ABG Shipyard
Buy/Medium Risk
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
Friday, April 13, 2007
STOCK UPDATE
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
Q4FY2007 FMCG earnings preview & BHEL
SHAREKHAN SPECIAL
Q4FY2007 FMCG earnings preview
Key points
* Backed by a pick-up in rural demand, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power.
* Rising input prices is a concern for the industry. Palm oil prices have increased by around 20% in the last three months but LAB prices continue to remain steady. Price increases as well as cost savings would help the companies to maintain their margins.
* We expect the profit of Hindustan Lever Ltd (HLL), the market leader in the segment, to grow by 18.8% year on year (yoy) backed by a strong growth in the home and personal care (HPC) segment and price increases in key products. We expect the margin to improve from 11.8% in Q1CY2006 to 12.8% in Q1CY2007, which would be primarily due to the price hikes taken in many of its products as well as improved product mix.
* ITC's profits are expected to grow by a strong 24% yoy. We expect the growth to be broad-based with the magnitude of losses in the non-FMCG business coming down. The imposition of the value-added tax (VAT) is having a dampening effect but we believe any decline is a good opportunity to buy.
* The long-term potential of this sector appears favourable with higher disposable incomes and increased spending. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth the sector still looks attractive.
STOCK UPDATE
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
NTPC capex plan augurs well for BHEL
Key points
* The near-term order flow for Bharat Heavy Electricals (BHEL) is expected to be robust in view of the ambitious capacity addition plans of the power utilities, especially National Thermal Power Corporation (NTPC). NTPC has announced its provisional results and plan for the next ten years where it plans to increase its capacity by 22,000 megawatt (MW) during the 11th Five-Year Plan and by 25,000MW in the 12th Five-Year Plan, taking its total capacity to over 75,000MW from 27,404MW at present. NTPC, which had awarded contracts for 3,600MW last year, has already placed orders for projects with aggregate capacity of about 11,300MW.
* More importantly, NTPC's capital expenditure (capex) budget of Rs12,792 crore for this fiscal is 63% higher than last year's Rs7,820 crore. Four straight years of 100% realisation on its billing has clearly improved its cash flows and strengthened its finances considerably. NTPC had free cash of about Rs12,000 crore as on December 31, 2006, hence the capex budget looks quite achievable.
* Furthermore, over the next 18-24 months, we expect the other power utilities to award projects worth around Rs76,000 crore for around 38,000MW of capacity.
* Over half of the total orders to be awarded in the next 18-24 months are in the category of 250/500MW units, where BHEL is extremely competitive. So far BHEL has not lost a single 500MW project in India, despite competition from Russian, Korean and Chinese companies. NTPC as well as the state utilities award many of the 500MW orders to BHEL on a negotiated basis. Thus, it is highly likely that BHEL may bag around 19,500MW, or Rs39,550 crore, worth of new orders.
Q4FY2007 FMCG earnings preview
Key points
* Backed by a pick-up in rural demand, the fast moving consumer goods (FMCG) sector has seen the volume growth getting better every quarter. The revenue growth for the current quarter is likely to be driven by volume growth as well as improved pricing power.
* Rising input prices is a concern for the industry. Palm oil prices have increased by around 20% in the last three months but LAB prices continue to remain steady. Price increases as well as cost savings would help the companies to maintain their margins.
* We expect the profit of Hindustan Lever Ltd (HLL), the market leader in the segment, to grow by 18.8% year on year (yoy) backed by a strong growth in the home and personal care (HPC) segment and price increases in key products. We expect the margin to improve from 11.8% in Q1CY2006 to 12.8% in Q1CY2007, which would be primarily due to the price hikes taken in many of its products as well as improved product mix.
* ITC's profits are expected to grow by a strong 24% yoy. We expect the growth to be broad-based with the magnitude of losses in the non-FMCG business coming down. The imposition of the value-added tax (VAT) is having a dampening effect but we believe any decline is a good opportunity to buy.
* The long-term potential of this sector appears favourable with higher disposable incomes and increased spending. We believe with strong free cash flows, high return on capital employed (RoCE) and sustainable growth the sector still looks attractive.
STOCK UPDATE
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,470
NTPC capex plan augurs well for BHEL
Key points
* The near-term order flow for Bharat Heavy Electricals (BHEL) is expected to be robust in view of the ambitious capacity addition plans of the power utilities, especially National Thermal Power Corporation (NTPC). NTPC has announced its provisional results and plan for the next ten years where it plans to increase its capacity by 22,000 megawatt (MW) during the 11th Five-Year Plan and by 25,000MW in the 12th Five-Year Plan, taking its total capacity to over 75,000MW from 27,404MW at present. NTPC, which had awarded contracts for 3,600MW last year, has already placed orders for projects with aggregate capacity of about 11,300MW.
* More importantly, NTPC's capital expenditure (capex) budget of Rs12,792 crore for this fiscal is 63% higher than last year's Rs7,820 crore. Four straight years of 100% realisation on its billing has clearly improved its cash flows and strengthened its finances considerably. NTPC had free cash of about Rs12,000 crore as on December 31, 2006, hence the capex budget looks quite achievable.
* Furthermore, over the next 18-24 months, we expect the other power utilities to award projects worth around Rs76,000 crore for around 38,000MW of capacity.
* Over half of the total orders to be awarded in the next 18-24 months are in the category of 250/500MW units, where BHEL is extremely competitive. So far BHEL has not lost a single 500MW project in India, despite competition from Russian, Korean and Chinese companies. NTPC as well as the state utilities award many of the 500MW orders to BHEL on a negotiated basis. Thus, it is highly likely that BHEL may bag around 19,500MW, or Rs39,550 crore, worth of new orders.
Thursday, April 12, 2007
Idea Cellular
Initiate at Buy: Free from Shackles, Poised for Growth
> Initiate coverage at Buy/Low Risk — Our DCF-based target price of Rs112 implies a target valuation of 11.6x FY09E EV/EBITDA – in line with that of Bharti. We believe Idea’s relatively undiluted exposure to India’s wireless growth, its higher growth rates (FY07-09E EPS CAGR of 47.7%) and long-term M&A possibilities make it a better proxy for Bharti than is RCOM.
> Leverage to wireless growth restored — Post its restructuring and IPO, Idea is placed to expand and deepen its network in what is essentially a supply-driven market (FY10E penetration of 32.8%). Roll-outs in three new circles have done well; two more rollouts are due based on spectrum. Margins will soften with new rollouts, but recover gradually to generate FY07-09E EBITDA CAGR of 42.6%.
> Strong regional player — Idea Cellular has a national market share of 8.7% (Feb-07). More importantly, its strong presence in the eight old circles with 18.2% share and top-three ranking in six of them indicate inherent strengths. Besides, respectable key performance indicators (KPIs), which imply rational competitive behaviour, provide a boost to our confidence in Idea’s ability to achieve NAV accretion from new rollouts.
> Key risks — Delays in procuring spectrum impacting the rollout timetable and project cost overruns remain the key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.
Buy/Low Risk 1L
Price (10 Apr 07) Rs94.90
Target price Rs112.00
Expected share price return 18.0%
> Initiate coverage at Buy/Low Risk — Our DCF-based target price of Rs112 implies a target valuation of 11.6x FY09E EV/EBITDA – in line with that of Bharti. We believe Idea’s relatively undiluted exposure to India’s wireless growth, its higher growth rates (FY07-09E EPS CAGR of 47.7%) and long-term M&A possibilities make it a better proxy for Bharti than is RCOM.
> Leverage to wireless growth restored — Post its restructuring and IPO, Idea is placed to expand and deepen its network in what is essentially a supply-driven market (FY10E penetration of 32.8%). Roll-outs in three new circles have done well; two more rollouts are due based on spectrum. Margins will soften with new rollouts, but recover gradually to generate FY07-09E EBITDA CAGR of 42.6%.
> Strong regional player — Idea Cellular has a national market share of 8.7% (Feb-07). More importantly, its strong presence in the eight old circles with 18.2% share and top-three ranking in six of them indicate inherent strengths. Besides, respectable key performance indicators (KPIs), which imply rational competitive behaviour, provide a boost to our confidence in Idea’s ability to achieve NAV accretion from new rollouts.
> Key risks — Delays in procuring spectrum impacting the rollout timetable and project cost overruns remain the key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.
Buy/Low Risk 1L
Price (10 Apr 07) Rs94.90
Target price Rs112.00
Expected share price return 18.0%
ABG Shipyard - CitiGroup
Buy: Raising Estimates on Improved Earnings Visibility
> What's new — ABG Shipyard recently announced that it has secured an order worth US$139m from Essar Shipping for the construction of 4 bulk carriers. This follows the US$13m repeat order that the company recently won for the construction of one APS tug vessel for Lamnalco, Cyprus.
> Order visibility improves — ABG's total unexecuted order book now stands at c.Rs33bn (5x FY07E sales) vs. Rs25bn earlier. With order backlog extending well into FY10 and orders for the company's upcoming Dahej facility yet to be completely tied up (5 slots are still available even after the recent order wins), earnings visibility for the company over the next 3 years has improved significantly – we expect ABG to deliver an EPS CAGR of 46% over FY07-09E.
> Revising FY09E earnings by 21% — We are raising our FY09E earnings by 21% factoring in improved earnings visibility following the order wins; FY08E earnings, which would not be affected by the Dahej expansion, remain relatively unchanged. Our earnings forecasts do not currently factor in any upside from yet-to-be announced rig orders. However, these are unlikely to have any significant impact on FY09 performance.
> Maintain Buy/Medium Risk — We believe fundamentals for Indian shipbuilders remain strong, driven by: (1) the robust E&P cycle ensuring strong demand in the OSV segment and (2) the continued tightness in the global shipbuilding sector. ABG's expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle. Maintain Buy / Medium Risk with a target price of Rs430.
Buy/Medium Risk 1M
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
> What's new — ABG Shipyard recently announced that it has secured an order worth US$139m from Essar Shipping for the construction of 4 bulk carriers. This follows the US$13m repeat order that the company recently won for the construction of one APS tug vessel for Lamnalco, Cyprus.
> Order visibility improves — ABG's total unexecuted order book now stands at c.Rs33bn (5x FY07E sales) vs. Rs25bn earlier. With order backlog extending well into FY10 and orders for the company's upcoming Dahej facility yet to be completely tied up (5 slots are still available even after the recent order wins), earnings visibility for the company over the next 3 years has improved significantly – we expect ABG to deliver an EPS CAGR of 46% over FY07-09E.
> Revising FY09E earnings by 21% — We are raising our FY09E earnings by 21% factoring in improved earnings visibility following the order wins; FY08E earnings, which would not be affected by the Dahej expansion, remain relatively unchanged. Our earnings forecasts do not currently factor in any upside from yet-to-be announced rig orders. However, these are unlikely to have any significant impact on FY09 performance.
> Maintain Buy/Medium Risk — We believe fundamentals for Indian shipbuilders remain strong, driven by: (1) the robust E&P cycle ensuring strong demand in the OSV segment and (2) the continued tightness in the global shipbuilding sector. ABG's expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle. Maintain Buy / Medium Risk with a target price of Rs430.
Buy/Medium Risk 1M
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
India Economics
Feb Industrial Production – Growth remains strong up 11%; it could result in one last policy hike
➤ Feb Industrial production – in line with expectations: Industrial production rose 11% in Feb with growth led by manufacturing, up 12%; mining up 6.3%; and electricity came in surprisingly lower at 3.3% as compared with an average of 7%+ in the past few months. Other highlights include strong growth in capital goods (18.2%), basic (10.4%) and intermediate goods (13.7%). Consumer non-durables remained buoyant at 9.7%, but growth in durables came in at 1.6% - partially attributed to the base effect. Overall industrial growth during Apr-Feb was 11% and bodes well for the government's 9.2% GDP estimate for FY07.
➤ So will the RBI hike in or around its April 24 Policy? Although we expect inflation to trend below 6% from the week ending Mar 30 (data due tomorrow), we think there is a 50:50 chance that the RBI will hike its policy rates once more given that inflation is likely to remain over its target range of 5%-5.5% till the week ending May 5. Further, the RBI remains concerned on trends in money supply (22%) and bank credit (29%). While we expect policy rates to peak shortly, we maintain that the RBI will continue to use the CRR to keep liquidity tight, but could lower SLR in 2H07 to ensure credit availability for the real sector.
➤ Maintaining our macro forecasts: The near-term outlook is a bit clouded given the RBI’s recent tightening measures coupled with the government’s semi-regressive measures to dampen inflationary expectations (price controls and export bans on commodities such as cement, steel, iron-ore, etc). However, given the continuation of the key economic growth drivers coupled with the uptrend in both savings and investment both touching new highs of 32.4% and 33.8% of GDP, respectively, we expect GDP growth to sustain around the 9%
level for FY08. Key risks would be politics and much further tightening.
➤ Feb Industrial production – in line with expectations: Industrial production rose 11% in Feb with growth led by manufacturing, up 12%; mining up 6.3%; and electricity came in surprisingly lower at 3.3% as compared with an average of 7%+ in the past few months. Other highlights include strong growth in capital goods (18.2%), basic (10.4%) and intermediate goods (13.7%). Consumer non-durables remained buoyant at 9.7%, but growth in durables came in at 1.6% - partially attributed to the base effect. Overall industrial growth during Apr-Feb was 11% and bodes well for the government's 9.2% GDP estimate for FY07.
➤ So will the RBI hike in or around its April 24 Policy? Although we expect inflation to trend below 6% from the week ending Mar 30 (data due tomorrow), we think there is a 50:50 chance that the RBI will hike its policy rates once more given that inflation is likely to remain over its target range of 5%-5.5% till the week ending May 5. Further, the RBI remains concerned on trends in money supply (22%) and bank credit (29%). While we expect policy rates to peak shortly, we maintain that the RBI will continue to use the CRR to keep liquidity tight, but could lower SLR in 2H07 to ensure credit availability for the real sector.
➤ Maintaining our macro forecasts: The near-term outlook is a bit clouded given the RBI’s recent tightening measures coupled with the government’s semi-regressive measures to dampen inflationary expectations (price controls and export bans on commodities such as cement, steel, iron-ore, etc). However, given the continuation of the key economic growth drivers coupled with the uptrend in both savings and investment both touching new highs of 32.4% and 33.8% of GDP, respectively, we expect GDP growth to sustain around the 9%
level for FY08. Key risks would be politics and much further tightening.
Post Market April 12th, 07
In line with the weakness in the global indices the domestic market slipped in early trades, as the investors were cautious ahead of the announcement of key results. The Sensex opened with a negative gap of 55 points at 13128. The index tumbled 152 points in early trades on heavy selling in banking and auto stocks. The market managed to pare some losses as buying emerged at lower levels but remained in negative territory. The market steadily lost momentum as the trading session progressed and slipped on selling in heavyweight, metal, banking, fast moving consumer goods and public sector unit stocks. The Sensex finally ended the session with losses of 69 points at 13114, while the Nifty shed 33 points and closed at 3830.
The market breadth was weak. Of the 2,628 stocks traded on the BSE, 1,090 stocks advanced, 1,464 stocks declined and 74 stocks ended unchanged. Most of the sectoral indices ended in the red. The BSE Metal Index led the slump and closed weaker by 2.24% at 9122 followed by the BSE PSU Index (down 1.31% at 6023), the BSE FMCG Index (down 1.28% at 1788) and the BSE Bankex (down 1.26% at 6470).
Among the Sensex stocks nine stocks advanced and 21 stocks declined during the day. ONGC slumped 3.13% at Rs853, Tata Steel shed 3.11% at Rs496, Ranbaxy declined 2.94% at Rs335, HDFC lost 2.92% at Rs1,537, Maruti Udyog shed 2.86% at Rs760, ITC fell 2.74% at Rs156, HDFC Bank slipped 2.26% at Rs958, Hero Honda plunged 1.89% at Rs629 and Tata Motors was down 1.63% at Rs710. Among the select gainers Bajaj Auto added 3.03% at Rs2,349, Infosys advanced 2.57% at Rs2,044 and Grasim gained 1.70% at Rs2,259.
Among the metal stocks Sesa Goa tanked 4.94% at Rs1,663, Jindal Steel slumped 4.01% at Rs2,501, Tata Steel dropped 3.11% at Rs496, Hindustan Zinc shed 2.54% at Rs684 and Nalco was down 2.29% at Rs241.
IFCI was the most actively traded counter with volumes of over two crore shares on the BSE followed by Orbit Corporation (1.44 crore shares), Reliance Natural Resources (53.53 lakh shares), Gremach Infrastructure (39.88 lakh shares) and Idea Cellular (39.57 lakh shares).
Value-wise Orbit Corporation clocked a turnover of Rs185 crore on the BSE followed by India Bulls Real Estate (Rs115 crore), Tata Steel (Rs112 crore), Mind Tree (Rs91 crore) and India Bulls (Rs90 crore).
The market breadth was weak. Of the 2,628 stocks traded on the BSE, 1,090 stocks advanced, 1,464 stocks declined and 74 stocks ended unchanged. Most of the sectoral indices ended in the red. The BSE Metal Index led the slump and closed weaker by 2.24% at 9122 followed by the BSE PSU Index (down 1.31% at 6023), the BSE FMCG Index (down 1.28% at 1788) and the BSE Bankex (down 1.26% at 6470).
Among the Sensex stocks nine stocks advanced and 21 stocks declined during the day. ONGC slumped 3.13% at Rs853, Tata Steel shed 3.11% at Rs496, Ranbaxy declined 2.94% at Rs335, HDFC lost 2.92% at Rs1,537, Maruti Udyog shed 2.86% at Rs760, ITC fell 2.74% at Rs156, HDFC Bank slipped 2.26% at Rs958, Hero Honda plunged 1.89% at Rs629 and Tata Motors was down 1.63% at Rs710. Among the select gainers Bajaj Auto added 3.03% at Rs2,349, Infosys advanced 2.57% at Rs2,044 and Grasim gained 1.70% at Rs2,259.
Among the metal stocks Sesa Goa tanked 4.94% at Rs1,663, Jindal Steel slumped 4.01% at Rs2,501, Tata Steel dropped 3.11% at Rs496, Hindustan Zinc shed 2.54% at Rs684 and Nalco was down 2.29% at Rs241.
IFCI was the most actively traded counter with volumes of over two crore shares on the BSE followed by Orbit Corporation (1.44 crore shares), Reliance Natural Resources (53.53 lakh shares), Gremach Infrastructure (39.88 lakh shares) and Idea Cellular (39.57 lakh shares).
Value-wise Orbit Corporation clocked a turnover of Rs185 crore on the BSE followed by India Bulls Real Estate (Rs115 crore), Tata Steel (Rs112 crore), Mind Tree (Rs91 crore) and India Bulls (Rs90 crore).
Market Close: April 12th, 07
Tracking the global trends, Indian indices had weak session for the second day. Indices traded on a weak note since the start of the trade. Profit booking was seen across the board except selective stocks in Software, Pharma and Airlines where there was some buying interest. IT major Infosys firmed up further as every one awaits the giants results which is due tomorrow. The key economic data of February 2007 industrial production output rises to 11.1% VS 8.8%, which shows no signs of slowdown in the economy. Asian markets ended in mixed where as European markets currently trading in red.
Sensex closed down 69 points at 13113.81. Weighing on the Sensex were losses in ONGC (852.5,-3 percent), TISCO (495.95,-3 percent), Ranbaxy (335.15,-3 percent), HDFC (1536.95,-3 percent) and Maruti (759.8,-3 percent). Losses are restricted by gains in Bajaj Auto (2349.3501,+3 percent), Infosys (2043.65,+3 percent), Grasim (2258.6499,+2 percent), NTPC (159.9,+1 percent) and Satyam (446.1,+1 percent).
Infosys numbers are due tomorrow and a lot is being made of it. Guidance expected is about 22- 28% for bottomline growth next year. Valuations at 24 X FY 08 certainly not enthusing in the current environment. So better to be careful here. There are short positions and that may limit the downsides.
Jet Airways India Ltd and Sahara Airlines have settled their dispute with regard to the Share Purchase Agreement of January 18, 2006. Jet is set to acquire Sahara Airlines for a lump sum price of Rs 1450 cr. Rs 500 cr has already been paid. Rs 400 cr is payable immediately no later than April 20, 2007. The balance Rs 550 cr is payable in four interest free annual equal instalments commencing on or before March 30, 2008. Jet closed up by 2.83% and its peer Deccan Aviation ended up 10%.
Telecom stocks closed in red on profit taking . Sustaining its aggressive growth in subscriber additions, the GSM-based cellular industry has added over 61 lakh subscribers in March with Bharti Airtel capturing 30.59% of the market share. With this, the all-India GSM subscriber base has touched 12.14 crore at the end of March 2007 compared to 11.53 crore as on end of February 2007, reflecting a growth rate of five per cent. In March, the cellular subscriber base of Bharti touched 3.71 crore with additions of over 17 lakh users, followed by BSNL at 2.74 crore with a market share of 22.59 per cent and additions of over 19.84 lakh subscribers. Hutch-Essar has 2.64 crore subscribers, taking its market share to 21.78% and Idea with a market share of 11.54% has 1.4 crore subscribers in March. Bharti Airtel closed marginally down and its peer R Com, MTNL and VSNL ended in red. Idea closed positive.
Educomp Solutions closed at the upper limit. The company has acquired a Web based trailing company and also bagged some orders in Haryana. We have been bullish on this one and our stand has been vindicated. Do read our research note here. We had a research note on Esab as well. This one looks interesting. Do read the note. Its for our subscribers.. may be here is a hidden gem as well.
Technically Speaking: It was a weak session for the whole day before closing. Sensex touched intraday high of 13194 and low of 12904. Sensex has closed above its resistance at 13170. On the higher side it is looking to hit near 13400 whereas on the lower side major support likes at 12900. Resistance lies at 13289, 13386. Support lies at 13000, 12808. Market turnover stood at Rs 3075 cr. Overall breadth was in favor of Advancers where the Advancers stood at 1916, Decliners stood at 632.
Sensex closed down 69 points at 13113.81. Weighing on the Sensex were losses in ONGC (852.5,-3 percent), TISCO (495.95,-3 percent), Ranbaxy (335.15,-3 percent), HDFC (1536.95,-3 percent) and Maruti (759.8,-3 percent). Losses are restricted by gains in Bajaj Auto (2349.3501,+3 percent), Infosys (2043.65,+3 percent), Grasim (2258.6499,+2 percent), NTPC (159.9,+1 percent) and Satyam (446.1,+1 percent).
Infosys numbers are due tomorrow and a lot is being made of it. Guidance expected is about 22- 28% for bottomline growth next year. Valuations at 24 X FY 08 certainly not enthusing in the current environment. So better to be careful here. There are short positions and that may limit the downsides.
Jet Airways India Ltd and Sahara Airlines have settled their dispute with regard to the Share Purchase Agreement of January 18, 2006. Jet is set to acquire Sahara Airlines for a lump sum price of Rs 1450 cr. Rs 500 cr has already been paid. Rs 400 cr is payable immediately no later than April 20, 2007. The balance Rs 550 cr is payable in four interest free annual equal instalments commencing on or before March 30, 2008. Jet closed up by 2.83% and its peer Deccan Aviation ended up 10%.
Telecom stocks closed in red on profit taking . Sustaining its aggressive growth in subscriber additions, the GSM-based cellular industry has added over 61 lakh subscribers in March with Bharti Airtel capturing 30.59% of the market share. With this, the all-India GSM subscriber base has touched 12.14 crore at the end of March 2007 compared to 11.53 crore as on end of February 2007, reflecting a growth rate of five per cent. In March, the cellular subscriber base of Bharti touched 3.71 crore with additions of over 17 lakh users, followed by BSNL at 2.74 crore with a market share of 22.59 per cent and additions of over 19.84 lakh subscribers. Hutch-Essar has 2.64 crore subscribers, taking its market share to 21.78% and Idea with a market share of 11.54% has 1.4 crore subscribers in March. Bharti Airtel closed marginally down and its peer R Com, MTNL and VSNL ended in red. Idea closed positive.
Educomp Solutions closed at the upper limit. The company has acquired a Web based trailing company and also bagged some orders in Haryana. We have been bullish on this one and our stand has been vindicated. Do read our research note here. We had a research note on Esab as well. This one looks interesting. Do read the note. Its for our subscribers.. may be here is a hidden gem as well.
Technically Speaking: It was a weak session for the whole day before closing. Sensex touched intraday high of 13194 and low of 12904. Sensex has closed above its resistance at 13170. On the higher side it is looking to hit near 13400 whereas on the lower side major support likes at 12900. Resistance lies at 13289, 13386. Support lies at 13000, 12808. Market turnover stood at Rs 3075 cr. Overall breadth was in favor of Advancers where the Advancers stood at 1916, Decliners stood at 632.
Global Economics - April 07
The global economy continues to be faring well in the face of a downshift in the US. Has the long-awaited decoupling — with the rest of the world untethering itself from the US — finally occurred?
It is premature to conclude that the world has faced a legitimate decoupling test. America’s deceleration has been concentrated in one of the least globalized pieces of
the US economy – homebuilding activity. It takes internal spillovers to drive external cross-border linkages.
America’s downshift will have global implications only if there are spillovers between housing and consumption demand.
Recent IMF research confirms the growing dependence of the rest of the world on the US, warning of a still synchronous global downturn if the US slowdown broadens and deepens. Canada, Mexico, China, and the rest of Asia ex Japan would be especially hard hit.
Market implications. I continue to believe that the American consumer will falter – taking the lead engine of the global growth train off the tracks, with the rest of the world quick to follow. That would be a major shock to financial markets, which are still discounting relatively sanguine prospects for global growth in 2007-08.
Risks. If the US labor market continues to display extraordinary staying power as it did in March, I would be the first to concede that the overly-indebted, saving-short
American consumer will squeak by – and so, too, will the rest of a still-coupled world.
It is premature to conclude that the world has faced a legitimate decoupling test. America’s deceleration has been concentrated in one of the least globalized pieces of
the US economy – homebuilding activity. It takes internal spillovers to drive external cross-border linkages.
America’s downshift will have global implications only if there are spillovers between housing and consumption demand.
Recent IMF research confirms the growing dependence of the rest of the world on the US, warning of a still synchronous global downturn if the US slowdown broadens and deepens. Canada, Mexico, China, and the rest of Asia ex Japan would be especially hard hit.
Market implications. I continue to believe that the American consumer will falter – taking the lead engine of the global growth train off the tracks, with the rest of the world quick to follow. That would be a major shock to financial markets, which are still discounting relatively sanguine prospects for global growth in 2007-08.
Risks. If the US labor market continues to display extraordinary staying power as it did in March, I would be the first to concede that the overly-indebted, saving-short
American consumer will squeak by – and so, too, will the rest of a still-coupled world.
US Economics April 07
The Employment Conundrum
What's New: The mix of growth and inflation has again turned less favorable. And the dichotomy between weak output and firm labor markets raises critical questions about the outlook: Will job and income gains sustain consumer outlays? Has potential output growth declined? If so, will it prolong the whiff of stagflation? And will slowing growth and rising unit costs squeeze profit margins?
Conclusions: Consumer retrenchment is unlikely
although the housing recession is far from over; strong global growth likely will sustain both output and employment. Amid uncertainty about productivity’s trend, we still think inflation has peaked, but inflation risks are rising again. Margin compression implies that profit growth likely will stall in 2007.
Market Implications: This mix likely will reinforce the Fed’s conviction that they must wait patiently for inflation to decline. Rising uncertainty about the outlook and reduced forward-looking guidance from the Fed imply that term and other risk premiums will rise
further, the yield curve will steepen irregularly, and TIPs may outperform.
Risks: The risks for investors are rising with
crosscurrents swirling around the outlook for growth, inflation, profits, and monetary policy. That markets have defied these uncertainties lately does not give us
comfort because we see neither a rapid improvement in growth, a quick decline in inflation, nor relief from the Fed.
What's New: The mix of growth and inflation has again turned less favorable. And the dichotomy between weak output and firm labor markets raises critical questions about the outlook: Will job and income gains sustain consumer outlays? Has potential output growth declined? If so, will it prolong the whiff of stagflation? And will slowing growth and rising unit costs squeeze profit margins?
Conclusions: Consumer retrenchment is unlikely
although the housing recession is far from over; strong global growth likely will sustain both output and employment. Amid uncertainty about productivity’s trend, we still think inflation has peaked, but inflation risks are rising again. Margin compression implies that profit growth likely will stall in 2007.
Market Implications: This mix likely will reinforce the Fed’s conviction that they must wait patiently for inflation to decline. Rising uncertainty about the outlook and reduced forward-looking guidance from the Fed imply that term and other risk premiums will rise
further, the yield curve will steepen irregularly, and TIPs may outperform.
Risks: The risks for investors are rising with
crosscurrents swirling around the outlook for growth, inflation, profits, and monetary policy. That markets have defied these uncertainties lately does not give us
comfort because we see neither a rapid improvement in growth, a quick decline in inflation, nor relief from the Fed.
Daily Call - April 12th, 07
The markets are likely to plunge in early morning trade in line with the international sentiment. The Dow lost 89 points, breaking it’s eight session continuous rise with Nikkei following its footsteps. The Sensex has now made a lower top of 13294 as compared to 13386 seen on 23rd March. So the 13,386- 12316 range, that was defined earlier remains intact . For the Nifty 3902 and 3554 still remain the defined boundaries. The derivatives data suggests that punters had gone short in the Nifty Wednesday as the discount between cash and Nifty futures widened to 31 points from 21 on Tuesday. Shorts were built in the IT and Banking arena, while metals went long yesterday. The metals today face their litmus test. The cash stocks too, which were beginning to do well are likely to see extensive profit taking because retail participation had only increased yesterday. I think the markets are likely to lie low today ahead of the Infosys numbers and guidance, that will come on Friday the 13th.
Morning Notes - April 12th, 07
Gujarat Ambuja Cements Ltd’s March shipments fell 4.5% to 1.48 million tonnes from 1.55 million tonnes a year earlier. Production fell to 1.43 million tonnes from 1.53 million tonnes a
year earlier. –ET
Elecon Engineering Company has been awarded a contract worth Rs 229.09 crore for supply and installation of coal handling plant package for National Capital Termal Power Project from
state-run NTPC. –ET
Domestic car sales in the financial year ended Mar’07 rose 22% from the year before to 1,076,408 from 882,208 in 05/06-ET
iGate Global Solutions posted over four fold jump in net profit at Rs 21.42 cr for the qtr ended March 31, as compared to Rs 5.25 cr for the same quarter last year. Total income of the company increased 29.91% to Rs 196.05 cr for the 4th qtr ended March 31, from Rs 150.91 crore a year ago. –ET
Mastek reported a 132% increase in consolidated net profit at Rs 40.23 cr for the 3rd qtr ended March 31, 2007 compared with Rs 17.31 cr in Q3FY06. –BS
Larsen & Toubro plans to set up a major state-of-the-art ship building yard at a cost of Rs 1,500 crore. The new greenfield ship building yard would come up on a 1,000-acre area and have capability to make all types of ships, including high tech designs like CNG, LNG carriers and containers upto 3 lakh dead weight tonnes. –BS
The final hearing by the arbitration panel on the Jet-Air Sahara merger has been postponed till 12 April 07. –BS
Around 14 funds and institutions, including eight from overseas, have shown interest in buying a strategic stake in India’s oldest term lending institution, IFCI Ltd, with a few even ready to pick up 51 per cent equity. –BL
Tanla Solutions Ltd‘s U.K.-based subsidiary, Tanla Mobile, has expanded its operations into Ireland. –BL
Punjab National Bank has increased the Benchmark Prime Lending Rate by 75 basis points to 13 per cent. –ET
Deccan Chronicle Holdings Ltd would raise its advertisement tariff by 30% from May 2007. –BL
year earlier. –ET
Elecon Engineering Company has been awarded a contract worth Rs 229.09 crore for supply and installation of coal handling plant package for National Capital Termal Power Project from
state-run NTPC. –ET
Domestic car sales in the financial year ended Mar’07 rose 22% from the year before to 1,076,408 from 882,208 in 05/06-ET
iGate Global Solutions posted over four fold jump in net profit at Rs 21.42 cr for the qtr ended March 31, as compared to Rs 5.25 cr for the same quarter last year. Total income of the company increased 29.91% to Rs 196.05 cr for the 4th qtr ended March 31, from Rs 150.91 crore a year ago. –ET
Mastek reported a 132% increase in consolidated net profit at Rs 40.23 cr for the 3rd qtr ended March 31, 2007 compared with Rs 17.31 cr in Q3FY06. –BS
Larsen & Toubro plans to set up a major state-of-the-art ship building yard at a cost of Rs 1,500 crore. The new greenfield ship building yard would come up on a 1,000-acre area and have capability to make all types of ships, including high tech designs like CNG, LNG carriers and containers upto 3 lakh dead weight tonnes. –BS
The final hearing by the arbitration panel on the Jet-Air Sahara merger has been postponed till 12 April 07. –BS
Around 14 funds and institutions, including eight from overseas, have shown interest in buying a strategic stake in India’s oldest term lending institution, IFCI Ltd, with a few even ready to pick up 51 per cent equity. –BL
Tanla Solutions Ltd‘s U.K.-based subsidiary, Tanla Mobile, has expanded its operations into Ireland. –BL
Punjab National Bank has increased the Benchmark Prime Lending Rate by 75 basis points to 13 per cent. –ET
Deccan Chronicle Holdings Ltd would raise its advertisement tariff by 30% from May 2007. –BL
Premarket April 12th,07
After consecutive two flat closes it seems market is waiting for a trigger to move either side of the zone. Most of the participants remained on the sidelines ahead of corporate result, beginning with Infosys announcing its forth quarter results tomorrow. For the last one month market is moving in tune with international markets and local indices may witness caution following the weak global indices. However, for the last few sessions FII have turned buyers of equities in the domestic market may help the sentiment turn positive. Among the domestic indices, the Nifty could test 3825 and below this level may slip to 3800, while on the upside it could edge higher to 3900. The Sensex has a likely support at 13050 and may face resistance at 13250.
US indices ended weak on Wednesday as minutes from last month's Federal Reserve meeting hinted at the need for more rate hikes. While the Dow Jones dropped by 89 points to close at 12485, the Nasdaq ended 18 points lower at 2459.
All the Indian ADRs ended in the red on US bourses. Wipro and Satyam Computers fell sharply and tumbled over 2% each, while Tata Motors, Infosys, HDFC Bank, Patni Computers and Rediff closed with the marginal losses.
The Nymex light crude oil for May delivery rose 12 cents to close at $62.01. In the commodity space, the Comex gold for June series rose by 20 cents to settle at $681.70 a troy ounce.
US indices ended weak on Wednesday as minutes from last month's Federal Reserve meeting hinted at the need for more rate hikes. While the Dow Jones dropped by 89 points to close at 12485, the Nasdaq ended 18 points lower at 2459.
All the Indian ADRs ended in the red on US bourses. Wipro and Satyam Computers fell sharply and tumbled over 2% each, while Tata Motors, Infosys, HDFC Bank, Patni Computers and Rediff closed with the marginal losses.
The Nymex light crude oil for May delivery rose 12 cents to close at $62.01. In the commodity space, the Comex gold for June series rose by 20 cents to settle at $681.70 a troy ounce.
Wednesday, April 11, 2007
Q4FY07 Preview - Macquarie
Is earnings growth slowing?
Event
> Our earnings growth forecasts for the 56 companies in our universe suggest a slowdown in aggregate growth to 12% YoY in 4Q FY3/07 from the 83% achieved in 3Q FY3/07. Sequentially, we expect earnings to drop 6% QoQ. This poses the question of whether earnings growth is poised to slow down.
Impact
> Only a partial earnings slowdown. One-offs in two of the largest sectors, oil & gas, and banks, are likely to skew growth. The oil & gas sector typically witnesses violent unpredictable swings in subsidy allocations, especially in the 4Q of every financial year. Stripping out oil & gas, estimated PAT growth improves to 35% YoY and 2% QoQ. Similarly, the banks will make ~Rs 9bn of one-off general provisioning. Stripping this out, the banks’ PAT growth increases to 37% YoY and 7 % QoQ. Excluding both oil & gas profits and banks’ one-offs, PAT growth rises to a significant 41% YoY and 7% QoQ.
> EBITDA margin expansion, but PAT pressure. We expect strong top-line aggregate growth of 24% YoY and even stronger EBITDA growth of 29% suggesting margin expansion of 100bp. Nevertheless, aggregate PAT margins will be squeezed by 140bp, a trend generally evident in most sectors and primarily attributable to higher interest costs.
> Telecom, pharma and property likely to show high growth, albeit off a lower base. Robust subscriber growth of 70-100% should cushion telecom average revenue per user (ARPU) declines, while pharma growth should be driven by US generic launches by Dr Reddy’s. Similarly, property sector growth should come from better volumes and margins off a low base.
> Cement and IT sectors driven by volume growth, with PAT growth of 73% and 46%, respectively. Volume growth in cement should be 8-10% and for IT, 35-40%. A small loss expected for Arvind Mills should force a 50% fall in textile aggregate PAT growth. Ex-Arvind, textile growth should be 26% YoY.
Outlook
> Cautious on cyclicals given risk of hard landing. The latest CRR hike was a serious surprise to the market, raising the probability of a hard landing. We think the market will be cautious on cyclicals (where the cycle relates to the Indian economy) and rate sensitives for a little while.
> Focus on low-interest-rate-sensitive stocks. We are positive on companies whose earnings are relatively protected from rising interest rates or where topline growth is somewhat hedged against a hard landing. This is reflected in our top 5 stock picks - Bharti Airtel (BHARTI IN, Rs753, Outperform, TP: Rs1,025), TCS (TCS IN, Rs1,203, Outperform, TP: Rs1,672), Reliance Industries (RIL IN, Rs1,362, Outperform, TP: Rs1,590), Tata Steel (TATA IN, Rs467, Outperform, Target: Rs556) and Dr Reddy’s (DRRD IN, Rs738, Outperform, TP: Rs837.5).
Our top five stock picks
Bharti Airtel (BHARTI IN, Rs753, Outperform, TP: Rs1,025) – 36.1% upside
> Bharti delivers one of the lowest tariffs per minute in the world, but still generates attractive operating margins (41.5% in FY08E) and returns (ROE 40.9% in FY08E).
> Bharti’s low-cost position, driven by its scale, innovation and efficiency, should insulate it from competitive threats.
> Further EBITDA margin expansion in the next three years and better asset leverage will result in higher return ratios (ROE).
> Among Asia’s cheapest wireless stocks on valuation multiples adjusted for growth. On EV/EBITDA by EBITDA CAGR, it is at 0.43x, while on PEG, it trades at 0.67x.
> More sharing of passive infrastructure should increase margins.
TCS (TCS IN, Rs1,203, Outperform, TP: Rs1,672) – 39.0% upside
> Huge volume growth due to small base effect (combined market share of Indian IT <3%> Presence of margin expansion levers, like 0-3 years employee mix - ie, the percentage of employees with 0–3 years of experience - (TCS at 52% as against Infosys at 59%) and offshore mix (TCS at 46% as against Infosys at 51%), would lower the per capita employee cost. These should more than offset the effect of margin erosion arising from wage inflation. TCS also enjoys the industry’s lowest attrition rates.
>Lastly, focus on software products business (driving non-linear growth and therefore operational gearing), adoption of global delivery model (delivery centres spanning from China to Chennai and Chile providing near-shoring capabilities) and complementary inorganic growth (eight relatively small gap-filling acquisitions in the past three years) would squarely position TCS to translate the growth into shareholder value.
Reliance Industries (RIL IN, Rs1,362, Outperform, TP: Rs1,590) – 16.7% upside
> RIL recently embarked on a staggering capex plan of US$19bn over the next five years to fuel aggressive growth.
> Earnings poised to triple as expansion plans in refining, petchem, oil & gas and organised retail contribute over the next five years.
> Financing growth not a concern as free cashflow should be sufficient to fund capex.
> ROE is expected to rise consistently due to contribution from high-margin businesses such as oil & gas.
> Fall in gearing would enhance flexibility to raise debt for funding stepped-up capex.
Tata Steel (TATA IN, Rs467, Outperform, Target: Rs556) – 19.1% upside
> India's largest private sector steel manufacturer, and with the acquisition of Corus is now the fifth largest steel producer globally.
> Six-fold expansion planned over the next 10 years, to drive the synergy benefits with Corus.
> Highest operating leverage to steel prices and the best steel play to ride the upcycle in the sector,in our view.
> Highest EBITDA margins in steel globally, along with a rich resource base and investment book,not being factored into valuations.
Dr Reddy’s Labs (DRRD IN, Rs738, Outperform, TP: Rs837.5) – 13.5% upside
> Launch of generic Ondansetron towards the end of December 2006 is expected to drive quarterly earnings for 4Q FY07 and 1Q FY08.
> Overall structural improvement in business and earnings mix, robust outlook for all base businesses including Betapharm (excluding the impact of 180 days marketing exclusivities and authorised generic launches).
> Strong growth outlook for FY09.
Event
> Our earnings growth forecasts for the 56 companies in our universe suggest a slowdown in aggregate growth to 12% YoY in 4Q FY3/07 from the 83% achieved in 3Q FY3/07. Sequentially, we expect earnings to drop 6% QoQ. This poses the question of whether earnings growth is poised to slow down.
Impact
> Only a partial earnings slowdown. One-offs in two of the largest sectors, oil & gas, and banks, are likely to skew growth. The oil & gas sector typically witnesses violent unpredictable swings in subsidy allocations, especially in the 4Q of every financial year. Stripping out oil & gas, estimated PAT growth improves to 35% YoY and 2% QoQ. Similarly, the banks will make ~Rs 9bn of one-off general provisioning. Stripping this out, the banks’ PAT growth increases to 37% YoY and 7 % QoQ. Excluding both oil & gas profits and banks’ one-offs, PAT growth rises to a significant 41% YoY and 7% QoQ.
> EBITDA margin expansion, but PAT pressure. We expect strong top-line aggregate growth of 24% YoY and even stronger EBITDA growth of 29% suggesting margin expansion of 100bp. Nevertheless, aggregate PAT margins will be squeezed by 140bp, a trend generally evident in most sectors and primarily attributable to higher interest costs.
> Telecom, pharma and property likely to show high growth, albeit off a lower base. Robust subscriber growth of 70-100% should cushion telecom average revenue per user (ARPU) declines, while pharma growth should be driven by US generic launches by Dr Reddy’s. Similarly, property sector growth should come from better volumes and margins off a low base.
> Cement and IT sectors driven by volume growth, with PAT growth of 73% and 46%, respectively. Volume growth in cement should be 8-10% and for IT, 35-40%. A small loss expected for Arvind Mills should force a 50% fall in textile aggregate PAT growth. Ex-Arvind, textile growth should be 26% YoY.
Outlook
> Cautious on cyclicals given risk of hard landing. The latest CRR hike was a serious surprise to the market, raising the probability of a hard landing. We think the market will be cautious on cyclicals (where the cycle relates to the Indian economy) and rate sensitives for a little while.
> Focus on low-interest-rate-sensitive stocks. We are positive on companies whose earnings are relatively protected from rising interest rates or where topline growth is somewhat hedged against a hard landing. This is reflected in our top 5 stock picks - Bharti Airtel (BHARTI IN, Rs753, Outperform, TP: Rs1,025), TCS (TCS IN, Rs1,203, Outperform, TP: Rs1,672), Reliance Industries (RIL IN, Rs1,362, Outperform, TP: Rs1,590), Tata Steel (TATA IN, Rs467, Outperform, Target: Rs556) and Dr Reddy’s (DRRD IN, Rs738, Outperform, TP: Rs837.5).
Our top five stock picks
Bharti Airtel (BHARTI IN, Rs753, Outperform, TP: Rs1,025) – 36.1% upside
> Bharti delivers one of the lowest tariffs per minute in the world, but still generates attractive operating margins (41.5% in FY08E) and returns (ROE 40.9% in FY08E).
> Bharti’s low-cost position, driven by its scale, innovation and efficiency, should insulate it from competitive threats.
> Further EBITDA margin expansion in the next three years and better asset leverage will result in higher return ratios (ROE).
> Among Asia’s cheapest wireless stocks on valuation multiples adjusted for growth. On EV/EBITDA by EBITDA CAGR, it is at 0.43x, while on PEG, it trades at 0.67x.
> More sharing of passive infrastructure should increase margins.
TCS (TCS IN, Rs1,203, Outperform, TP: Rs1,672) – 39.0% upside
> Huge volume growth due to small base effect (combined market share of Indian IT <3%> Presence of margin expansion levers, like 0-3 years employee mix - ie, the percentage of employees with 0–3 years of experience - (TCS at 52% as against Infosys at 59%) and offshore mix (TCS at 46% as against Infosys at 51%), would lower the per capita employee cost. These should more than offset the effect of margin erosion arising from wage inflation. TCS also enjoys the industry’s lowest attrition rates.
>Lastly, focus on software products business (driving non-linear growth and therefore operational gearing), adoption of global delivery model (delivery centres spanning from China to Chennai and Chile providing near-shoring capabilities) and complementary inorganic growth (eight relatively small gap-filling acquisitions in the past three years) would squarely position TCS to translate the growth into shareholder value.
Reliance Industries (RIL IN, Rs1,362, Outperform, TP: Rs1,590) – 16.7% upside
> RIL recently embarked on a staggering capex plan of US$19bn over the next five years to fuel aggressive growth.
> Earnings poised to triple as expansion plans in refining, petchem, oil & gas and organised retail contribute over the next five years.
> Financing growth not a concern as free cashflow should be sufficient to fund capex.
> ROE is expected to rise consistently due to contribution from high-margin businesses such as oil & gas.
> Fall in gearing would enhance flexibility to raise debt for funding stepped-up capex.
Tata Steel (TATA IN, Rs467, Outperform, Target: Rs556) – 19.1% upside
> India's largest private sector steel manufacturer, and with the acquisition of Corus is now the fifth largest steel producer globally.
> Six-fold expansion planned over the next 10 years, to drive the synergy benefits with Corus.
> Highest operating leverage to steel prices and the best steel play to ride the upcycle in the sector,in our view.
> Highest EBITDA margins in steel globally, along with a rich resource base and investment book,not being factored into valuations.
Dr Reddy’s Labs (DRRD IN, Rs738, Outperform, TP: Rs837.5) – 13.5% upside
> Launch of generic Ondansetron towards the end of December 2006 is expected to drive quarterly earnings for 4Q FY07 and 1Q FY08.
> Overall structural improvement in business and earnings mix, robust outlook for all base businesses including Betapharm (excluding the impact of 180 days marketing exclusivities and authorised generic launches).
> Strong growth outlook for FY09.
Post Market Apr 11th, 07
Continuing its upward move for the sixth straight session the Sensex opened with a positive gap of 32 points at 13222 on the back of positive global cues. The Sensex touched the day's high of 13295 amid some volatility in the heavyweights. The index struggled to make headway in the afternoon. Sustained selling in banking, pharma and information technology stocks towards the close pulled down the Sensex to an intra-day low of 13161. The Sensex managed to pare some losses and ended the session at 13183, down six points. The Nifty closed at 3863, up 14 points.
The breadth of the market was positive. Of the 2,632 stocks traded on the BSE, 1,531 stocks advanced, 1,037 stocks declined and 64 stocks ended unchanged. Among the sectoral indices the BSE Metal Index advanced by 3.68% at 9331 followed by the BSE CG Index (up 1.11% at 9342). However, the BSE Bankex, the BSE HC Index, the BSE IT Index, the BSE Teck Index and the BSE FMCG Index closed in negative territory.
Very few Sensex stocks moved up significantly. Hindalco surged 4.40% at Rs142, Tata Steel advanced 3.29% at Rs512, Bharti Airtel added 1.24% at Rs774, BHEL rose 1.22% at Rs2,493 and Cipla gained 1.07% at Rs236. ONGC, Bajaj Auto, ITC, Reliance Industries and NTPC closed with marginal gains. Among the laggards Ranbaxy tumbled 3.49% at Rs345, Dr Reddy's slipped 2.59% at Rs701, ACC was down 1.98% at Rs731 and HDFC dropped 1.55% at Rs1,583. Reliance Communications, Gujarat Ambuja, HDFC Bank, SBI and Satyam Computers ended with marginal losses.
Metal stocks were in the limelight. Shree Precoated soared 10% at Rs343, Nalco surged 6.43% at Rs247, Sterlite Industries added 5.70% at Rs506, Jindal Steel advanced 4.73% at Rs2,601 and SAIL gained 4.29% at Rs123. Maharashtra Seamless, Hindustan Zinc and Jindal Saw were up 3-4% each.
Over 1.31 crore Reliance Natural Resources shares changed hands on the BSE followed by IFCI (1.28 crore shares), Gremach Infrastructure (1.03 crore shares), India Bulls Real Estate (63.80 lakh shares) and SAIL (52.41 lakh shares).
Value-wise India Bulls Real Estate registered a turnover of Rs190 crore on the BSE followed by India Bulls (Rs171 crore), Mindtree (Rs136 crore), Tata Steel (Rs133 crore) and BHEL (Rs99 crore).
The breadth of the market was positive. Of the 2,632 stocks traded on the BSE, 1,531 stocks advanced, 1,037 stocks declined and 64 stocks ended unchanged. Among the sectoral indices the BSE Metal Index advanced by 3.68% at 9331 followed by the BSE CG Index (up 1.11% at 9342). However, the BSE Bankex, the BSE HC Index, the BSE IT Index, the BSE Teck Index and the BSE FMCG Index closed in negative territory.
Very few Sensex stocks moved up significantly. Hindalco surged 4.40% at Rs142, Tata Steel advanced 3.29% at Rs512, Bharti Airtel added 1.24% at Rs774, BHEL rose 1.22% at Rs2,493 and Cipla gained 1.07% at Rs236. ONGC, Bajaj Auto, ITC, Reliance Industries and NTPC closed with marginal gains. Among the laggards Ranbaxy tumbled 3.49% at Rs345, Dr Reddy's slipped 2.59% at Rs701, ACC was down 1.98% at Rs731 and HDFC dropped 1.55% at Rs1,583. Reliance Communications, Gujarat Ambuja, HDFC Bank, SBI and Satyam Computers ended with marginal losses.
Metal stocks were in the limelight. Shree Precoated soared 10% at Rs343, Nalco surged 6.43% at Rs247, Sterlite Industries added 5.70% at Rs506, Jindal Steel advanced 4.73% at Rs2,601 and SAIL gained 4.29% at Rs123. Maharashtra Seamless, Hindustan Zinc and Jindal Saw were up 3-4% each.
Over 1.31 crore Reliance Natural Resources shares changed hands on the BSE followed by IFCI (1.28 crore shares), Gremach Infrastructure (1.03 crore shares), India Bulls Real Estate (63.80 lakh shares) and SAIL (52.41 lakh shares).
Value-wise India Bulls Real Estate registered a turnover of Rs190 crore on the BSE followed by India Bulls (Rs171 crore), Mindtree (Rs136 crore), Tata Steel (Rs133 crore) and BHEL (Rs99 crore).
Market Close April 11th, 07
It was yet another day of consolidation and the markets ended flat with positive bias which opened with mild gap up tracking the positive Asian cues. Indices continued to trade with moderate gains on the back of buying seen in Metal and Capital Good sector but it was off the track on account of selling pressure seen in select stocks in FMCG, Pharma and cement. Profit-booking at higher levels saw the index pare gains and move in a narrow range. Results season has been started with few companies posting results but big Daddy Infosys, is due on Friday is most awaited to give direction. We believe nothing much is likely to change as clearly the guidance will not be bullish. Asian markets traded higher while European markets trading in green.
Sensex ended a point higher. It was supported by gains in Hindalco (+4.77%), Tata Steel (+3.42%), Bharati Airtel (+1.56%) and BHEL (+1.20%). Restricting the gains were Ranbaxy (-4.02%), Dr. Reddy?s (-2.81%), Gujarat Ambuja (-2.29%) and ACC (-1.88%).
Welspun Gujarat Stahl Rohren Ltd (WGSRL) has planned to bid for pipeline projects in Saudi Arabia, Iran and Indonesia. The company shall also approach oil and gas companies in the Middle East, North America and Asia. The metal pipes manufacturer is also likely to bag more orders from the US. Middle East, Qatar and Iran have the largest gas reserves in the world and are planning to develop them commercially. Even, Saudi Arabia has lined up mega projects of $45 billion to increase oil production, build petrochemicals complex and new pipelines. Welspun Gujarat will get many opportunities to encash huge profits from countries like Brazil, Indonesia, China and India, which have plans to build gas pipelines. Russia is also planning to build gas pipelines to supply China with natural gas. Welspun's SAW pipe sales have grown at a CAGR of 37% over FY03-06. In the past, Welspun has supplied pipes to oil and gas majors like British Gas, Exxon Mobil, and Shell. Welspun Gujarat ended up by 10% while its peer Jindal Stainless closed marginally up 1%.
Mastek announced third quarter results which reported net profit of Rs 23.8 cr (Rs 238 mn) in the third quarter vs Rs 21.8 cr (Rs 218 mn) in the previous quarter a growth of 9.17%. Its total income was up 2.38% to Rs 214.8 cr (Rs 2.14 bn) from Rs 209.8 cr (Rs 2.09 bn). The company's US operation has gone up by 27% QoQ. The stock closed marginally down by 1% on the general downtrend.
iGATE Global Solutions reported revenue of Rs 805.1 crore for the year ended March 2007 as against Rs 635.8 crore in the previous year. Net profit for FY07 increased to Rs 49.8 crore, a sharp spurt of 805.5% from Rs 5.50 crore in FY06. For the fourth quarter ended March 2007, the company?s revenues increased 25.50% to Rs 210.1 crore compared to Rs 167.4 crore in the corresponding quarter previous year. While net profit for Q4 FY07 surged 381% to Rs 22.6 crore from Rs 4.7 crore in Q4 FY06. However, operating revenue for the 4th quarter was adversely impacted by 2.1% due to the strengthening of the rupee against the US Dollar. But the overall Margins have not been impacted due hedging. During the recently concluded quarter, iGATE added six new clients largely for IT services. The stock ended down by 4.6% on indications that next quarter would be sluggish.
Technically Speaking: Market witnessed a Yoyo session to end in flat. Sensex is still stuck and finding it tough to move over the band of 13200-13400, which a very crucial range. Bull power will be clearly evident if this level is crossed. On the lower side, support is at 12940. Market turnover stood at Rs 3847 cr. Overall breadth was in favor of Advances as advancers were 1548 against decliners of 1027.
Sensex ended a point higher. It was supported by gains in Hindalco (+4.77%), Tata Steel (+3.42%), Bharati Airtel (+1.56%) and BHEL (+1.20%). Restricting the gains were Ranbaxy (-4.02%), Dr. Reddy?s (-2.81%), Gujarat Ambuja (-2.29%) and ACC (-1.88%).
Welspun Gujarat Stahl Rohren Ltd (WGSRL) has planned to bid for pipeline projects in Saudi Arabia, Iran and Indonesia. The company shall also approach oil and gas companies in the Middle East, North America and Asia. The metal pipes manufacturer is also likely to bag more orders from the US. Middle East, Qatar and Iran have the largest gas reserves in the world and are planning to develop them commercially. Even, Saudi Arabia has lined up mega projects of $45 billion to increase oil production, build petrochemicals complex and new pipelines. Welspun Gujarat will get many opportunities to encash huge profits from countries like Brazil, Indonesia, China and India, which have plans to build gas pipelines. Russia is also planning to build gas pipelines to supply China with natural gas. Welspun's SAW pipe sales have grown at a CAGR of 37% over FY03-06. In the past, Welspun has supplied pipes to oil and gas majors like British Gas, Exxon Mobil, and Shell. Welspun Gujarat ended up by 10% while its peer Jindal Stainless closed marginally up 1%.
Mastek announced third quarter results which reported net profit of Rs 23.8 cr (Rs 238 mn) in the third quarter vs Rs 21.8 cr (Rs 218 mn) in the previous quarter a growth of 9.17%. Its total income was up 2.38% to Rs 214.8 cr (Rs 2.14 bn) from Rs 209.8 cr (Rs 2.09 bn). The company's US operation has gone up by 27% QoQ. The stock closed marginally down by 1% on the general downtrend.
iGATE Global Solutions reported revenue of Rs 805.1 crore for the year ended March 2007 as against Rs 635.8 crore in the previous year. Net profit for FY07 increased to Rs 49.8 crore, a sharp spurt of 805.5% from Rs 5.50 crore in FY06. For the fourth quarter ended March 2007, the company?s revenues increased 25.50% to Rs 210.1 crore compared to Rs 167.4 crore in the corresponding quarter previous year. While net profit for Q4 FY07 surged 381% to Rs 22.6 crore from Rs 4.7 crore in Q4 FY06. However, operating revenue for the 4th quarter was adversely impacted by 2.1% due to the strengthening of the rupee against the US Dollar. But the overall Margins have not been impacted due hedging. During the recently concluded quarter, iGATE added six new clients largely for IT services. The stock ended down by 4.6% on indications that next quarter would be sluggish.
Technically Speaking: Market witnessed a Yoyo session to end in flat. Sensex is still stuck and finding it tough to move over the band of 13200-13400, which a very crucial range. Bull power will be clearly evident if this level is crossed. On the lower side, support is at 12940. Market turnover stood at Rs 3847 cr. Overall breadth was in favor of Advances as advancers were 1548 against decliners of 1027.
Idea Cellular - Lehman Brothers
We initiate coverage of IDEA Cellular with a 1-Overweight rating and a target price of Rs110. We believe IDEA is a simple wireless penetration growth story, with a robust 36% FY07-10E revenue CAGR, underpinned by positive surprises on both market-share and ARPU from its planned ramp-up in capex and new circles.
>We expect IDEA’s 781 mn population footprint (13 circles) to see penetration grow from 15% in March 2007 to 36% in March 2011E and 52% in March 2015E. IDEA has revenue KPIs and branding comparable to its listed peers; and is equally well-positioned to benefit from improving near-term industry dynamics (slowing tariff declines, coverage focus, infra sharing, lower handset pricing), in our view.
> We expect to see 80 bp market-share gains over FY07-10E, as IDEA ramps up in its five new circles. With GSM industry ARPU in its new circles higher than its established circles, we expect IDEA to narrow its discount to Bharti’s ARPU from 18.6% to 16.7% by FY10. We expect to see short-term margin surprise from LD traffic and outsourcing; and sharp ramp-up over FY09-10 from maturing new circles.
>IDEA’s rich valuations at 8.3x FY09E EV/EBITDA (a 20% discount to Bharti) are well-supported by its 41% FY07-FY10E EBITDA CAGR, in our view. On our target, IDEA would trade at 9.8x FY09E EV/EBITDA (14% discount to Bharti ex-towerco target). The company expects to receive more licenses this year, representing a free option on IDEA shares, in our view.
>Positive potential catalysts include a pick-up in subscriber additions post the ongoing clean-up, market-share gains, industry M&A, and spill-over demand for Bharti shares. Risks are higher-than-expected capex and delays in new spectrum grants.
We initiate coverage of IDEA Cellular with a 1-OW rating and a 12-month price target of Rs110.
>We expect IDEA’s 781 mn population footprint (13 circles) to see penetration grow from 15% in March 2007 to 36% in March 2011E and 52% in March 2015E. IDEA has revenue KPIs and branding comparable to its listed peers; and is equally well-positioned to benefit from improving near-term industry dynamics (slowing tariff declines, coverage focus, infra sharing, lower handset pricing), in our view.
> We expect to see 80 bp market-share gains over FY07-10E, as IDEA ramps up in its five new circles. With GSM industry ARPU in its new circles higher than its established circles, we expect IDEA to narrow its discount to Bharti’s ARPU from 18.6% to 16.7% by FY10. We expect to see short-term margin surprise from LD traffic and outsourcing; and sharp ramp-up over FY09-10 from maturing new circles.
>IDEA’s rich valuations at 8.3x FY09E EV/EBITDA (a 20% discount to Bharti) are well-supported by its 41% FY07-FY10E EBITDA CAGR, in our view. On our target, IDEA would trade at 9.8x FY09E EV/EBITDA (14% discount to Bharti ex-towerco target). The company expects to receive more licenses this year, representing a free option on IDEA shares, in our view.
>Positive potential catalysts include a pick-up in subscriber additions post the ongoing clean-up, market-share gains, industry M&A, and spill-over demand for Bharti shares. Risks are higher-than-expected capex and delays in new spectrum grants.
We initiate coverage of IDEA Cellular with a 1-OW rating and a 12-month price target of Rs110.
Morning Notes - April 11th, 07
Corporate Snippets
>Suzlon Energy has raised its takeover offer for REpower Systems AG to 150 euros a share after its subsidiary bought 7.7% in the German firm at that price. –ET
> With an aim to enhance its focus on tier-II cities, Arvind Mills plans to open nearly 100 Megamart stores in the country in the next five years. Megamart, an apparel discount chain, currently has 54 outlets in 16 cities, with footfalls in excess of 1.5 lakh consumers per month. –ET
> ABG Shipyard has bagged Rs 618 crore order from Cyprusbased Essar Shipping & Logistics Ltd, for construction of four supramax bulk carriers. –ET
> Educomp Solutions has acquired 76% stake in ThreeBrix EServices Pvt Ltd. Partnership with ThreeBricks would leverage Educomp’s large content library for providing tutoring in several ways - online, offline and through learning centers mainly focused on serving Indian students. –ET
> Uttam Galva Steels has decided to raise prices of all its products as a result of rising demand from construction companies and makers of automobiles and home appliances. –BS
> The board of directors of Strides Arcolab has given its in-principle approval to acquire the entire shareholding of Grandix Pharmaceuticals, Chennai. –BS
> Subhash Projects & Marketing Ltd has secured orders worth Rs 309 crore for execution of various power projects in Karnataka state. –BL
> Jet Sahara in a fresh deal.New agreement sets Air Sahara’s enterprise value Rs 250 Crs lower at Rs 2050 Crs. - ET.
> NTPC Ltd is open to sourcing equipment from Chinese vendors in an effort to keep project costs down for its new power stations. The Rs 30,000-crore utility is also looking at the possibility of tying-up with Chinese suppliers for the 4,000-MW Ultra Mega projects in the pipeline. - BL
Macro Economic & Geo-Political News
> Industrial output in February is expected to have risen 10.9% from a year earlier, the median forecast in a Reuters poll shows. That would be the same as in January, but down from 12.5% in December. –ET
> The Bank of Japan have voted unanimously to keep interest rates unchanged. –BS
Amtek Auto Ltd
(Rs. 365, FY08E - P/E 13x, BUY with a Target Price of Rs. 510)
>Suzlon Energy has raised its takeover offer for REpower Systems AG to 150 euros a share after its subsidiary bought 7.7% in the German firm at that price. –ET
> With an aim to enhance its focus on tier-II cities, Arvind Mills plans to open nearly 100 Megamart stores in the country in the next five years. Megamart, an apparel discount chain, currently has 54 outlets in 16 cities, with footfalls in excess of 1.5 lakh consumers per month. –ET
> ABG Shipyard has bagged Rs 618 crore order from Cyprusbased Essar Shipping & Logistics Ltd, for construction of four supramax bulk carriers. –ET
> Educomp Solutions has acquired 76% stake in ThreeBrix EServices Pvt Ltd. Partnership with ThreeBricks would leverage Educomp’s large content library for providing tutoring in several ways - online, offline and through learning centers mainly focused on serving Indian students. –ET
> Uttam Galva Steels has decided to raise prices of all its products as a result of rising demand from construction companies and makers of automobiles and home appliances. –BS
> The board of directors of Strides Arcolab has given its in-principle approval to acquire the entire shareholding of Grandix Pharmaceuticals, Chennai. –BS
> Subhash Projects & Marketing Ltd has secured orders worth Rs 309 crore for execution of various power projects in Karnataka state. –BL
> Jet Sahara in a fresh deal.New agreement sets Air Sahara’s enterprise value Rs 250 Crs lower at Rs 2050 Crs. - ET.
> NTPC Ltd is open to sourcing equipment from Chinese vendors in an effort to keep project costs down for its new power stations. The Rs 30,000-crore utility is also looking at the possibility of tying-up with Chinese suppliers for the 4,000-MW Ultra Mega projects in the pipeline. - BL
Macro Economic & Geo-Political News
> Industrial output in February is expected to have risen 10.9% from a year earlier, the median forecast in a Reuters poll shows. That would be the same as in January, but down from 12.5% in December. –ET
> The Bank of Japan have voted unanimously to keep interest rates unchanged. –BS
Amtek Auto Ltd
(Rs. 365, FY08E - P/E 13x, BUY with a Target Price of Rs. 510)
Premarket April 11th, 07
The Dow industrials recording the gains for an eighth straight session on Tuesday, the longest winning streak in four years and firm Asian indices in the morning trades may help the market to open in the green. Major Asian indices like Nikkei, Hang Seng, Kospi and Jakarta Composite are trading with the marginal gains. On the upside, the Nifty could test the recent high around the 3900 level and may witness support around the 3775 level. The Sensex has a likely support at 13050 and may test higher levels of 13250.
In the US markets, the broader Dow Jones scaled up by five points at 12574, and the tech-heavy Nasdaq moved up by eight points to close at 2476.
Indian floats also gained on the US bourses. Tata Motors was the major gainer and rose 1.57% while Wipro, Patni, Rediff, HDFC Bank, ICICI Bank and ended with steady gains. Among the laggards Infosysys, Satyam , Dr Reddys's and MTNL were slightly down.
Crude oil prices in the global market rose yesterday. The Nymex light crude oil for May series gained 38 cents at $61.89 per barrel. In the commodity segment, the Comex gold for June delivery jumped $4.60 to settle at $681.50 an ounce.
In the US markets, the broader Dow Jones scaled up by five points at 12574, and the tech-heavy Nasdaq moved up by eight points to close at 2476.
Indian floats also gained on the US bourses. Tata Motors was the major gainer and rose 1.57% while Wipro, Patni, Rediff, HDFC Bank, ICICI Bank and ended with steady gains. Among the laggards Infosysys, Satyam , Dr Reddys's and MTNL were slightly down.
Crude oil prices in the global market rose yesterday. The Nymex light crude oil for May series gained 38 cents at $61.89 per barrel. In the commodity segment, the Comex gold for June delivery jumped $4.60 to settle at $681.50 an ounce.
4Q FY07 Results Preview - Merrill Lynch
Slower earnings momentum reflects expected trend
Sensex earnings growth in this quarter, though strong at 30%, is losing momentum and is the slowest in FY07 (MSCI is much lower due to the oil PSUs). This is despite a low base (Q4FY06 was the second slowest growth in last 12 quarters). Our call has been that earnings will slow to the 20-22% level in Q1FY08 and 15-17% in FY08, a view that is now gaining favor with consensus.
Healthcare, cement – strong growth but slowing in FY08
Healthcare has a strong growth for this quarter mainly due to a low base. For FY08, growth in the sector is expected to slow to under 20%. Similarly, cement shows a very strong growth for this quarter but we have a sell on most stocks, given Government measures to reduce prices.
Telecom, IT, industrials – Sustainable growth; O/W
Telecom and industrials should sustain strong earnings growth next year. However, Larsen & Toubro is likely to report slower growth in this quarter and could underperform near term. Again in IT we like the strong earnings growth story but expect weakness ahead of the Infosys guidance.
Autos, consumer staples and oil PSUs – weak growth; U/W
We are U/W sectors like autos, consumer staples and oil PSUs that are expected to report the weakest growth amongst our universe.
Top Potential Result Outperformers: Dr Reddys, State Bank, Bharat Forge, Bhel, Jet
Top Potential Result Underperformers: HLL, Bajaj Auto, Hero Honda, Cipla, L&T
Top Mid-Cap Potential Outperformers: Panacea, IVRCL, Sasken, Educomp, Colgate, GSPL.
Sector Highlights
Automobiles
Potential Result Outperformers: Bharat Forge, M&M
Potential Result Underperformers: Hero Honda
> We expect the sector to exhibit a mixed performance, with four-wheelers and component companies doing better than two wheelers. This is a repetition of the past few quarters, and an indication of more acute margin pressures, and relatively slower demand in the two-wheeler sector.
> Within commercial vehicles, we expect Ashok Leyland to post a stronger YoY performance on the back of strong sales and steady margins, as should M&M, driven by strong performance in the autos segment. Maruti and Tata Motors should continue to grow at a reasonable rate, although profit growth will likely be restricted by lower margins. Reported profit for M&M should, however, be lower YoY due to an extraordinary gain of Rs1.67bn last year. Tata Motors’ reported growth will be lower due to last year’s forex gain of Rs221mn.
> Within the two-wheeler space, we expect both Bajaj Auto and Hero Honda to register severe contraction in profits, due to muted top-line and lower margins. We believe that margins will be marked down substantially, impacted by the World Cup cricket tournament (for Hero Honda) and Rs3,000 price discounts on Platina (for Bajaj Auto). TVS Motor will continue to be squeezed by the leading players, thereby likely registering a sharp decline in profits once again.
> Amongst the auto components companies under coverage, we expect Bharat Forge to register the strongest performance, aided by domestic four-wheeler sales, and steady exports. Automotive Axles too should likewise register a strong quarter. Rico Auto is expected to disappoint again due to high power costs, as well as increased depreciation and interest expense.
Airlines
Potential Result Outperformers: Jet Airways
We expect Jet Airways to report significantly improved financial performance this quarter, with adj. PAT of Rs699mn (up 23% YoY) as compared to YTD loss of Rs2.1bn. Previous year reported profit, though, included post-tax gain of Rs1.7bn from sale and leaseback. This performance would be the result of stronger than expected load factors mainly in international routes, steady oil prices, and full benefit of congestion surcharge (imposed in December).
Banks and Financial Services
Potential Result Outperformers: SBI
> Bank earnings may come in 4-5% lower than expected owing to margin compression arising from a mismatch in rise in funding cost and lending rates. In particular, govt. banks have not raised lending rates at the same pace as deposit rates. The margin compression would have been higher but for the one-off interest banks are to receive on the CRR in this quarter.
> Loan growth could, however, surprise on the upside as sector growth sustains at +28%. We had been expecting a moderation in growth during the 4QFY08. In particular, govt. banks could see stronger growth led by SME and farm.
> The key variable to watch will be provisions. While we do see higher credit costs as banks seek to provide for a likely uptick in NPLs, the extent of provisions and the NPLs will be critical. We also see some mark to market hit as bond yields rise v/s 3Q levels (and some banks had written back provisions during the previous quarters). Fee income is, however, estimated to remain strong for private banks (+35%); government banks that are leading on technology implementation could sustain fee income growth of 15-20%.
> Amongst banks, ICICI Bank could see much slower growth (at <20%) owing to higher general provisions of Rs3.0bn. The key for IBank, however, will be the qoq uptick in gross NPLs. SBI could be a positive surprise given its excess SLR and the high CASA. HDFC Bank and UTI Bank could sustain earnings growth of 28-30%yoy.
> SBI's net profit growth, at 72% YoY, is exceptionally high owing to a much lower hit on its bond portfolio and lower taxes (SBI had accounted for whole year’s fringe benefit tax in 4QFY06). We expect the pre-provisional profits to grow at a moderate 15% YoY. We however think that at the operating level SBI could surprise on the upside owing to its high CASA, which could result in stronger than expected top line growth.
Cement
Potential Result Outperformers: None
Potential Result Underperformers: ACC, Gujarat Ambuja, Shree Cement, India Cements
Result Expectations – Key Highlights
> We expect the cement sector to deliver strong profit growth for the quarter ended Jan-Mar ’07. Sector profits will likely rise ~83% YoY and 14% QoQ. Margin expansion, on the back of higher cement prices and flat-to-lower costs, will be the primary profit driver.
> We believe Jan-Mar ’07 will mark peak EBITDA margins for the cement majors. This reflects the industry’s recent commitment to the government that it will cap cement prices at current levels for a year, regardless of possible increase in input costs.
> In Jan-Mar ’07, cement volumes for our coverage universe are forecast to be flattish, up 2% YoY & 4% QoQ. This compares with the industry’s volume growth of ~ 7% YoY during Jan-Feb ’07 (March data is awaited).
> Net price realization (excluding excise) for our coverage universe is estimated to be up ~26% YoY and 1% QoQ. Operating costs are forecast to be up 11% YoY and down 3% QoQ, on average. EBITDA/ton is forecast to average ~Rs1200/ton, up 71% YoY and 7% QoQ.
> Among the pure plays, we expect India Cements to post strong profit growth (+56% QoQ), driven by seasonal recovery in volumes (+14% QoQ) and consequent lower costs (-4% QoQ). In the Mar quarter, Gujarat Ambuja & UltraTech should also post strong QoQ EBITDA growth helped by flat-tolower costs and modest rise in cement prices.
Consumers
Potential Result Outperformers: Colgate
Potential Result Underperformers: HLL, Nestle
We expect aggregate consumer sector profit to grow 17% in the Mar Q. This is slightly better than 14% growth in the Dec Q but still lower than the 20-21% growth reported in Sep and Jun quarters. We forecast sector sales to grow 16% and EBITDA to grow 24% this Q.
HLL – We expect HLL’s profit to grow 16% this Q, better than the 11% growth in the Dec Q. We expect revenue growth of 9% and a higher EBITDA growth of 15%. We see a 70bps improvement in EBITDA margins due primarily to base effect. We see high downside risk to our estimates.
ITC will likely report numbers in line with past trends. We expect profit to grow 19% led by turnover growth of 17% and EBITDA margin expansion of 220bps. We expect gross cigarette turnover to grow 16% and margin to expand 130bps. In the case of non-cigarettes, we look for turnover increase of 27% and EBIT increase of 58%
Colgate in Mar Q should stand out as the company with most improved performance on a yoy basis. We expect profit to grow 35%, better than the 10% growth in the first 9 months of the year. While forecast sales growth is 13%, EBITDA will grow 37% led by favorable base effect on advertising cost timing. We expect a 330bps improvement in Colgate’s EBITDA margin in the current Q.
Asian Paints should also have a strong quarter with pre-tax profit growth of 26% led by domestic business growing 20% and international businesses growing faster led by base effect. We expect post-tax profit growth to be faster at 38% as the previous year was hit by higher tax provisions in the international businesses.
For Tata Tea, we expect the March Q to be the second consecutive quarter of profit decline. We forecast Mar Q profit to fall 7% Y-o-Y owing primarily to high interest costs for funding recent large acquisitions.
Nestle – We expect Nestle to disappoint with EBITDA growth of merely 12% despite revenue growth of 18%. Higher milk and coffee prices will likely hit EBITDA margins. We expect profit growth of 8% due to the effect of writeback of provisions of Rs125m in Mar Q last year.
Dabur – We expect Mar Q results to be in line with past trends. We look for EBITDA growth of 20% led by topline growth of 18%, led by high growth in fruit juices and home care, and rejuvenated Chyawanprash portfolio.
Energy
Potential Result Outperformers: RIL, GSPL
Potential Result Underperformers: IGL, Petronet LNG,
Gujarat Gas
> Oil prices: Price of ONGC’s marker crude Bonny Light is down 6% YoY and 4% QoQ to US$59/bbl.
> Refining margins: Singapore refining margins based on Dubai crude stayed flat QoQ at US$5.75/bbl in 4Q FY07. On a YoY basis, margins are down US$0.5/bbl (9%).
> Subsidies: We expect under-recoveries (ie subsidies) in 4Q at Rs85bn to be 20% YoY lower due to a steep decline in auto fuel under-recoveries. Underrecoveries on LPG/ SKO in 4Q are also down 12% YoY.
> Subsidy upstream companies will bear in 4Q uncertain: The extent of subsidy upstream oil companies like ONGC will bear in 4Q is still uncertain. We have assumed that upstream companies will bear Rs29bn of subsidy in 4Q (ie 35% of subsidy). Upstream contribution would be higher at Rs35bn if it is made to bear 41% of subsidy.
Media
Potential Result Outperformers: Zee Telefilms
We expect strong PAT growth trend among media companies in 4QFY07 and continued improving outlook.
We expect the Indian Media Sector, represented by Zee & Balaji, to report sales growth of 17%YoY but PAT growth of 56%YoY, mainly led by Zee.
> For Zee: We expect 4QFY07 to mark modest topline growth despite the ongoing Cricket World Cup on a competing channel. Driver of the anticipated 17%YoY topline growth will be the monetization of advertisement rate hike announced last year. We expect 161%YoY growth in EBITDA given its startup investments are approaching breakeven and lower content cost as
compared to 4QFY06. This should lead to a 57%YoY rise in reported PAT. This rise in PAT is largely factored in the stock price, and hence, we do not see much impact on the stock.
> Balaji should show improvement, with estimated sales growth of 16% YoY, EBITDA growth of 50%YoY, and Recurring PAT growth of 54% led by improved operating matrix in terms of higher realization (Star Price hike effective 2QFY07) & lower cost of production. However, YoY growth in EBITDA and PAT is not comparable, as the company has started providing managerial remuneration on a quarterly basis v/s 4Q till last year.
Software
Potential Result Outperformers: Educomp, Sasken
Potential Result Underperformers: Infosys, Patni Could strike a note of caution
Given the uncertainty on the US economic outlook, surge in the Rupee, and lack of clarity on imposition of Fringe Benefit Tax on ESOPs, we believe companies may strike a note of caution on the FY08 earnings growth outlook. Bellwether Infosys will set the tone when they kick off results season on Apr 13 and provide guidance for the coming year. While this could pressure stocks near term, we currently see no structural change to the offshoring trend, and maintain our positive stance on the sector.
Infosys guidance could disappoint Given the uncertain US economic outlook, Rupee appreciation and certain clientspecific uncertainties, for e.g. with respect to ABN Amro (in potential merger talks), we believe EPS growth guidance could be in the early 20% range, disappointing the market. We and consensus are forecasting a 30% FY08 EPSg, which could see a downward revision of 3-5%. While we see this near-term risk, we retain our Buy rating, given our view that Infy can achieve at least a strong 25% EPS growth.
Q1 guidance tempered by wage hike, Rupee and high base
Last Q1 benefited from sharp Rupee depreciation, significant volume strength from some large clients like in Infosys. Thereby given a high base, Rupee appreciation and annual wage hike, Q1 guidance would be expected to be dull. US economy a concern, pricing commentary key to watch
We believe the Indian IT industry is concerned over a possible US slowdown. In case of a slowdown volume growth may slow before picking up, as clients review spending priorities. Discretionary spending will get impacted the maximum, whereas there would be pricing pressures on the rest of the business. In our view, a 1% change in price assumption could hit FY08 earnings by 2% to 3%. Rupee appreciation to impact FY08 margins The Rupee/USD appreciation of 2% in 2 weeks has taken all by surprise and has been likely the result of the central bank abstaining from steadying the Rupee in a likely bid to manage rising inflationary pressures. Moreover, hardening interest rates in India may not help ease the situation on the Rupee front. If we assume that the Re could move to Rs42 by Mar 31, 08, it could hit FY08 earnings by 1.5% to 3%. Impact of budget proposals not completely clear yet Budget 2007 imposed Fringe Benefit Tax (FBT) on ESOPs. As we await details on this, its complete impact on the bottom lines of IT companies is not completely certain. Moreover, most companies are likely to pass on the tax to the employees.
If it were not passed on, it could impact profits by as little as 1% to as much as 15% for companies under our coverage. Also, since companies have encouraged employees to exercise options prior to Mar 31, it can be expected to result in EPS dilution next year.
Mar qrt likely modest
The quarter itself will likely be modest, driven by seasonally weak revenues until new projects ramp up. We believe forex losses could be modest, where companies will probably gain on hedging but net lose on translation. However, given the Rupee movement is more modest, at 2% vs 3.8% in previous qrt, the forex losses would be lower than last year.
Strong results expected
TCS: Likely to show margin expansion of almost 90bps given beneficial impact of large deals ramping up, likely offshore shift, and S,G&A efficiencies. TCS is our favorite large-cap pick going into the quarter.
Sasken: Expect revenues to grow by 13% qoq, largely driven by sharp growth in product revenues. Expect product losses to reduce from Rs102mn to Rs42mn. Expect profits to grow by 20% qoq driven by lower losses in product business. Update on E series signup the key to stock rerating in the short term.
Educomp: Expect revenues to grow by 78% yoy driven by 149% yoy growth in Smart_Class revenues. Expect profits to grow at 66% yoy. Full year guidance key to rerating in the short term.
Weak results expected
Infosys: is likely to report a mere 4% qoq PAT growth due to seasonality. Guidance could disappoint, as discussed.
Patni: As guided, we expect Patni to report a 10% qoq decline in profits on muted revenue and likely increase in investments in building a bench and SG&A. The guidance for 2Q will likely be muted given the likely annual wage hike.
Mid Caps
Triveni Engineering
>Sugar production for this season is estimated to be around 25mn tonnes, with consumption estimated to be around 19mn tonnes. The sugar prices for this quarter have declined by 19% (Y-o-Y basis) to Rs.15.56/kg (data accumulated from NCDEX). We expect the sugar prices to remain under pressure due to the oversupply situation.
> Following the dire state of sugar mills, the government has declared various support measures for the industry in the form of buffer stocks (2mn tonnes), open exports and export subsidies. However, approval of the same is awaited from the election commission as Uttar Pradesh has elections this year. In spite of all these measures, we expect the industry to report bad numbers at least for another 3-4 quarters.
> In Q4FY07, we expect Triveni’s revenue to grow 24.6% on the back of the strong growth in the engineering division. However, the EBITDA is expected to decline on the back of the continuing margin pressure in its sugar division due to declining sugar prices. The profits for the quarter are thus expected to decline by around 76%.
Greaves Cotton
> In Q3FY07, we expect Greaves’s revenue to grow at 41% on the back of strong growth in both its segment of engines (36% Y-o-Y) and infrastructure (60% Y-o-Y). We expect EBITDA margins to be stable at 15.3%. Profits for the quarter are thus expected to improve by 50% on an adjusted basis to Rs.301mn.
Sensex earnings growth in this quarter, though strong at 30%, is losing momentum and is the slowest in FY07 (MSCI is much lower due to the oil PSUs). This is despite a low base (Q4FY06 was the second slowest growth in last 12 quarters). Our call has been that earnings will slow to the 20-22% level in Q1FY08 and 15-17% in FY08, a view that is now gaining favor with consensus.
Healthcare, cement – strong growth but slowing in FY08
Healthcare has a strong growth for this quarter mainly due to a low base. For FY08, growth in the sector is expected to slow to under 20%. Similarly, cement shows a very strong growth for this quarter but we have a sell on most stocks, given Government measures to reduce prices.
Telecom, IT, industrials – Sustainable growth; O/W
Telecom and industrials should sustain strong earnings growth next year. However, Larsen & Toubro is likely to report slower growth in this quarter and could underperform near term. Again in IT we like the strong earnings growth story but expect weakness ahead of the Infosys guidance.
Autos, consumer staples and oil PSUs – weak growth; U/W
We are U/W sectors like autos, consumer staples and oil PSUs that are expected to report the weakest growth amongst our universe.
Top Potential Result Outperformers: Dr Reddys, State Bank, Bharat Forge, Bhel, Jet
Top Potential Result Underperformers: HLL, Bajaj Auto, Hero Honda, Cipla, L&T
Top Mid-Cap Potential Outperformers: Panacea, IVRCL, Sasken, Educomp, Colgate, GSPL.
Sector Highlights
Automobiles
Potential Result Outperformers: Bharat Forge, M&M
Potential Result Underperformers: Hero Honda
> We expect the sector to exhibit a mixed performance, with four-wheelers and component companies doing better than two wheelers. This is a repetition of the past few quarters, and an indication of more acute margin pressures, and relatively slower demand in the two-wheeler sector.
> Within commercial vehicles, we expect Ashok Leyland to post a stronger YoY performance on the back of strong sales and steady margins, as should M&M, driven by strong performance in the autos segment. Maruti and Tata Motors should continue to grow at a reasonable rate, although profit growth will likely be restricted by lower margins. Reported profit for M&M should, however, be lower YoY due to an extraordinary gain of Rs1.67bn last year. Tata Motors’ reported growth will be lower due to last year’s forex gain of Rs221mn.
> Within the two-wheeler space, we expect both Bajaj Auto and Hero Honda to register severe contraction in profits, due to muted top-line and lower margins. We believe that margins will be marked down substantially, impacted by the World Cup cricket tournament (for Hero Honda) and Rs3,000 price discounts on Platina (for Bajaj Auto). TVS Motor will continue to be squeezed by the leading players, thereby likely registering a sharp decline in profits once again.
> Amongst the auto components companies under coverage, we expect Bharat Forge to register the strongest performance, aided by domestic four-wheeler sales, and steady exports. Automotive Axles too should likewise register a strong quarter. Rico Auto is expected to disappoint again due to high power costs, as well as increased depreciation and interest expense.
Airlines
Potential Result Outperformers: Jet Airways
We expect Jet Airways to report significantly improved financial performance this quarter, with adj. PAT of Rs699mn (up 23% YoY) as compared to YTD loss of Rs2.1bn. Previous year reported profit, though, included post-tax gain of Rs1.7bn from sale and leaseback. This performance would be the result of stronger than expected load factors mainly in international routes, steady oil prices, and full benefit of congestion surcharge (imposed in December).
Banks and Financial Services
Potential Result Outperformers: SBI
> Bank earnings may come in 4-5% lower than expected owing to margin compression arising from a mismatch in rise in funding cost and lending rates. In particular, govt. banks have not raised lending rates at the same pace as deposit rates. The margin compression would have been higher but for the one-off interest banks are to receive on the CRR in this quarter.
> Loan growth could, however, surprise on the upside as sector growth sustains at +28%. We had been expecting a moderation in growth during the 4QFY08. In particular, govt. banks could see stronger growth led by SME and farm.
> The key variable to watch will be provisions. While we do see higher credit costs as banks seek to provide for a likely uptick in NPLs, the extent of provisions and the NPLs will be critical. We also see some mark to market hit as bond yields rise v/s 3Q levels (and some banks had written back provisions during the previous quarters). Fee income is, however, estimated to remain strong for private banks (+35%); government banks that are leading on technology implementation could sustain fee income growth of 15-20%.
> Amongst banks, ICICI Bank could see much slower growth (at <20%) owing to higher general provisions of Rs3.0bn. The key for IBank, however, will be the qoq uptick in gross NPLs. SBI could be a positive surprise given its excess SLR and the high CASA. HDFC Bank and UTI Bank could sustain earnings growth of 28-30%yoy.
> SBI's net profit growth, at 72% YoY, is exceptionally high owing to a much lower hit on its bond portfolio and lower taxes (SBI had accounted for whole year’s fringe benefit tax in 4QFY06). We expect the pre-provisional profits to grow at a moderate 15% YoY. We however think that at the operating level SBI could surprise on the upside owing to its high CASA, which could result in stronger than expected top line growth.
Cement
Potential Result Outperformers: None
Potential Result Underperformers: ACC, Gujarat Ambuja, Shree Cement, India Cements
Result Expectations – Key Highlights
> We expect the cement sector to deliver strong profit growth for the quarter ended Jan-Mar ’07. Sector profits will likely rise ~83% YoY and 14% QoQ. Margin expansion, on the back of higher cement prices and flat-to-lower costs, will be the primary profit driver.
> We believe Jan-Mar ’07 will mark peak EBITDA margins for the cement majors. This reflects the industry’s recent commitment to the government that it will cap cement prices at current levels for a year, regardless of possible increase in input costs.
> In Jan-Mar ’07, cement volumes for our coverage universe are forecast to be flattish, up 2% YoY & 4% QoQ. This compares with the industry’s volume growth of ~ 7% YoY during Jan-Feb ’07 (March data is awaited).
> Net price realization (excluding excise) for our coverage universe is estimated to be up ~26% YoY and 1% QoQ. Operating costs are forecast to be up 11% YoY and down 3% QoQ, on average. EBITDA/ton is forecast to average ~Rs1200/ton, up 71% YoY and 7% QoQ.
> Among the pure plays, we expect India Cements to post strong profit growth (+56% QoQ), driven by seasonal recovery in volumes (+14% QoQ) and consequent lower costs (-4% QoQ). In the Mar quarter, Gujarat Ambuja & UltraTech should also post strong QoQ EBITDA growth helped by flat-tolower costs and modest rise in cement prices.
Consumers
Potential Result Outperformers: Colgate
Potential Result Underperformers: HLL, Nestle
We expect aggregate consumer sector profit to grow 17% in the Mar Q. This is slightly better than 14% growth in the Dec Q but still lower than the 20-21% growth reported in Sep and Jun quarters. We forecast sector sales to grow 16% and EBITDA to grow 24% this Q.
HLL – We expect HLL’s profit to grow 16% this Q, better than the 11% growth in the Dec Q. We expect revenue growth of 9% and a higher EBITDA growth of 15%. We see a 70bps improvement in EBITDA margins due primarily to base effect. We see high downside risk to our estimates.
ITC will likely report numbers in line with past trends. We expect profit to grow 19% led by turnover growth of 17% and EBITDA margin expansion of 220bps. We expect gross cigarette turnover to grow 16% and margin to expand 130bps. In the case of non-cigarettes, we look for turnover increase of 27% and EBIT increase of 58%
Colgate in Mar Q should stand out as the company with most improved performance on a yoy basis. We expect profit to grow 35%, better than the 10% growth in the first 9 months of the year. While forecast sales growth is 13%, EBITDA will grow 37% led by favorable base effect on advertising cost timing. We expect a 330bps improvement in Colgate’s EBITDA margin in the current Q.
Asian Paints should also have a strong quarter with pre-tax profit growth of 26% led by domestic business growing 20% and international businesses growing faster led by base effect. We expect post-tax profit growth to be faster at 38% as the previous year was hit by higher tax provisions in the international businesses.
For Tata Tea, we expect the March Q to be the second consecutive quarter of profit decline. We forecast Mar Q profit to fall 7% Y-o-Y owing primarily to high interest costs for funding recent large acquisitions.
Nestle – We expect Nestle to disappoint with EBITDA growth of merely 12% despite revenue growth of 18%. Higher milk and coffee prices will likely hit EBITDA margins. We expect profit growth of 8% due to the effect of writeback of provisions of Rs125m in Mar Q last year.
Dabur – We expect Mar Q results to be in line with past trends. We look for EBITDA growth of 20% led by topline growth of 18%, led by high growth in fruit juices and home care, and rejuvenated Chyawanprash portfolio.
Energy
Potential Result Outperformers: RIL, GSPL
Potential Result Underperformers: IGL, Petronet LNG,
Gujarat Gas
> Oil prices: Price of ONGC’s marker crude Bonny Light is down 6% YoY and 4% QoQ to US$59/bbl.
> Refining margins: Singapore refining margins based on Dubai crude stayed flat QoQ at US$5.75/bbl in 4Q FY07. On a YoY basis, margins are down US$0.5/bbl (9%).
> Subsidies: We expect under-recoveries (ie subsidies) in 4Q at Rs85bn to be 20% YoY lower due to a steep decline in auto fuel under-recoveries. Underrecoveries on LPG/ SKO in 4Q are also down 12% YoY.
> Subsidy upstream companies will bear in 4Q uncertain: The extent of subsidy upstream oil companies like ONGC will bear in 4Q is still uncertain. We have assumed that upstream companies will bear Rs29bn of subsidy in 4Q (ie 35% of subsidy). Upstream contribution would be higher at Rs35bn if it is made to bear 41% of subsidy.
Media
Potential Result Outperformers: Zee Telefilms
We expect strong PAT growth trend among media companies in 4QFY07 and continued improving outlook.
We expect the Indian Media Sector, represented by Zee & Balaji, to report sales growth of 17%YoY but PAT growth of 56%YoY, mainly led by Zee.
> For Zee: We expect 4QFY07 to mark modest topline growth despite the ongoing Cricket World Cup on a competing channel. Driver of the anticipated 17%YoY topline growth will be the monetization of advertisement rate hike announced last year. We expect 161%YoY growth in EBITDA given its startup investments are approaching breakeven and lower content cost as
compared to 4QFY06. This should lead to a 57%YoY rise in reported PAT. This rise in PAT is largely factored in the stock price, and hence, we do not see much impact on the stock.
> Balaji should show improvement, with estimated sales growth of 16% YoY, EBITDA growth of 50%YoY, and Recurring PAT growth of 54% led by improved operating matrix in terms of higher realization (Star Price hike effective 2QFY07) & lower cost of production. However, YoY growth in EBITDA and PAT is not comparable, as the company has started providing managerial remuneration on a quarterly basis v/s 4Q till last year.
Software
Potential Result Outperformers: Educomp, Sasken
Potential Result Underperformers: Infosys, Patni Could strike a note of caution
Given the uncertainty on the US economic outlook, surge in the Rupee, and lack of clarity on imposition of Fringe Benefit Tax on ESOPs, we believe companies may strike a note of caution on the FY08 earnings growth outlook. Bellwether Infosys will set the tone when they kick off results season on Apr 13 and provide guidance for the coming year. While this could pressure stocks near term, we currently see no structural change to the offshoring trend, and maintain our positive stance on the sector.
Infosys guidance could disappoint Given the uncertain US economic outlook, Rupee appreciation and certain clientspecific uncertainties, for e.g. with respect to ABN Amro (in potential merger talks), we believe EPS growth guidance could be in the early 20% range, disappointing the market. We and consensus are forecasting a 30% FY08 EPSg, which could see a downward revision of 3-5%. While we see this near-term risk, we retain our Buy rating, given our view that Infy can achieve at least a strong 25% EPS growth.
Q1 guidance tempered by wage hike, Rupee and high base
Last Q1 benefited from sharp Rupee depreciation, significant volume strength from some large clients like in Infosys. Thereby given a high base, Rupee appreciation and annual wage hike, Q1 guidance would be expected to be dull. US economy a concern, pricing commentary key to watch
We believe the Indian IT industry is concerned over a possible US slowdown. In case of a slowdown volume growth may slow before picking up, as clients review spending priorities. Discretionary spending will get impacted the maximum, whereas there would be pricing pressures on the rest of the business. In our view, a 1% change in price assumption could hit FY08 earnings by 2% to 3%. Rupee appreciation to impact FY08 margins The Rupee/USD appreciation of 2% in 2 weeks has taken all by surprise and has been likely the result of the central bank abstaining from steadying the Rupee in a likely bid to manage rising inflationary pressures. Moreover, hardening interest rates in India may not help ease the situation on the Rupee front. If we assume that the Re could move to Rs42 by Mar 31, 08, it could hit FY08 earnings by 1.5% to 3%. Impact of budget proposals not completely clear yet Budget 2007 imposed Fringe Benefit Tax (FBT) on ESOPs. As we await details on this, its complete impact on the bottom lines of IT companies is not completely certain. Moreover, most companies are likely to pass on the tax to the employees.
If it were not passed on, it could impact profits by as little as 1% to as much as 15% for companies under our coverage. Also, since companies have encouraged employees to exercise options prior to Mar 31, it can be expected to result in EPS dilution next year.
Mar qrt likely modest
The quarter itself will likely be modest, driven by seasonally weak revenues until new projects ramp up. We believe forex losses could be modest, where companies will probably gain on hedging but net lose on translation. However, given the Rupee movement is more modest, at 2% vs 3.8% in previous qrt, the forex losses would be lower than last year.
Strong results expected
TCS: Likely to show margin expansion of almost 90bps given beneficial impact of large deals ramping up, likely offshore shift, and S,G&A efficiencies. TCS is our favorite large-cap pick going into the quarter.
Sasken: Expect revenues to grow by 13% qoq, largely driven by sharp growth in product revenues. Expect product losses to reduce from Rs102mn to Rs42mn. Expect profits to grow by 20% qoq driven by lower losses in product business. Update on E series signup the key to stock rerating in the short term.
Educomp: Expect revenues to grow by 78% yoy driven by 149% yoy growth in Smart_Class revenues. Expect profits to grow at 66% yoy. Full year guidance key to rerating in the short term.
Weak results expected
Infosys: is likely to report a mere 4% qoq PAT growth due to seasonality. Guidance could disappoint, as discussed.
Patni: As guided, we expect Patni to report a 10% qoq decline in profits on muted revenue and likely increase in investments in building a bench and SG&A. The guidance for 2Q will likely be muted given the likely annual wage hike.
Mid Caps
Triveni Engineering
>Sugar production for this season is estimated to be around 25mn tonnes, with consumption estimated to be around 19mn tonnes. The sugar prices for this quarter have declined by 19% (Y-o-Y basis) to Rs.15.56/kg (data accumulated from NCDEX). We expect the sugar prices to remain under pressure due to the oversupply situation.
> Following the dire state of sugar mills, the government has declared various support measures for the industry in the form of buffer stocks (2mn tonnes), open exports and export subsidies. However, approval of the same is awaited from the election commission as Uttar Pradesh has elections this year. In spite of all these measures, we expect the industry to report bad numbers at least for another 3-4 quarters.
> In Q4FY07, we expect Triveni’s revenue to grow 24.6% on the back of the strong growth in the engineering division. However, the EBITDA is expected to decline on the back of the continuing margin pressure in its sugar division due to declining sugar prices. The profits for the quarter are thus expected to decline by around 76%.
Greaves Cotton
> In Q3FY07, we expect Greaves’s revenue to grow at 41% on the back of strong growth in both its segment of engines (36% Y-o-Y) and infrastructure (60% Y-o-Y). We expect EBITDA margins to be stable at 15.3%. Profits for the quarter are thus expected to improve by 50% on an adjusted basis to Rs.301mn.
4QFY07 earnings preview
FY07: a record year
> For 4Q FY07, while YoY profit growth for Sensex will slow from 34% in 9m, we see 27.4% YoY growth.
> Adjusted for exceptional items, growth will be higher, at 30% YoY.
> Growth for the CLSA Universe (-0.1% YoY) will be dampened by adverse comparisons for oil companies (bunching in oil-bond issuance in 4Q FY06), but excluding-oil & gas, growth will be 25.3% (41.9% in 3Q FY07).
> Three sectors - software, telecom and banks – will together account for 58% of incremental earnings growth. Cement sector earnings should rise 42% YoY, on the back of higher cement prices.
> Strong demand momentum will reflect in 54% YoY (pre-excep. basis) growth in profits for Telecom, 23% for capital goods, 45% for Software. Pharma should see +69% growth off a low base (losses for Wockhardt, Dr Reddy in 4QFY06).
> Ex oil & gas, ebitda margin will rise 114bps YoY led by margin improvements in cement, telecom, pharma and consumer sectors.
> For Power, Autos and Metals, we see decline in margins on a YoY basis.
> Our forecast of slowdown in Sensex EPS growth to 12-17% in FY08-09 is driven by lower profitability in commodities, following a slowdown in global growth, and moderation in growth in Autos, Pharma and Petrochems.
> Slower earnings growth and tighter domestic liquidity will be challenges for market performance in 2007, after two years of +40% annual returns.
> Industrials, Consumer staples, Utilities and Infotech are our key Overweights. Energy, Materials and Financials are our key Underweights. We will, however, review our tactical U-WT on banks in the next few weeks, based on indications on inflation and asset quality of banks (reflected in 4Q results).
> With rising pressures on input costs, growing execution challenges, we believe bottoms-up stock selection will become more critical for outperformance.
Automobiles
> We expect 19% sector revenue growth in 4Q07, which will be led by the four wheeler companies which have seen robust volume growth (Maruti 4Q07 car sales up 30%YoY; Tata Motors CV sales up 19%), while two-wheeler sales have remained subdued in 4Q07.
> However, high 4Q06 base, coupled with aggressive discounting in two-wheeler companies and adverse product mix among some four-wheeler companies will keep margins under pressure. We expect margin pressures seen in 3Q07 (sector margins down 191bps) to continue in 4Q07. Consequently, ebitda growth at 2% will sharply lag revenue growth with sector margins forecast to decline by 200bps.
> We expect sector pre-exceptional PAT growth to be at a higher 17% on account of higher non-operating income, (largely forex gains from rupee appreciation as well as higher interest income from rise in interest rates in 4Q07).
Banks and Financials
> Indian financials are expected to report a healthy 19% growth in earnings in the current quarter as well despite the increase in general provisions on certain loans and higher reserve requirements.
> Volume growth in the sector continues to be robust with loans up 29%YoY and deposits up 24%.
> The two lending rate increases which typically feed through faster than deposit cost rise are expected to help PSU banks report a moderate expansion in their margins during the quarter. While, higher reserve requirement will be a dampener, RBI decision to pay interest on cash reserves with retrospective effect will offset the impact in the current quarter.
> With benchmark bond yields up 50bps during the quarter mark to market provisions will also dampen earnings; however this will not have a large impact on reported YoY growth as banks had witnessed a similar 30bps rise in rates during Jan-Mar ‘06.
> We expect private banks to continue to maintain a higher earnings growth trajectory though the impact of deposit cost and general provision increase is higher at these banks. Strong rise in non-interest income will help banks partly offset these.
> Asset quality trends will be the key to watch for in these results as with rising interest rates, the asset quality cycle may also be reversing.
Capital Goods
> BHEL's FY07 net profit at Rs24bn, up 42% YoY, was in line with our estimates. Order booking for the year at Rs363bn was 14% higher than our expectations. Revenues were 3% lower than our expectation, indicating better than expected margins. The strong order backlog of over Rs540bn, provides high visibility to FY08 and FY09 earnings. BHEL is our top pick in the engineering sector and among Indian large caps.
> We expect 25% growth in L&T's 4Q FY07 pre tax profits on the back of strong revenue growth. Growth in reported profit will be around 10% due to higher tax rate and some one-time gain in 4Q FY06. Ebitda margins for the E&C divisions are likely to be down marginally versus 3Q (3Q margins were higher than usual). L&T has sustained its order booking momentum in the fourth quarter too.
> ABB's strong growth streak is likely to continue. We expect +40% revenue and profit growth in 1Q 2007.
> Crompton Greaves 4Q FY07 net profit growth is likely to be negligible, though we expect 25% YoY growth at the pre-tax level. For full year FY07 we expect 9% profit growth for Crompton Standalone. At the consolidated level the growth will be negligible due to consolidation of loss making Ganz. We are positive on the business and expect 55% profit growth in FY08, followed by 31% for FY09. FY07 profitability has been impacted by sharp increase in material cost and tax rates. Both these factors will be favourable in FY08.
> Top picks - BHEL, Crompton
Cement
> Cement demand growth has slowed down to 8% in the first two months of the quarter compared to 10%+ in the previous quarter. Volume growth in the major cement companies has been constrained by capacity. ACC reported a decline in its February volumes of 7% as it undertook some maintenance work in its key plants. We expect cement volumes to have expanded by 8%+ in March as well.
> Cement prices in the North rose by 1-2% while those in the South rose by 3-4% during the quarter. Overall average cement prices moved up by nearly 2-3% during the quarter and the current average cement price is at around Rs225/bag. However this includes the impact of excise duty hike done in the budget. Considering the price freeze and the government pressure, we do not expect any major movement in cement prices in the next quarter.
> Due to lower allotment of coal to cement companies by the mine operators, cement companies had to resort to higher amount of open market purchases of coal. This is likely to put some pressure on the margins.
> Ebitda/MT for the cement companies is expected to rise by 3-7% QoQ to Rs1100 – 1,300/mt. Grasim’s VSF business will realise the full impact of price increases and we expect segmental Ebitda to be up 42% YoY to Rs2.21bn.
Consumer
> Macro economic conditions continue to favour the consumer sector. We expect companies to report +10% growth in revenues. Most of the companies have taken price increases to pass on increase in raw material prices and this may lead to margin expansion in select companies.
> After the weaker growth performance in 4Q, we expect HLL to return to +10% revenue growth in 1Q2007. Higher EBITDA margins due to increased sales of personal products and price hike impact in key product lines will likely drive an earnings growth of 20%.
> In case of ITC, with VAT on cigarettes being implemented from April onwards, we will likely witness a stronger volume growth in 4QFY07 due to preponment of cigarette sales. Loss in ‘other FMCG’ segment will be another key number to watch out for.
> Colgate is likely to benefit from a combination of lower ad-spends and price increases. Topline growth will be strong at +12%, Ebitda will likely increase by +25% as margins increase by over 175bps YoY.
> Nestle is likely to report a strong topline growth of c.15% YoY. However margins are expected to be lower as key Milk & SMP prices have moved up again in the Jan-Mar quarter though YoY impact will be lower due to high base. We expect EBITDA margins to improve by 100bps over the previous quarter.
Metals
> Aluminium prices were cut twice during 4Q FY07 - in January and in March. Realisations during 4Q FY07 are likely to be lower by around 4-5%. This will impact Ebitda margins of the aluminium business. Profitability on alumina sales should be higher due to firming up alumina prices during the quarter. We expect negligible profit growth for Hindalco in the quarter and Nalco's profits are likely to show some decline/remain flat on YoY basis.
> Tata Steel should report a strong YoY earnings growth and around 10% sequential earnings growth on the back of higher sales volumes during the quarter. Cost of Corus acquisition may be reflected in 4Q results.
Oil & Gas
> With oil prices ($59/bbl) largely flat QoQ, retail losses were also flat (Rs85bn) despite the reduction in auto fuel prices in Feb.
> Oil bonds for 4Q (Rs49.8bn) have already been paid by the government to the oil marketing companies.
> GRMs firmed up $2-3/bbl QoQ and with expected inventory gains and moderate losses on retail fuels, 4Q should be a strong quarter for R&Ms. Strong GRMs will also make 4Q a strong quarter for Chennai Petroleum.
> We expect ONGC’s profitability to moderate and reflect $43/bbl net realisations. We are building in exceptional gains from insurance payments related to the Mumbai High fire and also an impact due to the contingent liability on the disputed profit sharing on the Ravva asset in the quarter.
Petrochemicals
> Reliance will benefit from a YoY stronger petrochemical quarter and a QoQ improvement in refining margins.
Pharma
> Companies such as Ranbaxy, Sun, Wockhardt, Jubilant, and Aurobindo with outstanding FCCBs will benefit from a marked-to-market gain because of rupee appreciation.
> Margins on base business across companies will be weak because of rupee appreciation.
> MNC Pharmas might benefit marginally from rupee appreciation
> Dr. Reddy’s expected to report a strong quarter because of Ondansetron exclusivity. Worsening profitability of Betapharm is a key risk.
> Strong growth in domestic formulation sales expected to sustain. Formulation exports to developing markets will remain strong.
Power
> NTPC should be the best performing power company in 4Q, with volume growth and improvement in operating efficiencies. Higher generation (around 90%PLF) should help the company earn higher efficiency incentives. There is potential for upside to our earnings estimates.
> MERC's Oct-06 order, of deduction of Rs2.6bn from Reliance Energy's revenue requirements, is likely to have continued negative impact on the profitability of the company this quarter too. Other income could be the major swing factor in earnings.
> We expect 10% growth in Tata Power's pre-exceptional net profit in 4Q FY07. However, at the reported level there could be an earnings decline due to exceptional income in 4Q FY06.
Software
> Rupee appreciation, ESOP dilution have already reduced expectations from Infosys guidance – the flagship event of the quarter on 13th April. While markets seem reconciled to the negative impact of these factors on the company’s outlook, we expect EPS forecasts to continue their correction course from high, extrapolative, levels of +32% to the 28-30% range.
> So far, strong demand has been assured in techs, but recent data points suggest some softening – (Please refer our 5th April note on IT Services). The banking and financial services vertical, which comprised 43% of TCS and 39% of Infosys revenue, is of special interest. Company commentary has remained bullish across all vendors but we expect a mixed view post the result season. E.g. Sector frontliner Cognizant may not be able to repeat its superior June quarter performances this time.
> We added TCS to the CLSA model portfolio at the expense of Wipro. TCS does not give guidance and a slew of deal wins implies that at least topline visibility is assured for the time being. Heading into numbers, Satyam remains our #1 pick, as we see low consensus EPS expectations of 22%YY growth in FY08 – imparting some earnings strength to the stock. Disappointing commentary could emanate from Infosys, some mid-caps and also perhaps from Cognizant (when seen relative to high expectations from the stock).
Telecoms
> 4Q07 mobile net adds have been impacted to some extent by lower net-adds in March-07 (on account of disconnections due to verification procedures at cellcos). Roaming rate cut, implemented in mid-Feb'07 will also impact mobile ARPUs. However, overall volume growth has remained strong and momentum to remain healthy for both Bharti (revenues +9%QoQ) and RCom (+10%QoQ)
> We see downside risk to our MTNL revenue forecasts, considering pressures on fixed-line business. However, we also note that 4Q is also typically an adjustment quarter, especially on the taxation front, which could impact reported earnings growth.
Aviation
> Revenues of Rs18,110m (+11.4% YoY, down 6.4% QoQ).
> Compared to 3QFY07, yields will likely be lower impacting Ebitda margins.
> Per ASKM fuel expenditure expected to decline by 5% QoQ due to lower ATF prices in 4Q
> Loss of Rs497m at PBT level (profit of Rs137m in 3QFY07)
> Jet expected to write of Rs1.8bn as charges related to the Air Sahara deal; We forecast net loss of Rs2.3bn for 4QFY07.
> Key things to watch out for: Performance of the international business, which was near break even in 3QFY07; trends in selling & distribution expenditure and salary costs; Further profits from sale and lease back of aircrafts; total debt and company's plans to raise equity linked funds.
Retail
> Pantaloon Retail is expected to report sales of Rs8.9bn during 3QFY07, a growth of 95% YoY and 18% QoQ. Net profit will increase by 50% YoY to Rs244m. Ebitda margins are expected to be at 7.2%, 120bps lower than 3QFY06 due to higher share of value retailing. Further store additions during the last two quarters mean that fixed costs will be higher.
> During the quarter, we estimate that the company has added over 0.5 msqft to its shelf space. A large part of this addition has been under the Big Bazaar and Food Bazaar formats.
> Key things to watch out for: addition to shelf space, trend in employee costs and trend in inventory
> For 4Q FY07, while YoY profit growth for Sensex will slow from 34% in 9m, we see 27.4% YoY growth.
> Adjusted for exceptional items, growth will be higher, at 30% YoY.
> Growth for the CLSA Universe (-0.1% YoY) will be dampened by adverse comparisons for oil companies (bunching in oil-bond issuance in 4Q FY06), but excluding-oil & gas, growth will be 25.3% (41.9% in 3Q FY07).
> Three sectors - software, telecom and banks – will together account for 58% of incremental earnings growth. Cement sector earnings should rise 42% YoY, on the back of higher cement prices.
> Strong demand momentum will reflect in 54% YoY (pre-excep. basis) growth in profits for Telecom, 23% for capital goods, 45% for Software. Pharma should see +69% growth off a low base (losses for Wockhardt, Dr Reddy in 4QFY06).
> Ex oil & gas, ebitda margin will rise 114bps YoY led by margin improvements in cement, telecom, pharma and consumer sectors.
> For Power, Autos and Metals, we see decline in margins on a YoY basis.
> Our forecast of slowdown in Sensex EPS growth to 12-17% in FY08-09 is driven by lower profitability in commodities, following a slowdown in global growth, and moderation in growth in Autos, Pharma and Petrochems.
> Slower earnings growth and tighter domestic liquidity will be challenges for market performance in 2007, after two years of +40% annual returns.
> Industrials, Consumer staples, Utilities and Infotech are our key Overweights. Energy, Materials and Financials are our key Underweights. We will, however, review our tactical U-WT on banks in the next few weeks, based on indications on inflation and asset quality of banks (reflected in 4Q results).
> With rising pressures on input costs, growing execution challenges, we believe bottoms-up stock selection will become more critical for outperformance.
Automobiles
> We expect 19% sector revenue growth in 4Q07, which will be led by the four wheeler companies which have seen robust volume growth (Maruti 4Q07 car sales up 30%YoY; Tata Motors CV sales up 19%), while two-wheeler sales have remained subdued in 4Q07.
> However, high 4Q06 base, coupled with aggressive discounting in two-wheeler companies and adverse product mix among some four-wheeler companies will keep margins under pressure. We expect margin pressures seen in 3Q07 (sector margins down 191bps) to continue in 4Q07. Consequently, ebitda growth at 2% will sharply lag revenue growth with sector margins forecast to decline by 200bps.
> We expect sector pre-exceptional PAT growth to be at a higher 17% on account of higher non-operating income, (largely forex gains from rupee appreciation as well as higher interest income from rise in interest rates in 4Q07).
Banks and Financials
> Indian financials are expected to report a healthy 19% growth in earnings in the current quarter as well despite the increase in general provisions on certain loans and higher reserve requirements.
> Volume growth in the sector continues to be robust with loans up 29%YoY and deposits up 24%.
> The two lending rate increases which typically feed through faster than deposit cost rise are expected to help PSU banks report a moderate expansion in their margins during the quarter. While, higher reserve requirement will be a dampener, RBI decision to pay interest on cash reserves with retrospective effect will offset the impact in the current quarter.
> With benchmark bond yields up 50bps during the quarter mark to market provisions will also dampen earnings; however this will not have a large impact on reported YoY growth as banks had witnessed a similar 30bps rise in rates during Jan-Mar ‘06.
> We expect private banks to continue to maintain a higher earnings growth trajectory though the impact of deposit cost and general provision increase is higher at these banks. Strong rise in non-interest income will help banks partly offset these.
> Asset quality trends will be the key to watch for in these results as with rising interest rates, the asset quality cycle may also be reversing.
Capital Goods
> BHEL's FY07 net profit at Rs24bn, up 42% YoY, was in line with our estimates. Order booking for the year at Rs363bn was 14% higher than our expectations. Revenues were 3% lower than our expectation, indicating better than expected margins. The strong order backlog of over Rs540bn, provides high visibility to FY08 and FY09 earnings. BHEL is our top pick in the engineering sector and among Indian large caps.
> We expect 25% growth in L&T's 4Q FY07 pre tax profits on the back of strong revenue growth. Growth in reported profit will be around 10% due to higher tax rate and some one-time gain in 4Q FY06. Ebitda margins for the E&C divisions are likely to be down marginally versus 3Q (3Q margins were higher than usual). L&T has sustained its order booking momentum in the fourth quarter too.
> ABB's strong growth streak is likely to continue. We expect +40% revenue and profit growth in 1Q 2007.
> Crompton Greaves 4Q FY07 net profit growth is likely to be negligible, though we expect 25% YoY growth at the pre-tax level. For full year FY07 we expect 9% profit growth for Crompton Standalone. At the consolidated level the growth will be negligible due to consolidation of loss making Ganz. We are positive on the business and expect 55% profit growth in FY08, followed by 31% for FY09. FY07 profitability has been impacted by sharp increase in material cost and tax rates. Both these factors will be favourable in FY08.
> Top picks - BHEL, Crompton
Cement
> Cement demand growth has slowed down to 8% in the first two months of the quarter compared to 10%+ in the previous quarter. Volume growth in the major cement companies has been constrained by capacity. ACC reported a decline in its February volumes of 7% as it undertook some maintenance work in its key plants. We expect cement volumes to have expanded by 8%+ in March as well.
> Cement prices in the North rose by 1-2% while those in the South rose by 3-4% during the quarter. Overall average cement prices moved up by nearly 2-3% during the quarter and the current average cement price is at around Rs225/bag. However this includes the impact of excise duty hike done in the budget. Considering the price freeze and the government pressure, we do not expect any major movement in cement prices in the next quarter.
> Due to lower allotment of coal to cement companies by the mine operators, cement companies had to resort to higher amount of open market purchases of coal. This is likely to put some pressure on the margins.
> Ebitda/MT for the cement companies is expected to rise by 3-7% QoQ to Rs1100 – 1,300/mt. Grasim’s VSF business will realise the full impact of price increases and we expect segmental Ebitda to be up 42% YoY to Rs2.21bn.
Consumer
> Macro economic conditions continue to favour the consumer sector. We expect companies to report +10% growth in revenues. Most of the companies have taken price increases to pass on increase in raw material prices and this may lead to margin expansion in select companies.
> After the weaker growth performance in 4Q, we expect HLL to return to +10% revenue growth in 1Q2007. Higher EBITDA margins due to increased sales of personal products and price hike impact in key product lines will likely drive an earnings growth of 20%.
> In case of ITC, with VAT on cigarettes being implemented from April onwards, we will likely witness a stronger volume growth in 4QFY07 due to preponment of cigarette sales. Loss in ‘other FMCG’ segment will be another key number to watch out for.
> Colgate is likely to benefit from a combination of lower ad-spends and price increases. Topline growth will be strong at +12%, Ebitda will likely increase by +25% as margins increase by over 175bps YoY.
> Nestle is likely to report a strong topline growth of c.15% YoY. However margins are expected to be lower as key Milk & SMP prices have moved up again in the Jan-Mar quarter though YoY impact will be lower due to high base. We expect EBITDA margins to improve by 100bps over the previous quarter.
Metals
> Aluminium prices were cut twice during 4Q FY07 - in January and in March. Realisations during 4Q FY07 are likely to be lower by around 4-5%. This will impact Ebitda margins of the aluminium business. Profitability on alumina sales should be higher due to firming up alumina prices during the quarter. We expect negligible profit growth for Hindalco in the quarter and Nalco's profits are likely to show some decline/remain flat on YoY basis.
> Tata Steel should report a strong YoY earnings growth and around 10% sequential earnings growth on the back of higher sales volumes during the quarter. Cost of Corus acquisition may be reflected in 4Q results.
Oil & Gas
> With oil prices ($59/bbl) largely flat QoQ, retail losses were also flat (Rs85bn) despite the reduction in auto fuel prices in Feb.
> Oil bonds for 4Q (Rs49.8bn) have already been paid by the government to the oil marketing companies.
> GRMs firmed up $2-3/bbl QoQ and with expected inventory gains and moderate losses on retail fuels, 4Q should be a strong quarter for R&Ms. Strong GRMs will also make 4Q a strong quarter for Chennai Petroleum.
> We expect ONGC’s profitability to moderate and reflect $43/bbl net realisations. We are building in exceptional gains from insurance payments related to the Mumbai High fire and also an impact due to the contingent liability on the disputed profit sharing on the Ravva asset in the quarter.
Petrochemicals
> Reliance will benefit from a YoY stronger petrochemical quarter and a QoQ improvement in refining margins.
Pharma
> Companies such as Ranbaxy, Sun, Wockhardt, Jubilant, and Aurobindo with outstanding FCCBs will benefit from a marked-to-market gain because of rupee appreciation.
> Margins on base business across companies will be weak because of rupee appreciation.
> MNC Pharmas might benefit marginally from rupee appreciation
> Dr. Reddy’s expected to report a strong quarter because of Ondansetron exclusivity. Worsening profitability of Betapharm is a key risk.
> Strong growth in domestic formulation sales expected to sustain. Formulation exports to developing markets will remain strong.
Power
> NTPC should be the best performing power company in 4Q, with volume growth and improvement in operating efficiencies. Higher generation (around 90%PLF) should help the company earn higher efficiency incentives. There is potential for upside to our earnings estimates.
> MERC's Oct-06 order, of deduction of Rs2.6bn from Reliance Energy's revenue requirements, is likely to have continued negative impact on the profitability of the company this quarter too. Other income could be the major swing factor in earnings.
> We expect 10% growth in Tata Power's pre-exceptional net profit in 4Q FY07. However, at the reported level there could be an earnings decline due to exceptional income in 4Q FY06.
Software
> Rupee appreciation, ESOP dilution have already reduced expectations from Infosys guidance – the flagship event of the quarter on 13th April. While markets seem reconciled to the negative impact of these factors on the company’s outlook, we expect EPS forecasts to continue their correction course from high, extrapolative, levels of +32% to the 28-30% range.
> So far, strong demand has been assured in techs, but recent data points suggest some softening – (Please refer our 5th April note on IT Services). The banking and financial services vertical, which comprised 43% of TCS and 39% of Infosys revenue, is of special interest. Company commentary has remained bullish across all vendors but we expect a mixed view post the result season. E.g. Sector frontliner Cognizant may not be able to repeat its superior June quarter performances this time.
> We added TCS to the CLSA model portfolio at the expense of Wipro. TCS does not give guidance and a slew of deal wins implies that at least topline visibility is assured for the time being. Heading into numbers, Satyam remains our #1 pick, as we see low consensus EPS expectations of 22%YY growth in FY08 – imparting some earnings strength to the stock. Disappointing commentary could emanate from Infosys, some mid-caps and also perhaps from Cognizant (when seen relative to high expectations from the stock).
Telecoms
> 4Q07 mobile net adds have been impacted to some extent by lower net-adds in March-07 (on account of disconnections due to verification procedures at cellcos). Roaming rate cut, implemented in mid-Feb'07 will also impact mobile ARPUs. However, overall volume growth has remained strong and momentum to remain healthy for both Bharti (revenues +9%QoQ) and RCom (+10%QoQ)
> We see downside risk to our MTNL revenue forecasts, considering pressures on fixed-line business. However, we also note that 4Q is also typically an adjustment quarter, especially on the taxation front, which could impact reported earnings growth.
Aviation
> Revenues of Rs18,110m (+11.4% YoY, down 6.4% QoQ).
> Compared to 3QFY07, yields will likely be lower impacting Ebitda margins.
> Per ASKM fuel expenditure expected to decline by 5% QoQ due to lower ATF prices in 4Q
> Loss of Rs497m at PBT level (profit of Rs137m in 3QFY07)
> Jet expected to write of Rs1.8bn as charges related to the Air Sahara deal; We forecast net loss of Rs2.3bn for 4QFY07.
> Key things to watch out for: Performance of the international business, which was near break even in 3QFY07; trends in selling & distribution expenditure and salary costs; Further profits from sale and lease back of aircrafts; total debt and company's plans to raise equity linked funds.
Retail
> Pantaloon Retail is expected to report sales of Rs8.9bn during 3QFY07, a growth of 95% YoY and 18% QoQ. Net profit will increase by 50% YoY to Rs244m. Ebitda margins are expected to be at 7.2%, 120bps lower than 3QFY06 due to higher share of value retailing. Further store additions during the last two quarters mean that fixed costs will be higher.
> During the quarter, we estimate that the company has added over 0.5 msqft to its shelf space. A large part of this addition has been under the Big Bazaar and Food Bazaar formats.
> Key things to watch out for: addition to shelf space, trend in employee costs and trend in inventory
Strategy In-Depth April 10th, 07
Slower Inflows Despite Stronger Asian Markets
> Inflows to offshore Asian funds decelerate from US$1.1bn to just US$295m — But Asian markets rose 3.4% and turnover increased 8.3% in the week ended 4 April. Either domestic funds or local individual investors supported the markets.
> India and Singapore country funds take in 30% of new money to Asia — Unlike most other country funds that still face redemptions, India and Singapore funds received net cash for a second week. The difference between these two investments, however, is that inflows to India funds are under water (the BSE Sensex has declined in the past two weeks) while new investment in Singapore funds has been profiting thus far.
> Foreign investors returning to Korea and Taiwan — Of the US$3.9bn foreign net purchases in emerging Asian markets over the past 2 weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn, respectively). Net purchases in the Philippines reached US$415m, close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
> Abundant liquidity to global equity funds — In contrast to the decelerating inflows to Asian funds, money going to global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at a record high in February, when they offloaded Asian weight.
Inflows to offshore Asian funds decelerated from US$1.1bn to just US$295m in the week ended 4 April. Nevertheless, Asian markets rose 3.4% and turnover was up 8.3%.
Either domestic funds or local individuals were the major supporters of the markets.
Inflows to Global Emerging Market funds slowed 62% week-on-week to US$267m, taking total outflows of the first quarter down to US$491m versus net inflows of US$1.4bn to all Asia dedicated funds. Back in 1Q06, inflows to GEM and Asian funds were around US$8-9bn individually.
Contrasting the decelerated inflows to Asian funds, money going to Global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at record high in February when they offloaded Asian weight.
Net Purchases/Sales by Foreign Investors
Of the US$3.9bn foreign net purchases in emerging Asian markets over the past two weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn respectively). Meanwhile, net purchases in the Philippine market reached US$415m, which is close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
> Inflows to offshore Asian funds decelerate from US$1.1bn to just US$295m — But Asian markets rose 3.4% and turnover increased 8.3% in the week ended 4 April. Either domestic funds or local individual investors supported the markets.
> India and Singapore country funds take in 30% of new money to Asia — Unlike most other country funds that still face redemptions, India and Singapore funds received net cash for a second week. The difference between these two investments, however, is that inflows to India funds are under water (the BSE Sensex has declined in the past two weeks) while new investment in Singapore funds has been profiting thus far.
> Foreign investors returning to Korea and Taiwan — Of the US$3.9bn foreign net purchases in emerging Asian markets over the past 2 weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn, respectively). Net purchases in the Philippines reached US$415m, close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
> Abundant liquidity to global equity funds — In contrast to the decelerating inflows to Asian funds, money going to global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at a record high in February, when they offloaded Asian weight.
Inflows to offshore Asian funds decelerated from US$1.1bn to just US$295m in the week ended 4 April. Nevertheless, Asian markets rose 3.4% and turnover was up 8.3%.
Either domestic funds or local individuals were the major supporters of the markets.
Inflows to Global Emerging Market funds slowed 62% week-on-week to US$267m, taking total outflows of the first quarter down to US$491m versus net inflows of US$1.4bn to all Asia dedicated funds. Back in 1Q06, inflows to GEM and Asian funds were around US$8-9bn individually.
Contrasting the decelerated inflows to Asian funds, money going to Global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at record high in February when they offloaded Asian weight.
Net Purchases/Sales by Foreign Investors
Of the US$3.9bn foreign net purchases in emerging Asian markets over the past two weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn respectively). Meanwhile, net purchases in the Philippine market reached US$415m, which is close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
SEZ Review
SEZ Update – Positives outweigh the negatives
➤ Special Economic Zone (SEZ) Policy Overhauled: Late last week, the government lifted the ban on SEZ’s that was imposed in Jan07 following protests seen in W Bengal by families displaced by land acquisition1 for SEZs.
The amendments relate to size, processing area, forex earnings and the role of state – most of which we believe are positive. We thus maintain our view that benefits in terms of infrastructure, trade, employment and investment could offset the negatives, with SEZs serving as catalysts to growth rather than fostering unbalanced development.
➤ Key parameters that have been amended include:
1. Land ceiling: The upper limit of the area for multi-product SEZs has now been capped at 5000 hectares. However, state governments can prescribe a ceiling lower than 5000 hectares. In addition, there is also a cap of 12,500 hectares for a single applicant. While this could impact the mega SEZ plans of Reliance, DLF, Omaxe, Unitech etc, it is reported that companies are looking at options such as splitting the SEZs to comply with the new rules3 2. Processing Area: The minimum processing area has been uniformly raised to 50% for all SEZs. Earlier, the minimum processing area was 35% for multiproduct SEZs and 50% for sector-specific SEZs. This could adversely impact developers who initially intended to use 65% of the SEZ land to build hotels, malls, schools and entertainment centres.
3. Land acquisition and rehabilitation: The onus of land acquisition will now fall on the private sector as compared to the earlier rules where states could acquire land. This is positive as in some cases, state governments powers were being mis-used. More-over the new rules will shield the land-owners from the states who had the power to forcibly acquire land for public use under the land acquisition Act.
Current Status on SEZs
Since the SEZ Rules came into effect in Feb 06, the Board has granted formal approval to 234 SEZ proposals, and in-principle approval to 162 proposals. 63 SEZs have been notified. However, with the Nandigram protests, the fate of several SEZs – including projects by Infosys Technology in Pune, Wockhardt at Aurangabad, and Mahindra World City in Jaipur – hung in the balance. This backlog will now be cleared, with the BoA resuming processing approvals. We think the move is an overall positive since it resolves several long-standing issues, and lends much needed clarity to development of these zones.
Are SEZs beneficial?
The concept of SEZs in India has been subject to much controversy and debate over the past year. Although Indian SEZs are much smaller in scale than their Chinese counterparts, we think they are a step in the right direction. While norms may have to be further tightened to prevent leakages, the government's thrust on SEZs coupled with private sector participation is likely to promote industrial activity. Further, estimates by the Ministry suggest that SEZs will bring in investments to the tune of Rs1000bn by the end of Dec07, creating 500,000 direct jobs. Net-net, we believe the benefits that will accrue in terms of infrastructure, trade, employment, and investment will offset the teething problems that SEZs have encountered so far.
Amendments to SEZ Policy over the past year
Over the past year, we have seen a number of amendments to the SEZ Policy. Key amendments during the last year include
1 Companies operating in SEZs would have to make fresh investments in plant and machinery;
2 Companies that import for the purpose of re-export would get tax breaks while those sourcing from domestic tariff areas would not.
3 Earlier the SEZ developer was permitted to allot land to anyone in the onprocessing
area for business and social purposes. These rules were changed so that vacant land can be leased only to a co-developer approved by the authorities.
4 The RBI issued a directive that said all loans given towards setting up SEZs will be treated in the same manner as exposure to commercial real estate, the stock market, and venture capital. This implies higher provisioning norms (100bps as against 40bps for standard loans) as well as higher risk weights (150% instead of 100% for standard loans). Higher capital requirements are yet another way of curtailing fly-by-night SEZs mushrooming over the country, and help retain only the more serious players.
5 Rules regarding minimum investment and net worth have also been amended, with promoters in multi-product SEZ's required to have a net worth of Rs2.5bn and a minimum investment of Rs10bn. (Sector specific Net Worth=Rs0.5bn and minimum investment =Rs2.5bn).
6 In contrast to the earlier rules where units had to be net forex earners over the first five years to get SEZ benefits, under the new rules export earnings from SEZs
will now have to be equivalent to their purchases from domestic areas.
➤ Special Economic Zone (SEZ) Policy Overhauled: Late last week, the government lifted the ban on SEZ’s that was imposed in Jan07 following protests seen in W Bengal by families displaced by land acquisition1 for SEZs.
The amendments relate to size, processing area, forex earnings and the role of state – most of which we believe are positive. We thus maintain our view that benefits in terms of infrastructure, trade, employment and investment could offset the negatives, with SEZs serving as catalysts to growth rather than fostering unbalanced development.
➤ Key parameters that have been amended include:
1. Land ceiling: The upper limit of the area for multi-product SEZs has now been capped at 5000 hectares. However, state governments can prescribe a ceiling lower than 5000 hectares. In addition, there is also a cap of 12,500 hectares for a single applicant. While this could impact the mega SEZ plans of Reliance, DLF, Omaxe, Unitech etc, it is reported that companies are looking at options such as splitting the SEZs to comply with the new rules3 2. Processing Area: The minimum processing area has been uniformly raised to 50% for all SEZs. Earlier, the minimum processing area was 35% for multiproduct SEZs and 50% for sector-specific SEZs. This could adversely impact developers who initially intended to use 65% of the SEZ land to build hotels, malls, schools and entertainment centres.
3. Land acquisition and rehabilitation: The onus of land acquisition will now fall on the private sector as compared to the earlier rules where states could acquire land. This is positive as in some cases, state governments powers were being mis-used. More-over the new rules will shield the land-owners from the states who had the power to forcibly acquire land for public use under the land acquisition Act.
Current Status on SEZs
Since the SEZ Rules came into effect in Feb 06, the Board has granted formal approval to 234 SEZ proposals, and in-principle approval to 162 proposals. 63 SEZs have been notified. However, with the Nandigram protests, the fate of several SEZs – including projects by Infosys Technology in Pune, Wockhardt at Aurangabad, and Mahindra World City in Jaipur – hung in the balance. This backlog will now be cleared, with the BoA resuming processing approvals. We think the move is an overall positive since it resolves several long-standing issues, and lends much needed clarity to development of these zones.
Are SEZs beneficial?
The concept of SEZs in India has been subject to much controversy and debate over the past year. Although Indian SEZs are much smaller in scale than their Chinese counterparts, we think they are a step in the right direction. While norms may have to be further tightened to prevent leakages, the government's thrust on SEZs coupled with private sector participation is likely to promote industrial activity. Further, estimates by the Ministry suggest that SEZs will bring in investments to the tune of Rs1000bn by the end of Dec07, creating 500,000 direct jobs. Net-net, we believe the benefits that will accrue in terms of infrastructure, trade, employment, and investment will offset the teething problems that SEZs have encountered so far.
Amendments to SEZ Policy over the past year
Over the past year, we have seen a number of amendments to the SEZ Policy. Key amendments during the last year include
1 Companies operating in SEZs would have to make fresh investments in plant and machinery;
2 Companies that import for the purpose of re-export would get tax breaks while those sourcing from domestic tariff areas would not.
3 Earlier the SEZ developer was permitted to allot land to anyone in the onprocessing
area for business and social purposes. These rules were changed so that vacant land can be leased only to a co-developer approved by the authorities.
4 The RBI issued a directive that said all loans given towards setting up SEZs will be treated in the same manner as exposure to commercial real estate, the stock market, and venture capital. This implies higher provisioning norms (100bps as against 40bps for standard loans) as well as higher risk weights (150% instead of 100% for standard loans). Higher capital requirements are yet another way of curtailing fly-by-night SEZs mushrooming over the country, and help retain only the more serious players.
5 Rules regarding minimum investment and net worth have also been amended, with promoters in multi-product SEZ's required to have a net worth of Rs2.5bn and a minimum investment of Rs10bn. (Sector specific Net Worth=Rs0.5bn and minimum investment =Rs2.5bn).
6 In contrast to the earlier rules where units had to be net forex earners over the first five years to get SEZ benefits, under the new rules export earnings from SEZs
will now have to be equivalent to their purchases from domestic areas.
Tuesday, April 10, 2007
Corporate News April 10,07
>Suzlon Energy has signed a contract with Tierra Energy of Austin, Texas, the USA to provide 42 units of S88-2.1 MW wind turbine generators, for delivery in 2008. The
company raised its bid for German wind-turbine maker Repower Systems AG by 19 percent after buying about 8% stake of the company. Suzlon paid 150 euro a share for the stake in the Germany's third-largest maker of wind-power equipment, 30% owned by Areva SA.
>Bank of Japan unchanged interest rate to 0.5%
>Strides Arcolab has given their in-principle approval to acquire the entire shareholding of Grandix Pharmaceuticals (Grandix), Chennai from the existing shareholders of Grandix.
>ABG Shipyard secures major order worth Rs6.18bn from Essar Shipping & Logistics, Cyprus.
>Tata Steel - The Board of Directors of the Company will be held on April 17, 2007, to consider possible proposals for raising equity funds as part of its long-term fund
raising exercise to finance the Company's investment in the SPV (Special Purpose Vehicle) for acquiring Corns Group Plc, UK.
>Jet Airways reached an agreement to buy rival Sahara Airlines Ltd., CNBC TV-18 channel. Jet Airways agreed to buy Sahara at a price lower than its earlier offer. An
arbitration panel will hear the agreement between Jet Airways and Sahara tomorrow evening. Jet Airways offered Rs15bn ($349 million) for Sahara, compared with its earlier offer of Rs22bn.
>I-flex Solutions - Allied Irish Bank Selects i-flex as Strategic Partner for Transformation of its Retail Operations
>Results - Igate Global and KEC Infra
Economy:
>ADB President – Asia’s economy, supported mainly by robust developments in China and India, grew by 8.3 percent in 2006, and the momentum will continue in the coming years, Asian Development Bank (ADB) President Haruhiko Kuroda said here on Tuesday.
Developing Asia as a whole achieved a year on year economic growth of 8.3% last year, with China and India accounting for 70% of that growth, Kuroda said, adding that China's double-digit annual growth of 10.7% and India's buoyant expansion of 9.2 percent suggest that high growth is likely to be sustained for some time in the future..
Commodity:
Nickel, Zinc and lead rose to records and copper advanced to the highest in seven months in London on rising demand from China. Copper stockpiles in Shanghai Futures Exchange warehouses rose for a sixth straight week to their highest in almost nine months following increased imports of the metal, used in wires and pipes.
Copper price gained by 5.5% ($405), Zinc price gained by 4% ($140) and Aluminum price gained 2.8% ($75) against previous day's close.
Global Market:
Asian stocks climbed to a six-week high, buoyed by record takeover proposals in Australia for Coles Group Ltd. and Rinker Group Ltd. Hang Sang gained by 0.7% while Nikkei slipped by 0.45% against previous day's close.
European stocks approached a six-year high as takeovers lifted property and auto shares and a surge in metal prices buoyed mining companies. FTSE, CAC and Dax gained nearly 0.4% each.
company raised its bid for German wind-turbine maker Repower Systems AG by 19 percent after buying about 8% stake of the company. Suzlon paid 150 euro a share for the stake in the Germany's third-largest maker of wind-power equipment, 30% owned by Areva SA.
>Bank of Japan unchanged interest rate to 0.5%
>Strides Arcolab has given their in-principle approval to acquire the entire shareholding of Grandix Pharmaceuticals (Grandix), Chennai from the existing shareholders of Grandix.
>ABG Shipyard secures major order worth Rs6.18bn from Essar Shipping & Logistics, Cyprus.
>Tata Steel - The Board of Directors of the Company will be held on April 17, 2007, to consider possible proposals for raising equity funds as part of its long-term fund
raising exercise to finance the Company's investment in the SPV (Special Purpose Vehicle) for acquiring Corns Group Plc, UK.
>Jet Airways reached an agreement to buy rival Sahara Airlines Ltd., CNBC TV-18 channel. Jet Airways agreed to buy Sahara at a price lower than its earlier offer. An
arbitration panel will hear the agreement between Jet Airways and Sahara tomorrow evening. Jet Airways offered Rs15bn ($349 million) for Sahara, compared with its earlier offer of Rs22bn.
>I-flex Solutions - Allied Irish Bank Selects i-flex as Strategic Partner for Transformation of its Retail Operations
>Results - Igate Global and KEC Infra
Economy:
>ADB President – Asia’s economy, supported mainly by robust developments in China and India, grew by 8.3 percent in 2006, and the momentum will continue in the coming years, Asian Development Bank (ADB) President Haruhiko Kuroda said here on Tuesday.
Developing Asia as a whole achieved a year on year economic growth of 8.3% last year, with China and India accounting for 70% of that growth, Kuroda said, adding that China's double-digit annual growth of 10.7% and India's buoyant expansion of 9.2 percent suggest that high growth is likely to be sustained for some time in the future..
Commodity:
Nickel, Zinc and lead rose to records and copper advanced to the highest in seven months in London on rising demand from China. Copper stockpiles in Shanghai Futures Exchange warehouses rose for a sixth straight week to their highest in almost nine months following increased imports of the metal, used in wires and pipes.
Copper price gained by 5.5% ($405), Zinc price gained by 4% ($140) and Aluminum price gained 2.8% ($75) against previous day's close.
Global Market:
Asian stocks climbed to a six-week high, buoyed by record takeover proposals in Australia for Coles Group Ltd. and Rinker Group Ltd. Hang Sang gained by 0.7% while Nikkei slipped by 0.45% against previous day's close.
European stocks approached a six-year high as takeovers lifted property and auto shares and a surge in metal prices buoyed mining companies. FTSE, CAC and Dax gained nearly 0.4% each.
Post Market April 10,07
The Sensex took a breather as investors remained on the sidelines ahead of the corporate results season that begins this week. The Sensex has gained almost 700 points in the last four sessions on the back of firm international markets. However the market was range-bound through the day. The Sensex resumed 58 points higher at 13236, but eased amid volatile moves on selling in heavyweight and information technology stocks in the afternoon and touched the day's low at 13075. Some late buying at lower levels saw the Sensex shed its losses and close the session on a positive note with marginal gains. The Sensex closed at 13190, up 12 points, while the Nifty gained five points and closed at 3848.
The breadth of the market was positive. Of the 2,649 stocks traded on the BSE, 1,575 stocks advanced, 1,006 stocks declined and 68 stocks ended unchanged. Among the sectoral indices the BSE FMCG Index advanced 2.18% at 1813 followed by the BSE Metal Index (up 1.07% at 9000). However, the BSE IT Index and the BSE Teck Index closed in negative territory.
Select blue chips notched up significant gains. HDFC rose 3.38% at Rs1,608, ITC advanced 2.90% at Rs159, HLL climbed 2.55% at Rs209, Tata Motors surged 2.44% at Rs721, HDFC Bank gained 2.05% at Rs992, Ranbaxy added 1.91% at Rs358, Grasim jumped 1.85% at Rs2,236, BHEL advanced 1.59% at Rs2,463 and ONGC was up 0.79% at Rs874. Among the laggards Satyam Computers tumbled 3.53% at Rs445, Wipro slipped 2.41% at Rs548 and Infosys dropped 2.25% at Rs1,998. TCS, Dr Reddy's, Bajaj Auto, NTPC, L&T, Cipla and Reliance Energy ended with marginal losses.
Fast moving consumer goods stocks were in the limelight. Godrej Consumer Products soared 4.16% at Rs156, Bata India jumped 3.53% at Rs148, United Spirits gained 2.29% at Rs846, Colgate advanced 1.62% at Rs345 and Proctor & Gamble was up 1.22% at Rs786. Glaxo, Britannia and Dabur India ended with marginal gains.
Over 1.87 crore IFCI shares changed hands on the BSE followed by India Bulls (96.25 lakh shares), India Bulls Real Estate (78.79 lakh shares), Tele Data India (39.61 lakh shares) and Himachal Futuristic (35.88 lakh shares).
Value-wise India Bulls registered a turnover of Rs479 crore on the BSE followed by India Bulls Real Estate (Rs221 crore), Tata Steel (Rs167 crore), Mind Tree (Rs146 crore) and Tata Motors (Rs92 crore).
The breadth of the market was positive. Of the 2,649 stocks traded on the BSE, 1,575 stocks advanced, 1,006 stocks declined and 68 stocks ended unchanged. Among the sectoral indices the BSE FMCG Index advanced 2.18% at 1813 followed by the BSE Metal Index (up 1.07% at 9000). However, the BSE IT Index and the BSE Teck Index closed in negative territory.
Select blue chips notched up significant gains. HDFC rose 3.38% at Rs1,608, ITC advanced 2.90% at Rs159, HLL climbed 2.55% at Rs209, Tata Motors surged 2.44% at Rs721, HDFC Bank gained 2.05% at Rs992, Ranbaxy added 1.91% at Rs358, Grasim jumped 1.85% at Rs2,236, BHEL advanced 1.59% at Rs2,463 and ONGC was up 0.79% at Rs874. Among the laggards Satyam Computers tumbled 3.53% at Rs445, Wipro slipped 2.41% at Rs548 and Infosys dropped 2.25% at Rs1,998. TCS, Dr Reddy's, Bajaj Auto, NTPC, L&T, Cipla and Reliance Energy ended with marginal losses.
Fast moving consumer goods stocks were in the limelight. Godrej Consumer Products soared 4.16% at Rs156, Bata India jumped 3.53% at Rs148, United Spirits gained 2.29% at Rs846, Colgate advanced 1.62% at Rs345 and Proctor & Gamble was up 1.22% at Rs786. Glaxo, Britannia and Dabur India ended with marginal gains.
Over 1.87 crore IFCI shares changed hands on the BSE followed by India Bulls (96.25 lakh shares), India Bulls Real Estate (78.79 lakh shares), Tele Data India (39.61 lakh shares) and Himachal Futuristic (35.88 lakh shares).
Value-wise India Bulls registered a turnover of Rs479 crore on the BSE followed by India Bulls Real Estate (Rs221 crore), Tata Steel (Rs167 crore), Mind Tree (Rs146 crore) and Tata Motors (Rs92 crore).
REAL ESTATE - Sector Update April 10, 07
Recently, the EGoM came up with new SEZ regulations which will have serious repercussions for the developers of these SEZs. The rulings are majorly due to the concerns raised by various factions on the land acquisition by SEZs and rehabilitation of the displaced residents. Moreover,
the government too was under pressure after what happened at Nandigram, West Bengal. The three major points that came out of the meeting are:
1. Fixing the ceiling on land area of an SEZ at 5,000 hectares.
2. Increasing the processing area from 35% to 50% of the total area under the SEZ.
3. State Government's role in land acquisition to be minimized.
We believe that fixing of the land ceiling to 5,000 hectares will affect developers with large SEZ projects. We believe that the developers will now split there SEZs into parts to overcome this ceiling. Hence, the final impact of this is to be seen. For instance, Reliance Industries may build
5 SEZs at Jhajjar, Haryana with one multi-product SEZ of 5,000 hectares and 4 smaller SEZs on the rest 5,000 hectares.
Moreover, the increase in processing area from 35% to 50% of the SEZ area is a big negative for all the SEZ developers as most of the money was to be made form the residential and commercial side of the play. The scope of this has now been reduced. This will force many developers to rework there plans from scratch. This will be a negative for developers like Mahindra Gesco, Indiabulls, DLF, Unitech, Omaxe, Peninsula Land, Anant Raj Industries and D S Kulkarni Developers.
the government too was under pressure after what happened at Nandigram, West Bengal. The three major points that came out of the meeting are:
1. Fixing the ceiling on land area of an SEZ at 5,000 hectares.
2. Increasing the processing area from 35% to 50% of the total area under the SEZ.
3. State Government's role in land acquisition to be minimized.
We believe that fixing of the land ceiling to 5,000 hectares will affect developers with large SEZ projects. We believe that the developers will now split there SEZs into parts to overcome this ceiling. Hence, the final impact of this is to be seen. For instance, Reliance Industries may build
5 SEZs at Jhajjar, Haryana with one multi-product SEZ of 5,000 hectares and 4 smaller SEZs on the rest 5,000 hectares.
Moreover, the increase in processing area from 35% to 50% of the SEZ area is a big negative for all the SEZ developers as most of the money was to be made form the residential and commercial side of the play. The scope of this has now been reduced. This will force many developers to rework there plans from scratch. This will be a negative for developers like Mahindra Gesco, Indiabulls, DLF, Unitech, Omaxe, Peninsula Land, Anant Raj Industries and D S Kulkarni Developers.
Daily Call April 10th , 07
Markets are likely to open on a flat to weaker note, as positions built yesterday are likely to see profit taking in the morning. Barring that the markets gave a solid account of themselves Monday as the advance –decline ratio was the best in almost 35 sessions. The Sensex registered its 25th gain of 300 points or more yesterday.
Meanwhile, open interest rose by Rs 2228 cr to Rs 46430 Cr. No concerns here so far. Most of the positions seem to have been built in the real estate and banking stocks. SBI and Tata Steel are the Sensex majors that have seen action. Reliance, ONGC, Hind Lever did not see much action with positions being pruned in Infosys and NSE IT Index. The next resistance comes at 13386 in the Sensex and the 3905 level in the Nifty.
Meanwhile, the Bank of Japan’s meeting on interest rates is currently on, where the rates are likely to unchanged at 0.5%. However, investors will do well to see how the Nikkei behaves after the meeting for the final verdict on how our markets would open.
A STRONG BUILD UP
The Sensex’s 321 point rise , has put brought the markets at cross roads, where it is about to end the weak trend. The stress is on ‘about’. That has not happened as yet. There are two things that need to be done. The first is the close above the downward sloping trend line, as shown in the chart below. And the second act that needs to be done is a close above the 13386 mark.
In case that happens, we would need to look forward with optimism. Till then, mid-caps can do well but the Sensex would need to be watched.
After Market Hours
Bank of Baroda has merged its wholly owned subsidiary, BOB Housing Finance (BOBHFL), with itself.
Lanco Infratech's subsidiary Lanco Electric Utility bagged the tender from Damodar Valley
Corporation (DVC) to trade 50 mega watt of power with an option to trade upto 200 MW on availability basis through the competitive bidding route.
Shree Ganesh Forgings has acquired Belgium's Hertecant and France's ELFE from Sweden-based Outo Kumpu.
During Market Hours
Aban Offshore Subsidiary Co. Bags US $ 141 mln Order From GSPC
Adhunik Metalics acquires iron ore miner Orissa Manganese & Minerals Pvt Ltd.
Deep Industries had acquired a service contract from Oil and Natural Gas Corp (ONGC) for development of three onshore marginal fields in Rajasthan.
Dhanalakshmi Bank Board to Meet On April 16 To Mull Rights Issue
Dolphin Offshore, L&T bags contract Worth Rs 184 Cr from ONGC for execution of entire scope of works for 6 Clampon Project
Hindustan Zinc Ups Zinc Prices By Rs 1,200/tn
Indiabulls Real Estate to raise up to $600 million through various means in the domestic or international markets
Kirloskar Brothers has received an order worth Rs 255 crore from IVRCL Navayuga & Sew's joint venture.
Oriental Bank of Commerce to raise Rs 500 crore through private placement of lower Tier II bonds.
Petron Engineering Construction gets extended order worth Rs 30 crore from Obajana Cement, Nigeria.
Praj Ind Board to Meet On April 18 To Mull Bonus Issue
Rane Madras announces its plans to sell 63,162 square feet of land in Chennai city.
Stone India has received an order worth Rs 14 crore for upgrading 1115 wagons from Ministry of Defence, Govt of India.
Trent has entered into an agreement with The Xander Group Inc., a global private equity firm, to expand real estate portfolio in India.
Meanwhile, open interest rose by Rs 2228 cr to Rs 46430 Cr. No concerns here so far. Most of the positions seem to have been built in the real estate and banking stocks. SBI and Tata Steel are the Sensex majors that have seen action. Reliance, ONGC, Hind Lever did not see much action with positions being pruned in Infosys and NSE IT Index. The next resistance comes at 13386 in the Sensex and the 3905 level in the Nifty.
Meanwhile, the Bank of Japan’s meeting on interest rates is currently on, where the rates are likely to unchanged at 0.5%. However, investors will do well to see how the Nikkei behaves after the meeting for the final verdict on how our markets would open.
A STRONG BUILD UP
The Sensex’s 321 point rise , has put brought the markets at cross roads, where it is about to end the weak trend. The stress is on ‘about’. That has not happened as yet. There are two things that need to be done. The first is the close above the downward sloping trend line, as shown in the chart below. And the second act that needs to be done is a close above the 13386 mark.
In case that happens, we would need to look forward with optimism. Till then, mid-caps can do well but the Sensex would need to be watched.
After Market Hours
Bank of Baroda has merged its wholly owned subsidiary, BOB Housing Finance (BOBHFL), with itself.
Lanco Infratech's subsidiary Lanco Electric Utility bagged the tender from Damodar Valley
Corporation (DVC) to trade 50 mega watt of power with an option to trade upto 200 MW on availability basis through the competitive bidding route.
Shree Ganesh Forgings has acquired Belgium's Hertecant and France's ELFE from Sweden-based Outo Kumpu.
During Market Hours
Aban Offshore Subsidiary Co. Bags US $ 141 mln Order From GSPC
Adhunik Metalics acquires iron ore miner Orissa Manganese & Minerals Pvt Ltd.
Deep Industries had acquired a service contract from Oil and Natural Gas Corp (ONGC) for development of three onshore marginal fields in Rajasthan.
Dhanalakshmi Bank Board to Meet On April 16 To Mull Rights Issue
Dolphin Offshore, L&T bags contract Worth Rs 184 Cr from ONGC for execution of entire scope of works for 6 Clampon Project
Hindustan Zinc Ups Zinc Prices By Rs 1,200/tn
Indiabulls Real Estate to raise up to $600 million through various means in the domestic or international markets
Kirloskar Brothers has received an order worth Rs 255 crore from IVRCL Navayuga & Sew's joint venture.
Oriental Bank of Commerce to raise Rs 500 crore through private placement of lower Tier II bonds.
Petron Engineering Construction gets extended order worth Rs 30 crore from Obajana Cement, Nigeria.
Praj Ind Board to Meet On April 18 To Mull Bonus Issue
Rane Madras announces its plans to sell 63,162 square feet of land in Chennai city.
Stone India has received an order worth Rs 14 crore for upgrading 1115 wagons from Ministry of Defence, Govt of India.
Trent has entered into an agreement with The Xander Group Inc., a global private equity firm, to expand real estate portfolio in India.
ShareKhan April ValueLine
THE STOCK IDEAS REPORT CARD
Uncertainty begins at home
The market’s cup of woes seems to be overflowing all at once. In a matter of two months the Sensex has lost almost two thousand points. In addition to the global uncertainties the market now has to deal with certain local risks as well. Till yesterday, every time the market stumbled and fell on global concerns, such as the possibility of recession in the USA, higher crude prices or unwinding of yen carry trades, it was the promise of India’s long-term growth story that helped it get back on its feet. Alas, today, there hangs a big question mark on this source of strength itself. Inflation has raised its ugly head again, you see. It has stubbornly remained well above 6% for four weeks now.
Sharekhan top picks
In the March 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on April 2, 2007, the basket of stocks has gained 3.7% as compared with the decline of 3.3% and 2.6% in the Sensex and the S&P CNX Nifty respectively during the period.
STOCK IDEA
Hexaware Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs220
Current market price: Rs159
Growth at attractive valuations
Key points
* Strong presence in niche areas: Hexaware Technologies Ltd (HTL) is a mid-cap company with a differentiated strategy of focusing on the fast-growing niche areas of enterprise package implementation and HR IT services. It has dominant share in the PeopleSoft implementation market and is growing its presence in Oracle and SAP space. Even in terms of verticals, it is focused on three key industry domains—transportation, BSFI and manufacturing—that account for over 95% of its revenues.
* Better mining of clients by expanding portfolio of service offerings: HTL is using a combination of organic and inorganic initiatives to expand its portfolio of service offerings that would enable it to enhance the share of business from its existing clients. One such initiative has been to build capabilities in the fast growing testing and quality assurance service practice, by developing manual testing services in-house and gaining a foothold in automated testing solution and consulting business through acquisition of US-based FocusFrame Inc. HTL aims to scale up the revenues from this practice to over $100 million per year in the next three years.
* Strong growth visibility with sustainable margins: The strong order book position of $250 million (of this $170 million is executable in CY2007), improving range of service offerings and a growing support for PeopleSoft by Oracle are some of the key drivers of the significant improvement in HTL’s revenue growth visibility. Moreover, it has a number of levers to cushion it against the severe cost pressures and is expected to maintain its OPM in a narrow band of 15.5-16% over the next two years.
* Attractive valuations: The consolidated revenues and earnings are estimated to grow at a healthy rate of 31.6% and 28.5% respectively but the same is not reflected in the stock’s prevailing valuations of 14.2x CY2007E and 11.2x CY2008E earnings. We recommend Buy on HTL with a price target of Rs220.
STOCK UPDATE
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs1,780
Price target revised to Rs2,430
Aban Offshore Ltd (AOL) has announced the signing of a contract with affiliates of Addax Petroleum and Sinopec to deploy its deepwater drill ship, Aban Abraham, in the offshore block located at the Gulf of Guinea. The contract to drill five firm wells (with an option to drill another five wells) over a duration of 300 days is worth $123 million (can be increased to $246 million). It works out to a charter rate of $410,000 per day (around 36.6% higher than the charter rate of $300,000 for its contract starting from July 2007). The recently acquired contract is effective from end of May 2008 and would positively affect the earnings of FY2009.
ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs753
Annual report review
Riding on the back of a cement boom in the economy, ACC, the largest cement producer in India, witnessed the highest growth rate in the revenues in its history. The company's production stood at 18.73 million metric tonne (MMT) against a total capacity of 19.91MMT translating into capacity utilisation of 94%. The sales volume grew by 8% year on year (yoy) to 18.76MMT. As the cement demand growth at 11.5% in CY2006 far exceeded the supply, the industry witnessed a rising utilisation scenario and consequently rising prices. Thanks to such a buoyant scenario, the cement realisations of ACC grew by a whopping 32% yoy to Rs2,866 per tonne resulting in a top line growth of 43% yoy to Rs5,405.35 crore. The overall revenues stood at Rs5,803 crore with the ready mix concrete (RMC) business contributing Rs300 crore.
Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs270
Current market price: Rs202
Bags Rs60-crore contract from ONGC
Alphageo India has bagged a 3D (three-dimensional) survey contract worth Rs60 crore from Oil & Natural Gas Corporation (ONGC). With this order in hand, the company is likely to opt out of the low-margin 2D (two-dimensional) survey order of Oil India Ltd (OIL) which is worth around Rs20 crore. Thus, the effective increase in the order backlog works out to Rs40 crore.
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs56
Current market price: Rs39
Good growth at attractive valuations
Key points
* Ashok Leyland Ltd (ALL) has reported good vehicle sales numbers for the month of February 2007 with an overall growth of 33%. The truck segment recorded a 33% growth and the bus segment grew by 27% during the month.
* The company is all set to surpass its sales target of 80,000 vehicles for the current fiscal. We maintain our positive outlook on the growth prospects of Ashok Leyland on the back of the continuing buoyancy in the commercial vehicle segment.
* The company is expected to spend about Rs4,000 crore in the next three-four years, including about Rs1,200 crore for setting up a plant in Uttaranchal.
* ALL is also a front runner for the acquisition of a stake in Punjab Tractors Ltd (PTL). The acquisition, in case it goes through, would give ALL an entry into the fast growing tractor market in India, and the acquirer would also be able to take advantage of the strong brand equity of PTL and its strong distribution network. However, the acquisition would come at a high price, and the acquirer would have to shell out anything between Rs1,200 crore and Rs1,500 crore, which would necessitate further raising of funds by the company.
* A sharp correction on the bourses following a global meltdown has seen the stock price of Ashok Leyland take a heavy beating. Considering its strong growth outlook, we believe that this is a good buying opportunity, as the stock is available at very attractive valuations, which are at a considerable discount to its peers. At the current market price of Rs39, the stock discounts its FY2008E earnings by 9.5x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs56.
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,715
Current market price: Rs1,550
Budget positive for BEL
The budgetary allocation for the defence sector has been pegged at Rs96,000 crore for 2007-08, which amounts to a growth of 7.9% over the earmarked figure of Rs89,000 crore in the last year’s budget. The same is 11.6% higher than the Rs86,000 crore shown in the revised estimate for 2006-07. The growth in the total defence allocation is in line with the trend seen in the past couple of years.
The huge jump in the capital outlay for equipment is likely to benefit a company like Bharat Electronics Ltd (BEL), which has emerged as one of the key suppliers of electronic and other high tech equipment to the defence forces. This coupled with the order backlog of around Rs7,300 crore (as on December 2006) and a strong traction in civilian business provides a reasonably strong revenue growth visibility for the company. Moreover, the recent alliances with leading defence contractors would also add to the overall growth in revenues over the coming years.
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,255
Foray into defence equipment space
Bharat Heavy Electricals Ltd (BHEL) is planning to produce defence equipment, including weapons. It has already applied for a licence to produce defence products. It is likely to manufacture all types of guns, including field guns, air defence guns, and mortars for the Indian defence sector and para-military forces. It has also firmed up plans to produce underwater weapon systems, weapon control solutions and their components.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs311
Remains strong and stout
Key points
* Cadila Healthcare aims to become a $1 billion company by December 2010 (FY2011), of which $800 million will come through organic growth and the remaining $200 million from inorganic initiatives. From estimated sales of approximately $400 million in FY2007E, this implies a doubling of the organic revenues over the next 4 years. The key drivers of this growth will be the growing revenues of the US and French businesses, a rebound in the growth of the domestic business and steady contributions from its joint ventures.
* Cadila has selected a basket of 60 products for the US market, which include existing generics, would-be generics (including certain blockbusters) and NDDS-based products. The company plans to file 20-25 abbreviated new drug applications (ANDAs) every year and launch 6-7 new products per year in the USA. With a strong pipeline of products and good marketing reach, we believe Cadila's US business is set to grow at a compounded annual growth rate (CAGR) of 65% from $11 million in FY2006 to over $50 million in FY2009E.
* Through a stream of new launches and an increasing market share (through Evolupharm's network of pharmacies), we believe Cadila's French business will grow at a CAGR of 43.5% from 10 million euros in FY2006 to over 31 million euros in FY2009E. Further, with an improving top line and a shift of manufacturing to India, the margins should also improve. The management has guided towards a H2FY2008 turnaround in the French operations.
* Cadila is ranked fifth in the domestic formulation market. Even though the domestic formulation business has been slow in recent times, we believe the worst is over. With the benefits of the restructuring programme flowing in, an increased thrust on rural areas, a continued focus on the lifestyle segments and a target of 35+ new launches per year, we expect Cadila's domestic formulation business to grow at a CAGR of 10.4% from Rs979 crore in FY2006 to Rs1,317 crore in FY2009E.
* Cadila has formed 50:50 joint ventures (JVs) with three companies in order to exploit specific opportunities, namely with Altana, Hospira/Mayne and Bharat Serums. We expect marginal growth in the contributions from Altana as Altana is already sourcing 60-70% of its requirement from Cadila. Upon expiry of the Pantoprazole patent, the loss in revenues and profits from the Altana JV is likely to be compensated for by the Mayne JV, the revenues from which should start flowing in by FY2009E.
* We are introducing our FY2009E estimates for Cadila. We estimate the sales to grow at a CAGR of 18.5% over FY2006-09E to Rs2,471.5 crore in FY2009. The growth will largely be driven by a 12.2% CAGR in the domestic business and a 35% CAGR in the exports. A growing top line and expanding margins will cause Cadila's net profit to grow at a CAGR of 26.7% to Rs335 crore in FY2009E, translating into earnings of Rs26.7 per share.
* At the current market price of Rs311, Cadila is trading at 14.1x its estimated FY2008E earnings and at 11.7x its estimated FY2009E earnings. The stock has underperformed the market in recent times, but we believe that as Cadila's international efforts start translating into gains, the stock's performance should improve. At these levels, the stock is available at near its 52-week low level. Considering the strong growth momentum of the company, we view this as a strong buying opportunity and hence maintain our Buy recommendation on the stock with a price target of Rs425.
Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs320
Current market price: Rs186
AMC JV between Canara Bank and Robeco
Key points
* Canara Bank has decided to sell its 49% stake in its asset management arm, Canbank Investment Management Services (CIMS), to the Netherlands-based Robeco Groep NV for Rs115 crore.
* The proposed venture has got the nod of the Reserve Bank of India. However approval from the capital market regulator, Securities and Exchange Board of India, and the Foreign Investment Promotion Board are awaited.
* The company plans to float five new equity-based products and aims to capture 5% market share in the next five years.
* The assets under management (AUM) of the bank stood at Rs2,200 crore, which is comparatively lower than that of industry leaders like Prudential ICICI (AUM of Rs43,280 crore as on February 2007).
Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs392
Angellini hikes stake in Elder
Italian pharma company Angellini ACRAF SPA (Angellini) has hiked its stake in Elder Pharmaceuticals (Elder) by 5% to 15%. According to Elder, the stake hike would not activate the takeover code; rather it would strengthen the business tie-up between the two companies. Angellini is one of Italy's top five pharmaceutical companies in terms of sales volume and has a wide presence in 60 countries. During FY2006, Elder had entered into an ownership deal with Angellini, whereby the Italian company had out-licenced three products to Elder and picked up a 10% stake in the company.
Esab India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs328
Top line growth ahead of expectations
Results highlights
* Esab India's Q4CY2006 results are good. Its top line grew by 32.4% which was ahead of our expectations. The profit before tax grew by an impressive 50%. However due to a higher tax rate vis-à-vis Q4CY2005, the net profit growth of 21.7% was below our expectations.
* The higher top line growth was aided by the company's new facility in Chennai. This facility, on a fully operational basis, can contribute additional Rs60 crore to the top line. The revenues for the quarter recorded an impressive 32.4% growth as the equipment division's revenue increased by a whopping 98% and the consumable division's revenue grew by 16%.
* The operating profit for the quarter grew by 49.6% to Rs14.4 crore as the operating profit margin (OPM) improved by 211 basis points to 18.4%.
* The improvement in the OPM was on account of the better profitability of the equipment division. The earnings before interest and tax margin of the equipment division improved by 1,200 basis points to 17.5%.
* The depreciation for the quarter increased by 35% as the company has commissioned its new plant in Chennai.
* The tax rate for the quarter stood at 33.3% as against 18% in the same quarter last year.
* Consequently, the net profit grew at a lower rate of 21.7% to Rs10.1 crore.
Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs160
Gateway forms a 51:49 JV with Concor
Key points
* Gateway Distriparks Ltd (GDL) through its subsidiary Gateway Rail has formed a 51:49 joint venture with Container Corporation of India (Concor) to construct and operate a rail-linked double-stack container terminal at Garhi-Harsaru, 7 kilometre from Gurgaon in Haryana.
* The rail-linked inland container depot (ICD) currently operated by GDL will be transferred to the joint venture. The excess land (approximately 70 acre) owned by GDL will also be transferred to the joint venture and GDL will earn lease rentals on the same.
* The total cost of setting up the joint venture will be Rs70 crore which will be funded in the debt/equity ratio of 2:1.
* The revenues (handling charges and ground rent) arising from the joint venture will be shared in the ratio of the stakes held by the two companies.
* The profits from the rail operations for the movement of container rakes from the Garhi ICD to the ports will be equally shared between GDL and Concor.
* We maintain our bullish stance on the company as it will be the direct beneficiary of the growth in container traffic, which currently accounts for just 10% of the total cargo.
* The stock has significantly underperformed the Sensex in the last three months, declining by 21% over the period. So we believe this to be a good buying opportunity for the investors and thus maintain our Buy recommendation with a price target of Rs250.
ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs550
Current market price: Rs435
ICI sells Quest International
Key points
* ICI India (ICI) on March 02, 2007 sold its 100% equity share holding in Quest International India to Givaudari (India) Pvt Ltd for Rs320 crore. The company had also received an interim dividend of about Rs31 crore prior to the sale of Quest International India. Further, it expects an additional consideration of about Rs35 crore for various agreed adjustments in the next quarter.
* At the current market price of Rs435, the stock trades at 14.7x its FY2008E earnings per share (EPS) of Rs29.7. We maintain our Buy recommendation on the stock with a price target of Rs550.
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,240
Current market price: Rs820
New holding structure to unlock value
Key points
* Key investments in insurance and asset management businesses to be transferred: ICICI Bank has decided to transfer its 74% stake in the insurance and 51% stake in the asset management businesses to a separate wholly owned subsidiary company called ICICI Holdings. It plans to further list ICICI Holdings separately in CY2007. The independent listing should unlock significant value for its life insurance business and provide further visibility to its stock's valuation. The bank plans to transfer the investments at the current book value, which stands at Rs1,950 crore.
* Listing will provide insurance companies greater access to capital: The insurance business needs a huge amount of capital infusion and ICICI Bank could not have met the capital demands without having to go for another equity issue. The transfer of stakes to a holding company was done with the idea of providing insurance companies greater access to capital.
* Significant value to be unlocked in the insurance business: Currently there are no listed insurance companies in the Indian market and the valuation provided to certain stocks like ICICI Bank and Bajaj Auto based on the new business adjusted profit (NBAP) multiple varies across the analyst community. The analyst community has taken a cue from comparable valuations given to the Chinese insurers which in the past year had been re-rated to 30-40x NBAP multiples. The listing of the holding company will provide a valuation benchmark for these high-growth businesses of the bank and unlock significant value for the insurance businesses. We have valued the life insurance business at 21x FY2009E NBAP, which we feel is a fair multiple for such a high-growth business.
ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs142
VAT on cigarettes
Key points
* ITC has been underperforming the market for quite some time owing to fears of the implementation of the value added tax (VAT). We believe the stock would continue to underperform till clarity emerges on how VAT would be implemented and how the subsequent price hike would affect the company's volumes.
* Historical data shows that whenever there has been a price hike in the range of 10-12%, cigarette volumes have dipped. We believe that a 12.5% VAT may result in a 8-10% price hike across segments. Consequently, we may see lower growth or no growth in volumes in 2008.
* We believe that with VAT getting implemented, our earnings per share (EPS) estimate for FY2008 would change by 9% from Rs8.8 to Rs8, which is still a 9.6% growth over the FY2007 EPS. At the current market price of Rs142, the stock is quoting at 17.7x its FY2008E EPS and 10.7x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a revised price target of Rs200.
KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs518
Strong performance
Result highlights
* KSB Pumps delivered good results for Q4CY2006. Its net sales grew by 24.9% to Rs108.3 crore during the quarter. There was a delay in the dispatch of certain orders in the previous quarter; the delayed sales got reflected in the fourth quarter, boosting the Q4CY2006 performance.
* On segmental basis, the revenues of the pump business went up by 16.2% to Rs78.9 crore while that of the valve business grew by a strong 57.7% to Rs28.7 crore. However, the margin in the pump business declined to 13.4% from 15.3% last year, while the profit before interest and tax (PBIT) margin in the valve business grew by 120 basis points to 25.4%.
* Overall, the operating profit grew by 24.2% to Rs20 crore, while the operating profit margin (OPM) was stable at 18.5%. This despite a steep hike in the raw material cost, which rose from 41% in the same quarter last year to 46.4%. However, substantial savings were made in the staff cost and other expenses.
* The profit after tax (PAT) for Q4CY2006 rose by 42.4% to Rs12.1 crore. For CY2006, the OPM grew to 20.4% from 18.1%, while the full years' PAT grew by 38.3% to Rs51.6 crore.
* Sales are traditionally better in the first and second quarters for pump makers because of seasonal factors. Hence, we should expect even better results from the company in the coming quarters, both in terms of revenues and margins.
* The pumps industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a 12% market share, would be one of the key beneficiaries of the same and hence we expect the growth momentum to sustain going forward. We are introducing our CY2008 earnings per share (EPS) estimate at Rs46 for KSB Pumps. At the current market price of Rs518, the stock quotes at CY2007E price/earnings ratio (PER) of 11.3x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs650.
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs670
Current market price: Rs570
Building momentum in EU business
Lupin, together with its French Regulatory agent Venipharm, has received the marketing approval for generic Cefpodoxime Proxetil 100mg tablets in France. Cefpodoxime Proxetil is a cephalosporin antibiotic used to treat a variety of bacterial infections. Lupin's Cefpodoxime Proxetil tablets would be the generic equivalent of Sanofi-Aventis's Orelox tablets. The sales of Orelox tablets in France are close to 75 million euros as per IMS. The patent on Sanofi's Orelox is due to expire in August 2007 in France.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs731
Acquisition marginally earnings accretive
Key points
* As mentioned in our earlier note dated March 9, 2007, M&M had won the bid to acquire a 43.5% stake in Punjab Tractors at Rs360 a share in an all-cash deal. Private equity fund Actis and the Burman family are selling their respective stakes of 29% and 14.5% in Punjab Tractors.
* M&M's management expects a number of strategic benefits and synergies from the acquisition. Several benefits are expected to come from the brand Swaraj, a well-respected brand that enjoys a good brand loyalty, particularly in the northern states like Punjab, Haryana, Uttar Pradesh and Bihar. M&M is particularly strong in the central, western and southern regions. The acquisition of Punjab Tractors would further increase its presence in the north Indian market.
* The acquisition would make M&M an undisputed leader in the tractor segment, with an overall market share of about 40%. It would help it consolidate its presence in the 31-40 horsepower (hp) category and help it to acquire a dominant status in the >51hp category. This would be a huge positive as a strong growth is expected in the higher-end tractor segment.
* We believe that the acquisition would have a marginal impact on M&M's earnings for FY2008. The management has indicated that it will use a mix of internal resources and debt to fund the acquisition. At present the management has surplus funds of up to Rs800 crore, and its debt equity ratio currently stands at 0.43:1. We expect that about 40-50% of the acquisition cost would be financed through debt. Considering this, our calculations suggest that the deal would be marginally earnings accretive for M&M for FY2008. However, we believe that the deal is a good strategic move by M&M, which would yield substantial long-term benefits for M&M.
* At the current levels, M&M trades at 11x its FY2008E consolidated earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,050.
New Delhi Television
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs348
Current market price: Rs304
Fund mobilisation begins for new channels
New Delhi Television (NDTV) has received a major push towards implementing its ambitious plans of diversifying its broadcast offerings by entering the general entertainment and lifestyle space. Last week the news broadcaster received the approval of the Foreign Investment Promotion Board to raise foreign investment of Rs585 crore (~$130 million) for its proposed channels through its UK-based subsidiary NDTV Network Plc. Taking a step forward, it has also entered into a definitive agreement with Com Ventures V.I.L.P for infusing $20 million in NDTV Network Plc. We believe the company will expedite the fund raising process by roping in strategic/financial investors or go for a listing on the Alternative Investment Market (commonly known as AIM).
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,341
Current market price: Rs1,012
R&D pipeline adds sheen
Key points
* Sun Pharma Industries has de-merged its innovative research division into a separate company called Sun Pharma Advanced Research Company (SPARC) Ltd.
* As anticipated Sun Pharma has unfolded the innovative research pipeline for SPARC Ltd, which comprises of 4 new chemical entities (NCE) and 4 novel drug delivery systems (NDDS). The lead molecule—SUN 1334H—that targets anti-allergic disorders is undergoing Phase-II clinical studies in the USA and is likely to enter Phase-III trials in 2008.
* On the NDDS technology front, Sun is working on four platforms including controlled release system (which covers gastro retentive innovative device and WRAP matrix system), dry powder inhalers (DPI), targeted delivery by Nanoemulsion and biodegradable injections/implants.
* Sun Pharma's NCE research is analogue-based which means that the research is for creating newer drugs by modifying the existing ones. Hence, the risks of uncertainty about the molecules are minimal.
* The de-merger would positively affect Sun Pharma Industries, as Sun Pharma currently spends 35-40% of its research and development (R&D) expenses for innovative research, which will be saved on the de-merger. On the other hand, the NDDS technologies developed by SPARC would help Sun Pharma to launch new NDDS products in various markets where it has a presence.
* For lack of information, we are maintaining our earlier estimate for SPARC at Rs54 per share. And as per our earlier estimate, the base business is valued at Rs1,287 per share. Hence, our target value for Sun Pharma remains at Rs1,341 per share.
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs774
Good performance
Sales highlights
* Tata Motors (TAMO) has reported decent numbers for February with an overall growth of 19% as its total sales rose to 53,707 units in the month from 45,113 units last February.
* The growth in the commercial vehicle segment continues to be strong despite the high base of last year. The segment recorded a 22% growth in February. The medium and heavy commercial vehicle segment saw a growth of 19.4% while the light commercial vehicle sales grew by 25.3% year on year (yoy).
* The passenger car sales were slower in February compared with that in the earlier months, with an overall growth of 12.8%. Indica reported sales of 12,580 units (up 19% yoy) while the Indigo family registered a decline of 6% in sales.
* The utility vehicle segment reported a phenomenal growth of 40.7% during the month, led by the strong sales of both Sumo and Safari. Safari sales grew by a staggering 258% to 2,009 units.
* TAMO's exports for the month stood at 4,526 vehicles as compared with 4,257 vehicles in February 2006. That's a growth of 6% yoy.
* At the current market price the stock is trading at 12.3x its consolidated FY2008E earnings and at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We remain bullish on the stock and maintain our Buy recommendation with a price target of Rs1,075.
Transport Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs86
Current market price: Rs62
Results ahead of our expectations
Result highlights
* The Q3FY2007 net profit of Transport Corporation of India (TCI) registered a year-on-year (y-o-y) growth of 53.65% to Rs8 crore, in line with our expectations.
* The net revenues (excluding trading revenues) grew by 32.7% year on year (yoy) to Rs257.8 crore on the back of a 30.6% y-o-y growth in the combined revenues of the transport and supply chain divisions to Rs178.6 crore.
* The earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 59% yoy to Rs18.3 crore on account of a significant decline in its raw material costs arising from the closure of its petrol pumps. Consequently the EBITDA margins grew by 140 basis points yoy to 6.6%.
* The profit before interest and tax (PBIT) margins in the transport and express cargo (XPS) divisions improved by 70 basis points to 3.4% and 40 basis points to 8.3% respectively on account of higher capacity utilisation of the company's fleet whereas the margins in the shipping division declined on account of an increase in the fuel prices.
* The net profit at Rs8 crore grew by 54% yoy whereas the net margins improved by 80 basis points yoy to 2.9%.
* To capitalise on the growth opportunity, the company has lined up a huge capital expenditure (capex) plan of Rs430 crore to be implemented over the next four years. The capex plan broadly includes Rs150 crore for setting up warehouses, Rs120 crore for acquiring trucks and Rs100 crore for buying ships.
* The company plans to fund this capex through debt, internal accruals and fresh equity in equal measures. The equity issue is expected to be undertaken in two parts. The first equity issue of close to Rs75 crore will be done in the next couple of months. Hence we have assumed that the first tranche of equity will be raised at Rs65 per share in FY2008 whereas the second tranche of Rs75 crore will be raised at Rs75 per share in FY2009. Consequently we have adjusted our numbers factoring in the same.
* Considering the company's focus towards high-margin XPS and supply chain divisions as well as higher volumes from the transport division, we are upgrading our FY2007 and FY2008 profit after tax (PAT) estimates by 4.9% to Rs32.1 crore and 8.8% to Rs44.2 crore respectively. On the revised numbers, the earnings per share (EPS) would stand at Rs4.8 per share for FY2007 and Rs5.6 per share for FY2008.
* We expect TCI's net revenues to grow at a compounded annual growth rate of 21% over FY2006-08 to Rs1,330 crore. The net profit is estimated to register a 28% CAGR growth to Rs44.2 crore by FY2008. At the current market price of Rs62, the stock trades at 13x FY2007E earnings and 11x FY2008E earnings. Considering the bullish outlook for the company as well as higher profitability, we maintain our Buy recommendation with a price target of Rs86.
Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs362
US FDA nod for painkiller
Wockhardt has received the approval of the US Food and Drug Authority (US FDA) for marketing painkiller tablets, containing a combination of Dextropropoxyphene napsylate and Acetaminophen (DPN+APAP), in the US market. The DPN+APAP combination is the generic version of Xanodyne Pharma's patented product, Darvocet-N. It is one of the more potent analgesic drugs and is widely used all over the world for control of various kinds of pain.
SHAREKHAN SPECIAL
Q4FY2007 IT earnings preview
The street expectations have toned down considerably in terms of both Q4 performance and the annual guidance for FY2008, and the recent underperformance of the tech stocks indicates that the same has already been factored in the valuations. This essentially means that the negatives have been priced in, leaving limited scope for downside. But positive surprises, especially in terms of higher than expected annual guidance by Infosys, are not ruled out. However, the continued strengthening of the rupee and seasonal weakness in Q1 (due to wage hikes and additional visa related cost) would continue to influence sentiments on tech counters in the short run. We believe that any further weakness would be an opportunity to accumulate the front-line tech stocks and prefer Infosys and TCS.
MUTUAL GAINS
Sharekhan's top equity fund picks
We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the returns, the Sharpe ratio and Fama (net selectivity).
The past performance is measured by the returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.
FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.
SECTOR UPDATE
Automobiles
High interest rates affect two-wheeler sales
Hardening interest rates seem to be having a dampening impact on automobile sales, as the sales during March were lower than expectations despite the month containing a number of auspicious days like Gudi Padwa and Navratri. The impact seems to be more severe in the two-wheeler segment, particularly motorcycles, while four-wheelers continued to record decent growth.
Our checks also reveal that the auto finance companies have been extra careful while disbursing loans, hence the rejection rates have gone up in the past few months. To counter the effect of rising interest rates, auto-manufacturers are partnering with auto finance firms to offer loans at a lower rate to consumers. The cost of the same is being borne by the manufacturers, financers and the dealers. However, the same shall have a negative impact on the earnings of the companies.
Banking
CRR hike—negative for banks
The Reserve Bank of India (RBI) has surprised the market with another 50-basis-point hike in the cash reserve ratio (CRR) to 6.5% from 6.0% at present and a 25-basis-point hike in the repo rate to 7.75%. The CRR is a percentage of the net demand and time liabilities, read deposits, which the banks need to maintain in the form of cash balances with the RBI. The CRR hike would be in two stages of 25 basis points each (effective from April 14 and April 28 of this year). The hike is expected to absorb Rs15,500 crore of liquidity from the banking system. The RBI has also reduced the interest on CRR balances from 1% to 0.5%.
Information Technology
Rupee plays spoilsport
The sharp appreciation of the rupee against all the other major currencies in the past couple of weeks has dented the sentiments towards the tech stocks and rightly so. That’s because the unexpected sharp appreciation in the rupee at the end of the quarter would not only adversely affect the fourth quarter’s financial performance of the information technology (IT) companies but also have a strong influence on their annual growth guidance for FY2008.
Pharmaceuticals
Strong competition to limit gains from Zolpidem
Ranbaxy Laboratories has received a tentative approval from the US Food and Drug Administration (US FDA) to manufacture and market Zolpidem Tartrate tablets, of 5mg and 10mg strength.
Telecommunication services
TRAI reduces ADC burden
The Telecom Regulatory Authority of India (TRAI) has announced a reduction in the access deficit charge (ADC) levied on the private sector operators to provide support to Bharat Sanchar Nigam Ltd (BSNL) for its operations in unviable rural areas. The regulator has gone ahead with the decision to reduce the ADC despite a strong protest voiced by BSNL and it clearly reflects that TRAI intends to gradually phase out the ADC regime.
Tyres
Rubber’s loss, tyre’s gain
The easing of the rubber prices is a positive development for tyre makers, given the fact that rubber accounts for around 39% of the total raw material cost.
In the past, owing to a buoyant demand scenario, the tyre manufacturers had been able to pass on a large part of the increased cost of inputs to user industries. Most of the tyre majors have announced a number of price hikes in the last twelve months (in the region of 20-25%). In fact, a price hike was initiated in February this year to pass on the upmove in the rubber prices during January. Apollo Tyres raised its prices in the passenger car radial segment by about 2% while MRF Tyres raised the prices by about 1.5-2%. The price hikes has limited the adverse impact of the rising input costs on the margins of the tyre manufacturers. We have also noticed that the tyre prices tend to remain sticky and do not come down as sharply with a fall in the raw material prices.
VIEWPOINT
ABC Bearings
Expansion to drive growth
The bearing industry is expected to grow at a rapid pace of about 15-20% going forward. ABC is expected to keep pace with the industry. To cater to the strong demand, the company is expanding its capacity from the current 6.5 million units to about 8.0 million units by October 2007. The company would be able to do this at a minimal capital expenditure. With technological inputs from NSK it would be able to make all its lines “universal”, capable of producing both taper as well as cylindrical bearings. At present, the company is operating at 100% utilisation.
Garware Offshore Services
Fleet expansion to drive growth
Incorporated in 1976, Garware Offshore Services Ltd (GOSL) is part of the Garware group of companies and involved in providing supply and support vessels to oil exploration & production (E&P) companies operating in offshore blocks.
Currently, the company has a fleet of six vessels: four anchor handling tugs (AHTs; deployed with Oil & Natural Gas Corporation [ONGC] with day rates of $4,500) and two platform support vessels (PSVs; one deployed with Transocean [day rate of $15,500] and another with British Gas on long-term charter at day rate of $14,500).
Glenmark Pharmaceuticals
An all-round growth
The recent developments on Glenmark are indicative of the management’s aggressiveness in growing the company. The management has been undertaking an all-round effort to grow in all the different segments of the business, whether it is expanding its product basket in the USA and Latin America, entering new markets like Europe or creation and unlocking value from assets created out of its research and development (R&D) assets. Through selection of niche, difficult to manufacture products with limited competition for the US market, Glenmark has been able to capitalise on each of its products and grow its US business by leaps and bounds. The recent disclosure of its Para IV ANDA filing for generic Ezetimibe (for which it is the only ANDA filer till date) is reflective of the strong product selection strategy of the company. Further, Glenmark has positioned itself as a truly innovative, research-driven company by the successful creation and unlocking of value of its IP assets.
Glenmark is upbeat about its growth prospects for the next two years, with its US and Latin American business being the major growth engines. As per the company's projections, it is planning to grow at a CAGR of 52% over FY2006-08E to $379 million, with the profits growing at a CAGR of over 137% over the same period to $115 million. The company has given earnings per share (EPS) guidance of Rs23.6 per share in FY2007E and Rs43.8 per share in FY2008E. The projected EPS however includes the anticipated milestone payments of $31 million in FY2007 and $69 million in FY2008. On excluding the impact of the uncertain milestone payments, the EPS would reduce by 50%.
Matrix Laboratories
Mylan’s exclusivity for Norvasc to benefit Matrix
Mylan, the US-based generic company, has been awarded 180-day exclusivity to market Amlodipine Besylate, the generic version of Pfizer’s anti-hypertensive, Norvasc. India’s Matrix Laboratories, in which Mylan had acquired a controlling interest in 2006, is the supplier of active pharmaceutical ingredients (APIs) to Mylan.
Uncertainty begins at home
The market’s cup of woes seems to be overflowing all at once. In a matter of two months the Sensex has lost almost two thousand points. In addition to the global uncertainties the market now has to deal with certain local risks as well. Till yesterday, every time the market stumbled and fell on global concerns, such as the possibility of recession in the USA, higher crude prices or unwinding of yen carry trades, it was the promise of India’s long-term growth story that helped it get back on its feet. Alas, today, there hangs a big question mark on this source of strength itself. Inflation has raised its ugly head again, you see. It has stubbornly remained well above 6% for four weeks now.
Sharekhan top picks
In the March 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on April 2, 2007, the basket of stocks has gained 3.7% as compared with the decline of 3.3% and 2.6% in the Sensex and the S&P CNX Nifty respectively during the period.
STOCK IDEA
Hexaware Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs220
Current market price: Rs159
Growth at attractive valuations
Key points
* Strong presence in niche areas: Hexaware Technologies Ltd (HTL) is a mid-cap company with a differentiated strategy of focusing on the fast-growing niche areas of enterprise package implementation and HR IT services. It has dominant share in the PeopleSoft implementation market and is growing its presence in Oracle and SAP space. Even in terms of verticals, it is focused on three key industry domains—transportation, BSFI and manufacturing—that account for over 95% of its revenues.
* Better mining of clients by expanding portfolio of service offerings: HTL is using a combination of organic and inorganic initiatives to expand its portfolio of service offerings that would enable it to enhance the share of business from its existing clients. One such initiative has been to build capabilities in the fast growing testing and quality assurance service practice, by developing manual testing services in-house and gaining a foothold in automated testing solution and consulting business through acquisition of US-based FocusFrame Inc. HTL aims to scale up the revenues from this practice to over $100 million per year in the next three years.
* Strong growth visibility with sustainable margins: The strong order book position of $250 million (of this $170 million is executable in CY2007), improving range of service offerings and a growing support for PeopleSoft by Oracle are some of the key drivers of the significant improvement in HTL’s revenue growth visibility. Moreover, it has a number of levers to cushion it against the severe cost pressures and is expected to maintain its OPM in a narrow band of 15.5-16% over the next two years.
* Attractive valuations: The consolidated revenues and earnings are estimated to grow at a healthy rate of 31.6% and 28.5% respectively but the same is not reflected in the stock’s prevailing valuations of 14.2x CY2007E and 11.2x CY2008E earnings. We recommend Buy on HTL with a price target of Rs220.
STOCK UPDATE
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs1,780
Price target revised to Rs2,430
Aban Offshore Ltd (AOL) has announced the signing of a contract with affiliates of Addax Petroleum and Sinopec to deploy its deepwater drill ship, Aban Abraham, in the offshore block located at the Gulf of Guinea. The contract to drill five firm wells (with an option to drill another five wells) over a duration of 300 days is worth $123 million (can be increased to $246 million). It works out to a charter rate of $410,000 per day (around 36.6% higher than the charter rate of $300,000 for its contract starting from July 2007). The recently acquired contract is effective from end of May 2008 and would positively affect the earnings of FY2009.
ACC
Cluster: Apple Green
Recommendation: Buy
Price target: Under review
Current market price: Rs753
Annual report review
Riding on the back of a cement boom in the economy, ACC, the largest cement producer in India, witnessed the highest growth rate in the revenues in its history. The company's production stood at 18.73 million metric tonne (MMT) against a total capacity of 19.91MMT translating into capacity utilisation of 94%. The sales volume grew by 8% year on year (yoy) to 18.76MMT. As the cement demand growth at 11.5% in CY2006 far exceeded the supply, the industry witnessed a rising utilisation scenario and consequently rising prices. Thanks to such a buoyant scenario, the cement realisations of ACC grew by a whopping 32% yoy to Rs2,866 per tonne resulting in a top line growth of 43% yoy to Rs5,405.35 crore. The overall revenues stood at Rs5,803 crore with the ready mix concrete (RMC) business contributing Rs300 crore.
Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs270
Current market price: Rs202
Bags Rs60-crore contract from ONGC
Alphageo India has bagged a 3D (three-dimensional) survey contract worth Rs60 crore from Oil & Natural Gas Corporation (ONGC). With this order in hand, the company is likely to opt out of the low-margin 2D (two-dimensional) survey order of Oil India Ltd (OIL) which is worth around Rs20 crore. Thus, the effective increase in the order backlog works out to Rs40 crore.
Ashok Leyland
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs56
Current market price: Rs39
Good growth at attractive valuations
Key points
* Ashok Leyland Ltd (ALL) has reported good vehicle sales numbers for the month of February 2007 with an overall growth of 33%. The truck segment recorded a 33% growth and the bus segment grew by 27% during the month.
* The company is all set to surpass its sales target of 80,000 vehicles for the current fiscal. We maintain our positive outlook on the growth prospects of Ashok Leyland on the back of the continuing buoyancy in the commercial vehicle segment.
* The company is expected to spend about Rs4,000 crore in the next three-four years, including about Rs1,200 crore for setting up a plant in Uttaranchal.
* ALL is also a front runner for the acquisition of a stake in Punjab Tractors Ltd (PTL). The acquisition, in case it goes through, would give ALL an entry into the fast growing tractor market in India, and the acquirer would also be able to take advantage of the strong brand equity of PTL and its strong distribution network. However, the acquisition would come at a high price, and the acquirer would have to shell out anything between Rs1,200 crore and Rs1,500 crore, which would necessitate further raising of funds by the company.
* A sharp correction on the bourses following a global meltdown has seen the stock price of Ashok Leyland take a heavy beating. Considering its strong growth outlook, we believe that this is a good buying opportunity, as the stock is available at very attractive valuations, which are at a considerable discount to its peers. At the current market price of Rs39, the stock discounts its FY2008E earnings by 9.5x and quotes at an enterprise value/earnings before interest, depreciation, tax and amortisation of 5.3x. We maintain our Buy recommendation on the stock with a price target of Rs56.
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,715
Current market price: Rs1,550
Budget positive for BEL
The budgetary allocation for the defence sector has been pegged at Rs96,000 crore for 2007-08, which amounts to a growth of 7.9% over the earmarked figure of Rs89,000 crore in the last year’s budget. The same is 11.6% higher than the Rs86,000 crore shown in the revised estimate for 2006-07. The growth in the total defence allocation is in line with the trend seen in the past couple of years.
The huge jump in the capital outlay for equipment is likely to benefit a company like Bharat Electronics Ltd (BEL), which has emerged as one of the key suppliers of electronic and other high tech equipment to the defence forces. This coupled with the order backlog of around Rs7,300 crore (as on December 2006) and a strong traction in civilian business provides a reasonably strong revenue growth visibility for the company. Moreover, the recent alliances with leading defence contractors would also add to the overall growth in revenues over the coming years.
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,255
Foray into defence equipment space
Bharat Heavy Electricals Ltd (BHEL) is planning to produce defence equipment, including weapons. It has already applied for a licence to produce defence products. It is likely to manufacture all types of guns, including field guns, air defence guns, and mortars for the Indian defence sector and para-military forces. It has also firmed up plans to produce underwater weapon systems, weapon control solutions and their components.
Cadila Healthcare
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs425
Current market price: Rs311
Remains strong and stout
Key points
* Cadila Healthcare aims to become a $1 billion company by December 2010 (FY2011), of which $800 million will come through organic growth and the remaining $200 million from inorganic initiatives. From estimated sales of approximately $400 million in FY2007E, this implies a doubling of the organic revenues over the next 4 years. The key drivers of this growth will be the growing revenues of the US and French businesses, a rebound in the growth of the domestic business and steady contributions from its joint ventures.
* Cadila has selected a basket of 60 products for the US market, which include existing generics, would-be generics (including certain blockbusters) and NDDS-based products. The company plans to file 20-25 abbreviated new drug applications (ANDAs) every year and launch 6-7 new products per year in the USA. With a strong pipeline of products and good marketing reach, we believe Cadila's US business is set to grow at a compounded annual growth rate (CAGR) of 65% from $11 million in FY2006 to over $50 million in FY2009E.
* Through a stream of new launches and an increasing market share (through Evolupharm's network of pharmacies), we believe Cadila's French business will grow at a CAGR of 43.5% from 10 million euros in FY2006 to over 31 million euros in FY2009E. Further, with an improving top line and a shift of manufacturing to India, the margins should also improve. The management has guided towards a H2FY2008 turnaround in the French operations.
* Cadila is ranked fifth in the domestic formulation market. Even though the domestic formulation business has been slow in recent times, we believe the worst is over. With the benefits of the restructuring programme flowing in, an increased thrust on rural areas, a continued focus on the lifestyle segments and a target of 35+ new launches per year, we expect Cadila's domestic formulation business to grow at a CAGR of 10.4% from Rs979 crore in FY2006 to Rs1,317 crore in FY2009E.
* Cadila has formed 50:50 joint ventures (JVs) with three companies in order to exploit specific opportunities, namely with Altana, Hospira/Mayne and Bharat Serums. We expect marginal growth in the contributions from Altana as Altana is already sourcing 60-70% of its requirement from Cadila. Upon expiry of the Pantoprazole patent, the loss in revenues and profits from the Altana JV is likely to be compensated for by the Mayne JV, the revenues from which should start flowing in by FY2009E.
* We are introducing our FY2009E estimates for Cadila. We estimate the sales to grow at a CAGR of 18.5% over FY2006-09E to Rs2,471.5 crore in FY2009. The growth will largely be driven by a 12.2% CAGR in the domestic business and a 35% CAGR in the exports. A growing top line and expanding margins will cause Cadila's net profit to grow at a CAGR of 26.7% to Rs335 crore in FY2009E, translating into earnings of Rs26.7 per share.
* At the current market price of Rs311, Cadila is trading at 14.1x its estimated FY2008E earnings and at 11.7x its estimated FY2009E earnings. The stock has underperformed the market in recent times, but we believe that as Cadila's international efforts start translating into gains, the stock's performance should improve. At these levels, the stock is available at near its 52-week low level. Considering the strong growth momentum of the company, we view this as a strong buying opportunity and hence maintain our Buy recommendation on the stock with a price target of Rs425.
Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs320
Current market price: Rs186
AMC JV between Canara Bank and Robeco
Key points
* Canara Bank has decided to sell its 49% stake in its asset management arm, Canbank Investment Management Services (CIMS), to the Netherlands-based Robeco Groep NV for Rs115 crore.
* The proposed venture has got the nod of the Reserve Bank of India. However approval from the capital market regulator, Securities and Exchange Board of India, and the Foreign Investment Promotion Board are awaited.
* The company plans to float five new equity-based products and aims to capture 5% market share in the next five years.
* The assets under management (AUM) of the bank stood at Rs2,200 crore, which is comparatively lower than that of industry leaders like Prudential ICICI (AUM of Rs43,280 crore as on February 2007).
Elder Pharmaceuticals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs508
Current market price: Rs392
Angellini hikes stake in Elder
Italian pharma company Angellini ACRAF SPA (Angellini) has hiked its stake in Elder Pharmaceuticals (Elder) by 5% to 15%. According to Elder, the stake hike would not activate the takeover code; rather it would strengthen the business tie-up between the two companies. Angellini is one of Italy's top five pharmaceutical companies in terms of sales volume and has a wide presence in 60 countries. During FY2006, Elder had entered into an ownership deal with Angellini, whereby the Italian company had out-licenced three products to Elder and picked up a 10% stake in the company.
Esab India
Cluster: Vulture’s Pick
Recommendation: Buy
Price target: Rs575
Current market price: Rs328
Top line growth ahead of expectations
Results highlights
* Esab India's Q4CY2006 results are good. Its top line grew by 32.4% which was ahead of our expectations. The profit before tax grew by an impressive 50%. However due to a higher tax rate vis-à-vis Q4CY2005, the net profit growth of 21.7% was below our expectations.
* The higher top line growth was aided by the company's new facility in Chennai. This facility, on a fully operational basis, can contribute additional Rs60 crore to the top line. The revenues for the quarter recorded an impressive 32.4% growth as the equipment division's revenue increased by a whopping 98% and the consumable division's revenue grew by 16%.
* The operating profit for the quarter grew by 49.6% to Rs14.4 crore as the operating profit margin (OPM) improved by 211 basis points to 18.4%.
* The improvement in the OPM was on account of the better profitability of the equipment division. The earnings before interest and tax margin of the equipment division improved by 1,200 basis points to 17.5%.
* The depreciation for the quarter increased by 35% as the company has commissioned its new plant in Chennai.
* The tax rate for the quarter stood at 33.3% as against 18% in the same quarter last year.
* Consequently, the net profit grew at a lower rate of 21.7% to Rs10.1 crore.
Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs160
Gateway forms a 51:49 JV with Concor
Key points
* Gateway Distriparks Ltd (GDL) through its subsidiary Gateway Rail has formed a 51:49 joint venture with Container Corporation of India (Concor) to construct and operate a rail-linked double-stack container terminal at Garhi-Harsaru, 7 kilometre from Gurgaon in Haryana.
* The rail-linked inland container depot (ICD) currently operated by GDL will be transferred to the joint venture. The excess land (approximately 70 acre) owned by GDL will also be transferred to the joint venture and GDL will earn lease rentals on the same.
* The total cost of setting up the joint venture will be Rs70 crore which will be funded in the debt/equity ratio of 2:1.
* The revenues (handling charges and ground rent) arising from the joint venture will be shared in the ratio of the stakes held by the two companies.
* The profits from the rail operations for the movement of container rakes from the Garhi ICD to the ports will be equally shared between GDL and Concor.
* We maintain our bullish stance on the company as it will be the direct beneficiary of the growth in container traffic, which currently accounts for just 10% of the total cargo.
* The stock has significantly underperformed the Sensex in the last three months, declining by 21% over the period. So we believe this to be a good buying opportunity for the investors and thus maintain our Buy recommendation with a price target of Rs250.
ICI India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs550
Current market price: Rs435
ICI sells Quest International
Key points
* ICI India (ICI) on March 02, 2007 sold its 100% equity share holding in Quest International India to Givaudari (India) Pvt Ltd for Rs320 crore. The company had also received an interim dividend of about Rs31 crore prior to the sale of Quest International India. Further, it expects an additional consideration of about Rs35 crore for various agreed adjustments in the next quarter.
* At the current market price of Rs435, the stock trades at 14.7x its FY2008E earnings per share (EPS) of Rs29.7. We maintain our Buy recommendation on the stock with a price target of Rs550.
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,240
Current market price: Rs820
New holding structure to unlock value
Key points
* Key investments in insurance and asset management businesses to be transferred: ICICI Bank has decided to transfer its 74% stake in the insurance and 51% stake in the asset management businesses to a separate wholly owned subsidiary company called ICICI Holdings. It plans to further list ICICI Holdings separately in CY2007. The independent listing should unlock significant value for its life insurance business and provide further visibility to its stock's valuation. The bank plans to transfer the investments at the current book value, which stands at Rs1,950 crore.
* Listing will provide insurance companies greater access to capital: The insurance business needs a huge amount of capital infusion and ICICI Bank could not have met the capital demands without having to go for another equity issue. The transfer of stakes to a holding company was done with the idea of providing insurance companies greater access to capital.
* Significant value to be unlocked in the insurance business: Currently there are no listed insurance companies in the Indian market and the valuation provided to certain stocks like ICICI Bank and Bajaj Auto based on the new business adjusted profit (NBAP) multiple varies across the analyst community. The analyst community has taken a cue from comparable valuations given to the Chinese insurers which in the past year had been re-rated to 30-40x NBAP multiples. The listing of the holding company will provide a valuation benchmark for these high-growth businesses of the bank and unlock significant value for the insurance businesses. We have valued the life insurance business at 21x FY2009E NBAP, which we feel is a fair multiple for such a high-growth business.
ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs142
VAT on cigarettes
Key points
* ITC has been underperforming the market for quite some time owing to fears of the implementation of the value added tax (VAT). We believe the stock would continue to underperform till clarity emerges on how VAT would be implemented and how the subsequent price hike would affect the company's volumes.
* Historical data shows that whenever there has been a price hike in the range of 10-12%, cigarette volumes have dipped. We believe that a 12.5% VAT may result in a 8-10% price hike across segments. Consequently, we may see lower growth or no growth in volumes in 2008.
* We believe that with VAT getting implemented, our earnings per share (EPS) estimate for FY2008 would change by 9% from Rs8.8 to Rs8, which is still a 9.6% growth over the FY2007 EPS. At the current market price of Rs142, the stock is quoting at 17.7x its FY2008E EPS and 10.7x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a revised price target of Rs200.
KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs518
Strong performance
Result highlights
* KSB Pumps delivered good results for Q4CY2006. Its net sales grew by 24.9% to Rs108.3 crore during the quarter. There was a delay in the dispatch of certain orders in the previous quarter; the delayed sales got reflected in the fourth quarter, boosting the Q4CY2006 performance.
* On segmental basis, the revenues of the pump business went up by 16.2% to Rs78.9 crore while that of the valve business grew by a strong 57.7% to Rs28.7 crore. However, the margin in the pump business declined to 13.4% from 15.3% last year, while the profit before interest and tax (PBIT) margin in the valve business grew by 120 basis points to 25.4%.
* Overall, the operating profit grew by 24.2% to Rs20 crore, while the operating profit margin (OPM) was stable at 18.5%. This despite a steep hike in the raw material cost, which rose from 41% in the same quarter last year to 46.4%. However, substantial savings were made in the staff cost and other expenses.
* The profit after tax (PAT) for Q4CY2006 rose by 42.4% to Rs12.1 crore. For CY2006, the OPM grew to 20.4% from 18.1%, while the full years' PAT grew by 38.3% to Rs51.6 crore.
* Sales are traditionally better in the first and second quarters for pump makers because of seasonal factors. Hence, we should expect even better results from the company in the coming quarters, both in terms of revenues and margins.
* The pumps industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a 12% market share, would be one of the key beneficiaries of the same and hence we expect the growth momentum to sustain going forward. We are introducing our CY2008 earnings per share (EPS) estimate at Rs46 for KSB Pumps. At the current market price of Rs518, the stock quotes at CY2007E price/earnings ratio (PER) of 11.3x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs650.
Lupin
Cluster: Apple Green
Recommendation: Buy
Price target: Rs670
Current market price: Rs570
Building momentum in EU business
Lupin, together with its French Regulatory agent Venipharm, has received the marketing approval for generic Cefpodoxime Proxetil 100mg tablets in France. Cefpodoxime Proxetil is a cephalosporin antibiotic used to treat a variety of bacterial infections. Lupin's Cefpodoxime Proxetil tablets would be the generic equivalent of Sanofi-Aventis's Orelox tablets. The sales of Orelox tablets in France are close to 75 million euros as per IMS. The patent on Sanofi's Orelox is due to expire in August 2007 in France.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs731
Acquisition marginally earnings accretive
Key points
* As mentioned in our earlier note dated March 9, 2007, M&M had won the bid to acquire a 43.5% stake in Punjab Tractors at Rs360 a share in an all-cash deal. Private equity fund Actis and the Burman family are selling their respective stakes of 29% and 14.5% in Punjab Tractors.
* M&M's management expects a number of strategic benefits and synergies from the acquisition. Several benefits are expected to come from the brand Swaraj, a well-respected brand that enjoys a good brand loyalty, particularly in the northern states like Punjab, Haryana, Uttar Pradesh and Bihar. M&M is particularly strong in the central, western and southern regions. The acquisition of Punjab Tractors would further increase its presence in the north Indian market.
* The acquisition would make M&M an undisputed leader in the tractor segment, with an overall market share of about 40%. It would help it consolidate its presence in the 31-40 horsepower (hp) category and help it to acquire a dominant status in the >51hp category. This would be a huge positive as a strong growth is expected in the higher-end tractor segment.
* We believe that the acquisition would have a marginal impact on M&M's earnings for FY2008. The management has indicated that it will use a mix of internal resources and debt to fund the acquisition. At present the management has surplus funds of up to Rs800 crore, and its debt equity ratio currently stands at 0.43:1. We expect that about 40-50% of the acquisition cost would be financed through debt. Considering this, our calculations suggest that the deal would be marginally earnings accretive for M&M for FY2008. However, we believe that the deal is a good strategic move by M&M, which would yield substantial long-term benefits for M&M.
* At the current levels, M&M trades at 11x its FY2008E consolidated earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,050.
New Delhi Television
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs348
Current market price: Rs304
Fund mobilisation begins for new channels
New Delhi Television (NDTV) has received a major push towards implementing its ambitious plans of diversifying its broadcast offerings by entering the general entertainment and lifestyle space. Last week the news broadcaster received the approval of the Foreign Investment Promotion Board to raise foreign investment of Rs585 crore (~$130 million) for its proposed channels through its UK-based subsidiary NDTV Network Plc. Taking a step forward, it has also entered into a definitive agreement with Com Ventures V.I.L.P for infusing $20 million in NDTV Network Plc. We believe the company will expedite the fund raising process by roping in strategic/financial investors or go for a listing on the Alternative Investment Market (commonly known as AIM).
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,341
Current market price: Rs1,012
R&D pipeline adds sheen
Key points
* Sun Pharma Industries has de-merged its innovative research division into a separate company called Sun Pharma Advanced Research Company (SPARC) Ltd.
* As anticipated Sun Pharma has unfolded the innovative research pipeline for SPARC Ltd, which comprises of 4 new chemical entities (NCE) and 4 novel drug delivery systems (NDDS). The lead molecule—SUN 1334H—that targets anti-allergic disorders is undergoing Phase-II clinical studies in the USA and is likely to enter Phase-III trials in 2008.
* On the NDDS technology front, Sun is working on four platforms including controlled release system (which covers gastro retentive innovative device and WRAP matrix system), dry powder inhalers (DPI), targeted delivery by Nanoemulsion and biodegradable injections/implants.
* Sun Pharma's NCE research is analogue-based which means that the research is for creating newer drugs by modifying the existing ones. Hence, the risks of uncertainty about the molecules are minimal.
* The de-merger would positively affect Sun Pharma Industries, as Sun Pharma currently spends 35-40% of its research and development (R&D) expenses for innovative research, which will be saved on the de-merger. On the other hand, the NDDS technologies developed by SPARC would help Sun Pharma to launch new NDDS products in various markets where it has a presence.
* For lack of information, we are maintaining our earlier estimate for SPARC at Rs54 per share. And as per our earlier estimate, the base business is valued at Rs1,287 per share. Hence, our target value for Sun Pharma remains at Rs1,341 per share.
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs774
Good performance
Sales highlights
* Tata Motors (TAMO) has reported decent numbers for February with an overall growth of 19% as its total sales rose to 53,707 units in the month from 45,113 units last February.
* The growth in the commercial vehicle segment continues to be strong despite the high base of last year. The segment recorded a 22% growth in February. The medium and heavy commercial vehicle segment saw a growth of 19.4% while the light commercial vehicle sales grew by 25.3% year on year (yoy).
* The passenger car sales were slower in February compared with that in the earlier months, with an overall growth of 12.8%. Indica reported sales of 12,580 units (up 19% yoy) while the Indigo family registered a decline of 6% in sales.
* The utility vehicle segment reported a phenomenal growth of 40.7% during the month, led by the strong sales of both Sumo and Safari. Safari sales grew by a staggering 258% to 2,009 units.
* TAMO's exports for the month stood at 4,526 vehicles as compared with 4,257 vehicles in February 2006. That's a growth of 6% yoy.
* At the current market price the stock is trading at 12.3x its consolidated FY2008E earnings and at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We remain bullish on the stock and maintain our Buy recommendation with a price target of Rs1,075.
Transport Corporation of India
Cluster: Cannonball
Recommendation: Buy
Price target: Rs86
Current market price: Rs62
Results ahead of our expectations
Result highlights
* The Q3FY2007 net profit of Transport Corporation of India (TCI) registered a year-on-year (y-o-y) growth of 53.65% to Rs8 crore, in line with our expectations.
* The net revenues (excluding trading revenues) grew by 32.7% year on year (yoy) to Rs257.8 crore on the back of a 30.6% y-o-y growth in the combined revenues of the transport and supply chain divisions to Rs178.6 crore.
* The earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 59% yoy to Rs18.3 crore on account of a significant decline in its raw material costs arising from the closure of its petrol pumps. Consequently the EBITDA margins grew by 140 basis points yoy to 6.6%.
* The profit before interest and tax (PBIT) margins in the transport and express cargo (XPS) divisions improved by 70 basis points to 3.4% and 40 basis points to 8.3% respectively on account of higher capacity utilisation of the company's fleet whereas the margins in the shipping division declined on account of an increase in the fuel prices.
* The net profit at Rs8 crore grew by 54% yoy whereas the net margins improved by 80 basis points yoy to 2.9%.
* To capitalise on the growth opportunity, the company has lined up a huge capital expenditure (capex) plan of Rs430 crore to be implemented over the next four years. The capex plan broadly includes Rs150 crore for setting up warehouses, Rs120 crore for acquiring trucks and Rs100 crore for buying ships.
* The company plans to fund this capex through debt, internal accruals and fresh equity in equal measures. The equity issue is expected to be undertaken in two parts. The first equity issue of close to Rs75 crore will be done in the next couple of months. Hence we have assumed that the first tranche of equity will be raised at Rs65 per share in FY2008 whereas the second tranche of Rs75 crore will be raised at Rs75 per share in FY2009. Consequently we have adjusted our numbers factoring in the same.
* Considering the company's focus towards high-margin XPS and supply chain divisions as well as higher volumes from the transport division, we are upgrading our FY2007 and FY2008 profit after tax (PAT) estimates by 4.9% to Rs32.1 crore and 8.8% to Rs44.2 crore respectively. On the revised numbers, the earnings per share (EPS) would stand at Rs4.8 per share for FY2007 and Rs5.6 per share for FY2008.
* We expect TCI's net revenues to grow at a compounded annual growth rate of 21% over FY2006-08 to Rs1,330 crore. The net profit is estimated to register a 28% CAGR growth to Rs44.2 crore by FY2008. At the current market price of Rs62, the stock trades at 13x FY2007E earnings and 11x FY2008E earnings. Considering the bullish outlook for the company as well as higher profitability, we maintain our Buy recommendation with a price target of Rs86.
Wockhardt
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs552
Current market price: Rs362
US FDA nod for painkiller
Wockhardt has received the approval of the US Food and Drug Authority (US FDA) for marketing painkiller tablets, containing a combination of Dextropropoxyphene napsylate and Acetaminophen (DPN+APAP), in the US market. The DPN+APAP combination is the generic version of Xanodyne Pharma's patented product, Darvocet-N. It is one of the more potent analgesic drugs and is widely used all over the world for control of various kinds of pain.
SHAREKHAN SPECIAL
Q4FY2007 IT earnings preview
The street expectations have toned down considerably in terms of both Q4 performance and the annual guidance for FY2008, and the recent underperformance of the tech stocks indicates that the same has already been factored in the valuations. This essentially means that the negatives have been priced in, leaving limited scope for downside. But positive surprises, especially in terms of higher than expected annual guidance by Infosys, are not ruled out. However, the continued strengthening of the rupee and seasonal weakness in Q1 (due to wage hikes and additional visa related cost) would continue to influence sentiments on tech counters in the short run. We believe that any further weakness would be an opportunity to accumulate the front-line tech stocks and prefer Infosys and TCS.
MUTUAL GAINS
Sharekhan's top equity fund picks
We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the returns, the Sharpe ratio and Fama (net selectivity).
The past performance is measured by the returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.
FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.
SECTOR UPDATE
Automobiles
High interest rates affect two-wheeler sales
Hardening interest rates seem to be having a dampening impact on automobile sales, as the sales during March were lower than expectations despite the month containing a number of auspicious days like Gudi Padwa and Navratri. The impact seems to be more severe in the two-wheeler segment, particularly motorcycles, while four-wheelers continued to record decent growth.
Our checks also reveal that the auto finance companies have been extra careful while disbursing loans, hence the rejection rates have gone up in the past few months. To counter the effect of rising interest rates, auto-manufacturers are partnering with auto finance firms to offer loans at a lower rate to consumers. The cost of the same is being borne by the manufacturers, financers and the dealers. However, the same shall have a negative impact on the earnings of the companies.
Banking
CRR hike—negative for banks
The Reserve Bank of India (RBI) has surprised the market with another 50-basis-point hike in the cash reserve ratio (CRR) to 6.5% from 6.0% at present and a 25-basis-point hike in the repo rate to 7.75%. The CRR is a percentage of the net demand and time liabilities, read deposits, which the banks need to maintain in the form of cash balances with the RBI. The CRR hike would be in two stages of 25 basis points each (effective from April 14 and April 28 of this year). The hike is expected to absorb Rs15,500 crore of liquidity from the banking system. The RBI has also reduced the interest on CRR balances from 1% to 0.5%.
Information Technology
Rupee plays spoilsport
The sharp appreciation of the rupee against all the other major currencies in the past couple of weeks has dented the sentiments towards the tech stocks and rightly so. That’s because the unexpected sharp appreciation in the rupee at the end of the quarter would not only adversely affect the fourth quarter’s financial performance of the information technology (IT) companies but also have a strong influence on their annual growth guidance for FY2008.
Pharmaceuticals
Strong competition to limit gains from Zolpidem
Ranbaxy Laboratories has received a tentative approval from the US Food and Drug Administration (US FDA) to manufacture and market Zolpidem Tartrate tablets, of 5mg and 10mg strength.
Telecommunication services
TRAI reduces ADC burden
The Telecom Regulatory Authority of India (TRAI) has announced a reduction in the access deficit charge (ADC) levied on the private sector operators to provide support to Bharat Sanchar Nigam Ltd (BSNL) for its operations in unviable rural areas. The regulator has gone ahead with the decision to reduce the ADC despite a strong protest voiced by BSNL and it clearly reflects that TRAI intends to gradually phase out the ADC regime.
Tyres
Rubber’s loss, tyre’s gain
The easing of the rubber prices is a positive development for tyre makers, given the fact that rubber accounts for around 39% of the total raw material cost.
In the past, owing to a buoyant demand scenario, the tyre manufacturers had been able to pass on a large part of the increased cost of inputs to user industries. Most of the tyre majors have announced a number of price hikes in the last twelve months (in the region of 20-25%). In fact, a price hike was initiated in February this year to pass on the upmove in the rubber prices during January. Apollo Tyres raised its prices in the passenger car radial segment by about 2% while MRF Tyres raised the prices by about 1.5-2%. The price hikes has limited the adverse impact of the rising input costs on the margins of the tyre manufacturers. We have also noticed that the tyre prices tend to remain sticky and do not come down as sharply with a fall in the raw material prices.
VIEWPOINT
ABC Bearings
Expansion to drive growth
The bearing industry is expected to grow at a rapid pace of about 15-20% going forward. ABC is expected to keep pace with the industry. To cater to the strong demand, the company is expanding its capacity from the current 6.5 million units to about 8.0 million units by October 2007. The company would be able to do this at a minimal capital expenditure. With technological inputs from NSK it would be able to make all its lines “universal”, capable of producing both taper as well as cylindrical bearings. At present, the company is operating at 100% utilisation.
Garware Offshore Services
Fleet expansion to drive growth
Incorporated in 1976, Garware Offshore Services Ltd (GOSL) is part of the Garware group of companies and involved in providing supply and support vessels to oil exploration & production (E&P) companies operating in offshore blocks.
Currently, the company has a fleet of six vessels: four anchor handling tugs (AHTs; deployed with Oil & Natural Gas Corporation [ONGC] with day rates of $4,500) and two platform support vessels (PSVs; one deployed with Transocean [day rate of $15,500] and another with British Gas on long-term charter at day rate of $14,500).
Glenmark Pharmaceuticals
An all-round growth
The recent developments on Glenmark are indicative of the management’s aggressiveness in growing the company. The management has been undertaking an all-round effort to grow in all the different segments of the business, whether it is expanding its product basket in the USA and Latin America, entering new markets like Europe or creation and unlocking value from assets created out of its research and development (R&D) assets. Through selection of niche, difficult to manufacture products with limited competition for the US market, Glenmark has been able to capitalise on each of its products and grow its US business by leaps and bounds. The recent disclosure of its Para IV ANDA filing for generic Ezetimibe (for which it is the only ANDA filer till date) is reflective of the strong product selection strategy of the company. Further, Glenmark has positioned itself as a truly innovative, research-driven company by the successful creation and unlocking of value of its IP assets.
Glenmark is upbeat about its growth prospects for the next two years, with its US and Latin American business being the major growth engines. As per the company's projections, it is planning to grow at a CAGR of 52% over FY2006-08E to $379 million, with the profits growing at a CAGR of over 137% over the same period to $115 million. The company has given earnings per share (EPS) guidance of Rs23.6 per share in FY2007E and Rs43.8 per share in FY2008E. The projected EPS however includes the anticipated milestone payments of $31 million in FY2007 and $69 million in FY2008. On excluding the impact of the uncertain milestone payments, the EPS would reduce by 50%.
Matrix Laboratories
Mylan’s exclusivity for Norvasc to benefit Matrix
Mylan, the US-based generic company, has been awarded 180-day exclusivity to market Amlodipine Besylate, the generic version of Pfizer’s anti-hypertensive, Norvasc. India’s Matrix Laboratories, in which Mylan had acquired a controlling interest in 2006, is the supplier of active pharmaceutical ingredients (APIs) to Mylan.
Subscribe to:
Posts (Atom)
