The provisions during the quarter increased marginally by 3.0% yoy to Rs55.8 crore vs Rs54.2 crore in Q2FY2008 on account of a provision write-back of Rs3.1 crore towards investment depreciation coupled with lower provisioning towards standard assets.
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In Q2FY2009, the asset quality of the bank remained largely stable on a sequential basis with the percentage of gross non-performing assets (%GNPAs) at 1.36% and the percentage of net non-performing assets (%NNPAs) at 0.40%. Importantly, the provision coverage declined to 70.7% from 81.7% in Q2FY2008 and 75.7% in Q1FY2009.
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The business growth during the quarter was well above the industry growth. The advances stood at Rs43,547 crore, up 33.3% yoy, while the deposits stood at Rs60,278 crore, up 31.8% yoy. Importantly, the current account and savings account (CASA) ratio of the bank slipped to 25.6%, down 390 basis points yoy, which is worrisome.
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As on September 30, 2008 the capital adequacy ratio (CAR) stood at a comfortable 11.75% compared with the year-ago level of 13.58%. The tier-I CAR stood at 9.60%, indicating that the bank has enough headroom to raise tier-II capital.
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We are fine-tuning our estimates in view of the H1FY2009 results of the company. At the current market price of Rs210, the stock trades at 3.8x 2009E earnings per share (EPS), 2.2x 2009E pre-provisioning profit (PPP) and 0.6x 2009E book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs321.
Punjab National Bank
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs587
Current market price: Rs452
Results exceeds expectations
Result highlights
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Punjab National Bank (PNB) has reported a profit after tax (PAT) of Rs707.1 crore for Q2FY2009, indicating a growth of 31.3% during the quarter. The PAT is above our estimate of Rs611 crore.
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The net interest income (NII) for the quarter stood at Rs1,712.3 crore, up a strong 32.6% year on year (yoy). The growth in the NII was primarily driven by a healthy growth in the advances and an expansion in the margin.
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The reported net interest margin (NIM) witnessed an expansion of 30 basis points to 3.78%. The expansion was the result of a hike in the lending rates (yields expanded by 134 basis points in Q2FY2009) and was partly offset by a higher cost of funds (a 53-basis-point increase). The bank has announced a 50-basis-point cut in its prime lending rate (effective immediately) and peak deposits rates (effective from December 1, 2008).
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The non-interest income too registered a healthy 41.7% growth yoy to Rs662.8 crore. The strong growth, despite a weaker treasury performance, was achieved on the back of a robust growth in fee income and recoveries.
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The operating expenses increased by 11.4% yoy to Rs1,007.2 crore. The increase was primarily driven by the other operating expenses (up 20.9% yoy) as the staff expenses grew by a moderate 7.5% yoy. The bank made a provision of Rs100 crore towards wage revision during the quarter.
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Interestingly, the provisions and contingencies jumped four fold to Rs317.7 crore. The spike in the provisions was due to higher NPA provisions and partly due to a lower base in the year-ago quarter.
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The advances registered a growth of 28.5% yoy to Rs130,432 crore while the deposits were up by 24.2% yoy to Rs186,315 crore. The current account and savings account (CASA) ratio declined by ~500 basis points to 38.8% but remained one of the best among peers.
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The asset quality improved yoy both on absolute and relative bases. The gross non-performing assets (GNPAs) in percentage terms stood at 2.37%, significantly down from 4.57% a year ago, while the net non-performing assets (NNPAs) in percentage terms declined to 0.42% from 1.88% a year ago.
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The capital adequacy ratio (CAR) as at the end of Q2FY2009 stood at a comfortable 13.64% based on the Basel II requirements compared with 12.58% (based on Basel I requirements) a year ago.
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We have revised our estimates for FY2009 upwards while we maintain our FY2010 estimates, after factoring in the additional information. At the current market price of Rs452, the stock trades at 5.7x 2009E earnings per share (EPS), 3.0x 2009E pre-provisioning profit (PPP) per share and 1.1x 2009E book value (BV) per share. We maintain our Buy recommendation and our price target on the stock.
Tuesday, November 4, 2008
Why BSE Sensex crossed 10,000 mark? Have you find any significant changes in the fundamentals of Indian economy? Will FIIs stop selling Indian stocks? Don't be fooled by the statements of FM and industry heads.
This is a classic bear market rally. Just see the top 10 gainers list. You will find no significant reason behind the rise in at least 5 stocks means just short covering. Current markets are only suitable for traders and ultra short term investors who can spot the rallies. Long term investors will be irritated by frequent rise and fall in even good stocks. This trend will continue for some more months. In between, we will get sharp rallies to 12,000 and shock treatments to below 7,000 levels. Prepare for uncertainty and plan accordingly.
Government should concentrate on how to stop dollar out flows, how to raise domestic consumption and protect exports or job losses. Easiest thing among the three is "stimulating domestic consumption by providing growth opportunities and creating new jobs". That is what China is now doing and India should follow this strategy immediately. It is very difficult for us to protect export sectors due to severe global crisis. It is better to concentrate on domestic consumption.
My GDP growth target for India is around 6.5-7%. I don't believe in the statements of RBI and Finance Minister.
Significant statements on economy:
1. "Global crisis had adversely impacted corporates, banks and investor sentiment" Indian Prime Minister Manmohan Singh. PM urged industrial bodies not to go for large scale layoffs.
2. "I think it's definitely a recession at this point. How deep, how steep and long it's going to be is uncertain. We don't know if it's going to be a garden variety recession or something steeper. I think it's most likely to be of a fairly moderate size," – US policy maker Laker.
3. US economic recession will continue till end of 2009 - A survey of top American economists. They failed to predict current crisis despite sweeping Nobel Economics awards in recent years.
Financial statistics:
1. Total loss for Indian mutual fund industry in October is around Rs 1 lakh crore. Industry lost 20% of its AUM. Reliance Mutual fund lost 30% of Asset Under Management.
2. World stock markets lost $5.79 trillion in October – Biggest ever monthly loss in the history. Stock markets lost $4 trillion in September – second biggest monthly loss in history. Equity investors lost $16.2 trillion in 2008. Hungary is the worst performing stock market (43% loss) in October while Pakistan is the performer (4% gain) in the last month.
3. India's exports growth slumped to 10.4% in October – 18 month low. Trade deficit increased by 53% in April-September 2008.
4. 20% England households will have more mortgage debt than the value of their property by 2010. Shocking news. This negative equity will collapse the consumption capacity of the people. UK will be severely affected due to this crisis than any other major European country. England will see 1% contraction in GDP 2009.
5. China's manufacturing output is falling at the fastest rate since figures began to be recorded. It will be very difficult for any exports based industry to recover from this crisis in the next 6 months.
Positive economic news:
1. Crude oil price fell to below $65 per barrel levels despite OPEC oil cut news due to less demand.
2. ICICI bank rating is stable – Moody's.
3. ATF price for domestic airlines will be further reduced by Rs 2,100 per kilo litre.
4. Cash rich The Religare Enterprises- promoted mutual fund, Religare Aegon, plans to buy the Lotus India mutual fund.
Negative financial news:
1. American Express lay off 200 Indian employees. 10% of workers at Tirupur textile units will lose jobs. Aviation, Textiles, Jewellery, IT, Realty and Auto sector employees will feel the heat in the coming months. Most of the Indian Companies may go for salary reduction instead of large scale layoffs in sectors like IT and aviation.
2. Retail home loan defaults are on the rise in India.
Global economic slowdown:
1. USA: Manufacturing in United States contracted at the fastest pace in 26 years. This much worse than analyst's estimates and is the lowest level since 1982. My range for Dow Jones is 6,000-6,500 but investors still do not understand the seriousness of this crisis. This crisis is much worse than 2001 and 1991 recessions. Ford motors car sales fell by 30%.
2. Europe: "Our economy probably entered a recession this year and will stagnate in 2009" – European Union. EU showing worst economic growth after 1993. Economic growth fell to 0.2% in the second quarter. Job losses are at the fastest rate since 2002.
3. Commodities: Price drop is indicating that US is heading for longest recession since 1981. Industrial raw materials fell at an annual rate of 56% last week. Worst price drop since 1949.
4. UK: Manufacturing sector shrunk for the six month in row in October.
5. US electronic retailer Circuit City closed 20% of shops and lay off 17% of its employees. This is surprisingly shocking news before Christmas shopping season.
6. USA: AIG is still feeling heat despite $143 bailout package. What will Government do? Will it continue to fund?
Company results analysis:
1. Tube Investments of India: Excellent results. Electric vehicles maker announced 50% increase in sales and 160% rise in net profit. This is a must have stock in any "emerging investor portfolio". Long term investors can accumulate on every fall. "Nano" door frame contract and falling steel prices are big positives. Future growth will come from electric vehicles.
CMP: 29; P/E: 6; Book value: 39.
2. Southern Online Bio Technologies:
Excellent results and turnaround story. Bio-diesel company announced 180% increase in sales while net profit is 0.83 crore Vs net loss of Rs 0.4 crore. Visionary investors should follow this stock. This is the first listed manufacturing company of bio-diesel in India. High valuations are a concern. I am blindly accumulating this scrip with a 2-3 year view while I am taking risk with IKF technologies with a 6-7 year view. I will become either a fool or a visionary due to these risky long term investments.
CMP: 11.3 (BSE); P/E: 28; Book value: 17.
3. Pennar Industries: Good results. Company reported 34% increase in sales and 74% rise in net profit. It is planning to enter railway wagon business (safe) to continue its growth momentum. Investors can accumulate it around Rs 20.
CMP: 30 (BSE); P/E: 9.7; Book value: 11.
4. Chowgule Steamships: Good results. 100% increase in sales and 200% rise in net performance. Baltic Exchange Dry Index lost 90% value in 2008 and shipping industry will continue to suffer. We have to see how this small player will face global recession. Company is sitting on huge debt.
5. Era Infra Engineering: Decent results. Company announced 60% increase in sales and 40% rise in net profit.
Good performance: Havells India, Gayatri projects, Logix Microsystems and Hawkins Cooker.
Poor Performance: Indoco Remedies (worst performance), IVR Prime, KEI Industries, Shopper' Stop, Royal Orchid Hotels, Puravankara Projects and Gokaldas Exports.
Good articles on economy:
1. How to cure American economic crisis?
Global economy is moving from bad to worse and bailout packages are not yielding significant results. FIIs will continue to sell and consumption will fall across the world. Long term investors should keenly follow best companies in good sectors which recently announced wonderful results and accumulate them on every major fall to build a great portfolio.
Tuesday, November 4, 2008 0