Run-up to Budget 2007-08
It's that time of the year again when wish lists are drawn by all and sundry and expectations are high that at least some of the wishes will be granted in the Union Budget. Yes, in about two weeks from now, the incumbent United Progressive Alliance (UPA) government will present its last but one budget before it goes to general parliamentary elections in CY2009. Needless to say investors will be hanging on every word of P Chidambaram when he presents the budget for FY2008 on February 28, 2007. That’s because they will be eager to see if the finance minister uses the opportunity to push forward fiscal reforms and announce well-directed spending on infrastructure, education and the farm sector. With the budget around the corner, we take this opportunity to present our pre-budget report.
STOCK UPDATE
Tata Motors
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,075
Current market price: Rs869
Deepening relationship with Fiat
Key points
- Tata Motors (TAMO) has entered into an agreement with Italy’s Fiat to provide the design and technology for manufacture of pick-ups in Argentina. Fiat will manufacture and market it under the Fiat brand name. TAMO would get a licence fee through this venture, both as a one-time fee and as sales dependent fee.
- TAMO has also signed a memorandum of understanding (MoU) with Iveco to analyse the feasibility of their co-operation, across markets, in the area of commercial vehicles.
- The joint venture agreement with Fiat for manufacture of cars, engines and transmission components has commenced trial production. The first batch of cars will roll out in early 2007. This would require an aggregate investment of Rs4,000 crore over a period of time.
- TAMO has bid for a 43.5% stake in Punjab Tractors together with the Fiat group’s CNH (New Holland Tractors India). This would mark TAMO’s entry into the tractor business and would catapult the TAMO-CNH combine to the third spot in India’s tractor market with CNH’s market share of 5.23%.
- We believe all these developments would have positive implications for TAMO in the long term. At the current market price of Rs869, the stock trades at 12.3x its consolidated earnings and at an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.4x. We maintain our Buy recommendation on the stock with a price target of Rs1,075.
SECTOR UPDATE
Cement
Dispatch growth slows down
Key points
- The industry dispatches for January 2007 have grown by 7% year on year (yoy) to 14 million tonne. The growth is much slower as compared with that in January 2006 when dispatches had grown by 16%. The growth has been slower because very few players have added capacity in the last one year and therefore been operating at full capacity.
- Amongst the regions, the north witnessed the highest dispatch growth of 14% yoy followed by the east, which grew by 9% yoy, and the western region, which grew by 8.6% yoy.
- Industry utilisation level continues to rise, breaching the 100% mark and settling at 102%, driven by the northern region where utilisation level stands at 110%.
- With all the three demand drivers, ie the housing, industry and infrastructure sectors, showing strong signs of growth, the consumption of cement is expected to grow at a compounded annual growth rate of 10-10.5% for the next three years.
- From January 1, 2007 Tamil Nadu implemented value-added tax (VAT), reducing the sales tax rate in the state from 14.5% to 12.5%. We maintain our earlier view that the savings that the companies will enjoy on account of the reduction in the tax on the selling price will be offset by the tax that will now be payable on the freight component.
- The prices have started rising in the south post-monsoons. Andhra Pradesh and Tamil Nadu witnessed a Rs10-per-bag increase in January. In the north, Delhi and Jaipur have witnessed a Rs5-per-bag hike in the same month. Dealers expect cement prices to rise across the country in the next couple of months as the construction activity reaches its peak.
- We believe that the import duty cut on cement from 12.5% to nil will not have any impact on the cement prices, as the landed cost of bulk cement translates into a 25% premium to the current national average of Rs205 per bag.
- The government has hinted that in the upcoming budget it might take measures to reduce the input costs for cement to contain the prices. On the other hand, it has ruled out any excise duty cut on cement.
- Taking cognisance of the third quarter performance of cement companies, we have upgraded our FY2007 and FY2008 estimates for UltraTech Cement, JK Cements, and Orient Paper and Industries. We have upgraded only the FY2008 estimates for Madras Cement. We also strongly believe that the south-based cement companies, after a lacklustre third quarter performance, would bounce back with better results in the fourth quarter.
- We maintain our positive view on the sector and believe that the companies that have taken a lead in announcing capacity expansions, such as Grasim Industries, Shree Cement, Jaiprakash Associates, UltraTech Cement and Madras Cement, will benefit the most in a scenario of rising prices. We rate Grasim Industries, UltraTech Cement and India Cements as our top large-cap picks in the sector. Among the mid-caps, we like Shree Cement and Madras Cement. We also like Orient Paper and Industries, and JK Cement on account of their compelling valuations, which are much less than the sector average.
MUTUAL FUND: INDUSTRY UPDATE
Equity AUMs rise in line with market movement
The AUM for equity funds increased by 2.2% to Rs146,749 crore in January 2007. The rise in the equity AUM was in line with the 2.2% upward movement in the market.Download here