IIP for October 2006 dips to 6.2%
The Index of Industrial Production (IIP) grew by 6.2% year on year (yoy) for October 2006, as compared to an 11.4% growth in September 2006 and a 9.8% growth in October 2005. The growth was significantly lower than the consensus estimate of 9.6%.
Key points
- The slowdown is not broad-based as basic goods are up 9.9% yoy, capital goods are up 8.2% yoy and intermediate goods are up 8.1% yoy.
- The slowdown is mainly in the consumer goods sector, which reported a 0.5% year-on-year (y-o-y) growth, with durables up only 2.4% yoy and non-durables down 0.4% yoy.
- The slowdown in the consumer goods production has largely been influenced by the festive season falling in the month October in the current fiscal compared to November in the previous fiscal.
- The decline in non-consumer durables production is somewhat strange as leading fast moving consumer goods (FMCG) companies have reported that the growth rate is normal. Further if we take a cue from the beverages and tobacco category which grew by 11.5% yoy the decline in non-durables remain a surpirse.
STOCK IDEA
Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs680
Current market price: Rs497
Product play
Key points
- Niche player with established presence: Nucleus Software Exports Ltd (NSEL) is a niche player offering software products and services to companies in the banking and financial service space. It has established itself globally with product installation base of over 250 application modules in more than 30 countries.
- Product business drives growth: The product business grew exponentially in FY2006, on the back of some impressive order wins like the $12-million multi-year deal with GMAC. Apart from this, it added 21 new clients and bagged orders for 38 new installations in FY2006. In the first half of FY2007 also, the company added 14 new clients and continued to grow its pending order book that stood at Rs135 crore as on September 2006. Consequently, we expect the product revenues to grow at a CAGR of 67% over FY2006-08.
- Margins are sustainable: In spite of the cost pressures and the aggressive employee addition targets for this year, the company is likely to sustain its overall profitability. The growing contribution from the high-margin product business is expected to mitigate the adverse impact of the rising wage bill and the expansion-related pressures in the intermediate term.
- Alliance could throw positive surprises: The initiatives to forge joint marketing alliances with global technology giants and develop a network of channel partners could result in higher-than-expected order bookings. The partnership model has already started yielding results.
- Valuation: Revenues and earnings are estimated to grow at CAGR of 38% and 40% respectively over FY2006-08E At the current price the stock trades at 11x its FY2008 earnings, which is relatively cheaper compared with the peer companies. We recommend a Buy on NSEL with a one-year price target of Rs680.
STOCK UPDATE
Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs185
Current market price: Rs165
Acquiring 76% stake in an Indonesian bank
Key points
- Bank of India (BoI) is set to acquire a majority 76% stake in Indonesian bank, P T Bank Swadesi Tbk, at an estimated cost of Rs111.3 crore ($25 million). The deal will be completed in another couple of months, as certain clearance issues need to be sorted out.
- The Indonesian bank is a mid-sized bank, listed on the Jakarta Stock Exchange and has been operating in Indonesia for the last 38 years. It has an asset base of Rs445 crore ($100 million), a deposit base of Rs333.8 crore ($75 million) and a net worth of Rs48.9 crore ($11 million).
- The Indonesian bank has four branches, two each in Jakarta and Surayaba, and five sub-branches. International business contributes approximately 20% of BoI’s assets as on September 30, 2006.
- BoI has been operating in Indonesia for the last 33 years through a representative office and hence its management felt that acquiring a local bank would be a better deal than setting up a bank in Indonesia as the capital requirements for setting up a new bank are high at Rs1,335 crore ($300 million).
- Since 20% of BoI’s assets are from foreign operations, we feel that the deal would add value to the bank’s overall operations considering the financials of the bank (refer table below). The bank acquired has an asset base of Rs445 crore (2% of BoI’s international assets and 0.4% of BoI’s total assets as on March 31, 2006) which we feel is fairly manageable.
MUTUAL FUNDS: WHAT’S IN—WHAT’S OUT
Fund Analysis: December 2006
An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of November 2006. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 17 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc
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