- Electrotherm India hit the upper circuit breaker of 5% on reports that the company plans to raise Rs100 crore.
- Rana Sugars slipped despite announcing plans to install an ethanol-manufacturing unit at its existing distillery in Punjab.
- Sakthi Sugars was down despite announcing that it has repaid debts by availing loans at a cheaper rate from the banks and institutions.
- Sri Adhikari Brothers Television Network inched lower despite getting the board's nod to raise $15 million.
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Friday, September 29, 2006
Movers & Shakers
Sharekhan Investor's Eye - Sept 28
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Thursday, September 28, 2006
Hanung Toys and Textiles
Hanung Toys and Textiles (HTTL) manufactures and exports stuff toys and home furnishings. Incorporated in 1993 as a stuff toy manufacturer in technical collaboration with a South Korean company, it began to independently manufacture stuff toys five years later. In 2002, HTTL entered home furnishings and textile processing.
Presently, HTTL has capacity of produce 1,10,00,000 pieces per annum of stuff toys and 12,50,000 pieces pa of home furnishings. The company mainly exports to Europe, the US, Latin America and Middle East. But now it is increasing its focus in the domestic market and has launched its stuff toy brands Play-n-Pets and Muskan and home furnishing brand Splash.
HTTL is to set up an integrated home textile unit with a total cost of Rs 153.44 crore, which includes 72 airjet looms with superior quality wider width weaving capacity of 21,000 meters per day and processing capacity of 1,05,000 meters per day in addition to the existing processing capacity of 60,000 meters per day. The company also plans to part substitute its existing working capital requirement of around Rs 15 crore. The expansion is to be funded with a term loan of Rs 90 crore under the TUF (Technology Upgradation Fund) scheme and the balance through an IPO.
Strengths
- HTTL is the largest player in the organised market of stuffed toys and its co-branding initiatives with Walt Disney Company and Percept Picture Company (for Hanuman) can fuel growth in the domestic market due to the retailing boom in India.
- The project is to be located in Uttaranchal, where the company enjoys various tax benefits.
Weaknesses
- The inventory-holding period is around 150-180 days, which is considered to be very high. This is attributed to the fact that the raw material (in case of stuff toys) is imported and the company has to maintain finished goods stock for its buyers. Moreover, of the total expansion of Rs 168 crore, around Rs 48 crore will be used for meeting existing and future working capital requirement. Even though net profit in FY 2006 was Rs 12.98 crore, cash flow from operating activities was a negative Rs 2.07 crore.
- The capacity utilisation in the home furnishing sector has been 12%, 26% and 53% in FY 2004, FY 2005 and FY 2006, respectively, which is considered to be significantly low.
- Post expansion, processing facilities will meet only 12% of its fabric requirement in-house as HTTL has a 21,000-meter per day weaving capacity and 1,65,000-meter per day processing capacity.
- Chinese competition is a key threat to its business.
Valuation
HTTL has allotted shares to Bennett Coleman and Company (BCCL) at Rs 150 in February 2006. The current offer price band is Rs 85-95.
The FY 2006 financials do not include financials of two group companies Hanung Furnishings and Hanung Processors for the period April- October 2005. However, the financials for the first quarter ended June 2006 includes the financials of both companies that have been merged with the flagship company. Because of these, financials are not comparable.
The first quarter of FY 2006 gives an annualised EPS of Rs 7.7. Considering this EPS, PE will be 11 to 12 times on post-issue equity. Due to HTTL’s presence in stuffed toys (which fetches 60% of its profit), there is no comparable listed company. However, Alok industries and Welspun India, which are much larger and integrated players in home textiles, trade at a TTM PE of around 9 and 17 times, respectively.
Wednesday, September 27, 2006
Sharekhan Investor's Eye - Sept 27
Orient Paper and Industries
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs800
Current market price: Rs579
Capex plan on track
After an exceptional first quarter performance, Orient Paper and Industries is all set to cash in on the booming cement cycle. It has lined up a capital expenditure (capex) plan of Rs205 crore for the next two years. As part of the capex plan, it is augmenting its cement capacity to 3 million tonne and paper capacity to 30,000 tonne per annum. Further, to rationalise its fuel cost the company is also setting up a 30-megawatt captive power plant.
VIEWPOINT
Zenith Infotech
Stock value at its zenith
Zenith Infotech's revenues are expected to grow at a robust compounded annual growth rate of 60% over the two-year period FY2006-08. However, the stock appears to be fully priced after considering the huge (possible) equity dilution planned to raise resources. At the current market price the stock trades at 25.2x FY2007 and 14.7x FY2008 estimated earnings (on a diluted equity base).
Movers & Shakers
- Rajesh Exports advanced on announcing the launch of Laabh Jewellers.
- United Phosphorus rose on signing a deal to buy Dupont's Bensulfuron-methyl business.
- Sical Logistics hit the upper limit of 5% on the likely acquisition of Bergen Offshore Logistics.
- Ranbaxy inched up on announcing the launch of Storvas in Malaysia.
- Sonata Software was locked at the upper limit of 5% on signing an agreement to buy a 50.1% stake in TUI Infotec.
- Escorts notched up gains on receiving Rs114 crore from its stake sale in Carraro to its joint venture partner, Carraro Italy.
- McNally Bharat Engineering jumped on bagging an order from France-based Solios Carbone.
- Dr Reddy�s Laboratories was marginally up on reports that the company has signed a deal with ClinTec International to jointly develop an anti-cancer compound, DRF 1042.
- Monnet Ispat slipped despite announcing plans to set up a Rs4,200 crore power plant in Orissa.
The Lost World - Jay Dubhashi
We Indians have a love-hate relationship with foreign companies, usually known as multinationals. We know that in this globalised world, we simply cannot avoid them and at the same time, we are not entirely happy about their presence in our midst.
So, from time to time, we crack the whip and ask them to behave. But they know they are here to stay and take it all in their stride. Fifteen years ago or so, before the economy was thrown open, things were different. Indian companies, whether in soft drinks or automobiles, were sitting pretty. They had a nice monopoly business going and since they never had to compete with foreign companies, they were clueless about their impact.
Ramesh Chauhan of Parle, who had built a profitable soft drink business from scratch, was initially rattled when news came that Coca-Cola had received a license to operate in India. Since I was all for Swadeshi, he believed that I might be of some use. So he came to see me.
I asked him if he knew Coca-Cola people. No, he said, he didn't. I told him that I knew some of them and had visited their offices in Atlanta. I told him that Coca-Cola's entry would be followed by Pepsi's-- or was it the other way round-- and Parle would have to take on two giant multinationals in a small market. Did he have the capacity to do that? A few weeks later, I heard that Parle had sold out to Coca-Cola for a hundred crore, which was a great deal of money then. That was the end of the nascent soft drink industry in India for it is either Coke or Pepsi now and there is no other choice for the consumer.
Things were a little different with the auto industry, but not all that different. When Maruti was taken over by Suzuki, I wrote in my column that companies like Premier Automobiles would soon be on their way out, just as Coke had replaced Parle. For Suzuki would be followed by other foreign auto companies and they would sweep the market.
Not so, wrote Vinod Doshi, who ran Premier Automobiles at the time. He actually took the first plane to Delhi from Bombay and came to see me. I have now forgotten what arguments he put forward, but within months he had signed up with Fiat of Itlay and had, in effect, sold out to them and virtually closed down his business, just as I had predicted.
I have not met Doshi for a long time, but, as far as I know, his Premier plant is no more. One more Indian business has fallen prey to yet another multinational.
It must be said both the soft drink business and the automobile businesses are flourishing. I am told that we are now producing or selling a million cars a year, about ten times more than what we did before liberalisation. The same must be the case with soft drinks.
I used to drive a Premier, now I drive a Maruti. But I neither drink Coke nor Pepsi because they don't suit me. Incidentally, I have never seen the inside of a McDonald's, either here or in the US, for reasons that have nothing to do with the fact that Mc Donald's is a foreign business. I just don't like hamburgers and I am allergic to French Fries.
DCB - IPO
DCB is a new private sector bank, which has embarked on revitalization plans. As part of revitalization plan, the bank has in
place a new management team & the board of directors committed to improving bank’s operational performance & overall business.
DCB’s business is concentrated in certain regional centers, primarily Maharashtra, AP and Gujarat. The Bank has 106 interconnected branches including 5 extension counters & 34 Satellite offices, spread over 26 cities in the country. It also has an ATM network of 58 interconnected onsite and 43 interconnected offsite ATMs.
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Citigroup - Nagarjuna Construction
Entering the big league — We initiate coverage on Nagarjuna with a Buy/Medium Risk (1M) rating and target price of Rs191. Among the fastest-growing construction companies in India, Nagarjuna has diversified skill sets and an improving business mix to exploit the growth opportunity in the construction sector. We expect Nagarjuna to provide 27% upside and rate its peers HCC and Gammon as Sell.
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Movers & Shakers
- Sterling Biotech attracted unabated buying on reports that the company will acquire China Gelatin in an all-cash deal.
- NIIT rallied sharply on launching IFBI in a tie-up with ICICI Bank.
- Asian Tea & Exports hit the upper circuit breaker of 5% after the company reported that it would take on lease a tea production facility and increase the capacity to produce 2 million kilogram of black tea per annum.
- Radha Madhav Corporation was frozen at the upper limit of 5% on receiving a packaging order worth Rs3.25 lakh from Reliance Retail.
- Alok Industries inched lower despite reporting that it will acquire a 60% stake in the Czech Republic-based Mileta International.
- Northgate Technologies fell sharply despite announcing the company's proposal to raise $35 million.
- Sujana Universal eased even as the company proposed to raise $15 million by selling equity shares through the GDR route.
Tuesday, September 26, 2006
Bharat Electronics
Bharat Electronics
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,525
Current market price: Rs1,108
Sound as a BEL(L)
Key points
- Growing addressable market: The healthy increase in the capital outlay of the defence budget and the government's efforts to reduce dependence on imports for critical equipment and security systems has considerably increased the size of the addressable market for the defence equipment manufacturers. With its wide range of product portfolio, R&D capabilities and a proven track record, Bharat Electronics Ltd (BEL) is well poised to effectively tap the same.
- Civilian orders and export business to aid overall growth: BEL has taken steps to improve its market share in the civilian market, especially the fast-growing broadband access equipment and telecom segments. It has bagged some prestigious large civilian contracts recently including the Rs500-crore order from MTNL. In exports market also, it is expanding its reach and has set an aggressive revenue target of $24 million in FY2007 (up from $13.7 million in FY2006).
- Scope for positive surprises: With the recent modernisation and expansion of its manufacturing facilities as well as its technical capabilities, BEL is actively looking at tapping the huge opportunity in the contract manufacturing service space. The additional capacities shall also make it the preferred contender for any foreign supplier looking at partnering with a domestic entity as per the offset clause for any contract worth over Rs300 crore from the defence sector.
- Attractive valuations: BEL's net revenue and earnings are estimated to grow at a CAGR of 16.4% and 14.1% respectively, over FY2006-08E. The current valuations do not capture the improved growth outlook and the free cash & cash equivalents of Rs385 per share expected by the end of FY2008. We recommend a Buy on BEL with the price target of Rs1,525.
Minar International IPO
Minar International (MIL) trades and exports made-ups, particularly bed linen, in the home textile segment. Almost 80% of its exports are to the US markets. Presently, the company outsources processed fabrics and processes them in its cutting, machining and trimming (CMT) unit at Vasai, Maharashtra, with a capacity of 10000 sheets per day.
MIL now proposes to backward integrate and set up an integrated and modern wider width fabric processing plant at Perunduria in the Erode district of Tamil Nadu. This unit would have a capacity of 60,000 metres per day. The company plans to spend around Rs 8.84 crore on land and building, Rs 46.77 on plant and machinery for fabric processing, Rs 11.06 crore on other fixed assets, and the balance to meet preliminary and pre-operative expenses. It plans to raise around Rs 74.76 to Rs 79.61 crore (depending on the price band) through the current IPO.
Strengths
- The abolition of the quota regime has opened new growth avenues for export-oriented companies like MIL, which was the largest merchant exporter in made-ups for five years of the quota period and held the largest quota in made-ups for the US till the quota era ended in December 2004.
- The proposed project will make the company backward integrated, resulting in timely delivery of processing fabrics and improvement in margin.
Weaknesses
- MIL has been debarred up to 22 November 2007 from exporting to quota-regulated destinations such as Canada, the European Union and the US by an order passed by Texprocil (Textile Export Promotion Council) on grounds of circumvention of quota restrictions on exports and for alleged fabrication of documents. The Bombay High Court has confirmed the debarment but stayed the other punishments awarded by Texprocil. Currently, the company is exporting indirectly. It has provided a bank guarantee of Rs 5 crore, though the contingent liability on this account is Rs 10 crore. Texprocil has also informed Sebi about the complaints lodged against MIL with CBI, though the company claims to have not received any copy of the complaint.
- Vibhgyor Texotech, another promoter group company, is in similar line of the business, which could lead to conflict of interest.
- Compared to a net profit of Rs 14.44 crore, MIL had a negative cash flow of Rs 24.02 crore from operating activities in FY 2006, mainly due to increase in inventories and debtors.
- In the pre-quota regime, MIL was awarded major quotas in segments that could be sold to other companies, which is also reflected in the huge other income. But after the abolition of the quota regime, this source of income no longer exists.
Valuations
MIL reported a net profit of Rs 14.44 crore in FY 2006. EPS on post- issue equity works out to Rs 5.9. The shares are being offered in a band of Rs 108 to Rs 115 at a PE of 18 to 19 times. Alok Industries, which is a much larger and far more integrated player, trades at Rs 64 at a TTM PE of 9.5 times. The sector TTM P/E is around 12.
Monday, September 25, 2006
Movers & Shakers
- Godrej Industries inched up on reports that its subsidiary Godrej Agrovet will form a joint venture for the palm oil business with IJM Plantations Berhad of Malaysia.
- Brady & Morris Engineering hit the upper circuit on announcing a 1:1 bonus issue.
- Mefcom Agro surged on the acquisition of a stake in Gypcrete Building India.
- Southern Ispat slipped despite announcing the signing of a MoU with KSIDC.
- Gateway Distriparks eased in spite of entering into a joint venture with the Chakiat group.
- Kamla Dials inched lower despite announcing a 2:3 right issue.
Sunday, September 24, 2006
Dimensional Securities - Tulip IT
Dimensional recommends BUY on Tulip IT with a target of 516 (12 months)
Saturday, September 23, 2006
Sensex advances 227 points
The market surged for the third consecutive week on account of falling crude oil price, strengthening of rupee, strong FII-buying and on expectations of robust results from corporate India. The market moved up as the US Federal Reserve kept interest rates unchanged at a meeting on Wednesday (21 September).
The market also rose on expectations that the RBI may keep short-term interest rates unchanged at its credit policy meeting next month.
The BSE Sensex gained 227.41 points, to finish on 12,236.78. The S&P CNX Nifty rose 65 points, to close at 3,544.
The BSE Sensex rallied on Monday, gaining 62 points on the back of strong FII inflows, and steady-to-firm Asian markets.
On Tuesday, the Sensex fell 101 points on profit-booking and on concerns over possible sales by hedge funds after US hedge fund Amaranth Advisors said on Monday (18 September) it may suffer billions of dollars in natural gas losses following a steep fall in price recently. Amaranth’s woes fuelled concerns that many other hedge funds could also have been hurt by the steep fall in crude oil and natural gas price, and has bred concerns that such funds may book profits in Indian equities, to make up for losses suffered in their energy related investments globally.
On Wednesday, the BSE Sensex jumped 139 points as crude oil prices fell below $61 a barrel.
On Thursday, the benchmark index rose 165 points, as investors stocked up equities ahead of the second quarter results and after the US Federal Reserve kept interest rates unchanged. Buoyant direct tax collections in the current fiscal also lifted the market as it indicated a rise in corporate profits. The centre’s gross direct tax collections registered a 33.5% growth in April-September 2006, to Rs 87,831 crore.
On Friday, the Sensex lost 37.49 points, taking cue from weak global markets.
FIIs invested to the tune of Rs 1,296.5 crore in equities in four trading sessions, from Monday to Thursday, while mutual funds offloaded Rs 15.76 crore worth of equities.
Engineering and construction major L&T was up 0.64% in the week, to close at Rs 2,656.75. Investors mopped up the scrip ahead of the record-date for a bonus issue. The company will allot bonus shares on 29 September 2006.
Cipla rose 2.1% in a week to close at Rs 260.15. Recently, it received tentative FDA approval for Lamivudine and Zidovudine, both anti-AIDS drugs.
Ranbaxy fell marginally by 0.06% in a week, to close at Rs 413.80. The pharma major has received approval from the US Food and Drug Administration to manufacture and market Furosemide Tablets 20 mg, 40 mg, and 80 mg.
FMCG giant Hindustan Lever rose 5.6% in a week, to close at Rs 257.25. The company has hiked prices by an average 3%, across portfolio over the last two months.
ONGC rose nearly 2% in a week, to close at Rs 1,184.45. The company’s foreign subsidiary and Sinopec, in joint venture, acquired Colombian oil assets of US-based Omimex Resources. Omimex has oil & gas operations exclusively in Colombia, which include onshore production and exploration areas with proven reserves of more than 300 million barrels of oil, and a current production of approximately 20,000 oil barrels per day.
Reliance Industries rose 1.2% in a week, to close at Rs 1,155.20. The company paid Rs 425 crore as advanced tax, in the second installment this year, compared to Rs 225 crore last year.
IT stocks were in demand this week. Satyam rose 1% in a week, to close at Rs 838, Wipro rose nearly 2% in a week, to close at Rs 519.55 and Infosys gained 1.1% in a week, to finish at Rs 1,830.10.
PSU power equipment manufacturer Bhel gained nearly 2%, to close at Rs 2,312.30. There were reports that it may acquire an IT company in the west, to enhance capacity and technological expertise. The company is reportedly said to have bagged Rs 1,224 crore contract from Uttar Pradesh Rajya Vidyut Utpadan Nigam (UPRVUNL).
BRICS - Tulip IT Services
We are revising our estimates and target for Tulip IT Services in order toincorporate the higher-than-expected demand for its wireless IP/VPNcorporate data services (CDS) as well as a shift in our valuation method.We have upgraded our FY07 and FY08 EPS estimates to Rs 28.4 and Rs40.2 from Rs 22.3 and Rs 29.5 respectively. We reaffirm our BUYrecommendation with a revised March ’07 target of Rs 383, which is 12%lower than our previous target of Rs 437. This revision is mainly becausewe have switched from a P/E-based valuation model to the DCF methodwhich we feel is more appropriate given the recurring nature of revenuesfrom Tulip’s high-margin CDS business. In our opinion, the company’scurrent valuations do not factor in the high growth and profitability of itsCDS business and the expected growth in coming quarters.
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Sharekhan Investor's Eye - Sept 22
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Omax Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs178
Current market price: Rs97
Annual report review
The key highlights from the latest Omax Auto's annual report are mentioned below.
- FY2006 performance: Omax Auto registered a good top line and exports growth, but the profitability declined due to a rise in the employee and power costs and higher interest cost.
- Efforts to increase efficiencies: The company plans to undertake a number of measures in order to increase its operational efficiencies. The use of low-cost fuel, captive material consumption and increased automation and productivity are expected to achieve the same and aid in improving its margins going forward.
- Export expected to surge: The management has an export target of Rs50 crore for FY2007 as against exports of Rs26.6 crore in FY2006. The current export order book of the company is to the tune of Rs150 crore, which is to be executed within the next three years.
- Capex plans: Omax has aggressive plans to expand capacities across all its units including the units at Dharuhera, Binola and Bangalore. For the current fiscal, the estimated capital expenditure is Rs61 crore.
- Reiterate Buy: At the current levels, the stock discounts its FY2008E earnings by 4.7x and enterprise value (EV) by 3.5x. The stock appears to be attractive at these levels and we maintain our Buy recommendation on the stock with a price target of Rs178.
Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,155
It is solid, not gas
Recently there have been several news reports on Reliance Industries stating that the gas reserves in place in its KG-D6 block could be as high as 50 trillion cubic feet (tcf), almost three times the existing reserves as reported to the directorate of hydrocarbons.
We have revised our price target on the stock to take into account the earnings of the company for FY2008 and the value of Reliance Retail. We believe that with newer and exciting businesses lined for investment, RIL is set to enter another era of strong growth for itself over the next five years. We maintain our Buy recommendation on the stock with a price target of Rs1,250.
VIEWPOINT
Educomp Solutions
Growing exponentially
Educomp is well positioned to tap the huge potential in the education segment, both in the private and public schools, due to the investments made in developing the digital content. We expect the consolidated revenues and earnings to grow at a CAGR of 82% and 80% respectively over the two-year period FY2006-08. However, the positives appear to be fully priced in with the stock trading at 27.5x its FY2008 estimated earnings of Rs25 per share (on a diluted equity base).
Putting ethanol in the fast lane
Despite falling oil prices and a corresponding drop in the stock price of various ethanol companies, famed venture capitalist, Sun Microsystems co-founder and ethanol investor Vinod Khosla outlined four steps he said would help the country use more of the plant-derived fuel.Speaking at a Cleantech Venture Forum conference in New York City, Khosla told a roomful of fellow venture capitalists that a couple of government mandates and a shift in the subsidy policy would go a long way in helping bring more ethanol to market.
Specifically, he called for a government mandate that 70 percent of all cars sold in the U.S. be flex-fuel - which is having the ability to run on gas, ethanol or other alcohol-based fuels - by 2014, and that 10 percent of all major-branded gas stations in the U.S. sell E85, a fuel that contains 85 percent ethanol.
The move is an attempt to allay concerns by the oil industry that there aren't enough ethanol cars to make installing E85 pumps worthwhile, and simultaneous concerns by the auto industry that people won't buy ethanol cars because there's no place to fill them up.
He also said the current government ethanol subsidy of 50 cents a gallon should be based on a sliding scale corresponding to the price of oil: 25 cents a gallon if oil is at $75 a barrel ranging up to 75 cents a gallon if oil falls to $25 a barrel.
"It indicates to Saudi Arabia, or (Venezuelan President Hugo) Chavez or whoever your favorite manipulator is that they can't manipulate the markets" and drive out alternative fuels, he said.
When asked who would pay for these mandates, Khosla indicated it would be up to to industry or the government. He said installing the gas pumps would cost something less than a billion dollars and making cars flex-fuel amounts to $35-$100 a vehicle.
"We're spending so much on energy security, spending that kind of money is a worthwhile investment," he said.
He also called for lifting tariffs on imports of ethanol from Brazil, a move strongly opposed by U.S. farmers, in exchange for increasing corn-derived ethanol in gasoline from 10 to 15 percent, a move he said was supported by some in the agriculture industry.
Most ethanol in America is currently derived from corn. Using corn-based ethanol as a fuel has been criticized for its potential to drive up food prices and its ability to provide only a fraction of the the country's total gasoline demand.
Khosla also has investments in cellulosic ethanol, a nascent but promising technology that involves making ethanol out of nearly any plant, wood or other biomass source, not just food crops.
"The president loves biomass, the farmers love biomass, even evangelicals love biomass" because it decreases the county's reliance on the Middle East, he said. "As investors we should make this happen because its good for the country."
Oil produced by such companies as BP (down $0.61 to $65.35), ConocoPhillips (down $0.39 to $57.82) and Exxon Mobil (down $0.14 to $64.64) has become the subject of debate as its cost rises, climate change becomes more visible and tensions in the Middle East and South America underscore the U.S. dependence on crude.
Friday, September 22, 2006
Sharekhan Investor's Eye - Sept 22
Omax Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs178
Current market price: Rs97
Annual report review
The key highlights from the latest Omax Auto's annual report are mentioned below.
- FY2006 performance: Omax Auto registered a good top line and exports growth, but the profitability declined due to a rise in the employee and power costs and higher interest cost.
- Efforts to increase efficiencies: The company plans to undertake a number of measures in order to increase its operational efficiencies. The use of low-cost fuel, captive material consumption and increased automation and productivity are expected to achieve the same and aid in improving its margins going forward.
- Export expected to surge: The management has an export target of Rs50 crore for FY2007 as against exports of Rs26.6 crore in FY2006. The current export order book of the company is to the tune of Rs150 crore, which is to be executed within the next three years.
- Capex plans: Omax has aggressive plans to expand capacities across all its units including the units at Dharuhera, Binola and Bangalore. For the current fiscal, the estimated capital expenditure is Rs61 crore.
- Reiterate Buy: At the current levels, the stock discounts its FY2008E earnings by 4.7x and enterprise value (EV) by 3.5x. The stock appears to be attractive at these levels and we maintain our Buy recommendation on the stock with a price target of Rs178.
Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,155
It is solid, not gas
Recently there have been several news reports on Reliance Industries stating that the gas reserves in place in its KG-D6 block could be as high as 50 trillion cubic feet (tcf), almost three times the existing reserves as reported to the directorate of hydrocarbons.
We have revised our price target on the stock to take into account the earnings of the company for FY2008 and the value of Reliance Retail. We believe that with newer and exciting businesses lined for investment, RIL is set to enter another era of strong growth for itself over the next five years. We maintain our Buy recommendation on the stock with a price target of Rs1,250.
VIEWPOINT
Educomp Solutions
Growing exponentially
Educomp is well positioned to tap the huge potential in the education segment, both in the private and public schools, due to the investments made in developing the digital content. We expect the consolidated revenues and earnings to grow at a CAGR of 82% and 80% respectively over the two-year period FY2006-08. However, the positives appear to be fully priced in with the stock trading at 27.5x its FY2008 estimated earnings of Rs25 per share (on a diluted equity base).
Movers & Shakers
- Harrisons Malayalam surged following the company's decision to sell its rubber estate in Kerala for Rs53 crore.
- Everest Kanto Cylinder inched up on reports that the company would raise Rs92 crore by issuing shares to Brightwill.
- JB Chemicals & Pharmaceuticals slipped despite getting a licence to manufacture and distribute a generic version of tenofovir disoproxil fumarate.
- NTPC eased despite reports that the company has signed a memorandum of agreement with the government of Arunachal Pradesh for setting up two hydroelectric power projects.
- Orchid Chemicals & Pharmaceuticals fell despite getting the USFDA nod to market Cefadroxil in the US market.
- Four Soft ended in the red despite winning an order worth Rs70 lakh from Panasonic.
- GE Shipping ended weak despite reports that the company has taken the delivery of a new built offshore supply vessel from Bharati Shipyard.
Trading Calls
Buy Tulip IT at Rs 283-277. Stop Loss at Rs 273
Buy Bajaj Auto at Rs 2915-2880. Stop Loss at Rs 2860. Target of Rs 3009 and Rs 3179
Trading Calls
Buy Datamatics around Rs 55 with a stop loss of Rs 53
Buy Tata Consultancy Services with a stop loss of Rs 1020 for a target of Rs 1110
Buy Federal Bank with a stop loss of Rs 198 for a target of Rs 240
Buy ICSA with a stop loss of Rs 701 for a short-term target of 900
Buy Dalmia Cement with a stop loss of Rs 325 for a short-term target of Rs 418
Buy Gujarat Ambuja Cements (Rs 115.95) with a stop loss below Rs 113.75 for a target of Rs 121-124
Buy ONGC (Rs 1198) with a stop loss below Rs 1190 for a target of Rs 1215
Sharekhan Investor's Eye dated September 21, 2006
Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs94
Current market price: Rs67
Development efforts yield results
We attended the annual general meeting of Selan Exploration Technology Ltd (SETL). The key takeaways from the same are given below.
- Recent efforts to develop oil assets bear fruits: SETL has discovered significant amount of recoverable oil deposits from the four wells drilled at its Bakrol oil field. It has already commercialised two of the oil wells and hopes to enhance the oil production volume by 35-40% during the current fiscal.
- Future plans chalked out: Under the next phase of development of its oil assets, the company has already organised services (like drilling and cementing) to drill four more wells. Given the encouraging findings of the data collected from the development work, SETL plans to induct a strategic partner to generate resources needed for further development of oil assets and also acquire the required technical expertise.
SECTOR UPDATE
Cement
Rain drain
Key points
- The incessant floods in the states of Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and Madhya Pradesh slowed down the growth in cement the dispatches to 4.35% in August.
- A higher base of August 2005 also subdued the growth figures. Last year the floods had affected the cement dispatch figures for July 2005. As a result, the dispatches that had lagged in July 2005 had picked up significantly in August 2005.
- Despite the severe rainfall and floods in the country this year, cement prices remained firm at around Rs205 per bag, up by a very handsome 30%. The southern and western regions registered a very high rise in cement prices on a year-on-year (y-o-y) basis.
- Going forward, we expect the cement dispatches to regain their momentum on the back of a pick-up in the construction activity post-monsoon. Cement prices may rise by Rs5-8 per bag during November 2006.
- This will be extremely positive for cement companies, as their earnings would receive a tremendous boost owing to the double impact of rising volumes and the substantially higher cement realisation.
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Thursday, September 21, 2006
FIEM Industries IPO
Promoted by J.K.Jain, FIEM Industries is one of the leading manufacturers of automotive lighting and signaling equipment and rear-view mirrors. Major business comes from the two-wheeler segment of the vehicle industry. The company is capable of catering to the needs of almost all segments of the automobile industry: two-wheelers, three-wheelers, light commercial vehicles (LCVs) and tractors.
FIEM has technical support agreement with Ichikoh Industries, Japan. Ichikoh is supplier of automotive lighting, rear-view mirrors to major Japanese vehicle manufacturers such as Nissan Motors, Tyota Motor Corporation, and Daihatsu Motor. It has also entered into a memorandum of understanding (MOU) with Zadi Divisione Fanaleria CEV Spa, Italy, for producing products as per Zadi's specification for the European as well as the Indian markets. However, this MOU is yet to be converted into any agreement.
Customers of FIEM, both in India and abroad, range from TVS Motor Company, Honda Motorcycles and Scooters India, Suzuki Motorcycle India, LML, Kinetic Engineering., Kinetic Motor Company., Majestic Auto, Scooters India, General Motors, Hyundai Motors India, Skoda Auto India, Swaraj Mazda, Ashok Leyland, HMT Tractors, and Tractors and Farms Equipment to Piaggio Italy, Aspock Systems GmbH, Austria, and Geka, Germany.
The objects of the issue are to put up new manufacturing facilities and expand existing facilities. FIEM is setting up a 100% EOU (Unit-V) at Hosur, Tamil Nadu, and a unit at Nalagarh, Himachal Pradesh, a state that accords various tax benefits. Commercial production at both the units is expected to commence by January 2007.
Strengths
- The Indian auto component industry is expected to experience robust growth over the coming years. Growing demand from domestic original equipment manufacturers (OEMs) coupled with massive export opportunity created due to outsourcing by global OEMs and Tier 1 companies will be good for FIEM's growth. Already an established player with good technical collaboration, the company is expanding aggressively to capitalise on new opportunities as also to win over business from competitors, which are not aggressive. However, if it fails to tie up enough new business for the new and expanded capacities, its financials will suffer.
Weaknesses
- FIEM is dependent on TVS Motors, which accounted for around 70% of the total income in FY 2006. This makes it vulnerable to the fortunes of TVS Motors and also reduces its bargaining power with TVS Motors.
- The details of the MoU/ joint venture agreement by FIEM with Korea Airconditioners Company and Aspock Holding GmbH, Austria, for entering into totally new auto ancillaries such as air-conditioners and wiring harness are not available. These can increase the risk profile of the company.
- The FY 2006 performance is extraordinary, with sales up 24% and net profit 136% due to the sharp rise in operating profit margin (OPM) from around 9% in the past four years to 12.6%. This is despite the sluggish sales and profit of its largest customer, TVS Motors.
Valuation
The post-IPO EPS based on FY 2006 earning works out to Rs 6.6. At the offer price band of Rs 125-145, the PE range is 18.9x to 21.9x. The TTM PE of the Auto Ancillary-Lamps industry is around 13.5.
Sharekhan Investor's Eye dated September 20, 2006
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Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs159
Financials continue to impress
Key points
- During FY2006 GDL registered a 45% growth in its revenues on the back of a 14% rise in the throughput handled and a 30% increase in the realisation per twenty-foot equivalent units (TEUs).
- The growth in the volume and the realisation improved GDL's operating profit margin (OPM) by 540 basis points from 55.1% to 60.4%. Consequently the operating profit jumped by 59.1% to Rs83.8 crore.
- Towards the end of FY2006, GDL had come out with a USD85-million global depository receipt (GDR) issue and garnered around Rs375 crore. As the majority of the funds had not been utilised, the same had been deposited in banks. The cash that GDL had on its books was utilised to pay off its debts worth Rs50 crore. Hence we saw a very significant nine-fold jump in its other income and a 45% decline in its interest charge in FY2006.
- Although with the repayment of the debts GDL's debt/equity ratio has come down to 0.06, yet the excess un-utilised capital is hurting its return ratios. Its return on capital employed (RoCE) has come down from 27% to 20% and its return on net worth (RoNW) has fallen from 21% to 12.7%.
- In 2006 GDL commenced its rail container freight (RCF) service. It is now setting up its second rail linked inland container depot (ICD), which will ply on electric route connecting the Jawaharlal Nehru Port Trust (JNPT) to northern India.
- GDL has expanded the capacity of its container freight station (CFS) at JNPT by 36,000 TEUs to 216,000TEUs. Further with huge cash of Rs352 crore on its books, GDL is now actively looking to acquire an existing CFS at Nava Sheva.
- JNPT is all set to commission its third container terminal at Nava Sheva, taking its container handling capacity from 2.4 million TEUs currently to 3.6 million TEUs. Hence GDL's move to expand its Nava Sheva facility augurs well for its profitability.
SECTOR UPDATE
Pharma
Data protection cheers MNC pharma!!
Key points
- The Government of India is on the verge of allowing 5-year data protection.
- Data protection implies the safety of the clinical trial and test data provided to the regulatory authorities by innovator drug companies. This means that other companies cannot make use of the innovator's data to obtain marketing authorisations for drugs.
- The implementation of data protection would enhance the confidence among the MNC associates to launch innovative products in the domestic market. Indian subsidiaries have been traditionally restricted from launching new products from their parent's portfolio due to lack of data protection.
- The regulation is likely to benefit Indian companies, which have shifted their focus from being pure generic players to innovative players, as it would protect their research data from being copied in the future.
- The increasing launch of new products by MNCs would increase the pressure on domestic companies to reduce drug development costs. This would provide a boost to players in the contract research and clinical data management space.
VIEWPOINT
Monsanto India
Sowing seeds of growth
We recently attended the annual general meeting of Monsanto India Ltd (MIL). The company is a 72% subsidiary of Monsanto Co., USA and is in the business of manufacturing and selling herbicides (used for controlling weeds) and seeds (corn and sunflower). The company is not to be confused with Mahyco Monsanto, another joint venture of Monsanto that sells the controversial BT cotton seeds.
As the herbicide and agrochemical market has become increasingly generic and competitive, MIL's focus has shifted towards the higher margin seeds business. The contribution of the seeds business has jumped from 21% of revenues in FY2001 to 53% in FY2006. As part of this portfolio restructuring, MIL has sold one of its herbicide products, Leader, to Sumitomo Chemicals recently.
Trading Calls
Buy Indiabulls at Rs 445-431. Stop Loss at Rs 415. Target of Rs 454 and Rs 492
Buy HPCL around Rs 290.85 with stop loss of Rs 286
Trade at your own risk
Trading Calls
Buy GEI Hamon around Rs 47.90 with stop loss of Rs 46
Buy HPCL around Rs 290.85 with stop loss of Rs 286
Trade at your own risk
Trading Calls
Buy IPCL with stop loss of Rs 285 for a target of Rs 355
Buy Bharti Airtel with stop loss of Rs 430 for a target of Rs 550
Buy ICSA with a stop loss of Rs 691 for a short-term target of 900
Buy R K Forgings with a stop loss of Rs 110 for a short-term target of Rs 146
Buy TCS with stop loss below Rs 1012 for a target of Rs 1045
Buy Bharti Airtel with stop loss below Rs 453 for a target of Rs 480
Trade at your own risk
Wednesday, September 20, 2006
Movers & Shakers
- Gabriel India zoomed on reports that the company will be selling its Mumbai property for Rs85 crore.
- Alstom Projects advanced on bagging multiple orders worth Rs330 crore from NTPC, Tata Power, Nalco and GEA Energy Systems.
- Ceat gained after it announced that it would cut the prices of truck and bus tyres by 4-5%.
- Nandan Exim rallied sharply on reports that the company would raise up to Rs100 crore through the issue of FCCBs/GDRs/ADRs.
- Diamond Cables gained on bagging two orders worth Rs14 crore.
- Thermax moved up on receiving an order worth Rs88 crore from a cement company.
- Chettinad Cement Corporation edged higher on plans to set up a new greenfield cement manufacturing unit at Ariyalur near Trichy in Tamil Nadu.
- i-flex Solutions inched up on launching the i-flex Process Framework for Banking tool.
- Magma Leasing declined despite reports of the company signing a car financing deal with Maruti.
Sharekhan Investor's Eye dated September 19, 2006
Genus Overseas Electronics
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs270
Current market price: Rs219
Genius over the seas
Key points
- Genus Overseas has entered into a joint venture with Brazilian company, Mobix Wireless Solutions Ltd, to set up a greenfield manufacturing unit in the country.
- The plant will have a capacity to manufacture one million electronic energy meters; both single and three-phase ones.
- The proposed project will entail an investment of USD15 million which will be financed through a mix of debt and equity.
- At 100% utilisation, the joint venture will clock a turnover of Rs200 crore and enjoy better margins on account of Mobix Wireless Solutions' brand image.
Welspun Gujarat Stahl Rohren
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs84
Current market price: Rs74
Bags fresh order worth Rs700 crore
Welspun Gujarat Stahl Rohren (WGSR) has announced fresh order booking of Rs700 crore for the supply of line pipes to the oil & gas companies. What's important is the fact that the large part of the new orders has been received from the overseas market including an order worth Rs450 crore from the USA, which is a developed and highly competitive market.
The company has also strengthened its position in Iran with an order worth Rs200 crore. Earlier the company had bagged orders from National Iranian Gas Company ($50 million) and PetroIran Development Company (around $52 million). Other notable overseas order wins in the past couple of years are the Rs500-crore order from Indonesia (PGN) and Rs301-crore order from Algeria (Story Transgas). The large orders reflect that the company has been able to establish itself in the niche area of high-pressure oil & gas segment globally.
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