Gandhi Special Tubes, Mannapuram Finance
Sunday, December 30, 2007
Scrip, Offer Price, Current Price, Listing Date, Total Gain, Annualized gain
INDIABULLS FINANCIAL SERVICES 19.00 981.15 Sep 24, 2004 5,063.95 1,550.62
IND. INFOLINE 76.00 1,773.70 May 17, 2005 2,233.82 851.98
BHARATI SHIPYARD 66.00 729.10 Dec 30, 2004 1,004.70 334.90
TULIP IT SERVICES 120.00 1,101.20 Jan 5, 2006 817.67 412.22
PROVOGUE (I) LTD 150.00 1,282.35 Jul 7, 2005 754.90 304.13
PETRONET LNG 15.00 105.30 Mar 26, 2004 602.00 159.92
UTV SOFTWARE 130.00 903.25 Mar 17, 2005 594.81 213.27
NDTV 70.00 459.85 May 19, 2004 556.93 154.00
IDFC 34.00 222.85 Aug 12, 2005 555.44 233.03
GMR INFRA 42.00 249.15 Aug 21, 2006 493.21 362.95
YES BANK LIMITED 45.00 249.60 Jul 12, 2005 454.67 184.19
ABG SHIPYARD 185.00 998.85 Dec 13, 2005 439.92 214.95
ICICI BANK 280.00 1,227.10 Apr 22, 2004 338.25 91.66
INFO EDGE 320.00 1,334.65 Nov 21, 2006 317.08 286.47
GLOBAL BROADCAST 250.00 1,037.85 Feb 8, 2007 315.14 353.93
PUNJ LLOYD 140.00 561.50 Jan 6, 2006 301.07 151.99
ENTERTAINMENT NETWORK 162.00 633.05 Feb 15, 2006 290.77 155.39
NTPC 62.00 241.40 Nov 11, 2004 289.35 92.32
SUZLON 510.00 1,902.35 Oct 19, 2005 273.01 124.25
GUJ. STATE PETRONET 27.00 97.40 Feb 16, 2006 260.74 139.55
VISHAL RETAIL 270.00 946.55 May 4, 2007 250.57 381.08
BANK OF MAHARASHTRA 23.00 78.05 Apr 12, 2004 239.35 64.38
TECH MAHINDRA 365.00 1,141.25 Aug 28, 2006 212.67 158.74
POWER FIN CORP 85.00 262.25 Feb 23, 2007 208.53 245.53
ICRA LTD 330.00 999.95 Apr 13, 2007 203.02 283.91
GAIL 175.80 530.65 Mar 25, 2004 201.85 53.58
RELIGARE ENTERPRISES 185.00 552.15 Nov 21, 2007 198.46 1,857.38
JAGRAN PRAKSHAN 267.00 775.55 Feb 22, 2006 190.47 102.84
3I INFOTECH LTD 50.00 141.95 Apr 22, 2005 183.90 68.35
MUNDRA PORT & SEZ 440.00 1,245.50 Nov 27, 2007 183.07 2,024.85
TANLA SOLUTIONS 265.00 736.95 Jan 5, 2007 178.09 181.07
POWER GRID CORP. 52.00 142.90 Oct 5, 2007 174.81 741.92
GVK POWER & INFRA 310.00 801.10 Feb 27, 2006 158.42 86.17
ONGC 475.00 1,226.75 Apr 8, 2004 158.26 42.44
TCS 425.00 1,080.05 Aug 25, 2004 154.13 46.04
MAYTAS INFRA 370.00 883.35 Oct 25, 2007 138.74 767.29
SHOPPERS STOP 238.00 553.10 May 23, 2005 132.39 50.81
SHRINGAR CINEMA 53.00 122.40 Apr 29, 2005 130.94 49.02
GATEWAY DISTRIPARKS 72.00 162.50 Mar 31, 2005 125.69 45.70
KOUTONS RETAIL 415.00 924.00 Oct 12, 2007 122.65 566.68
AKRUTI CITY 540.00 1,162.90 Feb 7, 2007 115.35 129.15
MOTILAL OSWAL 825.00 1,761.80 Sep 11, 2007 113.55 376.78
ILFS INVESTSMART 125.00 266.50 Jul 27, 2005 113.20 46.63
HOUSING DEV. INFRA 500.00 1,044.75 Jul 24, 2007 108.95 250.11
DLF LIMITED 525.00 1,063.70 Jul 5, 2007 102.61 210.41
BANK OF BARODA 230.00 456.70 Feb 6, 2006 98.57 51.99
DECCAN AVIATION 148.00 280.90 Jun 12, 2006 89.80 57.91
OMAXE LTD 310.00 573.30 Aug 9, 2007 84.94 216.79
EDELWEISS CAPITAL 825.00 1,521.20 Dec 12, 2007 84.39 1,711.20
BIOCON LIMITED 315.00 577.60 Apr 7, 2004 83.37 22.34
INOX LEISURE 120.00 216.95 Feb 23, 2006 80.79 43.69
IDEA CELLULAR 75.00 131.60 Feb 9, 2007 75.47 85.02
PNB 390.00 671.25 Mar 27, 2005 72.12 26.11
PIRAMYD RETAIL 140.00 233.20 Dec 6, 2005 66.57 32.23
MAHINDRA FINANCE 200.00 317.45 Mar 17, 2006 58.73 32.82
CAIRN INDIA 160.00 246.90 Jan 9, 2007 54.31 55.84
BINANI CEMENT 75.00 114.65 May 28, 2007 52.87 89.33
PARSVNATH DEV 300.00 457.45 Nov 30, 2006 52.48 48.50
PVR LIMITED 225.00 325.70 Jan 4, 2006 44.76 22.53
PATNI COMPUTERS 230.00 330.65 Feb 25, 2004 43.76 11.38
ALLAHABAD BANK 82.00 117.25 Apr 28, 2005 42.99 16.08
SPICE COMMU 46.00 62.00 Jul 19, 2007 34.78 77.41
ALLCARGO GLOBAL LOG 675.00 893.25 Jun 23, 2006 32.33 21.26
CENTRAL BANK 102.00 134.65 Aug 21, 2007 32.01 89.19
JYOTHY LABS 690.00 854.55 Dec 19, 2007 23.85 791.31
INDOCO REMEDIES 245.00 302.25 Jan 14, 2005 23.37 7.90
ANDHRA BANK 90.00 105.50 Feb 7, 2006 17.22 9.10
MINDTREE CONS 425.00 494.75 Feb 7, 2007 16.41 18.38
FIRSTSOURCE SOLN 64.00 73.70 Feb 22, 2007 15.16 17.79
CINEMAX INDIA 155.00 170.60 Feb 14, 2007 10.06 11.52
MUDRA LIFESTYLE 90.00 98.65 Feb 9, 2007 9.61 10.83
PURAVANKARA 400.00 429.00 Aug 30, 2007 7.25 21.69
PRITHVI INFO 270.00 288.05 Nov 16, 2005 6.69 3.15
FORTIS HEALTHCARE 108.00 104.50 May 9, 2007 -3.24 -5.03
ROYAL ORCHID HOTELS 165.00 154.60 Feb 6, 2006 -6.30 -3.32
SUN TV LTD 437.50 406.80 Apr 24, 2006 -7.02 -4.16
JET AIRWAYS 1,100.00 987.65 Mar 14, 2005 -10.21 -3.65
IVR PRIME 550.00 452.20 Aug 16, 2007 -17.78 -47.72
HOUSE OF PEARL 550.00 280.90 Feb 15, 2007 -48.93 -56.16
No, I am not a big fan of cheese. Not that I have anything against cheese. There are times when, for want of a good Indian paratha breakfast, I will eat a cheese sandwich. Two of them.
And I don’t really like being photographed and having to say “Cheese” to get that smile. The smile should be there because you feel it inside. If you feel happy, show it. If you’re not in a “smiling” mood, that not so happy face or tiredness should show up. But there are a lot of people out there with a lot of “cheese” smiles. It is the Holidays. And it is time to be merry.
And, if you manage a hedge fund with a “2 by 20” structure, all the more reason to be happy.
A “2 by 20” is another financial innovation that ensures the financial services industry maintains its reputation of harbouring genius and creativity. A “2 by 20” means that the fund manager gets a 2% annual fee on all assets they manage for the client (the normal fee is about 1% per annum) and gets 20% of the profits that are generated in any one year. So, if you manage an India fund and the Indian portfolio is up 60% in the calendar year 2007, the fund manager gets an additional 20% of that 60% - which means an extra 12% per annum. That makes it a total fee of 14% per annum. A regular fund manager would charge 1%. So the hedge funds earn about 14x the fee paid out by the client.
Do people pay that? Sure, remember what P. T. Barnum said, “There is a sucker born every minute.”
Not that the sucker will admit he is one.
Clients will justify the high fee paid by saying that they there fund manager is a genius. He deserves to be paid more than the idiot who earns 1%, the average guy. Problem is, in the last 5 years the number of hedge funds has probably grown from 100 to 30,000. And if there is an average of 10 fund managers and analysts per hedge fund out there, that is 300,000 geniuses.
Somehow, the financial world has created or discovered 300,000 geniuses in the past 5 years. Or maybe the lure of earning 14x the normal fee structure has created some geniuses - and some pretty average people with a good business head.
I am smiling as I write this.
And not saying, “Cheese”.
We missed out on being geniuses.
And we have not been good businessmen.
But it is year end now and, in most major markets around the world, all the fees and this profit-share (called “carried interest”) is based on what happens for the 12 months ending December 31, 2007.
Now if you are a hedge fund manager – or even a normal, regular average fund manager earning that useless 1% annual fee getting an annual bonus for the good work you did in the year – it would be in your interest to see that markets are up, up, and way up.
The 300,000 geniuses in hedge funds have lifestyles to maintain. The average fund manager not smart enough to have made it to a hedge fund also has a lifestyle to maintain. And along with the hedge fund crowd there are all the financial services providers who live off the high velocity trading typically associated with most hedge funds. Brokers, research analyst, back office settlements, lawyers, administrators, a long list that gets to eat different amounts of food in this economic food chain.
No one wants to see an unhappy hedge fund manager. Or a tense regular fund manager. That is a sign of sure trouble and job losses at all the financial intermediaries along the way. Maybe affecting 5 million jobs, globally.
So, it is the holiday season and everyone is out there walking around, visiting the malls. Checking out the new products for sale. Buying gifts. If you cannot afford something, at least you can see it: window-shopping, is what they call it.
But a Thomson Financial news item dated December 26th refers to another kind of window activity: “Singapore shares closed higher Wednesday as some fund managers, returning from the Christmas holiday, resumed their year-end window-dressing following the positive lead from Wall Street.”
Window-dressing. How innocent.
On the same day, CNN reports, “Home prices fell 6.7 percent in October, compared with a year ago, according to the S&P/Case-Shiller 10-city home-price index. It was the largest drop recorded since the index began in 1987. It marked the 10th consecutive month of price depreciation (in USA) and 23 months of decelerating returns.” The CNN report then adds a quote: "No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim," said Robert J. Shiller, chief economist at MacroMarkets, in a statement.
Oil is at near peak levels trading at USD 96 per barrel. Gold is at USD 812 per ounce. The US housing bubble has burst. The European Central Bank jumps in to pump in USD 501 billion as it injects “liquidity”, the Chairman of the Federal Reserve, Ben Bernanke, is willing to drop money from a helicopter to keep the US economy and its citizens afloat. Banks continue to discover minefields and black holes in their balance sheets.
And stock markets are heading northwards as we end the year 2007?
That’s a lot of window dressing going on.
Making everything seem good so that there is a nice profit by year-end. The 20% carried interest is secure. The 300,000 geniuses are safe. The 5 million jobs are secure.
That is a lot of smiling. A lot of “say, cheese” requests from the photographers hired to capture that moment of joy for the year-end report to clients. A lot of window dressing when share prices end higher so that the performance numbers “captured” in the year end financial statements have a lot of plus signs – and fewer minus signs.
Not happy with an “h” but happy with a “cheese” – the cosmetic kind. The one that shows all your investors that the world is fine and yes there are these bumpy rides that come one in a while but, net, net (as in “net” , after I have taken my fees and share of profits from you) the world is fine and dandy.
And the Christmas carol reminds us, “Tis the season to be jolly, la lala la, la la lala la”.
The next two years could be the right time to enter the market for the long-term investor.
The political pundits have very mixed opinions about the UPA's track record on the governance and reform fronts. But there are no two opinions that it has been in charge through the biggest bull market India has ever seen. In May 2004, when it took charge, the Nifty was trading at 1300 levels after a panic collapse. In December 2007, the Nifty is above the 6000 mark.
The UPA can scarcely claim much credit for this since it has essentially done very little. There hasn't been much movement on any policy front except for the SEZ fiasco (negative) and the VAT reforms (positive). There have been a series of anaemic Budgets and consistent foot-dragging on reforms. However, the momentum has been strong enough to drive market returns. I suppose one must give the UPA credit for not doing anything spectacularly stupid. That has been enough to encourage foreign institutional investors (FIIs) who have come in record numbers seeking returns in emerging markets. In the last year alone, FIIs have pumped over Rs 68,000 crore into Indian equities. That has dwarfed the Indian mutual funds, which have been net buyers to the tune of about Rs 5,400 crore in the same period.
There are clouds on the horizon. Global liquidity in the next year could be uncertain because of the fallout from the subprime lunacy. The Indian growth engine is also running into capacity constraints. And, a change in the political equations is likely to happen fairly soon.
Any one of these factors could induce a sell-off in the stock market. Given the presence of all three, a major correction in asset prices is almost guaranteed. Either calendar 2008 or 2009, perhaps both years, may be bearish or see periods of bearishness.
Should one read this as a threat or an opportunity? It is actually both. To take the factors one by one, India isn't decoupled from global markets but it is better insulated than most of East Asia because it does have a large domestic market. If the US goes into recession, India could be viewed as a haven by a certain class of foreign investors. There are huge investment opportunities in India including long-term infrastructure projects that will continue to attract funds.
In terms of corporate earnings, there are two factors that need review. India Inc. is continuing to build capacity so constraints will not be a factor for very long. There may be a one year period of slower growth in earnings and turnovers but capacity will catch up with demand, sooner rather than later.
The second factor is that the consumption-investment mix of the Indian economy is changing. Two years ago, perhaps two-thirds of GDP growth was driven by consumption. Three years later, it will probably be less than 50 per cent. That change is already reflected in the manner in which smart money has moved out of perennials like FMCG and into core sectors such as power.
The political factor is the most difficult to assess. One can state with a high degree of confidence that the next general elections will put a coalition in charge. However, the shape of that coalition is impossible to predict. In the short-run, political change will have a negative impact on prices. If there is a Deve Gowda-Gujral situation of fast-changing ineffectual governments and accidental PMs, there could be a long-term bear market.
However, if the UPA and its successor leave plans that are already in motion alone, growth is likely to continue. Over the next five years, infrastructure capacities in almost every sector are set to double, in certain cases, nearly triple. In most cases, autonomous regulatory authorities are in charge. If the NHAI, the TRAI, the new PNGRB, the TAMP, the yet-to-be-installed air regulator, etc are allowed to perform their tasks, a change in government won't matter that much. In practice we all know that there will be some political interference but ideally, it would be minimal.
This is why there is a real opportunity for the long-term investor. If you intend to stay invested for a decade or more, surely you would like to start with a couple of years of depressed prices and continuing growth? That's when you can create your base portfolio. I think the way that things are panning out, 2008-09 could be that period.
The trading activity in the final hour on Friday signalled bullishness, going ahead. However, if the past is any indication, the markets tend to have one good week, only to follow it up with weakness in the subsequent week. What happens on Monday will thus be a trend setter.
The markets opened on a weak note on Friday, the first trading day of the new January series, with the bears pulling the benchmark indices close to their support levels.
The reversal came towards the close, with the Nifty moving up from the day’s low of 6,022 to close at 6,080. The late charge should continue on Monday, the last day of the calendar year.
The Nifty is expected to hit its all time high of 6,185 and the Sensex should surpass 20,500. Going ahead, the Nifty is likely to target 6,300 and 6,350 levels and the Sensex should see 21,400 and 21,600.
According to a technical analyst at Motilal Oswal, the uptrend is expected to resume from the January series. The Nifty is expected to move towards the initial target of 6,185 as the undercurrent is still strong.
On a weekly chart, the spot Nifty has already crossed the previous week’s close of 6,040 and is now at the verge of testing the all-time high of 6,185.
An increase in Call options OI was seen at 6,100, 6,200, 6,300 and 6,400 strikes, indicating that operators were buying at-the-money Calls and writing out-of-the-money Call options.
Put options added 5.96 lakh shares at the strike price of 6,000, pointing to this as the support base for the Nifty in the near future.
Among the Nifty stocks, long OI build-up was seen in stocks such as Hindustan Unilever, National Aluminium, Punjab National Bank, Ranbaxy Laboratories, Reliance Energy, Tata Power and Tata Steel. Fresh shorts were seen in Bharti Airtel, Dr Reddy’s Labs, GSK Pharmaceuticals, ICICI Bank, Infosys Technologies, ONGC and Suzlon Energy.
The markets witnessed a smart rally last week with the benchmark indices, the Sensex and Nifty, surging 5.5 per cent each.
The Sensex began the week with a bang on Monday by rising 691 points, and thereafter rallied past the 20,000 mark to touch a high of 20,324. It finally ended with a gain of 5.5 per cent (1,044 points) at 20,207.
The index seems poised to test new highs, technically. However, unfavourable external events may trip the current upmove.
The Sensex may face resistance around 20,595-20,715-20,835 this week, while it may find support around 19,820-19,700-19,575 on the
The Nifty rallied to a high of 6,111 before settling with a gain of 5.4 per cent (313 points) at 6,080.
The moving average convergence divergence (MACD) crossed the signal line, which indicates bullishness.
The Nifty’s short-term (20 days) moving average is 5,928 and the mid-term (50 days) moving average is 5,786. These should act as support levels in case of a decline.
The Nifty is on firm ground and is likely to gain momentum above 6,150. Its support and resistance levels are placed at 5,950-5,910-5,870 and 6,210-6,250-6,290 respectively.
The weekly support and resistance levels are fibonacci retracement levels of the previous week’s movement, viz 38 per cent, 50 per cent and 62 per cent respectively.
Investors with a two-three year perspective can consider fresh exposures to the Amtek Auto stock at the current market price of Rs 425. The stock, which trades at around 14 times the estimated FY-08 earnings, has cooled off considerably from its 52-week high of Rs 526 recorded in end-October. A diversified product and client base, thrust on exports and foray into the high-margin aluminium castings business inspire confidence about the company’s earnings prospects. Any decline in stock price related to the broader markets can also be used to step up exposure.
Business and Financials
Amtek Auto is in the forgings business, manufacturing engine, transmission and suspension parts and assemblies for the automobile industry. It derives 60 per cent of its revenues from clients in the four-wheeler segment. The two-wheeler and commercial vehicle segments chip in with the rest. Top customers include Maruti, Hyundai, Hero Honda, Bajaj Auto, Tata Motors, Ford and General Motors.
For the quarter-ended September 2007, standalone sales stood at Rs 311 crore, growing by 32 per cent on a year-on-year basis. While strong growth from key customers such as Maruti aided domestic sales, export sales got a boost from more outsourcing of components by its overseas subsidiaries.
A decline in overall capacity utilisation levels due to the ongoing capacity expansion took a toll on the standalone operating margins, which fell to 27.2 per cent from 30.7 per cent in the corresponding previous quarter.
Acquisitions to drive growth
The buoyancy in the domestic automobile industry, coupled with the increased outsourcing by global auto majors to low-cost countries such as India, will be the key revenue driver for the company. Besides, the company’s strategy of acquiring front-end capacities near global OEMs (original equipment manufacturers) in the US and European markets will also drive growth. This is because these acquisitions help the company adopt a ‘dual shore manufacturing model’ under which offshore locations could be used as a technical hub with emphasis on product design, development and manufacture of high-value critical components, while Indian facilities could be used in high-volume production due to their low-cost advantage. For the company, this model brings in three benefits. One, optimisation of costs and, two, product diversification and, three, added clientele.
The company’s acquisition of the assets of the UK-based JL French (Witham) Ltd in June this year is an extension of this strategy. This acquisition has added JLF’s aluminium casting business to Amtek. This augurs well for the company as OEMs are looking at substituting engine and transmission parts made of iron with aluminium, as it is lighter, stronger and more fuel-efficient.
Moreover, aluminium components also bring in better margins. During the first quarter, the company has commissioned a new facility at Ranjangaon, Maharashtra, for manufacturing aluminium castings with a capacity to produce 40,000 MT by FY-08. It plans to shift JL French’s manufacturing lines from the UK to India over the next 2-3 years.
The company is also expanding its forging and machining capacity which is expected to be completed by FY-08. This will help the domestic operations cater to 40-60 per cent of the overseas requirements, from the 20-40 per cent levels now, paving the way for increased localisation and, hence, reduced costs.
While the JLF acquisition has given access to customers such as Peugeot, Land Rover and Jaguar, the acquisition of the precision machining companies — Triplex components and Kelton — based in the UK in November this year has also brought in customers such as Dana Spicer, Honeywell, Perkins, TRW and Toyota (UK).
Likely boost from exports, re-rating
The company derives around 55 per cent of its revenues from overseas and given the increasing opportunities for outsourcing, exports are likely to receive a fillip. Besides, a majority of its exports are to Europe with the US bringing in less than 5 per cent of the revenues thus reducing the risk of losses due to depreciation of the dollar against the rupee.
The consolidation of Amtek Auto with Amtek India, a group company manufacturing castings, is also on the cards. Synergies from consolidation such as product line expansion, economies of scale and settlement of issues relating to transfer pricing between the group companies (Amtek India and its subsidiary Sigmacast Iron supply castings to two of Amtek Auto’s subsidiaries), are expected to trigger a re-rating for the stock.
Investments with a one-two year horizon can be considered in the HCL Infosystems stock, considering its strong position in the domestic IT infrastructure market and reasonable valuations. At Rs 272, the stock trades at 14 times its estimated 2007-08 earnings.
This is at a discount to competitors such as CMC, partly explained by the low earnings before tax, depreciation and amortisation (EBITDA) margins (about 4 per cent) that HCL Info enjoys. But considering its integrated operations across the IT hardware segment, strong deal wins and reasonable growth expected from the relatively new forays, margins could improve.
The company is in the entire gamut of IT infrastructure offerings such as desktops, laptops, servers, storage solutions, security, and networking solutions. This integrated operation helps the company cater to a wide range of clientele.
Computer sales holds promise: The company has its own brand of desktops and laptops. Over the last three-four years, HCL Info has managed to expand rapidly and capture an IDC-estimated market share of 15.5 per cent in the desktop and 7.4 per cent in the laptop segments in the Indian market.
Compared to other MNC players in these segments, HCL Info’s pricing is fairly aggressive and may position it to capture further market share, considering that PC penetration is very low in India. Several governmental agencies have heightened spend on computing devices, presenting a potential market.
As the cost of hardware components that are imported to assemble desktops and laptops reduces, the company may be able to further bring down costs, expand margins or, alternatively, play the volume game. A substantial increase in the relatively high-margin laptop sales may also help margins.
Nokia GSM phone sale rights: The company had rights to distribute Nokia’s GSM phones through HCL Info’s channel and retail stores.
Nokia’s position among the top mobile handset players in India helped the company in terms of revenue growth. But this contract has been re-negotiated in 2006 and HCL Info will be transferring 50 per cent of the country-wide distribution area to be handed back to Nokia by this year-end. The transition period has seen a blip on the revenue front. But with GSM phone sales expanding at a rapid pace, growth may continue at a reasonable pace once the transition-related issues are sorted out.
Increased focus on system integration: The company seems to have increased its focus on the high-margin system integration projects. Recent deal wins such as that with BSNL for convergent billing and setting up data centres, the setting up of VoIP network for Defence through BSNL, valued at over Rs 500 crore each, reiterate this point.
This apart, HCL Info has strong client relationships with PSU banks, e-governance agencies, and the power segment. All these segments are likely to witness increased IT spends in the domestic context, which the company is well-positioned to tap.
In addition, media and entertainment sectors have also been added to the portfolio. This includes a presence in the high-growth FM station business, where it provides radio design and implementation services. TV broadcasting is another area where the company has won a deal.
These apart, new forays have been made into segments such as railways, airports, retail, healthcare — all of which have growth potential.
Other new forays: The company has obtained rights to sell a wide range of gadgets and digital equipment through its retail outlets. These include the highly successful iphone, Kodak’s digital cameras, Toshiba’s laptops and the rights to sell Dish TV packages as well.
These offerings, though at a nascent stage, are expected to gain momentum in the near future. The company has also forayed into the training business with a focus on hardware. With a wide-ranging product experience, this new venture of HCL Info can be watched for sustainable revenues.
Risks: The company may face stiff competition from players such as CMC, Datacraft and Wipro Infotech, which may create margin pressures. The company’s operations are import-intensive as it imports products for reselling. Any depreciation in the rupee, after the significant appreciation in recent quarters, is a risk to margins.
As the reliance on government clientele increases, which is a strong possibility, the receivables cycle may be longer, thus increasing working-capital requirements.
Investors with a long-term perspective can retain their holdings in the stock of Gujarat Apollo Industries (GAI), a manufacturer of road construction equipment. Increased investments towards the development of road infrastructure combined with GAI’s timely capacity expansion suggest good earnings prospects.
At the current market price of Rs 364, the stock is valued at about 15 times its likely FY-09 per share earnings on a fully diluted basis. While this does not appear very cheap, the valuations are underpinned by strong prospects and the healthy return ratios of the company. Investors can utilise broad market corrections, if any, to take fresh exposure to the stock.
Road to success
The various road development initiatives undertaken by the government are likely to have a positive impact on GAI’s revenues. The Eleventh Plan, entailing an investment of about Rs 2,09,400 crore in road infrastructure projects points to strong order flows. Road construction equipment contributes about 21-23 per cent of the total project cost in road projects, indicating the growth potential of the road equipment sector.
GAI could, thus, emerge as one of the leading beneficiaries of such a positive investment climate. The company’s market share of about 30 per cent in the asphalt road construction equipment segment should help it capitalise on the growth in this segment. Besides this, GAI’s increasing exposure to the overseas market also suggests more diversified revenues and healthy future prospects.
With its established clientele spread across countries such as Saudi Arabia, Australia and African countries, the company could benefit significantly from the increased overseas demand for road construction equipment.
An increased exposure to such markets may improve margins as margins tend to be superior in such projects; it also reduces the company’s vulnerability to any blips in domestic activity.
Gujarat Apollo’s strategy of adding to its product portfolio, to expand its addressable market is also promising. It has recently concluded a technical know-how and licensing agreement with a European Company for manufacturing of two models of soil compactors and three models of tandem vibratory compactors.
The management expects this range of products to start contributing to revenues from the first quarter of FY-09. Besides this, the recently added range of crusher and mining equipment also strengthen GAI’s product offerings.
Addition of rollers and crusher holds potential given their larger addressable market size. Further, the company has embarked on a capacity expansion drive and plans to almost double its capacity from the current levels.
The management plans to use the proceeds from the recent disinvestment of a 49 per cent stake in subsidiary — Johnson Screens (India) (pegged at about Rs 25.8 crore) to fund its expansion plans.
Robust earnings growth
For the quarter ended September 2007, the company recorded an earnings growth of about 65 per cent on the back of 39 per cent increase in revenues. Operating margins for the quarter have expanded by 3.2 percentage points to about 22 per cent. This could be attributed to lower raw material cost and improving efficiency. On a long-term basis, the company has recorded a compounded earnings growth of about 32 per cent over the last four years.
Exports have also risen significantly to the current levels of about 40 per cent of revenues. Going forward, margins may expand further on the back of better realisations supported by a firm demand scenario. GAI’s focus on increasing exports may also help.
Slowdown or delays in spending on road development and a rise in interest rates remain key risks to GAI’s business. The entry of MNC players with better product offerings or with attractive price points may also affect GAI negatively. For investors, liquidity constraints could also pose a challenge since GAI is a small-cap stock.
It is that time of the year when we take a look at the twists and turns that lie ahead for the Sensex. When we did this exercise last year, our preferred view was that the Sensex would move sideways between 11,000 and 15,400 in 2007. Our outer limit for 2007 was 19,550, but we had added that ‘speculative excesses’ would accompany a move to these higher levels. The Sensex has moved beyond the upper limit.
The move past 15,400 proved beyond doubt that the long-term uptrend has resumed from the June-2006 trough of 8,800. But this move appears to be the final (fifth) part of the long-term move that commenced in May 2003. This final leg can take a few more months to complete during which the Sensex will move between 17,500 and 24,800. We place the outer target for the Sensex in 2008 at 27,145.
To understand what can happen after the completion of the fifth wave from the May-2003 trough, we need to step back and take a longer term view, from 1980. It is then evident that this long-term bull market began way back, in 1988. Following a protracted correction between 1994 and 2003, a fresh up-move commenced in May 2003. The swiftness and the gradient of the move from May 2003 have all the characteristics of a third wave.
Third and fourth wave
Once the third wave from 1990 completes, our market could launch into a corrective fourth wave. Whether it will be another swift and sharp correction akin to May 2006 or if it will be a long-drawn one on the lines of the correction from 1994 peak remains a conjecture at this point. This correction can make the index test 15,200 or 13,700. But the long-term outlook (next 10 years) for the Sensex remains positive as the index will resume its upward trajectory after the completion of this long-term correction.
To put it simply, the first few months of 2008 could be fairly benign with the Sensex moving within the 17,500-24,800 band. But the index can form a significant peak anywhere between 20,000 and 25,000 and a long-term correction can then ensue. The initial support in the event of a major correction is 16,000. If this is breached, 15,200 would be on the cards.
We will revisit these forecasts if the upper (24,800) or the lower limit (15,200) for the year is breached by a significant margin.