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Saturday, April 30, 2005
Reliance: Good numbers but…
Performance Summary
Reliance Industries has announced strong results for the fourth quarter and year ended March 2005. For FY05, while revenues have grown YoY by 28%, profits are up 47%, mainly on account of a slight margin expansion and higher other income. The fourth quarter was much more robust with the company clocking over 26% revenue and nearly 62% bottomline growth.
What is the company's business?
Reliance Industries is the country's largest private sector company having interests across the hydrocarbons value chain. The company, along with subsidiary, IPCL, controls over 70% of the country's domestic polymer capacity. Further, the acquisition of the German company, Trevira, by Reliance makes it the largest polyester manufacturer in the world. The company also has interests in the upstream petroleum sector, whereby it has participating interests in existing oil and gas fields, while it is likely to begin commercial production from its Krishna Godavari fields in 2007. It has recently ventured into fuel retailing with nearly 300 outlets.
What has driven performance in FY05?
Robust pricing key to realizations: During FY05, the company's gross revenues were up by about 30% YoY. Of this, 24% could be attributed to higher product prices, while the balance 6% is on account of higher volumes. Firm petrochemical and petroleum product prices in the international markets helped boost realizations. The company also witnessed a jump of 71% in export revenues. Although the company sells petroleum products to oil marketing PSUs in the domestic markets at a discount, higher prices on a YoY basis explains the growth in the topline.
Operating margins: In 4QFY05, operating margins improved encouragingly (1.1%), while the improvement was marginal during FY05. The increase in margins during the March quarter could largely be attributed to a scale down in other expenditure head of the company. Raw material costs (forming over 85% of expenditure) increased by 2.5% during the quarter. However, for the said period, strong product prices helped the company enjoy gross refining margins at over US$ 8 per barrel, thereby negating the hike in raw material costs.
Other income boost: The bottomline growth of nearly 47% during FY05, is largely a result of higher other income component, which has grown by over 27% during the period. The other income boost was largely on account of income from preference shares. Also helping boost the bottomline were extraordinary expenses that were part of last year's financials. But for a marginal rise in interest outgo (due to foreign exchange differences) and depreciation during the year, the bottomline growth could have been better for the FY05 period.
What to expect?
At the current price of Rs 554, the stock is trading at a price to earnings multiple of 10.2 times FY05 earnings. The board of the company has recommended a final dividend of Rs 7.5 per share (dividend yield of 1.3%). The current petrochemicals uptrend has helped Reliance post record profits for eight consecutive quarters. Given the firm international demand on the back of no significant capacity addition, Reliance is likely to continue to maintain momentum in the medium term.
Also, refining margins are likely to remain robust in wake of high crude oil prices and growing demand for petroleum products. Infact, domestic demand for petroleum products increased by 4.8% in FY05, as compared to 3.5% last year.
Its retail foray is also going strong with product sales higher volumes per outlet as compared to the PSUs. Although the company has not made any significant breakthrough in the retail business, it is likely to continue to grow over the next couple of years. The company has approvals for setting up 5,849 retail outlets in India. The company's E&P business (oil and gas) is on track and the its telecom initiative (Reliance Infocomm) posted a profit of Rs 510 m in FY05, as against a loss of Rs 3.9 bn last year. All in all, the company is likely to continue on a higher growth trajectory during the medium term backed by its core business. However, the tussles in the top management are likely to have a bearing on investor sentiment till the issue is resolved.Friday, April 29, 2005
Gillette: India Vs USA
A name synonymous to male grooming worldwide, the Gillette Company today is the global market leader, principally in the grooming and alkaline battery segment. It also has a decent presence in oral care business. In the more than 100 years since the company was founded, Gillette has gained, held and strengthened leadership positions globally. We decided to compare Gillette India with Gillette USA (Consolidated Worldwide) to get a perspective as to where does its Indian operations stand vis-à-vis the global parent.
Background
Gillette USA: A company founded in 1901, Gillette is the world leader in male grooming (Gillette, Sensor Excel, Mach range etc.), a category that includes blades, razors and shaving preparations, and in selected female grooming products, such as wet shaving products and hair removal devices. In addition, the company holds the number one position worldwide in alkaline batteries (Duracell) and in manual and power toothbrushes (Oral B). Gillette manufacturing operations are conducted at 31 facilities in 14 countries, and products are distributed in over 200 countries and territories.
Gillette India: Earlier known as Indian Shaving Products, the company's presence in India is over two decades old. The company was rechristened to Gillette India Limited in CY00, the same year in which it consolidated its Indian operations, by merging all existing businesses in India under a single fold. Gillette India is the 52% subsidiary of US shaving major - Gillette USA. The company's promoter groups' (including the Indian partners) together hold 88.8% in the company. The company hived off its battery manufacturing (Duracell and Geep) plant at Manesar in CY03 and is now a focused shaving product major, which also markets the Duracell range of batteries.
Despite being the 2nd most populous country in the world, India's contribution to the parent is negligible, a mere 1% in terms of revenues. In grooming, Gillette has a market share of above 75% in almost all countries where it has a presence in, except India and a few other third world countries while in some places like Latin America it is almost 90%.
Asian markets have grown at a rate of 12% from CY02 to CY04, but at the same time, Indian markets have shown a decline of 1%. The share of India to Asia-pacific revenues is low at 9.3%.
The Indian market has not been totally tapped and penetration levels are yet low for its flagship products. In India, the company is aiming to wean away consumers from the traditional double-edged razor segment to twin blade system through its mid-priced offering 'Vector Plus'. If successful, the company could achieve a new growth trajectory. Worldwide, the consumer Razor and blades sales have grown 31% in the past three years.
In terms of potential in India, nearly 90% of consumers' still use double-edged razors, a large part of which Gillette can convert. Slowly and steadily, times are changing with Indian men, beginning to place more emphasis on grooming and taking as much time as the fairer sex at the super market to pick up their favourite cologne, deodorant, aftershave lotion, shaving cream, body talc, face wash, shampoo, and conditioner.
Sales mix
The parent has a vast array of products including 5 US$ 1 bn plus brands. Unlike the parent's diverse folio mix, in India, Gillette sales primarily consist of its key brands 'Sensor Excel' and 'Mach 3' i.e. male grooming. Duracell, which holds the No.1 position worldwide in Alkaline batteries under performed badly in India, forcing the Indian counterpart to sell the factory to a worldwide subsidiary, and focus only on marketing the product.
India being a very price sensitive market has never been on the parents' priority list for new launches and products are made available only after considerable time. To put things into perspective, Mach3 turbo is trying to make an arrival in India, whereas worldwide M3Power an automatic version of Mach3 turbo is available in stores and in developed markets like US and Europe, M3Power Nitro a newer version of M3Power has already hit shelves.
P&G acquisition of Gillette
P&G recently acquired Gillette globally for US$ 56 bn. The combination will create a US$ 62 bn company - number two in the consumer products world behind Nestle in sales, and number one in market capitalization at nearly US$ 200 bn. The fit works just as well geographically, creating a good balance in sales across North America, Europe and the developing markets of Asia and Latin America.
Valuations
Gillette USA currently trades at US$ 52.75, a P/E multiple of 32 times its CY04 earnings and market cap to sales of 5x. On the other hand, Gillette India trades at Rs 660 that translates into a rich valuation of 35 times CY04 earnings. This is at the higher end of the spectrum in comparison to other stocks in the Indian FMCG space. Market cap to sales of its Indian operations is at 5.5x.
Although Gillette India just forms 1% of global revenues, the US parent will be looking to change that. The Indian operations have seen a major restructuring and cash infusion to continue on the path to profitability. With every 3rd person globally either an Indian or Chinese, Gillette can ill-afford to not focus on this geography. But progress will be a long drawn affair in this value conscious country. From the stock perspective, with nearly 90% stake in the hands of promoters', liquidity is an issue and the only thing keeping the valuations pepped up is hope of a good buyback offer in future.
Monday, April 25, 2005
Infosys, world's most valuable IT firm
Are Bangalore-based Infosys Technologies and Wipro Ltd, India's software bellwethers, the first and third most valuable software services companies in the world?
It would seem so.
Today, the $1.5 billion Infosys would be the costliest company to acquire even ahead of the $16 billion Accenture, the biggest consultancy and software solutions multinational.
Surprised? Don't be.
The EV or enterprise value of Infosys as on April 25, 2005 at $16.72 billion has nudged ahead of Accenture's, which had an enterprise value of $16.57 billion.
Infosys's market cap though at $17.41 billion is lower than that of Accenture's market capitalisation, which stands at $19.95 billion.
Also to understand how valuable Infosys is as a software company consider the enterprise values of other software companies, both Indian and global.
Bigger MNC competitors like EDS and Bearing Point have enterprise values of $10.27 billion and $1.40 billion, respectively. Another Indian IT major Wipro, with an enterprise value of $13.09 billion, is third after Infosys and Accenture in the most valuable software services companies list.
The enterprise value of a company is calculated by adding the total amount of long-term debt that the company is carrying on its balance sheet to the company's market capitalisation, whilst subtracting the value of cash and cash equivalents that are held by the company.
The enterprise value of a company also reflects the actual purchase price of the company if it were to be acquired without taking into account any premium or discount that may be offered at the time of sale.
With Infosys as a company carrying no debt on its balance sheet, it is but normal to expect a premium to be offered in case there is an offer to buy out India's most valuable software company.
Interestingly, the enterprise value of Infosys is higher than that of Accenture despite its most recent fourth quarter results that had disappointed market watchers and had also led to a fall in the Sensex.
Only IBM, which offers both products and software services -- and hence is not a pure play software consultancy and services player -- is more valuable than Infosys.
The $96 billion IBM dwarfs Infosys with an enterprise value of $135.92 billion and a market capitalisation of $121.16 billion.
Source : Rediff.com
Put your money where you shop
The retail sector will grow faster than the fastest growing sector in the country. But, in return, they sell at a premium. May be justifiably so.
More than a decade ago, shopping for clothes, perfumes, footwear and fashion jewellery - all under one roof - in Mumbai meant going to just one shop. Shopper's Stop in suburban Andheri.
Today, Shopper's Stop has six stores in Mumbai. Add to that an equally large number of competing stores like Pantaloon, Lifestyle and Westside.
Fast forward to 2010. There will be 600-odd malls across the country, constituting nearly 10 per cent of total retail sales. That is great news not just for shoppers but also for investors in stocks.
More here
Sunday, April 24, 2005
Saturday, April 23, 2005
Reality Check
The indices gained yesterday. But it will not bring a sense of relief to investors who have been following the market goings on over the past couple of months. With equity markets globally in a state of dilemma, not much will change towards India overnight. But is it the end of the India story?
It is a known fact that most emerging markets and even key western markets have been on a slippery ground in recent times. With US consumer price index indicating a sign of inflationary pressure, US Fed chairman's strategy to control economic excesses in the world's largest economy is taking shape. It is a given that US rates are on their way up, only the speed and the quantum of the hikes is not really known.
If the rate hike is faster than anticipated, then FII flows could slow down, drying up liquidity in the emerging markets. However, in our view, despite the bonhomie, sustainability of growth of the US economy is still not really visible. And even if it was, there are too many worries it has created in the global investor's mind, which are unlikely to go away any time soon.
The pressure on the US economy over the past few years has been a blessing in disguise for other large emerging economies. In the past couple of years, global investors have really stepped out of their US horizon and looked at other regions. We believe that even if the US economy does sustain its current growth rate, the newer economies are unlikely to come in as an 'after thought' to global investors.
Sure, the next couple of months may be choppy, but longer term, the India story looks good. Even if India trudges along its usual 6%-6.5% GDP growth, that itself offers potential to equity investors to grow their capital, beating most other investing avenues. Though inflationary pressures are also evident in the economy, it is unlikely to be a very sharp rise in interest rates.
For India, FY06 has started on a good note. Structurally, VAT has been implemented, which has the capability to bring in cost efficiencies in the system over the longer term, despite early worries. Efforts are on to allow FDI in retailing and other sectors. Early indications are that the monsoon will be 'normal' this year. This again is a proven positive for the Indian economy. All in all, the benchmark indices at 13 times forward FY06 earnings, does not seem to be steep. Pick and choose!
Source : Equitymaster
Friday, April 22, 2005
Wednesday, April 20, 2005
A pull-back rise possible
The Nifty is trading near its 200-daily exponential moving average that lies at 1908. Volatility can be expected around this level. The index can see a pull-back rise in the near term. In case of a pull-back the Nifty can test 1953-1960 levels, where it can faces resistance. On the downside the index is likely to test at 1894-1872 levels in the short term. The short-term bias remains Down till the resistance at 1970 holds on a closing basis.
On an intra-day basis if the Nifty manages to sustain above 1934, then we may see the index stretch to 1953. On the downside Nifty has support at 1916. If it breaks 1916, then we may see the index seeking lower levels in the vicinity of 1900. Satyam made a matching low at Rs364; on the upside the stock can test Rs386. Tisco has support at Rs352; on the upside the stock can pull back to Rs374. Reliance can pull back to Rs538-542 levels, where resistance can be expected. Infosys faces resistance at Rs1,976 above which the stock can test Rs2,006 levels.
Source : Sharekhan
Tuesday, April 19, 2005
i-flex, Infosys among top 10 Banking Solutions
Indian companies operating in the banking technology space are seen as a natural choice for banks across the world which wish to adopt advanced technology systems.
In a recent survey conducted by International Banking System (IBS), four Indian companies figure among the top 10 companies worldwide in the banking technology space.
According to the Annual Sales League released by IBS, the four Indian companies are i-flex Solutions (ranked at the top), Infosys (at fifth), InfrasoftTech (eighth) and Nucleus Software (10th).
Meanwhile, another study conducted by the Tower Group, which is an advisory research and consulting firm, points out that technology spending in the global banking industry is well on its way to increase by approximately 4% during the 2005 calendar year. Significantly, almost three-quarters of the spend will take place out of Europe and North America.
"Consumer banking will continue to represent the largest share in technology spending while wholesale banking will experience a steady recovery during the year," said Nasscom research head Sunil Mehta. Flexcube — an internet banking and e-finance platform from i-flex — has been ranked as the world's best universal banking solution for 2002 and 2003 by IBS. "Citigroup accounts for almost 38% of our aggregate revenue. Other top clients include the North Carolina Department of State Treasurer, Bharat Overseas Bank, IMF etc," said i-flex Solutions CEO and CFO Deepak Ghaisas. Infosys software product Finacle is used by approximately 84 banks worldwide. 3i Infotech is ranked 18th worldwide for banking technology products. "In fiscal 2004, our suite of banking software solutions contributed to about 8% of our total income," said 3i Infotech managing director and CEO V Srinivasan.
Rights, bonus, splits no more good news for stocks
38 of 45 scrips have declined after such Announcements
The shares of 38 companies, out of a total sample of 45, whose prices got adjusted for either bonus, rights or stock-splits between January and April 2005, have seen their prices decline sharply after the
respective adjustment.
A Business Standard Research Bureau study shows that out of the 45 stocks, 16 have declined between 20 per cent and 50 per cent, while 12 fell between 5 per cent and 20 percent. The scrip price of only seven companies firmed up after the adjustment, while ten scrips declined by
around five per cent each.
The shares of Interworld.com got adjusted for stock-split when the face value was reduced from Rs 10 to Re 1 per share on February 14, 2005. After adjusting for the stock-split, the stock price fell by a
big 50 per cent from ex-split price of Rs 3.35 on February 14, 2005 to Rs 1.70 on April 15.
Likewise, Doctors Biotech India's share price declined by 35.2 percent from ex-split price of Rs 8.50 on January 18 to Rs 5.51 on April 15. The stock was split, from Rs 10 per share to Re 1 per share.
Hitech Gears' shares, adjusted for a 1:1 bonus issue on March 16, has fallen by 27.4 per cent, from Rs 202.65 to Rs 147.05 now.
Similarly, the stock price of Aarti Industries, which gave a liberal bonus in the ratio of 2:1, went down by 27.1 per cent, from Rs 127.65 (ex-bonus) on February 9 to Rs 93.05 on April 15.
ING Vysya Bank's stock price also fell by 27 per cent from ex-rights price of Rs 200.05 on February 21 to Rs 146 now. The bank issued shares in the ratio of 3:1 at a premium of Rs 35 on a rights basis to existing shareholders.
Others in the category include: Karnataka Bank whose stock price has fallen 26 per cent, Ipca Laboratories (22.6 per cent), Vijay Textiles (21 per cent), Matrix Laboratories (17.2 per cent) and Gammon India (15.4 per cent).
The seven companies which bucked the trend include Vyapar Industries, whose shares appreciated 109 per cent after it became ex-bonus, Mercator Lines (ex-split prices up 20 per cent), G V Films (up 12.5 per cent ex-split), Hindustan Sanitaryware (up 5.7 per cent ex-bonus), Prraneta Industries (4 per cent ex-split) and Gujarat NRE Coke (1 per cent ex-bonus).
Source : Business Standard
Monday, April 18, 2005
Sharekhan Stock Update
Geometric Software Solutions
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs550
CMP: Rs485.00
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs550
CMP: Rs485.00
Growing in double-digits
Result highlights
- Geometric Software Solutions' overall results are in line with our expectations.
- The top line is up by 14.7% in rupee terms quarter on quarter (qoq). In dollar terms the same is up by 17.2%.
- The operating profit margin fell during the quarter but if we ignore the one-time expenses incurred during the period the same is largely in line with expectations.
- The company has given a robust growth guidance for FY2006: a growth of 45-50% in the top line in US Dollar terms and a similar growth at the net profit level.
- At the current market price the stock is quoting at 12.3x FY2006E earnings.
- We maintain our Buy call on the stock.
Sunday, April 17, 2005
Result Dates
April 18
Teledata Informatics, Dhampur Sugar
April 19
Essel Propack , HCL Infosystems, Castrol India, Hexaware
April 20
Helios Matheson, Wockhardt, Infotech Enterprises, Aptech, Guj. Ambuja Cement, Sakthi Sugars, Uttam Galva Steel, Kopran
Saturday, April 16, 2005
Expect further weakness
The Nifty breached its recent low of 1970. On the downside the index could decline to 1930 or 1900. On the upside the Nifty faces resistance in the 1992-2004 range. Any intra-day bounce will face resistance around the 1992-2004 range and in the short-term the index could decline to 1900. Intra-day the Nifty faces a resistance at 1972 and on the downside it could decline to 1930. The intra-day bias is down as long as the Nifty stays below 1972.
Maruti faces a resistance at Rs412 and on the downside the stock could decline to the Rs398-390 range. SBI faces a resistance at Rs636 and on the downside the stock could decline to Rs605. Satyam could see intra-day weakness below Rs381. Intra-day Tata Motors is likely to test Rs403. A break below Rs403 is likely to see further weakness in the stock. The stock faces a resistance at Rs419.
Time : Short Term (Nifty)
Target : 1900
Trend : Down
Reversal : Up Above 2004
Support/Resistance : 1930/1952
Source : Sharekhan
Tuesday, April 12, 2005
Lower Guidance - a buying Opportunity .. .
Networth Stock Broking does a pre-quarter result check on IT companies and suggests a buy on dips on frontline techs and a few niche players.
EPS Growth guidance to be lower compared to last year
As Q4FY05 tech results are in the offing, we believe that more emphasis would be on the outlook for FY06. The expectations are high following the thunder performances in FY05 with the tier-I companies expected to report more than 40% growth for the year ended March 05. However for FY06 the growth rates are expected to return to normal growth rates due to the base effect and hence would not positively surprise investors to trigger a fresh rally. We expect prices of tier-I IT companies to adjust to these growth rates. We believe that valuations are still attractive on a Price to Growth (PEG) basis. We recommend investors to use every dip in prices as a buying opportunity.
Click here to download the entire report
Sunday, April 10, 2005
How Yogi Deveshwar Changed ITC
ITC chairman Y C Deveshwar, better known by his nickname Yogi, is a man who loves doing deals. It was no surprise, therefore, that he went out of his way to settle the 20-year-old tax dispute with the excise department of the central government earlier this week in pursuit of his stated intention to clean up the books of ITC and settle outstanding disputes and litigation.
Deveshwar inherited a slew of disputes from his predecessors when he assumed the mantle at ITC -- they ranged from unpaid tax notices through criminal cases filed by the government of Singapore and trade-related litigation in the US.
"Many would have described the inheritance as a crown of thorns but Deveshwar's commitment to the company has never wavered," say his compatriots in Kolkata.
Deveshwar has braved criticism over the years at successive annual general meetings, from shareholders who would have liked ITC to dip into its vast reserves and issue bonus shares or other forms of shareholder reward.
The chairman's position has been that the firm would be wise to conserve its resources till such time as the disputes could be resolved through a carrot and stick policy, of legal action and judicious pay-outs.
He has conveyed this message to agitated shareholders over the years through replies that were strong on both logic and charm, and disarmed them. To be fair, not all his deals have worked -- an offer to settle such a dispute in Singapore was not accepted by the administrators there.
So why did it work in India? It's because ITC is today seen as a true-blue Indian company (and Deveshwar can take credit for this too!) that has been investing in the rural economy and in crucial sectors of the economy much before such things became fashionable.
The company's investments in the creation of a unique information-technology-enabled rural information and trading network, called e-choupal, and India's first rural mall at Sehore, have transformed ITC from a multinational peddling cigarettes to a venture with firm roots and commitment in the Indian economy.
Its paper business has looked beyond the balance sheet through investments in social forestry programmes and environment-friendly technology. Its retailing and foods businesses have brought Indian products to the market without a hitch, and its hotels have Indian-ness at their heart.
As far as the tax dispute is concerned, some credit doubtlessly goes to the government for being so pragmatic as to gracefully accept the verdict of the apex court and withdrawing the ill-advised Ordinance that sought to recover unjust dues through executive action.
But just as much credit should go to Deveshwar's skill in cooling down what could have been a nasty run-in with the taxman.
"You can succeed in doing a deal only if you are convinced about what you are seeking to achieve and also if are sure you can carry others with you -- Deveshwar has achieved both," says a fellow professional manager and CEO.
The performance of ITC has silenced his critics on the board, including one-third shareholder BAT plc, which was initially very hostile to his plans to make ITC look beyond tobacco.
While the boardroom presence of Indian financial institutions, also with one-third shareholding in the company, might have helped the settlement with the government, Deveshwar was clearly balancing two sets of critics while doing this deal.
One the one hand, BAT could well have disputed the wisdom of paying anything in view of the favourable Supreme Court judgment, while on the other, the FIs could well have applied pressure for payment of the entire sum in the light of the Ordinance.
Deveshwar can justly claim the entire credit for reconciling these viewpoints through his conviction, and, of course, his trademark combination of hard logic and charm.
Source : Business Standard
Hindu Businessline Recommendations
Buy >> GRUH Finance, Madras Cements
Hold >> Dwarikesh Sugar, Hindalco, Pfizer
Infosys Vs Cognizant
The Indian software industry has grown by leaps and bounds over the past few years. It is one truly global industry that has given India global recognition, fame and acknowledgement. With its unique geographical location, global delivery model pioneered by Indian companies, labour cost arbitrage, strong English-speaking skills, highly skilled technical and managerial talent and ability to execute complex projects at optimal cost and highest quality on time, it comes as no surprise that Indian firms have been giving their global competitors sleepless nights.
However, is all this hype justified After all, India accounts for just around 3% of the global industry and global giant IBM earns annual revenues that are nearly 5 times the size of the entire Indian IT industry put together, hardware included! So is it right to give so much attention to these firms. The answer would lie in a comparison of these firms with their global competitors, in order to separate the music from the noise. We analyse how favourably (or unfavourably) industry bellwether Infosys compares with Cognizant Technology Solutions, a comparable US-based offshore outsourcing firm, engaged in providing application development and maintenance, BPO and consulting services to clients around the world.
Financial parameters - A no-brainer ?
Infosys scores over Cognizant on most of the parameters used for comparison. It is close to three times the size of Cognizant in terms of revenues. However, it needs to be noted that this size advantage has slightly reduced over the years. In FY02, it was nearly 2.5 times the size of Cognizant. Cognizant has, in fact, grown at a faster CAGR over the time period taken for comparison, increasing its revenues by almost 55% a year on an average. Infosys has managed a pretty impressive growth as well at nearly 43%, though it has not managed to grow at the same pace as Cognizant.
In terms of operating margins, Infosys enjoys far superior margins when compared with Cognizant. However, the margins for both companies have been falling over the years. This can be attributed to the gradual movement of both companies up the software value chain, because of which there has been pressure on margins. There has also been hiring at a frenetic pace by both companies in order to scale up operations at a rapid rate in order to execute projects from clients, present and future. This has put pressure on margins of both companies. But it should be noted that margins for Cognizant have not fallen as much as they have for Infosys over the years. Still, Infosys in FY05, is expected to earn margins that are almost 10% higher than Cognizant.
Infosys earns slightly higher revenues per employee than Cognizant. However, the gap has been falling over the past few years. Even though Cognizant has been hiring at a rate slightly faster than Infosys over the years, it has still managed to maintain the revenues per employee at a stable level. This has been mainly due to the fact that it has grown its revenues at an almost equal rate over the years. Infosys on the other hand, has been hiring at a more rapid rate as compared to the growth rate in revenues. Therefore, revenues per employee have come down considerably, from US$ 51,000 in FY02 to an expected US$ 41,400 in FY05. There has been an increasing trend of hiring a greater number of campus recruits, with entry level salaries. This has resulted in a decreasing cost per employee, and is one of the levers that Infosys has used to keep costs under check.
On the return parameters, Infosys wins hands down. Its return on equity has consistently been higher than that of Cognizant. This shows the value that Infosys has created for its investors over the years, and at expected levels in FY05, is almost double that of Cognizant.
Geographical break-up
Both companies have a high reliance on North America for revenues. However, while Infosys has reduced dependence on this region over the years, Cognizant has actually increased it dependence from 85% in CY01 to 88% in CY03. This is a risk according to us, since it exposes the company to risks in that particular region. In case of any adverse event occurring in North America, Cognizant would get affected to a greater degree than Infosys.
Onsite-offshore mix
In terms of onsite-offshore mix of revenues, Cognizant has consistently maintained around 70% offshore revenues. In spite of this, margins have not improved, which could be a matter of concern. Since the company has been moving up the value chain, the margin contraction can be understood. However, even though it has maintained such a high proportion of offshore revenues, margins have fallen. Going forward, there does not appear to be much scope for increasing the offshore component. This gives rise to margin concerns, as these will either remain stagnant, or even fall marginally from current levels.
Infosys on the other hand, has seen a slight bias towards onsite work, as it moves higher up the value chain. However, going forward, as the company builds stronger competencies in high-end services, it will be able to execute them at its offshore development centres around the globe. This will result in a bias towards offshore revenues. Given the current levels of onsite to offshore revenues, there is ample scope, going forward, to increase the offshore component of revenues, and thus, protect margins.
Conclusion
Infosys compares favourably with Cognizant on most of the parameters discussed above. In terms of size, profits, margins, revenue per employee and return on capital, Infosys scores over Cognizant. However, Cognizant has managed to maintain a better growth rate than Infosys. As a result, the gap in terms of size has reduced over the years.
But it needs to be seen in another context. Infosys, when it was of a similar size as Cognizant is now, grew at a similar rate. In fact, from FY00 to FY03 when it was of a similar size as Cognizant is today, in rupee terms, it grew revenues by as much as 60% CAGR, while in dollar terms, the rate was 54.7%. Therefore, it remains to be seen as to how Cognizant manages to maintain the scorching pace of growth it has seen over the past few years.
Overall, Infosys has time and again proved its ability to grow at a fast clip even in times of a downturn. Its scalable business model, highly competent and visionary management and a highly skilled and dedicated workforce make it the star that it is. It is also making efforts to reduce its dependence on the key US market by diversifying its client base into other geographies like Europe. Going forward, given these factors, we expect the company to continue on a high growth path and it remains one of our top picks in the sector.
At the current price of Rs 2,153, Infosys trades at a forward price to earnings ratio of 19.9 times estimated FY07 earnings. Our PE band for the stock is in the range of 18x to 24x earnings. For FY07, our sell limit for the stock is thus, Rs 2,653, which is a 23.3% return from current levels. Cognizant, which is listed on the tech-heavy NASDAQ, trades at around 68 times CY04 earnings. This premium is due to the fact that it is listed on the NASDAQ. In the US markets, generally, stocks get higher valuations. Infosys ADR is also trading at a much higher PE ratio of 52.6 times earnings on the NASDAQ. This is possibly a reflection of the fact that it is a slightly more mature company than Cognizant and due to its considerably bigger size, investors do not expect it to grow at a similar rate to Cognizant.
Saturday, April 09, 2005
Further Losses Likely
After an initial pull-back to 2084, the Nifty exhibited weakness. The index encountered stiff resistance around the 2077 level, which is the 50% retracement level of its decline from 2183 to 1971. In the near-term the Nifty could decline to 2000-1970. In the short-term the index has a support at 2014. If the 2014 support holds, the Nifty could see a bounce to its short-term averages around 2062-2066. A break below 2014 will see the weakness continue and the Nifty could test lower levels. IPCL could test the Rs166-163 range and on the upside the stock faces a resistance at Rs175. SBI is range-bound between Rs675 and Rs636. Shipping Corporation could test its previous bottom at Rs147. A break below Rs147 is likely to see further weakness in the stock. Reliance Industries is in the Rs575-540 range and the stock could exhibit weakness and test Rs540.
Source: Sharekhan Research
Indian Broadband prefers masses to classes
Subscribers of telephones from Mumbai's landline telephone provider Mahanagar Telephone Nigam Limited (MTNL) got a pleasant surprise some weeks ago in the form of a little note along with the traditional New Year greetings message. The note welcomed subscribers to the broadband age and talked of how MTNL plans to roll out 1500000 broadband connections in Mumbai by end March 2005. Delhi subscribers of MTNL received a similar note, as did subscribers of BSNL in 100 BSNL cities across the country. Getting the show on the road In the middle of 2004, an IBEF analysis had reported that a broadband revolution was at the tip-off point in India. Now, the show has hit the road. Public sector giants such as MTNL and Bharat Sanchar Nigam Limited (BSNL) have stepped on gas and are working out plans to wire up India with high-speed internet access through speeds ranging from 512 KBPS to 2 MBPS. Both MTNL and BSNL have imported broadband equipment and are working round the clock to fulfill their New Year promise. Not to be left behind, private sector players like Tata, Bharti and Reliance have also joined the race and in some cities, and have already begun offering broadband connections. The latest Economic Survey of the government of India predicts that India would have three million broadband subscribers by 2005-end. Another estimate expects India to ring in 20 million broadband users by 2009. Broadband is high on the government's agenda for strategic reasons. To begin with, unlike over countries, where it is used more to tap middle class and high end customers, the government here wants broadband to be made affordable for the masses.
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Wednesday, April 06, 2005
Tuesday, April 05, 2005
Monday, April 04, 2005
Stock up on defensives
| The jury is still out on whether we have seen the beginnings of a bear phase; but this may not be a bad time to opt for a defensive strategy. |
| The stock market decline in the second half of March almost ran parallel to the disillusionment experienced by cricket fans who were expecting an easy victory over arch rival Pakistan. Players who could do no wrong till recently were suddenly found to have had feet of clay. |
| As soon as Virender Sehwag got out, nervousness gripped one reputed batsman after another, resulting in a calamitous crash. |
| As for stocks, the big run-up of the past year is tapering off alarmingly. A bit of selling by foreign institutions last week and warnings by certain corporates regarding the adverse impact of VAT on sales sent jitters down the market's spine. Stocks fell sharply mid-week before recovering in the last two sessions. |
| The obvious question is: if we are headed for a bearish or jittery market, how can stock investors safeguard their investments? One way to do so is to shift focus to defensive stocks. |
| To be sure, marketmen are not predicting a bear market for now, but given the uncertainty about growth and fund inflows, a defensive strategy may still be appropriate at this time. |
| Defensive stocks are essentially those which are less volatile, do not get affected too much by short-term mood shifts, and thus fall less than the market in the event of a downturn. |
| For starters, one can take cues for defensives from cricket. The question to ask oneself is: who would you choose as your anchor batsman if you had to bat for your life? |
| If the answer is strong players with good technique, mental stamina and experience, say a Steve Waugh or a Sunil Gavaskar, for example; then you might as well apply that analogy to stocks, too. When the going gets tough, look at stocks which have a good record, have the staying power and will most probably see you through the tough times. |
| In other words, go for large-cap stocks which are usually quality stocks that tend to post stable growth. In comparison, mid-caps offer promise of better earnings growth during good times while the quality and stability of small-caps is mostly suspect. |
| While preparing for a downturn or corrective phase, it may be a good idea to exit small- and mid-cap counters. Says Prudential ICICI Mutual Fund chief investment officer Nilesh Shah, "A defensive strategy will have to be centred around large-caps." |
| It is well known that when the economic cycle is turning for the better, large-cap stocks - which represent more large-sized, financially stable companies - will usually underperform their smaller and financially weaker siblings. |
| This is simply because the earnings of smaller companies can go up much more sharply as compared to larger ones when product prices are on the rise and vice versa. A defensive strategy also means moving to lower momentum-driven stocks within each category. |
| For instance, within each sector, one could switch from volatile to stable. Example: PNB to HDFC Bank, Reliance Energy to Tata Power, Ultra-Tech Cement to Grasim and Satyam to Infosys. Given this premise, we have listed four ways to approach defensives. |
| LOW BETA STOCKS On a good pitch, even a limited player in good form can outperform truly great players, but it requires solid technical abilities to negotiate a bad pitch. The equivalent for a flat-track bully in stock markets is probably what we call high beta stocks. |
| Beta is a statistical measure which represents how much a stock will move up for a given movement in the market index. A beta of one indicates that the stock will mimic the market. |
| A value greater than one means that the stock will go up more than the market during an upmove and also fall more than the index in a downturn. |
| Some safe havens from the Nifty basket based on beta for the past one year are HDFC, HDFC Bank, Gujarat Ambuja, Grasim, ITC, Hindustan Lever and Dabur. |
| Interestingly, several technology, media and pharma stocks qualify as low beta stocks while banks are high beta stocks. The problem is beta itself is extremely fickle, since the metric is derived from stock price data for a particular time period and the behaviour of stock prices during different time periods may differ widely. |
| For instance, check out State Bank - over the last one year, the beta value was 1.60 - which is fairly high - while for the past five-year period it was 0.97, meaning low beta. |
| "Since beta values change with alarming speed, it may be difficult to formulate a strategy anchored around beta values always," says Shah. |
| The fact is that the recent bull market has been driven largely by economy stocks which have boomed on account of strong domestic and global demand apart from reform initiatives. Several infrastructure companies have grown several-fold, moving ahead of fundamentals. |
| "Though order books of infrastructure companies give them visibility, stocks prices are already reflecting the positives," says KN Siva Subramanium, fund manager, Franklin Templeton. |
| Similarly, improved earnings visibility in capital goods companies has also resulted in a re-rating in these stocks. |
| But these companies have disappointed in terms of margins. With the steady rise in steel prices, margins could continue to be a cause for concern. Since the momentum in these stocks has been fairly strong till now, they look inherently more vulnerable. |
| CONSUMER SURPRISE FMCG could very well spring a surprise this year. There are reasons to believe this will happen. |
| According to AC Nielsen's retail sales data for January, 2005, sector sales grew fairly strongly by 8.2 per cent (y-o-y). Only 10 of the 62 categories tracked by the firm recorded a decline in sales during the month. The largest player, Hindustan Lever's (HLL) sales rose 4.1 per cent in January, in line with the 3.4 growth in the last quarter of calendar 2004. |
| "Margins appear to have bottomed out and with volumes growth sustaining, earnings should grow," says Yasmin Shah, FMCG analyst at Anand Rathi. ITC may prove to be an excellent defensive play. Dabur, Marico and Godrej Consumer are other attractive bets. But analysts are still divided on HLL. |
| Though pharma fits well into the defensive logic, expert views differ. Some say the dynamics of the domestic pharma industry as it stands today makes the sector risky. Pharma companies are going to be driven by a lot of policy changes and other external factors. |
| Says Tridib Pathak, chief investment officer, Cholamandalam Mutual Fund, "Pharma may remain volatile because of the transition that the industry is going through right now. The new patent regime in the country plus the fact that several domestic companies are just about discovering themselves and creating their own space in the international markets leaves them with a streak of unpredictability." |
| But others maintain that the pessimism is already factored into prices. "Given the recent correction witnessed in the stocks of many pharmaceutical companies, the downside appears to be limited. MNC pharma companies look favourably poised, given the new patent laws in place," says Subramanium. |
| THE CLASS OF UNDERPERFORMERS As the saying goes, "form is temporary, class is permanent." Notes Pathak, "There is no substitute for fundamental valuations when it comes to investing for the long term. Stocks which look undervalued considering their growth potential are the best choices now." |
| Good quality stocks which have underperformed in the recent past may be wonderful buys. First, they will be less susceptible to a fall in the overall market. Secondly, cheap valuations may shift the focus to these stocks. |
| One classic example is ONGC. While energy analysts are convinced than crude will now trade in the new range of around $35 per barrel (at the minimum), the market seems to value the company based on crude realisations of $20-25 per barrel. |
| At $35 a barrel, some analysts value ONGC's stock at Rs 1,600. There can be no asset which can offer a better hedge against the rise in oil prices. |
| The stock, however, still trades close to the public offer price last year. That is because the market often does not accord high valuation to firms where the government has a stranglehold. Currently, the stock trades at 7.5 times FY06 earnings. |
| Another such stock is Reliance Industries. The company has posted excellent numbers over the past year and yet the stock has underperformed due to the feud between the Ambani brothers. |
| Analysts say even if the market loses value, Reliance may be less hurt as fundamentals provide a solid cushion. Currently, the stock trades at 10x FY06 earnings. |
| CONTRARIAN BUYS One can even follow a contrarian approach. As Pathak explains, "If you are sure that the market is only seeing a correction and not really slipping into a bear market which will persist for long, then it might actually be a good idea to pick up high beta stocks." |
| On that count, banks may win. If there is one reason why banks are not looking bad despite the sharp run-up in prices in this bull run, it is their valuation relative to the market. Banks are still trading at 7-8 times forward price-earnings multiples compared to 12x for the Sensex. |
| "Given the good economic growth and improvement in retail offttake, private sector banks, especially those which are increasing their retail footprint, look favourably placed," says Subramanium. |
| Another contrarian call could be techs. Both Subramanium and Pathak say earnings visibility in techs is quite high compared to several other sectors, making them attractive as defensive plays. |
| Techs are now seeing their best times after the bust in 2000 with business volumes growing and margin pressures easing. However, there is a caveat: expectations from techs are still running high. |
| The top three companies - Infosys, Wipro and TCS - trade at P/E multiples of 24-25x based on FY06 earnings estimates. This, combined with the risk of dollar weakness, means that techs can also be risky bets. THE PITCH INS'T BAD Marketmen do not seem perturbed about the market's fall last week. The main reason, of course, is that fundamentals seem to be intact. Take a glance at stock valuations. For the 30 stocks constituting the Sensex, the consolidated earnings per share for FY04-05 stand at Rs 490. Assuming that earnings grow at the rate of 15 per cent in FY05-06, the earnings would be Rs 570, indicating a forward earnings multiple of 11.8x at the current level of 6,350 for the Sensex, which does not look expensive. Even if one assumes no growth for the year and that the earnings would remain constant at Rs 490, the market is trading at 12.8x forward earnings. Says Nilesh Shah, chief investment officer, Prudential ICICI Mutual Fund, "valuations do not look too bad even if we assume that earnings will not grow at all next year." While valuations seem comforting, concerns about growth are not unfounded either. Analysts have been warning that the high base of last year will impede growth this year. Higher prices of raw material, especially steel, is eating into the profits of several manufacturing companies, particularly autos and capital goods. Maruti has already announced its intention to raise prices. And M&M has said the company's profit margins are under pressure. Growing competition in two-wheelers and higher oil prices are also keeping auto stocks nervous. Added to that is the confusion over the implementation of value added tax (VAT), which is making corporates nervous. Industry believes that VAT is good news over the long term; in the short term it may inject inflationary pressures and slow down sales growth. This would affect the entire manufacturing sector, especially those catering to consumers directly. Foreign fund flows, which drove the markets last year, have also turned uneven over the past few weeks. Though the dollar's weakness over the long term is not in question, the more-than-expected hike in US interest rates and the pull back in the dollar over the past weeks have also led to some selling pressure in emerging markets |
Source : N Mahalakshmi - Business Standard
Nifty - Target - 2077
The Nifty achieved the 50% retracement level of the decline from 2183 to 1971 at 2077. The 2077 level is a crucial resistance level. The index can touch an intra-day high around 2077 and see a sideways short-term trading range between 2077 and 2041(10-DMA). A break above 2077 with volumes could see the Nifty test higher levels at 2093 and 2100. The 20-DMA is placed at 2093. The 2100 level is the 62% retracement of the decline in the index from 2183 to 1971. In the short-term 2077 is a crucial resistance while 2041 is a critical support.
Source : Sharekhan
Sunday, April 03, 2005
The Corporation
Just watched this documentary. A sure eye-opener. Basically shows how corporations are taking over our lives - controlling every aspect of our life, how privatizations and these corporations are ruining people's lives and how Capitalism rules and ruins the world.
After I saw this movie, I have begun to appreciate the 'Left Parties' - No, I was not and still am not their supporter , They do have valid concerns. The second person I appreciate is Micheal Moore. I didnt like him at all after I saw 9/11 - I thought he was biased ! Just watch this and you will start appreciating him too.
Its a thought provoking, very well made documentary - Official Link - http://www.thecorporation.com/ or IMDB Link http://imdb.com/title/tt0379225 - Don't miss it
On second thoughts, since we all are shareholders, we favor capitalism, we want our companies to make as much profits as they can so that it increases their stock price and our wealth.
Well, I guess I will still go out and buy ITC - Do I care because I don't smoke ? Maybe I should ! I am in a state of confusion.
Saturday, April 02, 2005
India Market Weekly Report
Market bounced back with a bang The market bounced back in the second half of the week and Sensex ended with 2.5% gains. The gains in mid caps were equally sharp as the fall was. However the FII money flow remained negative with Rs 558cr outflow during the week. The IT sector remained the outperformer for the week.
For more on India Market Weekly Report, click here
Source : Networth Stock Broking
Sesa Goa: It’s not over yet!
Performance Summary
Sesa Goa, the largest private sector iron ore company in the country, recently announced strong December quarter results. For 3QFY05, the company has reported a strong topline growth of 73% YoY, while its bottomline has leapfrogged 278% YoY. Notably, operating margins have more than doubled during the quarter, thanks to the sustained hardening of iron ore prices, thus helping the company garner better realisations.
| Company background |
| What has driven performance in 3QFY05? |
| (% of net sales) | 3QFY04 | 3QFY05 | 9mFY04 | 9mFY05 |
| (Increase)/Decrease stock-in-trade | 15.4% | 4.9% | 0.2% | -3.7% |
| Staff costs | 3.3% | 2.5% | 5.4% | 3.2% |
| Consumption of stores | 9.0% | 6.2% | 13.3% | 7.8% |
| Inlands transportation & other services | 31.6% | 17.6% | 38.3% | 26.7% |
| Purchase of ore | 8.5% | 15.4% | 11.7% | 14.3% |
| Other expenditure | 10.0% | 4.0% | 12.2% | 6.5% |
Operating margins leapfrog: On the back of strong realisations, the operating margins during the quarter more than doubled from 22% in 3QFY04 to about 50% in 3QFY05. With the strong topline growth coming largely from stronger iron ore realisations, the operating costs as percentage of sales have witnessed a considerable decline. It must be noted that logistics cost is a key element in the value chain of the iron ore business. Moreover, since iron ore exports form a major source of revenue for the company, freight rates have a key role to play in deciding the profitability of the company.
Net profits: The bottomline performance of the company is primarily a trickle down effect of the performance at the operating level. It must be noted that the growth at PAT level would have been higher but for the increased tax provisioning during the quarter (up 466% YoY).
| What to expect? |
Friday, April 01, 2005
Enam says Buy Large Caps on Dips
Enam has brought out a report on India Strategy. They recommend buy large caps on dips
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