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Saturday, October 21, 2006

Blue Star : In full bloom

Blue Star is India’s largest central air-conditioning and commercial refrigeration company, with over six decades of experience in providing expert cooling solutions. Its business also includes import, distribution and maintenance of professional electronic and industrial equipment and systems. These include turnkey engineered solutions in the areas of banking, telecom, healthcare, defence, pharmaceuticals, manufacturing and R&D.

Blue Star primarily focuses on the corporate and commercial markets. These include institutional, industrial and government organizations as well as commercial establishments such as showrooms, restaurants, banks, hospitals, theatres, shopping malls and boutiques.

The central air-conditioning business saw 26% growth in FY 2006 and continues to be the key growth driver for Blue Star’s revenue as it contributes nearly 70% of its revenues. Blue Star remains the undisputed market leader in this segment with a market share of 30%. The demand for centralised air-conditioning business is set to grow at healthy pace of more than 25% considering the pace of growth of its user industry, which includes the retail, IT/ITES, healthcare, hospitality, entertainment, telecom, banking and other service sectors. In the June 2006 quarter, the segment grew 36% to Rs 186.37 crore, and profit before interest and tax (PBIT) 46% to Rs 15.07 crore.

The cooling segment represents 23% of Blue Star’s revenue and grew 29% in FY 2006. The cold chain business is expected to register a dramatic increase in the next few years. The Central government’s intention to enhance production and export of vegetables and fruits to raise agricultural income has resulted in large industrial houses announcing plans for contract farming and branded exports. This will necessitate precoolers, bulk cold storages, transport refrigeration and perishable cargo complexes.
Further, retailing of agricultural produce — both raw and processed — is expected to undergo a massive transformation in the big cities with the emergence of supermarket chains. Multinational supermarket chains are also waiting in the wings. These high quality supermarkets, regardless of size, will require a lot of refrigeration equipment for storing and showcasing food produce. The supermarkets will also drive growth of bulk cold storages.

In the June 2006 quarter, the segment’s net sales advanced 36% to Rs 111.76 crore, and PBIT 32% to Rs 7.82 crore.

For over five decades, Blue Star’s professional electronics and industrial equipment
division has been the exclusive distributor in India for many internationally renowned manufacturers of hi-tech professional electronic equipment and services as well as industrial products and systems. The company has carved out profitable niches for itself in most of the specialised markets it operates such as analytical instruments, medical electronics, data communication products, material testing, and test and measuring instruments. In the June 2006 quarter, net sales of this division moved up 5% to Rs 14.16 crore, and PBIT 6% to Rs 1.36 crore.

Blue Star has four modern, state-of-the-art manufacturing facilities at Thane in Maharashtra, Bharuch in Gujarat; Dadra, a Union territory near Gujarat; and Kala Amb in Himachal Pradesh. The expansion at Uttranchal is going on according to plan. The first phase was operational in June 2005; the second phase was supposed to be operational from August 2006, while the third by end of Q4 (March ending) of FY 2007. The overall capacity of refrigeration at Uttranchal is more than 1.25 lakh units. However, the actual production will depend on product mix and the number of shift that the company will operate.

The outstanding order book position on 30 June 2006 was up 25% to Rs 688 crore as against Rs 550 crore on 30 June 2005. Furthermore, the company received Rs 75-crore orders in July 2006.

In FY 2007, we expect Blue Star to register net sales and net profit of Rs 1582 crore and Rs 65.51 crore. This gives an EPS of Rs 7.3 on a face value of Rs 2 per share. At the current market price of Rs 138, the scrip is available at a PE of 19, leaving scope for decent returns.

Business Today - The Battle of Two Portals

It's a battle that has largely remained invisible. Yet, two global portal giants are fighting it out for dominance in India's fledgling internet market. One reason why the battle between msn, the portal from software giant Microsoft, and Yahoo has gone unnoticed is because of the size of the Indian internet market. With total online advertising estimated at a paltry $50 million (Rs 230 crore), the Indian market is a mere 0.4 per cent of the $12.5-billion (Rs 57,500-crore) us online advertising market. But then what matters for internet businesses is not the here and now, but the future. The number of internet users in India-37 million-may not appear big, but a million new users are added to that base every month and by 2010, an estimated 78 million Indian users are expected to be surfing the web.

That's the sort of market Yahoo and msn are targeting and to do that both players have unveiled a flurry of India-focussed products to woo users. msn, with estimated Indian ad revenues of about $4.5 million (Rs 20.7 crore), celebrated its sixth anniversary in India recently by revamping its Indian site, adding four new channels on lifestyle, sports, news and entertainment, sfx advertising (a special effects advertising package that allows contextual targeting of surfers), and the launch of the portal in five regional languages-Hindi, Tamil, Telugu, Kannada and Malayalam.

Yahoo India (estimated ad revenues around $8 million or Rs 36.8 crore), which also completed six years in the country this year, has been equally aggressive with its India strategy. Last fortnight, it introduced Yahoo! Search Marketing, which enables advertisers to bid for priority placements in web search results that are served up in response to a user's search for a product or service. In a couple of months it will launch its instant messenger (IM) service (currently offered in English) in a host of regional languages.

In May this year, on a visit to India, Yahoo's CEO Terry Semel spoke of Yahoo's commitment to India and even hinted at big-ticket acquisitions that the company could be making in the Indian market. Says Yahoo's coo Daniel Rosensweig (who was in India last fortnight): "This is a market nobody can take lightly."

Tomorrow's Market

India's attraction is its size and potential-its population of over a billion people and growing numbers of internet users. But web strategies of both these portals (and of other Indian players) haven't targeted the really big numbers. Of the urban population of 250 million people, just 75 million are English speakers. And 37 million of them are internet users. Says Murugavel Janakiram, CEO of Bharat Matrimony, one of the largest Indian online matrimonial services sites: "It is predicted that in a couple of years, the internet will have captured the entire English speaking population and saturated the market." That's precisely why both Yahoo and msn are going local and launching sites, products and services in regional languages. Like Yahoo's IM in Indian languages, msn too will soon roll out its messenger service in five Indian languages-Hindi, Tamil, Telugu, Kannada and Malayalam.

By going regional, both expect to expand the market and capture a larger share of it. "The old misnomer that internet users are only English speaking has gone out of the window. The top end of internet users, the most affluent and well-do-to in India, are the language audiences," says V. Ramani, founder & ceo of Media Turf, a leading Indian internet advertising company.

For both portal giants, not to be in India is not a choice. Of the 500 million Yahoo users in the world today, half that number are in the us (population: 300 million), with the remaining coming from the rest of the world. Clearly, future growth will come from outside the us. And the biggest potential is in-yes, you guessed right-India and China. Says Rosensweig: "We see the biggest growth coming from outside the us and we see India as one of the biggest opportunities over the next 5-20 years."

Although India is the smallest market among the BRIC (Brazil, Russia, India and China) countries, it is the fastest growing. The smallness, explains Jaspreet Bindra, Country Manager, msn India, is not in terms of subscribers; it's in terms of average revenue per user (ARPU), which stands at 50 cents (Rs 23) a year in India. "Compare this with newspapers in India which monetise their readers at $25 (Rs 1,150) a year. That means I'm a one-50th of the newspapers," explains Bindra. In China, the online advertising market is $500 million (Rs 2,300 crore) and with about 100 million internet users, the ARPU works out to a better $5 (Rs 230). Yet, internet companies are excited about India. "One of the biggest reasons why companies are excited about India is because China is a controlled market, where there is censorship on the internet," says Bindra.

Bloggers, businesses all are welcome. Here's the lowdown:
Jobs search: Currently in beta, Yahoo's new job search service will allow users to search for a particular job profile. "The Yahoo job search will crawl through all the job sites in the world and throw up the relevant vacancies," explains George Zacharias, Managing Director, Yahoo India.

Yahoo! 360: This is Yahoo's site for bloggers, which allows users to create their own pages with text and pictures. Currently in beta, the service is expected to be launched soon.

Content: Yahoo will soon be launching several new channels of interest to the India audiences. "We want to bring all our international services to India," says Zacharias.

Search engine platform codenamed Panama: Expected to be launched in the first quarter of next year, the new paid listing model will be more like Google's AdWords, where clickthroughs impact ranking.

Yahoo Search Marketing: Based on the advertising model called Sponsored Search, it allows businesses to bid for highly visible placements in the search results that are served in response to a user's query for a specific product or service.

Everything from video uploads to social networking. Take a look:
Soapbox on MSN Video: The service lets people upload, share and discover videos within the Soapbox community and with people around the world. You can sign up to be wait-listed for the beta at http//

Windows Live Messenger: It takes messaging to a new level, allowing users to easily have full-screen rich video conversations with people on their contact list, call their friends on their PC or phone, and share personal files instantly.

Live Search and customers can customize their home page content, create multiple pages, and add their favourite content from millions of sources of information.

Windows Live Spaces: This ( is a free, easy-to-use, customizable social networking and blogging service that provides you with a place to connect with your friends, and tell your story using blogs, photos and more.

Windows Live Writer: Windows Live Writer combines the desktop editing tools found in Microsoft Word with a set of enhancements that will help bloggers posts in the style of their blog and easily include rich media assets such as photos, maps and videos.

In For The Long Haul

Their bullishness notwithstanding, the two portal giants aren't the biggest players in India, at least not for now. According to industry ad revenue estimates, Yahoo is #4 and msn India #5. In the top two spots are Indian internet company, with estimated ad revenues of $13.21 million (Rs 60.76 crore) and search giant Google with an estimated $10.44 million (Rs 48 crore). Indiatimes is a close third with an estimated $8.88 million or Rs 40.85 crore (see Click for Cash). Yet, their sheer global size enables them to pump resources that will put home-grown rivals in the shade. Yahoo's global revenues topped $5.25 billion (Rs 23,625 crore then) last year, while msn with $2.2 billion (Rs 9,900 crore then) in revenues, accounts for 5 per cent of Microsoft's sales of $44 billion (Rs 1,98,000 crore). In fact, it wouldn't come as a big surprise if either of these players made a play for some of the prominent Indian internet companies, provided they got them at a good price.

For both Yahoo and msn, the biggest share of revenues on the internet comes from advertising and the us with online ad spend valued at $12.5 billion (Rs 57,500 crore) in 2005 is the largest market for such advertising. In contrast, India's online advertising market is estimated at $50 million (Rs 230 crore). Why then are the two portal giants fighting over small beer? Says Ramani: "Business today is fragmented and only one-nth of what it can be in a couple of years. Monetisation per user is miniscule, but over a period of time, all investments will be justified." The Internet and Mobile Association of India estimates that the online advertising market will grow 35 per cent in the next year.

Besides launching products in regional languages, the two portals have also tied up with local players. While msn has tied up with, in August Yahoo, along with Canaan Partners, a global venture investor, announced a $8.65-million (Rs 39.79-crore) investment in Bharat Matrimony. "Yahoo's business model has always been to build, buy or partner the businesses we see potential in," says Rosensweig explaining the deal.

Increasingly, the two companies are launching products in India before they do so in the US. "There will be products we will launch only in India. You will see us very aggressive and very busy," says Rosensweig. MSN's Bindra too follows the same principle. "If I were talking to you a year back," he says, "I might have told you about various products and the fact that they are likely to come to India maybe three, two or one year down the line. Today, I can tell you that almost all our products are launched in India as soon as they are elsewhere, if not earlier. In fact, there are products being developed specifically for the Indian audience," he says, citing the example of user bots such as Munnabhai that have become a rage in India.

Challenges Galore

With India's mobile phone subscriber base slated to grow to 278 million (or nearly 24 per cent of the population) by 2010, Yahoo and msn are eyeing the wireless market. MSN is in talks with cellular service providers and handset manufacturers to provide its services in India on the mobile. Yahoo has already entered that market as have Indian players like Rediff and Indiatimes.

either Yahoo nor msn disclose revenue data or other financial information about their Indian operations, yet executives at both companies say they are satisfied with the progress of their businesses here. Only six years into the market, each claims to have garnered a sizeable slice of the pie. Industry estimates suggest Yahoo has about 15 per cent of the ad market, while msn has an 8.5 per cent share. Things aren't going to be easy, though. For one, ARPU is still low in India. Then, broadband costs are high and penetration is low. As is the usage of data on mobile phones. Says Rosensweig: "These are speed bumps rather than roadblocks."

With deep pockets and a long-term approach to the Indian market, Yahoo and msn could make life difficult for portals like Rediff, Sify and the newly re-launched Particularly because some of these home-grown players still depend on revenues from other sources. Sify, for instance, with an estimated market share of 3.3 per cent, continues to depend on services such as access, enterprise services and data centres, which account for nearly 90 per cent of its revenues. Rediff, on the other hand, won't be a pushover for the portal giants. The company launched the new 'Lightning Fast Rediffmail' in 11 languages in July, ahead of the competition, and recently, its instant messenger, Rediff Bol, in Hindi. With 45 million registered users, Rediff targets Indians worldwide and closed last year with revenues of around $18.70 million (Rs 84.15 crore) for 2005-06, when it also posted a small profit ($1.21 million or Rs 5.4 crore) for the first time in its 10-year history. Says Manish Agarwal, Vice President (Marketing), Rediff: "Providing innovative services that are easy to use, have a high utility value and are able to solve a real world problem or substitute a real world need is a challenge for all online companies." That, incidentally, holds good even if you are the two largest internet portals in the world.

Category/Top player

Top of mind recall
Yahoo: 35%; Google: 21%, Rediff: 15%, Indiatimes: 5% and Hotmail: 5%

Yahoo is the biggest online brand in India, tops for e-mail: 37% share

Bharatmatrimony and Shaadi slug it out for the top matrimonial site: 33% share each

Job search
Naukri leads the online job search domain: 49% share

Google is the king of information search: 77% share

IRCTC tops online ticketing source: 38% share

Online buyers shop at ebay: 38% share

For financial content, the buck stops at Moneycontrol: 12% share

Mobile Downloads
Rediff is the website of choice for users who download mobile content from the net: 23% share
Source: JuxtConsult India 2006 survey

Top 10 Picks This Festive Season

Muhurat trading session for Samvat 2063 is a fortnight away, and the BSE Sensex has already gained 56 per cent since Samvat 2062. The new year, experts insist, will be buoyant. Business Today carried an opinion poll among five experts to identify 10 stocks that will earn returns in excess of 25-50 per cent over the next 12 months.

The Top 10

Crompton Greaves. Adjusted Stock Price: (September 27, 2006) Rs 249.55; Face Value: Rs 2 per share. The firm operates in three segments-industrial, consumer and transformer. In the domestic market all the three segments are expected to do well in the coming year. "Apart from the domestic market, the global expansion will reap benefits for the firm," says Khemani.

Mphasis BFL. Price: Rs 184.60; Face Value: Rs 10. Following the acquisition by EDs, the company has become a global player and is all set to move from the mid-cap league to the large-cap league. "The stock is all set for a re-rating," says Mudlapur. "And with eds wanting to acquire 100 per cent in the company, the stock will always be on an upswing."

ITC. Price: Rs 185.65; Face Value: Re 1. Cigarettes apart, experts are betting on the non-core businesses in the hotel, paper, consumer goods and retail spaces (including e-chaupal). Kejriwal expects the company's stock price in the next 12 months to surge by between 25 per cent and 40 per cent.

Larsen & Toubro. Price: Rs 2,589.20; Face Value: Rs 2. The company will benefit from the infrastructure boom.

Tata Steel. Price: Rs 515.65; Face Value: Rs 10. "From 5 million tonnes now, the company's capacity will zoom to 27 million in the next 6-7 years and will help increase shareholders value," says Kejriwal.

LG Balakrishnan. Price: Rs 27.95; Face Value: Re 1. LG Balakrishnan is a leading supplier of transmission chains catering to both the automobile and industrial segment. Being a leader in automotive transmission, it occupies a significant share in OEM supplies (it supplies to Bajaj Auto, Hero Honda and TVS Motors) as well as the replacement market. Also, its recent foray into metal forming and forging will lead to better revenue mix and margins going ahead.

Bartronics. Price: Rs 67.25; Face Value: Rs 10. Bartronics is a Hyderabad-based automatic identification and data capture solution provider. The company is the market leader in the domestic market. "It is one of the best retail proxy plays available," says Baliga.

Gateway Distriparks. Price: Rs 156.30; Face Value: Rs 10. Gateway Distriparks Ltd. (GDL) is a multi-location, port-related container freight station-cum-logistics company and stands to benefit significantly from the infrastructure and manufacturing boom.

Reliance Industries. Price: Rs 1,175.05; Face Value: Rs 10. "We expect the company to grow by 25-30 per cent on a year-on-year basis," says Baliga. "The benefit will be reaped following its steady growth in the refining business as well as due to its venture into retail."

Infosys Technologies. Price: Rs 1,835.50; Face Value: Rs 5. "Rising volume growth, consolidation and direct competition with global biggies will drive the growth in the company," says Sisodia.

Travelling Light

Ever used your mobile phone to check airfares and book tickets? Well, the process is simple. You start by messaging the sector (say, fly del mum for a flight from Delhi to Mumabi) and the date (Oct 22, for October 22) to the concerned shortcode (4242 in the case of, a travel website). In 15 seconds, the service provider reverts with options, essentially the fares and the time of departure. Once you decide, you send a message saying fly book, and an executive calls you in a few minutes to help complete the transaction. Easy, isn't it? It isn't just the mobile phone and it isn't just air tickets. Similar services are available over the internet covering hotel bookings to holiday packages to car rentals.

By some estimates, travel accounted for $151 million (Rs 694.6 crore) of the $262-million (1,205.2- crore) worth of online transactions completed in India in 2005-06. India's most successful e-commerce firm, Indian Railways Catering and Tourist Corporation, is owned by the government, and in 2005-06, sold tickets worth Rs 290 crore online. Travel, as numbers such as these would suggest, is the preferred destination then for entrepreneurs. "This is to ensure that there are a limited number of customer touch points," says Vinay Gupta, CEO,

Flying High And How
Some of the popular websites offering a range of services. Founded in 2000. In May 2005, Soft Bank Asia Infrastructure Fund (SBAIF) invested $10 million in it
OFFERINGS: Flights, hotel bookings, holidays in India and elsewhere, car rental services
USP (in the company's own words): The travel business is characterised by high-competition and volumes are a must. The only way to handle high volumes is by leveraging technology, which is the USP Began operations about two months ago. Has received funding from Reliance Capital, NWP and TV18
OFFERINGS: Flights, hotel bookings, car rentals, bus services.The company also offers packages like pilgrimages to destinations such as Gangotri and weekend ones to places like Yercaud and Agra. Offers flights and hotel bookings within India
USP (in the company's own words): Reassurance is the USP. Tell the consumer that if you come to us, your experience will be smooth. Yatra's objective is to grow the market The investors in the company are Kleiner, Perkins, Caufield & Byers, and Sherpalo Ventures
OFFERINGS: Flights and hotel bookings within India
USP (in the company's own words): Ease and experience is the USP here. The home page is simple with an effort to create the best user experience Has gone live recently. Former Thomas Cook India CEO Ashwini Kakkar has recently joined as the Chairman of the board
OFFERINGS: Flights and holiday packages within India and to overseas destinations
USP (in the company's own words): Innovation. Has been among the earliest players to offer services such as bookings through mobile phones
Source: Companies

At last count, there were some 15 websites seeking to make money off the travel space. Some, like, one of the earliest companies to enter the space, offer cheaper-than-cheap airfares (and a host of other things, but it is the airfares that attract customers; and makemytrip actually offers a low-fare guarantee). "Basically, we give back the difference if you find a cheaper deal," says Deep Kalra, founder and CEO, makemytrip., promoted by Yatra Online and funded by Reliance Capital, Norwest Venture partners and TV 18, believes it is the promise of "the best deal". Says Dhruv Shringi, Co-founder and Executive Director, Yatraonline, "Our USP is the reassurance that your experience will be smooth." With travel sites venturing into hotel reservations, customers can look forward to good bargains here too. "While flight bookings are complex, the challenge in hotel reservations comes from the fact that hospitality is a fragmented industry," says Sandeep Murthy, CEO, Customers, then, may have to wait before they can book hotel rooms. Still, given the cost implications for customers, it will be worth the wait

A Surprise Feast

Forget stocks, went a refrain popular with investors in India and elsewhere over the past 12 months-the act of forgetting, especially in India, was made all the more difficult by a stock market that was visibly on steroids-and look at commodities. Several sage investors followed that advice, and to good effect. With every brokerage worth its commission launching commodity broking services (there are some 120 commodities available for futures trading on three national and 22 regional commodity exchanges in India), the commodity market will likely soon witness the lemming effect that is more commonly seen on the stock market. Indeed, over the past year, the calls given by several commodity brokerages resulted in huge dividends for investors.

That was then (which, depending on the commodity in question can be as recent as May or June, this year). A quick recap: gold prices climbed up sharply from a five-year low of $255.95 (Rs 12,030 then) an ounce (28.34 gm) in April 2001 to a high of $725 (Rs 34,075 then) an ounce in May 2006; oil, from $23-24 a barrel (159 litres) to a high of $78.40 a barrel in July 2006. The yellow metal was predicted to touch $800 an ounce by end-2006; oil, $100. Since then, the prices of both commodities have headed south. Ajoy Pathak, Associate Vice President, Kotak Commodity Services, predicts that gold prices could now decline to $500 an ounce, maybe even $475, although he remains "bullish" on the commodity "in the longer run". And Pankil Shah, Associate Director, Angel Commodities, believes that there is no fundamental reason for crude prices to increase now. "The actual valuation of crude is $50-55 a barrel," he says. Today, gold trades at $585-590 an ounce and crude at around $60 a barrel.

There is still money to be made in both commodities, just as there is money to be made in the commodity market in general. Only, things aren't as easy as they once were. There is no clear trend that indicates either an upturn or a downturn. Savvy investors say that the only way to make money now from commodities, is the only way to ever make money from commodities, play every emerging trend both ways. There are other nuances to investing in commodities as well, some similar to the tenets of prudent stock market investing-"Commodities have their own demand-supply factors and you need to study all the information before plunging in," says P. Patnaik, Associate Vice President, Kotak Commodity Services-and others different. "You have to pick the right exchange and the right commodity for safe investing (in commodities)," says a commodity analyst. That said, here are a few simple strategies to getting the most out of your investment in commodities.

Seven Strategies

1. Buy gold: Yes, this is, despite the bearish outlook on gold in the short-term, the safest commodity investment even today. Investors can buy gold from commodity exchanges the same way they buy it from neighbourhood jewellers or banks. "This is the safest and by far easiest way to enter the commodity market," says Kotak's Patnaik. "You are not only assured of the best quality, but also have the facility to keep the gold in demat (electronic) form." Indeed, the opinion among commodity brokers is that it is difficult to go wrong with gold. "Gold is inflation hedged," says Sumesh Parasrampuria, Head (Commodities), Motilal Oswal Commodities Brokers. "You will surely end up with decent returns."

2. Go vanilla: The world of commodities and commodities trading may appear strange to the newbie investor. Such investors would do well to adopt the plain vanilla trading strategy, simply because it is easiest to understand (although pulling it off requires hard work and a bit of luck). This simply involves taking a directional call on the market, bullish or bearish, as in "I expect prices of gold to increase" or "I expect prices of copper to decline". Investors who seek to adopt this strategy should observe price trends, and those of most commodities tend to move in cycles. "You have to get your cycle right before you start investing in commodities," says Motilal Oswal's Parasrampuria.

3. Follow the leader: There is another easy way to make money in commodities. "Ride the trend," says Kotak's Pathak. So, in a futures market, all investors will need to do is follow the trend, irrespective of whether it is bullish or bearish.

4. Set a stop-loss: "Keep a stop-loss if the actual market is going against your initial call," says Angel Commodities' Shah. A stop-loss is a predetermined amount of loss an investor is willing to incur, and at which, he or she exits the commodity. The underlying logic: there is no point in hanging on to a commodity if the price is going against your initial call. "You are only bound to lose money if you try to average it out," adds Shah.

5. Seek an expert: Don't try to invest in commodities on your own; seek and retain the services of a professional brokerage. "Unlike equity, commodities require in-depth knowledge of international price movements, demand and supply positions, and other economic variables," explains Shah. Remember, despite all their research, analysts, even international ones, didn't see the sudden drop in gold and oil prices coming.

6. Play spreads: The difference in price between one futures contract and another is called a spread. Investors can play spreads to their advantage. For instance, to leverage a bull spread they would have to simply simultaneously buy and sell futures contracts in the same commodity (or related ones) with the aim of benefiting from a rise in prices while limiting losses if the call happens to be wrong (usually achieved by buying the futures contract with a shorter or closer delivery and selling the one with a longer one). Leveraging a bear spread, similarly, involves an attempt to benefit from a decline in prices while limiting losses should prices rise (usually achieved by selling the futures contract with a shorter or closer delivery and buying the one with a longer one).

7. Go systematic: Systematic investment plans (sips) have become very popular with mutual fund investors. A similar strategy could pay off in the commodity market too. Essentially, investors keep buying a commodity every month, month after month. "After a certain period, one can take the physical delivery and pledge it with the exchange," says Kotak's Patnaik. This product is the safest and holds the potential of the highest return. Better still, investors do not need to track the market on a daily basis.

A Fund For All Seasons

With the sensex hovering over 12,000 as this magazine goes to press (12,366.91 on September 27), late starters like Sudharshan Nambiar (name changed) are not too sure about investing in mutual funds (MFs). "Is this the right time to invest in a fund?" ask Nambiar and his ilk. "And if yes, then which fund should we pick?"

"Anytime is a good time to invest in mutual funds," says Hemant Rustagi, CEO, Wiseinvest Advisors. "Investors cannot and should not try to time the market; they should discipline themselves and invest regularly to build wealth." The man is right: the sooner you start, the longer your money can work for you. And regularity helps: a systematic investment plan (SIP) is light on the wallet, ensures that the investor isn't timing the market and comes with the added benefit of rupee cost averaging. Still, the original question remains: what are the funds an investor should target?

Business Today trawled the MF firmament for funds that investors can invest in at any point in time, irrespective of how the market moves. These funds are perfect not just for investors like Nambiar, but also for high net worth individuals (HNIs) who aren't exactly new to the game. "They are dream funds," says Dhirendra Kumar, CEO, Valueresearch. "They rise more than their peers in a rising market and fall lower than others in a falling market."

Before we get on to these funds, some preliminaries: investors, especially first-time ones who aren't exactly acquainted with the basics, need to go through a few steps (recommended not mandatory). One, they need to determine their financial goals and time-lines (how soon they want to achieve these). Two, they need to understand their risk profiles and arrive at a debt:equity mix for the investments. For instance, a long-term investor who is not averse to risks should always pick equities: in the long term, returns from equity exceed those from any other investment option. In the third step, investors should shortlist the funds (which is what bt has done). There are significant risks involved in doing things the other way around. As a final step, investors should review the prospectus of all funds from the shortlist, and pick those that meet their financial goals and match their risk-profiles. "Choosing a fund is the last step in mutual fund investing," says Rustagi. Even after matching investment goals and risk profiles, there are things investors should look for. "Opt for a performer fund house that has given consistent returns across many schemes and whose management style, systems and processes have evolved and established credentials over a period of time," says R. Swaminathan, Associate Vice President and National Head (MFs), IDBI Capital Market. "Then, go for schemes from such a firm." The key mantras: consistency of performance, allocation to large-cap and mid-cap stocks, flexibility (changing fund allocation according to market dynamics) and balanced exposure to various sectors.

The four funds listed below (based on a survey of four experts; see Evergreen Funds) have a long history of picking winners and have earned consistent returns over time. "Superior returns compared to the average return of the peer group; lower probability of returns from the fund falling below risk-free returns; less concentration on a particular industry or company; investment in stocks with ample liquidity; and the size of the corpus are the key elements that make these funds an ideal part of every portfolio," says Vidur Verma, Country Investments Director, Citigroup.

HDFC Equity
Investment Objective: To provide capital appreciation through investments predominantly in equity-oriented securities.
Launch Date: December 24, 1994
Corpus: Rs 3,273.46 crore (on August 31, 2006)
Net Asset Value: Rs 131.653 (on September 22, 2006)
Investment Style: A mix of large-caps, mid-caps and small-caps.
Performance: In the last one year, delivered nearly 52 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top six stocks accounts for 40 per cent (Rs 1,306.4 crore) of the total portfolio of 30 stocks.
Investment Rationale: It is the only diversified equity fund that has outperformed the average return of such funds every year for the past eight years. It is a consistent performer and focuses largely on larger cap stocks. A combination of low risk and above-average returns makes this a compelling investment option.

DSP Merrill Lynch Opportunities Fund
Investment Objective: The primary one is to generate long-term capital appreciation; the secondary one is income generation and distribution of dividend, from a portfolio constituted of equity and equity related securities.
Launch date: April 10, 2000
Corpus: Rs 1,145.34 crore (on August 31, 2006)
Net Asset Value: Rs 48.96 (on September 22, 2006)
Investment Style: A well diversified portfolio dominated by large-caps, with ample representation of mid-caps and small-caps.
Performance: In the last one year, delivered 47 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top 10 stocks are large cap stocks that account for 35 per cent (Rs 402 crore) of the total portfolio of 59 stocks.
Investment Rationale: The fund is projected as a tactical fund that will maximise returns by investing predominantly in certain sectors and stocks. Its focus is to respond to the dynamically changing Indian economy by moving its investments amongst different sectors, such as lifestyle, pharmaceuticals, cyclicals and technology as prevailing trends change. Today, it has a well-diversified portfolio dominated by large-caps, with ample representation of mid- and small-cap stocks.

SBI Magnum Contra Fund
Investment Objective: To invest in under-valued stocks that may be currently out of favour, but are likely to show attractive growth in the long term.
Launch Date: July 3, 1999
Corpus: Rs 1,253 crore (on August 31, 2006)
Net Asset Value: Rs 32.91 (on September 22, 2006)
Investment Style: A well diversified portfolio dominated by large-caps and mid-caps.
Performance: In the last one year, delivered 51 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top 10 stocks are large cap stocks that account for 39 per cent (Rs 488 crore) of the total portfolio of 45 stocks.
Investment Rationale: It's the oldest among contrarian funds and has a proven track record. The fund focuses on investing in fundamentally sound companies that are overlooked by the market and are waiting for their value to be discovered. With equity markets at all-time highs, contrarian investing will help investors diversify and create wealth over the medium to long term.

Franklin India Bluechip Fund
Investment Objective: To achieve a high degree of capital appreciation through investments in well-established, large size blue-chip companies.
Launch Date: November 30, 1993
Corpus: Rs 2,313.2 crore (on August 31, 2006)
Net Asset Value: Rs 116.27 (on September 22, 2006)
Investment Style: Portfolio dominated by large-caps.
Performance: In the last one year, delivered 45.3 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top 10 stocks are large cap stocks that account for 54 per cent (Rs 1,251 crore) of the total portfolio of 32 stocks.
Investment Rationale: The fund focuses on steady and consistent growth by predominantly investing in well established large cap stocks.

There could be other good funds that do all that these four do and more. bt is not suggesting that investors should opt only for these four funds. Indeed, a mix of some of these funds, and others not named here could form part of an investor's portfolio, as long as it is in keeping with his or her financial goals and risk profile. However, those investors who are not very sure where to invest would do well to opt for these four, existing funds all, and with sound track records. Remember, the key to successful MF investment is those oft-repeated rules: define investment objectives, decide asset allocation on the basis of risk profile, and give each fund (and fund manager) time to perform.

Auto's Big Boom

Car companies in India have lined up more than Rs 30,000 crore in investment. The money will not just double capacity in the industry, but make it vastly more global.

It's the first time Maruti Udyog (MUL) has allowed any journalist onto the shopfloor of its brand new facility at Manesar near Gurgaon and, obviously, its Managing Director Jagdish Khattar is keen to get an endorsement of the work being done here. "Don't you like it?" he asks, never meaning it as a question. It's easy to say yes. It's a late September afternoon and the humidity inside the plant is killing (you can see construction workers still trying to finish the ducting for the plant), but to the eye, Suzuki's newest investment in India looks beautiful. The main assembly line is bathed in natural light as workers start assembling the first batch of Swifts that have started to roll off the line. Tens of red, silver and grey Swift cars roll on hangers on the shop roof, seemingly flying from chassis assembly point to the final assembly line. And compared to MUL's first but much older plant in Gurgaon, the 600-acre Manesar facility has vastly more breathing space, both inside and outside. Ask Khattar why MUL decided to get the assembly going, although the plant is still under construction, and he tells you matter-of-factly: "It is because we can claim depreciation for the half year," he says, pausing to add for effect, "and that's a Rs 100 crore saving. When work starts here full steam in a couple of years, producing 300,000 cars a year, it will be the best plant in the country." The Rs 4,000-crore Manesar plant (with Rs 1,500 crore already invested), which will not just assemble Swift cars, but fit them with diesel engines from an adjoining Rs 2,500-crore facility, is Suzuki's attempt to ensure its continued dominance in a passenger car market it has ruled for the last 23 years. MUL already churns out 600,000 cars a year, and when Manesar kicks in, the capacity will soar to 900,000.

Approximately 1,800 km south from where Khattar stands, another ambitious and fierce automotive warrior is plotting similar moves. A man called H.S. Lheem is so busy that he barely has time to breath. Yet, he has kindly offered to give this reporter a guided tour of the expansion happening at his 10-year-old facility in Errungattukottai near Chennai. There are JCB excavators and cement mixers all over the place, and hundreds of workers in hard hats are trying to put up a huge new car factory in record time. "It's not easy making a factory," says Lheem, Hyundai Motor India's (HMIL) CEO of six months. "But what to do, I need the cars that the new factory will make," he says in perfectly good English. Lheem needs cars and he needs them fast. He's got an export order of 25,000 cars, but "I just don't have the capacity," he says almost in despair. "Thank God, I have the garden," he suddenly says, referring to a small bit of the plant that has been converted into a tranquil farmhouse, where India's #3 carmaker rears poultry and pigs alongside Korean vegetables for the Korean canteen.

"Any further increases, especially the one to 150,000, would mean that we will have to think of a volume car"
M. Takadegawa
President & CEO/Honda Siel

India's automotive CEOs had better keep their yoga books and squeeze balls handy. In what could be industry's most competitive phase yet, vehicle manufacturers have lined up massive investments to boost capacities. Apart from MUL's Rs 9,000-crore and Hyundai's Rs 5,000-crore investments, home-grown giant Tata Motors has put together a war chest of Rs 10,000 crore to do everything from developing new passenger car and commercial vehicle platforms to launch an ultra low-cost car, billed the Rs 1-lakh car, which, if successful, could single-handedly change the face of the industry. Honda Motor is plonking down Rs 1,000 crore to increase its low capacity of 50,000 units a year to 150,000 by 2008, and the plans may include a small car; General Motors (GM) is also investing Rs 1,400 crore, mainly in the building of a new plant and the launch of a small car, the Spark, that could increase the troubled automotive behemoth's market share in India from an insignificant 3 per cent to something more respectable; Ford too, which has hit a sweet-spot with its sedan Fiesta, has a modest capex plan of Rs 400 crore, aimed at debottlenecking its plant in Chennai; Mahindra & Mahindra (M&M), the tractor-to-SUV major, has tied up with Carlos Ghosn-led Renault-Nissan to launch a sedan, Logan, by mid-2007. Finally, Toyota Motors, which, in keeping with its quiet style, hasn't yet disclosed its investment plans, has a stated objective of capturing a 10 per cent share of the car market. If no one's laughing at Toyota's bid to increase market share five-fold (yes, its current share is a modest 2 per cent), it's because, well, we are talking of Toyota here. The Japanese giant has gone from being a nobody to, pretty soon, the world's biggest vehicle manufacturer.

Shifting Gears

Do the numbers, and the industry's investment figures tot up to more than Rs 30,000 crore. That's not too much less than the investment already sunk into the industry over the years, but it's significant for what it will do to the industry capacity: it's simply going to double it. Why are car majors falling over each other to make the investments? Blame it on the market boom. Even as recently as five years ago, annual vehicle sales in India added up to a modest seven lakh a year. Last year, that figure stood at 11 lakh, of which cars accounted for 80 per cent, representing a two-fold growth in that time. This financial year, car sales are expected to surge 10-15 per cent, and by 2010, the size is projected to double to 2 million. Seconds a Scotiabank report on the industry: "Rising incomes and rapid growth in the 20-64-year-old age group suggest that car sales in India could double to 2 million units by the end of the decade."

By 2010, the demand for cars is expected to almost double to 2 million a year. No wonder, manufacturers are racing to boost capacities.
Tata Motors
Proposed Investment: Rs 10,000 crore
Build new platforms for passenger cars, commercial vehicles and launch the ultra-small "Rs 1-lakh car". Develop all-new engines for the three platforms, including common rail diesel engine. Possibly start a joint venture with Fiat to develop the Ranjangaon facility as a two-lakh-car-a-year facility. Upgrade existing range of commercial vehicles.
Capacity by 2010: Approx. 5 lakh a year for passenger cars, 2.5 lakh for the ultra-small car and 4 lakh a year for commercial vehicles.
What's at Stake? Tata Motors has a little over 16 per cent of the passenger car market, but its position will come under threat once Maruti launches its diesel Swift. Also, compared to its global rivals, Tata Motors has limited access to technology. Hence, the Fiat tie-up.

Maruti Udyog
Proposed Investment*: Rs 9,000 crore
Upgrade the 5.5-lakh-a-year Gurgaon plant, set up a diesel engine plant at Manesar (near Gurgaon) and increase capacity at Manesar from 1 lakh to 3 lakh cars a year.
Capacity by 2010: Approx. 10 lakh a year
What's at Stake? MUL is the market leader with 44.25 per cent share, but globally its parent Suzuki is a small player compared to Toyota and Honda. India fetches 12 per cent of Suzuki's global revenues.
*Does not include a proposed Rs 2,500-crore investment in "outsourced manufacturing" for Nissan

Hyundai Motor India
Proposed Investment: Rs 5,000 crore
Reason: Set up a second manufacturing plant beside the existing plant to double capacity to 600,000 units a year. Also develop a new small engine plant.
Capacity by 2010: 6 lakh a year
What's at Stake? It's right behind #2 Tata Motors, although it ranks #6 globally. India's largest car exporter (in terms of value), HMIL doesn't have a global manufacturing footprint unlike Toyota, and half of its production by 2008 will be exported. By 2010, Hyundai wants to be #5 globally.

Mahindra & Mahindra
Proposed Investment: Rs 1,000 crore
Expand capacity at the Nashik facility for production of Renault sedan, Logan, and increase production of its own SUV, Scorpio. Develop an all-new multi-purpose vehicle, Ingenio, by mid-2007.
Capacity by 2010: Approx. 2.5 lakh a year
What's at Stake? Like Tata Motors, M&M needs access to technology, and the Renault tie-up will take care of that to an extent. It already exports the Scorpio to South Africa, Uruguay and Europe, but will remain a niche player. It has a current domestic market share of 6.38 per cent.

General Motors India
Proposed Investment: Rs 1,380 crore
Set up a new, 1.4-lakh-a-year manufacturing facility at Talegaon near Pune, primarily for the small car, Spark. Increase capacity of existing facility at Halol (Gujarat) to 85,000 units a year from 50,000.
Capacity by 2010: 2.25 lakh a year
What's at Stake? The global #1 company is precariously positioned. In India it has just 3 per cent share, but the launch of Spark next year may increase its share significantly. GM is reportedly considering an alliance with Renault-Nissan globally, but its India fortunes will perhaps be tied to the developments at Detroit.

Honda Siel
Proposed Investment: Rs 920 crore
Increase capacity from 60,000 to 100,000 units by 2008, and then to 150,000 by 2010. Launch a small car.
Capacity by 2010: 1.5 lakh a year
What's at Stake? It has less than 5 per cent share of the Indian car market, although it ranks #9 globally. But given that Honda is best-known for its fuel-efficient engines, it may be sitting in a sweet spot. A small car is what Honda needs in India.

Ford Motor India
Proposed Investment: Rs 345 crore
Increase production to 100,000 units a year from 50,000 currently.
Capacity by 2010: Approx. 1.5 lakh a year
What's at Stake? Like GM, Ford is in bad shape in the US. However, its international ventures are profitable, and Ford has been more willing to launch "India-specific" cars. It has less than 3 per cent of the Indian car market, and its plans will remain hamstrung by the parent's performance in the US.

Toyota Kirloskar Motor
Proposed Investment: N.A.
What's at Stake?
A relative late-comer to the Indian market, Toyota wants to grab a 10 per cent share by 2010 (current share: 3.94 per cent). That means a capacity of at least 2 lakh by 2010. Some analysts expect the investment to be closer to Rs 3,000 crore.

That puts India in sharp contrast to developed markets elsewhere in the world. The us is the biggest market and will continue to remain so for a long time, but its growth seems to be stagnating at about 17 million vehicles a year; Western Europe is stagnant too and expected to remain so at least until next year. So, while there's an estimated 20 per cent overcapacity in the industry globally, markets like India and China are still underfed. And as car companies respond to falling profits and flat markets, they'll have even more reason to expand in low-cost countries like India, turning it into a sourcing hub of sorts.

"Our Chairman came to India and he announced that we have to get a 10 per cent market share by 2010"
A. Toyoshima
Managing Director/Toyota Kirloskar

For instance, half of the 600,000 cars that HMIL plans to roll out by 2008 will be exported. Suzuki is weighing a tie-up with Nissan to manufacture up to 350,000 cars in India that will be exported back to Ghosn's company. Its own exports added, by 2010 MUL could be shipping off more than 400,000 cars a year to global markets. So, just between MUL and HMIL as many cars will get exported as what was getting sold domestically barely five years ago. "This", declares Khattar, "is the biggest thing to happen to the Indian automotive industry. We are going to become a global destination for outsourced automobile manufacturing."

In the process, don't be surprised if the industry starts looking more and more global. For, the current stack-up doesn't quite reflect the global order. Suzuki is the market leader by far with a 45 per cent share, although globally it ranks a distant #11. The #2 is Tata Motors, which still is a one-car-platform company, if not a one-car company, and is followed closely by HMIL, rapidly moving up but #6 worldwide (as the Hyundai-Kia combine). GM, Ford and DaimlerChrysler, all loss-making and losing market share in the us, may never become top players in the country, but Toyota and Honda definitely seem intent and capable. In fact, a PricewaterhouseCoopers (PWC) study predicts that by 2010, the combined market shares of the top three manufacturers in the light passenger car market (as opposed to passenger vehicles, which include utility vehicles, multi-purpose vehicles, and luxury cars) will drop from 90 per cent at the end of 2005 to 73 per cent in 2010, with MUL seeing the biggest decline.

Playing Different Stakes

The report may not be way off the mark. Competitive contours of the industry are already coming into relief, and it is clear what's at stake for each of the players. Let's start with Suzuki and Hyundai. When they first came to India, 13 years apart, both were relatively unknown brands, but have since been able to turn India into strategic markets for themselves. In the case of the Japanese company, MUL accounts for 12 per cent of its global consolidated revenues and close to 50 per cent of its consolidated profits and, by 2008, a third of its production capacity will be based in India too. So Suzuki will do everything in its power to keep its golden goose from getting killed. Hyundai, on the other hand, manufactures only in India, outside of Korea, China, Turkey and America. In one sense, therefore, India is doubly more important to it. How are they fortifying their positions? By building massive capacities, with an eye on exports. It's a no-brainer what this sort of scale and marketing flexibility will mean to the two players: First of all, by churning out cars in large numbers, they will be able to spread their fixed costs over larger units and price them competitively in the domestic market.

Should there be a slump in car sales in India, they'll be the last to get hit, since they'll have the export market to cushion the blow. The others may have to drop prices and suffer losses. So, if Khattar and Lheem don't seem ruffled by the PWC study, it's possibly because of this reason. After all, by 2010, when sales double to 2 million, Maruti and Hyundai combined will have a capacity of 1.6 million.

"We will not change the paradigm of the car. But we do hope to change the way people buy cars and make them more affordable"
Ravi Kant
Managing Director/Tata Motors

At the other end of competitive spectrum will be the two Indian players, Tata Motors and M&M. Despite the initial hiccups, the former's indigenously-developed small car, the Indica, proved to be a big hit because it was the only diesel car in its segment. To be sure, MUL did try to dislodge Tata Motors from its perch with a diesel Zen, but the move failed because of the Zen's more expensive pricing. Now, however, it is planning to hit back with a force that may knock Indica's breath out. Suzuki's snazzy Swift is about to hit the market in a second avatar, as a diesel car, rolled off the Manesar plant. It is anybody's guess if the diesel Swift will sidetrack the Indica, but it is obvious that it is something Tata Motors needs to worry about.

But there are two reasons why Tata's passenger car business may not roll over and play dead: One, in an investment that's even bigger than Suzuki's at Rs 10,000 crore, the company is upgrading its entire range of vehicles-from the Indica to SUV Safari to 40-tonne commercial vehicles. At the Pune engineering centre, work is already underway to develop new platforms and a superior, common rail diesel engine. Two, and this is something close to Chairman Ratan Tata's heart, is the Rs 1-lakh car. The company is already testing several prototypes and scouting for a manufacturing location. Tata has promised to roll it out by 2008, and even if it is not exactly priced at Rs 1 lakh, it could be a game changer. It could move thousands of two-wheeler owners to a four-wheeler. Initial estimates put the annual demand at a staggering five lakh. "Will we change the paradigm of the passenger car? No. But we do hope to change the way people buy cars and make them more affordable," says Tata Motors' Managing Director, Ravi Kant.

Maruti, which hasn't phased out the entry-level small car, the 800, for precisely such a day, may prove to be Tata Motors' nemesis all over again. But the latter has some aces it can play. When Tata and his counterpart Sergio Marchionne of Fiat inked a deal back in January this year for the Italian vehicle maker to leverage Tata's distribution network in India, many aspects of the deal were left open, with both men preferring to state that "all options were open." One option that was evidently open was the possibility of Fiat and Tata setting up a joint manufacturing plant in India and evidently (even though the deal has not been signed as yet) the two companies are looking at setting up a joint-plant at Ranjangaon near Ahmednagar. "If, and I wish to highlight 'if', such a plant gets built, we will look at using some capacity from that plant", says Rajiv Dube, Senior Vice President (Passenger Cars), Tata Motors. "Maybe 30,000 units a year could be Tata vehicles." He even confirmed the possibility of the Tatas' leveraging Fiat's diesel engine technology. "Even though we have developed our own in-house common-rail engines for the Indica, the Fiat brand will obviously help us," says Dube.

More than a dozen cars will be launched by the end of next year.

Maruti's New Zen
1.1 litre petrol engine (shared with the WagonR)
Expected price: Rs 3.5-4 lakh

Maruti Swift Diesel
1.3 litre diesel common-rail engine
Expected price: Rs 5-5.5 lakh

Hyundai Diesel Sonata Embera
2.2/2.4 litre diesel common-rail engine
Expected price: Rs 15-17 lakh

Chevrolet Aveo UVA
1.2/1.4 litre petrol engine
Expected price: Rs 4.5-5.5 lakh

Ford Fiesta CNG
Factory-fitted CNG conversion Rs 30-40,000 more than standard models


Mahindra-Renault Logan
1.5/1.6 litre petrol/diesel engines
Expected price: Rs 4.5-6 lakh

Chevrolet Spark
1.0/1.2 litre petrol engine
Expected price: Rs 3-4 lakh

Maruti Sedan (Esteem/Baleno replacement)
1.3/1.5 litre petrol engine/1.3 litre diesel
Expected price: Rs 5-7 lakh

BMW 3/5/7 Series (made in India)
Range of engines: Expected price: Rs 20 lakh
(3 series) Rs 35 lakh (5 series) Rs 70 lakh (7 series)

Skoda Fabia (hatchback/notchback)
1.2/1.4 litre petrol/diesel engines
Expected price: Rs 5-8 lakh

Ford Mondeo (replacing current model)
2/2.5, petrol/diesel engine
Expected price: Rs 15-18 lakh

Hyundai Getz Diesel
1.3 litre diesel engine
Expected price: Rs 5-5.5 lakh

Fiat Grande Punto
1.2 litre petrol/1.3 litre diesel
Expected price: Rs 4-5 lakh

At the least, Tata Motors is no push-over. It acquired Daewoo's commercial vehicles business in 2004, and exports 20,000 Indicas and 30,000 trucks every year to countries in Africa, Europe and neighbouring saarc countries. And that's the sort of strength, the other home-grown automotive major, M&M, plans to get to. It's on the verge of launching the Renault Logan (even though the car is actually a Dacia Logan, a Romanian subsidiary of Renault), and is developing an all-new multi-purpose vehicle, codenamed the Ingenio. After the roaring success of the SUV Scorpio, developed on a shoestring budget of Rs 600 crore, no one doubts M&M's engineering prowess anymore. But Pawan Goenka, Managing Director of M&M, knows better than to rest his ambitions on a sedan, and especially one not built by his company (although the engineering involved in converting the car from left hand to right hand drive was done in-house by M&M). So Ingenio will be important for M&M. "I can't tell you anything about it at present," says Goenka. Still, it will be some time before M&M even gets to where Tata Motors is at present.

Mind The Japs

What the two Indian players, and even the little Japanese and the big Korean, need to fear are Toyota and Honda. But first, a quick look at what the Detroit giants have planned for India. After years of putting China ahead of India (no surprise; Chinese buy 2.2 million passenger vehicles a year, compared to the 1.1 million bought by Indians last year), they have started taking the democratic market more seriously. Ford's former CEO, but current Chairman, Bill Ford came down to India in late 2005 to launch the Fiesta, a car that has transformed the car maker's fortunes in India (its growth has doubled so far this year). Says Ford's India boss, Arvind Mathew: "We could and should have done better in India, and I believe that for a few years after the Ikon, we had a very limited product portfolio. We should have had another vehicle; we should have launched something around 2001."

Its compatriot GM hasn't lacked new launches, but unfortunately they have all been in segments where there are limited volumes. But in August this year, GM announced a $300-million (Rs 1,380-crore) investment in India, just days after declaring a $1.1-billion (Rs 5,060-crore) loss globally for the second quarter. The money will help set up a new plant to manufacture a slightly reworked version of the former Daewoo small car, the Matiz, which has been renamed the Spark. "We have already begun constructing the new plant at Talegaon," says Country Head Rajeev Chaba, adding that by 2008-09, GM would have capacity in excess of 225,000 units. "I don't think you will be able to call us a small player then," he says.

Maybe not, but GM and everyone else included, will have the stars of auto industry, Toyota and Honda, to worry about. "Our Chairman (Fujio Cho) came to India and he announced that we have to get a 10 per cent market share by 2010," says A. Toyoshima, Managing Director of Toyota Kirloskar Motors (TKM). "And that is our target," he says without batting an eye lid. In the same breath, Toyoshima, who's now spent two years in the country, says that it would mean moving into the "volume segment", which is small cars. "Since it is already 2006, we will have to enter the volume segment fairly soon," he says. Typically, Toyota is tight-lipped about its plans, but there's no doubt that it will have to cough up large investments. The annual capacity at TKM's Bidadi plant near Bangalore is a meagre 50,000 units, including Corolla, Camry and the Innova. While there is room to expand at Bidadi itself, it is possible that Toyota decides to set up a new plant elsewhere with a capacity of 200,000, which is what would count as a viable scale for a small car. But what small car will it be? Toyota, of course, isn't telling, but industry watchers expect it to be a new platform that Toyota is developing for markets like India (the engine size will be between 1-1.2 litre to take advantage of India's Excise structure) Experts also estimate the required investment in a new plant of this size at between Rs 2,000 crore and Rs 3,000 crore.

With the economy on a roll, truck sales are clipping.

Sanjiv Bajaj, executive director (Finance), Bajaj Auto, told a group of investors in a Manhattan hotel recently that the company was seriously exploring the 'four wheel' option. But by that he didn't mean a passenger car. Instead, he was talking about light commercial vehicles like the Tata Ace. Italy's Piaggio, which runs a small three-wheeler operation in India, plans to do the same thing. In Germany, Anton Weinmann, Managing Director of MAN Nutzfahrzeuge, says that he wants his new joint venture in India with Abhay Firodia's Force Motors to power his company's exports. DaimlerChrysler decides, after years of mulling over it, to finally launch its commercial vehicles in India. American giant International Trucks also goes for the JV route and ties up with a resurgent Mahindra & Mahindra. Even Hyundai Motor India's Managing Director H.S. Lheem looks wistfully at the commercial vehicles market. Why? The segment grew 10 per cent last year and has soared another 38 per cent so far this year.

But any company that wants a piece of the trucks market must first contend with Tata Motors, which controls a whopping two-thirds of it. "When we launched the Ace in 2005, we created a whole new segment in the commercial vehicles market," says Telang P.M., Tata Motors' Director of small and light commercial vehicles. There's no doubt about that. But as companies rush into the market, they will do well to remember what happened after the last commercial vehicle boom in the late 90s. Warns a Mumbai-based industry analyst: "Even though the economy is doing well and the market is growing, no one should be too exuberant." It's a message worth listening to.

If there's any car maker in the world the industry has learnt to take seriously, it is Toyota. So, if you are a serious player, then you have to have matching strategies. And the Takeo Fukui-led Honda is a serious player. In fact, despite being the smaller of the two players, Honda is larger than Toyota in India. Its Accord and newly-launched Civic cars outsell Toyota's competing models (the Camry and Corolla). When Honda's Chairman Fukui came down to India a few months ago, he declared Honda's hand by saying that the company would invest $300 million (Rs 1,380 crore) in India. Of that, almost $200 million (Rs 920 crore) would be invested in Honda Siel Cars India, reveals M. Takadegawa, who oversees all of Honda's interests in India (including two-wheelers and portable power generators). For starters, the company is doubling capacity to 100,000 cars by the end of 2007 and plans to take production up to 150,000 by 2008. "The first jump in production would easily cover our current line-up, but any further increases especially the one to 150,000 would mean that we will have to think of a volume car (small car). I can tell you that it will not be the Jazz/Fit, but it might be a model that is still being developed," reveals Takedagawa.

Too Good, Too Soon?

Compared to Suzuki, HMIL and Tata Motors, the plans of Toyota and Honda may seem modest. But don't forget that these two companies are best known for making cautious, but carefully calibrated moves. Other auto companies would do well not to see everything through rose-tinted glasses. While no one doubts that the market size will top 2 million by 2010, there are enough potential pitfalls. "...challenges include inconsistent government policies at the state level, low levels of investment in product and technology development and relatively strict emission regulations..." the PWC report says. Adds Sachin Nandgaonkar, automotive analyst at The Boston Consulting Group (BCG): "It is clear that customers have money to spend, and while the fantastic numbers of the first part of the year (20 per cent growth) are clearly unsustainable, 10 per cent year on year growth over the next few years is quite achievable."

However, he does believe that a lot of the numbers being bandied about might be posturing. "While the auto sector is going to remain a prime investment destination, it is not a 1-0 game. It is not as if someone will invest a thousand crore or nothing at all, this is not a crore by crore business," he says. What that means, he explains, is that while the big manufacturers have seen several white spaces in their line-up, they have also seen opportunities in India as an auto-hub, besides feeling the need to protect their turf. "Some of the numbers might be intimidating to rivals and that's why they have been announced, final figures may be smaller," says Nandgaonkar.

At any rate, the investments are unlikely to be vastly smaller than the ones proposed. As far as one can see, there are millions of Indians who are waiting to buy cars. The twin force of growing affluence and the industry's move towards small cars could just make the market explode. And as they say, as long as the wheels keep turning, the money will keep churning.

Sharekhan Investor's Eye - Oct 20

Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,215

Results ahead of expectations

Result highlight

  • Reliance Industries (RIL) has positively surprised on its Q2FY2007 results by reporting a 9.6% year-on-year (y-o-y) growth in its earnings, much ahead of our estimates.
  • The net revenues for the quarter grew by 37.4% driven by a strong 33.1% y-o-y growth in the revenues from the petrochemicals business and a 25% y-o-y growth in the revenues from the refining business.
  • In the petrochemicals business the impact of the shut down at the Hazira plant was more than compensated for by the increased capacities as the revenues grew by 33.1% year on year (yoy).
  • The profit before tax and interest (PBIT) from the petrochemicals business grew by 38% yoy driven by a 57-basis-point expansion in the profit before interest and tax (PBIT) margins.
  • The refining and marketing (R&M) business reported a 24.8% y-o-y growth in revenues driven by a higher throughput and better prices. The PBIT declined by just 3% despite a steep fall in the regional Singapore gross refining margins (GRM). RIL's GRM outperformed Singapore GRM by 90%.
  • With extraordinary expenses of Rs34 crore, a higher tax rate and a lower other income the net profit increased by 9.2% yoy. However, the same was ahead of our expectations by 6%.
  • We like the way RIL has been diversifying into new areas of growth like upstream oil and gas activity, organised retailing and construction of Special Economic Zones (SEZs). However, these areas of business would entail a lot of investment for RIL going forward, and we expect them to generate tremendous shareholders' value.
  • We expect that in near future a substantial upside can come from the higher-than-reported gas find in the KGD6 block owned by RIL (see our report 'It is solid, not gas' dated September 22, 2006). However, we would like to see an official confirmation of the same before taking it into our numbers. We maintain our Buy recommendation on the stock with a price target of Rs1,250.

Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs480
Current market price: Rs428

Growth continues to be robust

Result highlight

  • Satyam Computers Services (Satyam) reported a robust revenue growth of 11% quarter on quarter (qoq) and of 38.7% year on year (yoy) to Rs1,601.9 crore during the second quarter ended September 2006. The sequential growth was contributed by a 10.9% quarter-on-quarter (q-o-q) growth in the stand-alone revenues and a sequential growth of 14.5% in the revenues from its various subsidiaries. The sequential growth of 9.5% in the volume on a consolidated basis was higher than that seen in the previous three quarters.
  • The operating profit margin (OPM) declined sharply by 200 basis points to 22.6% on a sequential basis, largely due to the aggressive annual salary hikes given with effect from July to its entire workforce (a negative impact of 420 basis points) and lower employee utilisation (offshore utilisation declined by 80 basis points sequentially). On the other hand, the lower visa cost (down 125 basis points), foreign exchange (forex) gains (up 30 basis points), improvement in profitability of subsidiaries (30 basis points) and the savings in the selling, general and administration (SG&A) expenses positively affected the margins.
  • The other income component plummeted 62.1% qoq to Rs28.2 crore (sharply down from Rs74.5 crore in Q1FY2007). However, the lower tax rate limited the decline in the net profit to 9.7% qoq at Rs319.8 crore (better than the guidance of over 18% q-o-q decline and consensus estimates of 14-15% q-o-q drop in the earnings).
  • For the full year, the management has revised upwards the annual growth guidance for the revenues and earnings by 3.6% and 6% respectively. As per the revised guidance, the revenues are guided to grow by 34.6-35.1% (Rs6,452-6,476 crore) and the earnings per share (EPS; including the non-cash charges related to the restricted stock options) are guided in the range of Rs20.73-20.81 (35.9-36.4% growth over FY2006).
  • For Q3, the consolidated revenues and earnings are guided to grow by 4-4.5% sequentially. The management has factored in the appreciation of the rupee, as the revenue growth guidance in US dollar terms is higher at 5.6-6.1%.
  • At the current price the stock trades at 20.4x FY2007 and 17x FY2008 estimated earnings (including the non-cash charges for the stock options). We maintain our Buy call on the stock with a price target of Rs480.

Canara Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs320
Current market price: Rs277

Operationally strong results

Result highlight

  • Canara Bank's net profit at Rs362.0 crore was in line with expectations driven by a strong growth in the net interest income (NII) and lower-than-expected operating expenditure.
  • During the quarter the bank's NII grew by 21.6% year on year (yoy) to Rs981.1 crore compared to our expectations of a 16.6% year-on-year (y-o-y) growth.
  • The better growth could be attributed to a 26.8% y-o-y growth in the advances. A sharp improvement in the yields on advances helped the net interest margin (NIM) remain stable despite the cost of deposits moving up.
  • The other income at Rs313.3 crore was lower than our expectations as the same decreased by 20.3% yoy. The fall in the other income could be a result of lower recoveries in Q2FY2007 compared to Q2FY2006.
  • The operating expenses reported a sedate 9.8% y-o-y growth, slightly below our expectations.
  • As a result, the operating profit grew by 5.9% yoy to Rs615.2 crore broadly in line with our expectations as higher NII and lower operating expenses compensated for the higher unanticipated fall in the other income. The operating profit excluding the treasury income grew by 5.6% yoy.
  • The decline in the bond yields has helped the bank to write back provisions on the investment book. The bank has used the opportunity to provide higher provisions on its advances book. Despite higher provisions for non-performing assets (NPAs), the total provisions have declined by 24.3%.
  • With the operating performance in line with expectations and a decline in the provisions, the net profit at Rs362 crore was in line with our expectations.
  • Canara Bank is planning to go for raising hybrid tier I capital funds to the tune of Rs300 crore soon to shore up its Tier I capital adequacy ratio.
  • We have revised our earnings per share (EPS) estimates for FY2007 and FY2008 from Rs32 and Rs39 to Rs36 and Rs47 respectively to take into account the lower provisioning requirement.
  • At the current market price of Rs277, the stock is quoting at 6.0x its FY2008E EPS, 3.2x pre-provision profits (PPP) and 1.2x book value. The stock is available at attractive valuations looking at its strong average return on equity (RoE) of 20.2% over FY2006-08E. We reiterate our Buy call on the stock with a revised price target of Rs320.

Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs325
Current market price: Rs243

Q2 results in line with expectations

Result highlight

  • Nicholas Piramal India Ltd (NIPL) reported an 18.6% quarter-on-quarter (q-o-q) and 29.8% year-on-year (y-o-y) growth in its earnings to Rs63.89 crore for the second quarter ended September 2006.
  • The revenues were up by 21.9% quarter on quarter (qoq) and 74.4% year on year (yoy) to Rs636.86 crore. The 393% jump in the international sales (largely due to the incremental revenue of Rs260 crore flowing from the new acquisitions of Pfizer's Morpeth facility, UK and Avecia) supported by a 22% rise in the domestic formulation business contributed to the revenue growth.
  • The operating profit margin (OPM) declined by 250 basis points yoy to 15.1% largely due to a substantial 650-basis-point jump in the staff cost driven by the integration of the acquired businesses like Pfizer's Morpeth facility, UK and Avecia.
  • During the quarter, NPIL acquired the balance 51% equity stake in its 49:51 joint venture company, Boots Piramal Healthcare Pvt. Ltd (BHPL). In the process it got a one-time income of Rs17.8 crore as compensation for losing three brands, Strepsils, Clearasil and Sweetex.
  • Due to the acquisitions, the depreciation and interest costs were higher by 31% and 58% at Rs7.64 crore and Rs24.36 crore respectively.
  • In terms of valuation, at Rs243 the stock trades at 15.9x FY2008 estimated earnings. We maintain our Buy call on the stock. Considering the recent acquisitions of Pfizer's Morpeth facility, the acquisition of the 51% stake in BHPL etc, we are evaluating the financials and are likely to revise our estimates soon.

Associated Cement Companies
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,050
Current market price: Rs978

Results ahead of expectations

Result highlight

  • In Q2FY2007 the pre-exceptional net profit of Associated Cement Companies (ACC) grew by 228% year on year (yoy) to Rs243 crore, ahead of our expectations.
  • The net revenues grew by a healthy 36.7% yoy to Rs1,373.5 crore driven by a 41% growth in the realisations (bolstered by the reduction in the excise duty) and a 5.6% growth in the volumes.
  • The operating cost jumped by 18.3% yoy on account of a 12% increase in the power and fuel cost, and a sharp jump of 43% in the other expenditure, which included a one-time maintenance & shutdown expenditure of Rs18-20 crore. But this was overshadowed by the steep revenue growth that caused the company's operating profit to increase sharply by 139.2% yoy to Rs366 crore and the operating profit margin (OPM) to expand by a massive 1,150 basis points to 26.7%.
  • The reduction in the interest expense was partially offset by a decline in the other income whereas the depreciation charge increased by 21% on account of the commissioning of the Chaibasa plant and expansion at the Gagal plant.
  • A lower tax provision of 22.5% as against 32.4% in the same quarter last year boosted the pre-exceptional net profit by 228% to Rs243.5 crore.

Cluster: Apple Green
Recommendation: Buy
Price target: Rs565
Current market price: Rs510

A mixed bag

Result highlight

  • Lupin's net sales increased by 21.1% year on year (yoy) to Rs491.1 crore in Q2FY2007. The growth in the top line is in line with our expectations. The sales growth was driven by a healthy growth of 25% in the domestic business to Rs288.6 crore and a 17% increase in the exports to Rs218 crore.
  • The formulation sales advanced by 48.6% to Rs298.9 crore, with a strong growth in both the domestic business and exports. However, the sales of active pharmaceutical ingredients (APIs) rose by a meagre 6.9% to Rs195 crore in the quarter. The subdued growth in the API sales was on account of lower sales of Ceftriaxone bulk drug to Baxter (due to one-time production constraints) and a strategic change of focus from the Lisinopril API to Lisinopril formulations.
  • Lupin's operating profit margins (OPMs) took a hit of 60 basis points to 17.0% in Q2FY2007 mainly on account of a 38% rise in the research and development (R&D) expenditure and a 34.5% increase in the other expenses. Consequently, the operating profit grew by only 17.2% to Rs83.4 crore in the quarter.
  • A substantially higher tax outgo impacted Lupin's net profit, which nevertheless grew by 29% to Rs58.3 crore in the quarter. At the profit before tax (PBT) level, Lupin reported a 32% rise in its profits to Rs79.2 crore.
  • Lupin's R&D expenses for the quarter stood at Rs31.8 crore or 6.5% of sales. This is in line with the company's plans to accelerate the spend on R&D, which it believes will yield results in the future.
  • At the current market price of Rs510, Lupin is quoting at 13.5x its FY2008E earnings estimate. In view of the strong growth potential lined up for the company�a pick-up in the sales of Suprax, a healthy growth in the domestic market and new product launches arising out of the aggressive R&D efforts�we reiterate our Buy recommendation on Lupin, with a price target of Rs565.

3i Infotech
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs244
Current market price: Rs187

Robust operating performance

Result highlight

  • 3i Infotech reported a growth of 12.9% quarter on quarter (qoq) and of 49% year on year (yoy) to Rs145 crore during the second quarter. The two acquisitions (Delta Tech and G4 Software) contributed incremental revenues of Rs4.5 crore during the quarter.
  • The operating profit margin (OPM) improved by 70 basis points to 23.5% on a sequential basis. The sequential improvement in the OPM was largely contributed by the 250-basis-point improvement in the gross margins of the product business to 55% (due to better revenue mix). On the other hand, the gross margins of the service business declined by 100 basis points sequentially to 38.3%. On an annual comparison basis, the OPM has improved sharply by 300 basis points largely due to increased contribution from the high-margin product business.
  • The other income component stood at Rs3.9 crore as compared with Rs4.8 crore in Q1FY2007. The other income declined due to lower gains from the foreign exchange (forex) fluctuations during the quarter (the company had reported Rs1.1 crore of forex gain in Q1).
  • The lower other income, and higher interest and depreciation charges limited the sequential growth in the earnings to 5.6% at Rs22.5 crore (exactly in line with our estimates).
  • The order backlog has grown by 9.9% qoq to Rs322.3 crore, with the product order book growing by 9.8% qoq to Rs160.9 crore and service backlog rising by 10% qoq to Rs161.4 crore. This is the third consecutive quarter of a double-digit sequential growth in the order backlog.
  • Along with the quarterly results, the company announced the acquisition of a 100% stake in a UK-based product company, Rhyme Systems. The acquired company has annual revenues of around $28 million and has OPM of over 20%. The acquisition has been made at consideration of $52 million, which works out to 1.9x its annual revenues.
  • The management has revised the annual revenue growth guidance to Rs620-640 crore (48-53% growth). The diluted earnings are guided in the range of Rs16-17 per share (net of dividend on preference share capital) in FY2007, which amounts to a growth of 69-79% over the earnings of Rs9.5 reported in FY2006. The guidance factors in the impact of the acquisitions already made in the current year.
  • At the current market price the stock trades at 14.4x FY2007 and 9.6x FY2008 revised earning estimates(On the fully diluted equity base of Rs69 crore). We maintain our Buy call with a price target of Rs244.

NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs296
Current market price: Rs207

First-cut analysis of Q2FY2007 results

Result highlight

  • NIIT Technologies (NIIT) reported a growth of 15.1% quarter on quarter (qoq) and of 39.9% year on year (yoy) in its consolidated revenues to Rs219.9 crore during the second quarter of FY2007. Excluding the incremental contribution from Room Solutions (acquired in May 2006), the organic revenues grew at a healthy rate of 10.6% sequentially. The strong sequential growth of 14.9% (as compared with that of 4.3% in Q1) in the BPO business also aided the overall growth in the consolidated revenues.
  • The operating profit margin declined marginally by ten basis points qoq but improved by 120 basis points yoy as compared with 17.7% reported in Q2FY2006. The sequential decline was largely contributed by the one-time transition cost related to the integration of Room Solutions (around Rs1 crore). The adverse impact of the same was mitigated by the savings in the selling, general and administration expenses as a percentage of sales.
  • The other income declined to Rs2.4 crore as compared with Rs3.5 crore in Q1FY2007, largely due to the lower gains from the foreign exchange (forex) fluctuations during the quarter (forex gains of Rs0.4 crore as compared with Rs1.7 crore in Q1). However, the lower depreciation charges and minority interest enabled the company to post an impressive earnings growth of 23.9% qoq and of 79.1% yoy to Rs27 crore (much ahead of expectations).
  • In terms of the outlook, the growth in the organic business is likely to remain robust on the back of healthy fresh order intake of $42 million in Q2, one of the highest in any quarter. The pending order backlog of $87 million is executable over the next one year.
  • At the current market price the stock trades at 9.5x FY2007 and 7.8x FY2008 estimated earnings. However, we would be revising our earning estimates to factor in the higher-than-expected Q2 performance and robust net addition of employees in the first half of FY2007. We maintain our Buy call on the stock with the price target of Rs296.

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs412

Q3CY2006 results below expectations

Result highlight

  • Ranbaxy Laboratories (Ranbaxy) reported a 15.0% quarter-on-quarter (q-o-q) in its earnings to Rs139.3 crore for the third quarter ended September 2006; the earnings saw a six-fold jump on a year-on-year (y-o-y) basis. Though the net profit seems higher, the same is much below the expected earnings of Rs193.2 crore.
  • The revenues are up 26.8% to Rs1,627.10 crore, largely driven by a 25% jump in the US sales, a 39% rise in sales in the European and CIS markets, and a 49% increase in the sales in the Asia-Pacific and Middle-East markets.
  • The operating profit margin (OPM) witnessed a 140-basis-point fall sequentially to 16.8%. The fall was largely due to the company incurring a Rs18.4 crore other operating loss as against an income of Rs75.5 crore in the previous quarter.
  • Further, the company has charged a one-time cost of Rs22.6 crore relating to a settlement of its contract manufacturing arrangement.
  • Finally, with higher depreciation, the loss at the other operating income level and the one-time provision, the net profit grew by 6.5x against the estimated 9.5x. Though Ranbaxy has disappointed the market with below expected earnings, we believe the company would perform well going forward by following a comprehensive business model that involves aggressive new launches, in-licencing, strategic partnering, widening geographical presence etc. Also, its margins will remain firm, thanks to its cost-cutting initiatives. At the current price of Rs412, the stock trades at 19.8x its CY2007 earnings per share (EPS). We maintain our confidence in the stock and reiterate the Buy recommendation with price target of Rs558 .

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