Sunday, May 11, 2008
The last few weeks have been quite good for the markets in general. There has been a positive trend in the markets thanks to a push from the companies' results (many large companies have declared a good set of numbers) as well as the Reserve Bank of India's (RBI) Credit Policy.
The market volumes are good and advance-decline ratio is in favour of advances. Foreign institutional investors (FII) numbers shows that they are buying in the market but their buying is limited to certain selected counters only.
The inflation rate is above seven percent from the last one month. Both the RBI and the government have made some key announcements last week to control the soaring inflation rate.
These are the highlights of this week's announcement made by the government and RBI:
Cash reserve ratio
The RBI raised the cash reserve ratio (CRR) by 25 basis points to 8.25 percent with effect from May 24. This 25 basis point hike is in addition to the 50 basis points CRR hike announced a couple of weeks ago, which is to be implemented in two 25 bps installments on April 26 and May 10. The RBI has left the repo and reverse repo rates unchanged at 7.75 percent and six percent respectively
The RBI revised the GDP growth target downwards to 8-8 .5 percent.
The RBI has revised the Wholesale Price Index (WPI) based inflation range upwards from 4.5-5 percent to 5-5 .5 percent.
Duty on steel
The government has imposed an export duty on steel exports. This will impact exporters operating in steel sector negatively.
IT tax holiday
The government has extended the tax exemption for IT and BPO companies under the Software Technology Parks of India (STPI) upto March 2010. This is an extension for one more year from the earlier deadline of March 2009.
The markets and analysts were pleasantly surprised by these announcements by the RBI and government. With the inflation rate hovering above seven percent and showing no signs of cooling off, many analysts and market participants were expecting the RBI to take harsh steps.
They expected the central bank to increase the repo rate by at least 25 basis points. But the RBI left the reverse repo and repo rates unchanged, surprising many in the market. Raising the CRR in steps (0.5 percent earlier followed by 0.25 percent) clearly suggests that the RBI was thinking of a larger CRR hike earlier and decided to spread out the impact on the markets.
Analysts believe the inflation rate will continue to remain high for a few weeks due to the base effect from last year and rising commodity prices (especially crude oil) in global markets. Many analysts are not comparing the WPI index from their last year levels but are looking at week over week tick movement in the WPI index.
The current inflation level of seven percent is factored in by the market. Analysts believe that the markets will not fall much if we get a couple of weeks with a seven percent plus inflation numbers but the market may inch up a bit if the rate of inflation goes below the seven percent level.
Currently, markets have factored in most of the positive news. Since the results season has almost come to an end and not many news bits are expected to be coming out in the next couple of weeks, there could be some correction or consolidation in the markets. It would be a good time to look at your portfolio and pick some stocks which have potential in the current market conditions.
Via Economic Times
Fitch Ratings commented on Friday that it will monitor closely the disclosure by Bharti Airtel (Bharti, `BB+`/Stable) that it is in discussion with the shareholders of South Africa-based telecommunications company, MTN Group (MTN, National long-term rating `A+(zaf)`/Stable), regarding the potential acquisition of a stake in the latter. Fitch understands that the discussions are at a preliminary stage and that Bharti has not yet made any commitment to purchase a stake in MTN. However, in the event that Bharti does end up successfully acquiring a major stake in MTN, then depending on the extent of debt financing used to fund the acquisition; Fitch cautions that its ratings could come under downward pressure.
Given the early stages of the discussions, the likelihood of other competitive bids being placed, and the associated uncertainties surrounding any investment in MTN or its terms, Fitch has refrained from taking any formal rating action at this stage. The agency is monitoring this situation and would take rating action as warranted by any developments. Should the discussions currently underway lead to Bharti acquiring a stake in MTN, Fitch would consider the investment involved, the financing structure and the level of cash flows from MTN that would support any incremental debt assumed by Bharti for the transaction prior to reviewing its ratings.
South Africa-based MTN is one of the largest global systems for mobile communications (GSM) operators in Africa and the Middle East by number of subscribers. At end-December 2007, it had 61 million subscribers across 16 African countries, 5 countries in the Middle East and operations in Cyprus. MTN is also listed on the JSE (JSE). Currently, 63.7% of MTN`s shareholding structure is free float, with the largest individual shareholders being Public Investment Corporation (13.5%), Newshelf 664 (13.0%), and M1 (9.8%).
Shares of Bharti Airtel gained Rs 14.6, or 1.76%, to settle at Rs 842.2. The total volume of shares traded was 1,505,664 at the BSE. (Friday)
After seven years of hectic activity, the Bangalore real-estate market is hesitant, perhaps more on the part of bulk investors than serious home buyers. Blame it on the rising inflation or the economic crisis in the US. Like other locations, Bangalore real-estate, termed ‘hot’ by leading realty consultants, seems to have cooled off in the last few months.
Though property prices have not seen a dip, home sales has come down “at least by 50 per cent”, say consultants. According to Mr Karun Varma, Managing Director, Jones Lang LaSalle Meghraj, a real-estate services firm, in Bangalore, “Certain Grade ‘A’ developers have experienced a sustained drop of around 50 per cent on the monthly level of bookings compared to what they enjoyed prior to December 2007.”
First-home buyers, it seems, are still interested in the market, though it is the second- or third-home buyers who are shying away.
This is because of the overall economic scenario, the US economic crisis, sub-prime issue, etc, reasons Mr Farook Mahmood, Founder-President, National Association of Realtors - India. “A certain percentage of these buyers are working in the US, and hence an economic crisis there will have an impact here too,” he says.
However, 2007 and 2008 have not been so bad, says Mr A. Balakrishna Hegde, President, Confederation of Real Estate Developers’ Association of India (CREDAI), Karnataka. Statistics show that 26,000 units were sold in 2007, higher than in 2002-2004 whenabout 22,000 units were sold each year. But it is a far cry from the peak sales of 30,000-32,000 units a year in 2005 and 2006.
Of shark and remora
Mr Varma makes an interesting analogy: Investors buying residential units in bulk are like ‘sharks’ while retail investors are the ‘remora,’ a fish that stays close to sharks. Typically, in a bullish phase, the shark invests in projects at competitive prices. As the market drops, the developer holds on to stocks till the market ‘corrects’, to give him acceptable profits.
But the ‘shark’ sells out at wafer-thin margins, dragging the market to the depths. Thus, in addition to immediate profit booking, he rolls his cash into more units for a future profit. The ‘remora’ is more likely to align with the developer and hold on to stocks. In fact, as the ‘shark’ sells, the ‘remora’ flocks to pick these units up.
While the sharks could have a drastic impact on the market if left to themselves, the remora’s decision does not have as drastic an effect on the market.
Also, the developer would be able to influence a retail investor better than the large investor in such a phase. “Thus, it is not difficult to see who the favourites would be for the developer in the present circumstances,” says Mr Varma.
But this comes with a price… developers offer competitive pricing and other sops to retain the retail investors’ support and keep large investors away.
So, repeat unit buyers get pre-launch offers and other marketing sops to get wooed into investing further into the developer’s portfolio.
Mr S.N. Nagendra, Senior General Manager-Karnataka and Goa, HDFC, cautions, “It’s a little risky to be selling to investors in such a market, and many first-home buyers have adopted a wait-and-watch approach.”
Prices are perceived to be high, and so they are a little hesitant, he adds.
A recent report from Cushman & Wakefield, real-estate services firm, says that end-users and investors over the past six months have adopted a cautious approach towards purchasing residential plots, apartments, villas, etc, in Bangalore, which is quite evident from the relatively lower collection of stamp duty and registration fees by local authorities.
‘Correction, not crash’
However, reputed developers offering homes in booming locations in the city are still selling. In fact, some of them have upped their pricing by 3-7 per cent, with South and South-West homes costing 3-5 per cent more. In the North of the city, prices have gone up by 8-12 per cent, says Mr Hegde.
Disbursements have bettered expectations, Mr Nagendra adds, indicating that this is a correction phase and not a crash as witnessed in 1996. Mr Mahmood says that the market currently is more need-based and mature; there’s no need to panic, he adds. He expects prices to head north again in the third and fourth quarters, and recommends buyers make their deals then. There’s a 10 per cent more supply than demand in the market now but this should get absorbed by the last quarter of 2008-09.
According to the Cushman and Wakefield report, capital values appreciated marginally by 1-2 per cent across micro markets in January-March 2008 on account of increasing demand, primarily from a migratory and working population. It is expected that both capital and rental values in the city will continue to stabilise during the next few months across select micro markets (Whitefield, Kanakapura Road, Outer Ring Road) with a large number of investment-based properties expected to see softening of rates over the next six months.
Investments with a one-two year perspective can be considered in the shares of MIC Electronics, considering the bright prospects for its LED (light emitting diode) display business and potential to sharply scale up earnings. At Rs 905, the stock trades at 30 times its estimated current year earnings. This appears justified considering the company’s improving margin profile (profits have more than trebled in the nine months ended December 2007 compared to the same period in the previous year) on the back of increasing contribution from the LED display business, in which there are not comparable listed peers.
MIC has two key business segments — media and infotech and communication. The media business provides LED video, graphics, text displays and lighting solutions for “out-of-home” advertising at stadiums, billboards and malls as well as for various applications in airports and railway stations.
The infotech and communications segment makes telecom network products, WLL terminals, handheld computers and offers software solutions associated with network management and computer telephony.
The infotech and communication business, which contributed over 65 per cent of revenues even a couple of years ago now contributes less than 40 per cent.
This is due to the high-margin LED business gaining considerable momentum in terms of order wins with both national and international clients. MIC manufactures LED displays in India, with LED and other raw materials imported from NICHIA Corporation, Japan. MIC’s revenues and net profits have grown by a CAGR of 53 per cent and 100 per cent respectively in the last five years.
LED business holds the key
A 2008 report of FICCI-PWC on out-of-home advertising estimates the market size to be Rs 1,250 crore for 2008 in India alone with a growth of 25 per cent last year. MIC Electronics, with its countrywide reach and established relationships with government and other clients, appears well-placed to tap into this market opportunity. The pace of mall and large format retail store rollouts is likely to remain quite strong in India over the next few years, with home-grown retailers, large realty companies and international retailing giants all readying pan-India forays.
This points to strong demand for LED billboards, which are deemed a better mode of display than incandescent bulb lighting, and suggests sizeable opportunities for this business. This apart, higher offtake from the Railways (the Railway budget has indicated expansion in LED displays in stations around the country) and airports, also present domestic opportunities for growth.
MIC and InfoSTEP (its subsidiary) have jointly developed a Global Digital Billboard Exchange Solution (GLOBIX) that enables clients to optimise the utilisation of their advertisement space. This solution has been launched in the stations of the Delhi Metro Rail and may be replicable in high potential markets such as the US, where adoption of such technology may be higher.
This apart, MIC has also inked a JV with Latin America Futbol Corporation — Sports LED Media — to focus on LED solutions for stadiums across the world. Initially, the JV would focus on Latin America and Europe, two large markets where football is a popular sport with several events through the year.
This presents potential for LED displays by way of perimeter advertising, billboards and other forms of visual displays. If the JV manages to tap even a part of the market, the company would benefit by way of revenue-share arrangements.
Though the telecom equipment manufacturing business is a low-margin business, MIC has two potentially strong areas of operation. First is the inter-operator billing solutions that it provides, which may hold potential as the number of operators in the telecom segment expands.
Second, the proposed forays by leading telecom operators such as Bharti Airtel and Reliance Communications into the IPTV segment may expand the market for products in the broadband DLC for triple play (voice, data and video).
Competition in the domestic market from players such as Barco and in the international market from Barco, Daktronics, Stella Vista may lower order sizes and have the potential to put pressure on margins. WLL handsets, which MIC manufactures, may not have strong prospects in the wireless landscape.
Pantaloon Retail appears to be in a sweet spot in the Indian retail sector. Revenue growth continues to be buoyant on the back of rapid store rollouts. Benefits of scale are also beginning to kick in, which is borne out by the expansion in margins in the last couple of quarters.
There is greater confidence on the execution front, as the company has tied up real-estate at lower costs compared to competition. Pantaloon is also building new businesses through subsidiaries that are well placed to raise money independently, thus addressing funding concerns.
The stock has dropped nearly 50 per cent from its January high. The preceding rally was on the back of expectations of “value unlocking” upon the listing of Future Capital Holdings, which now trades at a discount to its offer price. Valuations now appear to be at more reasonable levels.
We prefer to evaluate Pantaloon on a standalone basis for now, as its subsidiaries nurture new formats and are unlikely to contribute significantly to profits in the near term.
Its subsidiary Home Solutions Retail is beginning to make a significant contribution to consolidated revenues (15 per cent in the nine months ended March’08, according to updates on the Web site).
We value Pantaloon’s stake in Home Solutions at Rs 46 a share (assuming a market cap to sales ratio of 1 on likely FY08 sales). The market is also likely to continue factoring in Pantaloon’s stake in Future Capital Holdings (FCH), which listed recently, as the group companies derive significant synergies from each other.
We value Pantaloon’s stake in FCH at Rs 113 a share, based on our estimate of its fair value (Rs 507 a share, against current market price of Rs 582). Stripped of the value of Home Solutions Retail and FCH, the stock is trading at about 35 times its likely June 2008 earnings per share.
This appears reasonable as Pantaloon’s stand-alone operation is well placed to record a 35 per cent annualised growth rate over the next five years.
Risks to our buy recommendation would be a significant decline in the stock of FCH, a greater-than-expected slowdown in consumption and delays in break-even of some of its newer retail formats.
Pantaloon’s revenues increased 57 per cent on the back of expanding retail space and improving performance of existing stores. Same-store sales growth, which measures the performance of stores that have been in operation for at least a year, have slowed down significantly.
In the nine months to March 2008, same store sales of its value retailing format grew by 8.8 per cent, down from 19 per cent a year earlier.
Similarly, same-store growth in the lifestyle format slowed to 10.5 per cent from 23.3 per cent a year earlier. Greater competitive intensity in the metros may be one reason for slowing growth. However, the same-store numbers in the last two months have bounced back to the double digits.
Its home retailing venture, on the other hand, registered same-store growth of 35 per cent in the last nine months. Strong growth in new markets may compensate for any slackening of growth in the more mature formats. In any case, revenue growth is likely to be driven mainly by new store additions. Pantaloon has added 2 million sq.ft in the last nine months and is likely to finish fiscal 2008 with slightly more than 8 million sq.ft under its various formats.
Pantaloon’s earlier target of 30 million sq.ft by 2011 appears a bit difficult to achieve currently, despite the fact that the company has tied up 70 per cent of its space requirement. However, any increase in its pace of execution is likely to buoy revenues significantly.
Pantaloon has surprised with better-than-expected numbers in the last three quarters by recording an expansion in margins.
Margins in the third quarter ended March 2008 expanded by 130 basis points to 8.4 per cent on the back of savings in employee costs and tighter control on other expenses.
While some of the savings in employee costs may be due to transfer of employees to its subsidiaries, the company does appear to be benefiting from its greater scale.
This has compensated for lower gross margins, which is a result of a higher proportion of “value” retailing. Value retailing, which is led by its Big Bazaar hypermarket format, accounts for 70 per cent of its standalone revenues.
Improving profitability of newly opened stores is likely to offset the adverse impact of higher competitive intensity and expansion costs on margins.
Pantaloon’s earlier formats — Pantaloons (departmental store), Big Bazaar (hypermarket), Food Bazaar (Food supermarket) and Central (mall) — together accounted for over 250 stores as of March 2008.
In the specialty retailing segment, Pantaloon is witnessing significant growth in the home retailing segment. Home retailing includes formats such as Home Town, Home Bazaar, Collection I, Furniture bazaar and E- Zone. Revenues from this segment have tripled to Rs 711 crore in the nine months ended March.
Pantaloon has carved relatively new formats such as home retailing into subsidiaries, which enables these arms to raise funds for their projects independently.
ICICI Venture has a 15 per cent stake in the home retail subsidiary. Its practice of tie-ups for other specialty retail ventures such as fitness (Talwalkars Fit & Active), Office Products (joint venture with Staples Inc, US) and footwear (Liberty shoes) also reduces the risk to the main operation from new forays.
Pantaloon’s ability to discover new under-penetrated markets remains one of its key strengths and makes it a preferred partner for foreign retailers who are targeting the Indian market.
Investors with a 3- to 5-year perspective can consider investing in the stock of IRB Infrastructure Developers. With a portfolio of 11 operating toll roads and three under execution through special purpose vehicles, the company’s revenue stream carries a high degree of certainty, making the business less risky compared with other infrastructure players. Investors can accumulate the stock, using market declines to their advantage.
Being an early mover, the company’s asset portfolio is also endowed with superior rates of return (IRR) relative to projects that are currently being awarded. Increase in toll rates and recent concession agreements are likely to provide significant room for growth in toll revenues over 2009-10. With consolidated revenues of over Rs 2,000 crore expected by FY10, the stock currently trades at about 20 times its per-share earnings for 2009-10. This does not factor in revenue from real estate activities planned by the company.
IRB generates revenue from three businesses — building of roads, maintenance of roads built, and toll collection. Of this, toll revenue is likely to be the major earnings driver. The Bharuch-Surat and Surat-Dahisar roads expected to be operational over 2009 and 2010) and the already operational Mumbai-Pune road, are all high traffic areas with over 65,000 passenger car units (measure of traffic density). This suggests high revenue potential.
IRB’s portfolio is distinctive for two reasons. One, none of the projects has any revenue-sharing agreements with the Government. Two, a good number have agreements for toll increases, or non-compete clauses that restrict the Government from operating competing roads that could disrupt IRB’s revenues from traffic. For instance, the company’s key asset — Mumbai- Pune Expressway — has received an 18 per cent hike in toll rate effective April 2008, and this is likely to be reset at the same rate once in three years.
Future projects under the Model Concession Agreement (MCA) would be revenue sharing in nature and could also cap returns from future projects. However, with high quality assets already in its portfolio, IRB is likely to sustain higher margins, compared with peers. Further, the company could retain its edge under MCA, as these contracts would require superior execution capabilities for better profitability. IRB, with its qualification in toll roads, appears well placed to bag orders under the new model.
The Associated Cement Company Limited is a trend setter and a benchmark for Indian cement industry. It enjoys excellent equity. A prominent overseas presence and figuring on the elite list of consumer super brands of India but most importantly ACC has been amongst the first Indian companies to make environmental protection, it is a cornerstone of its corporate objectives.
The historic merger of ten existing cement companies lead to the establishment of ACC - melding into a cohesive organization in the year 1936 at Maharashtra. Its a big company in cement manufacturing and offers the services of Ready mixed concrete and Consultancy service. This company is listed by Bombay Stock Exchange , National Stock Exchange and in London .
The house of TATA was intimately associated with ACC upto1999, after 1999 they sold their stake to AMBUJA Cement group. In the year 2005 an association was initiated between ACC and HOLCIM of Switzerland and in the same year company acquired the 98.84% of the equity shares of Tarmac India private Ltd . At January 1st 2006 the Tarmac India private Ltd was merged with ACC which operated two ready mix plants in Mumbai. ACC Ltd has four subsidiary companies namely Bulk Cement Corporation of India (BCCI), ACC Machinery Company Ltd (AMCL), ACC Nihon Castings Ltd (ANCL) and The Cement Marketing Company of India Ltd. As of the financial year 2007-08 ACC divested its entire stake in its engineering subsidiary ACC Nihon Castings Ltd.
The company received an award as "Good Corporate Citizen" for the year 2005-2006. During the year 2007 company acquired 100 % of the equity stake of Lucky Minmat Private Limited for Rs 35 crs and also acquired 14.3 % equity stake in Shiva Cement Limited. Meanwhile the company divested its entire equity shares in Almatis ACC Ltd to the Almatis group. The overseas contract with YANBU Cement Company in the kingdom of Saudi Arabia is successfully ongoing relationship from last 28 years and has been renewed up to February 28, 2011.
The company has developed comprehensive expansion plans to meet the requirements of its agenda for growth with a view to attain leadership position in the cement industry, for that company made a project for augmentation of clinkering and cement grinding. As a result with this the capacity of Gogal works stands increased to 4.4 Metric Tonne Per Annum. ACC planed to expand the unit of Bargarh works capacity to 2.14 MTPA together with 30MW captive power plant is underway. The implementation of the projects for augmenting grinding capacity at Madukkarai by 0.22 MTPA and New Wadi by 0.60 MTPA.
Production and sales of Ready Mix stood at 1.11 million cubic metres and 1.23 million cubic metres which was higher by 4.7 % and 9.8 % respectively compared to the previous year. The sales value of Ready Mix stood at Rs.367.02 crs which is 22.4% higher than the last year sales value. Ready mix concrete business has been identified as an area of strategic priority. ACC commissioned a Wind Energy Farm in Tamil Nadu to promote clean and green technology. The company foresees substantial scope for growth of this business in India and has accordingly finalised plans to expand Ready Mix business in major cities including Tier1 and Tier 2 cities. ACC realizes the growth potential of Ready Mix, the company has 26 plants for the same and enhance to 46 in 2008. The company have major capital expenditure projects in hand, as a result of these projects the total cement capacity of the company will increase to about 30.4 MTPA by end of 2010 with total outlay of Rs 4,000 crore
Investors can consider subscribing to the IPO from Gokul Refoils and Solvents in the price band of Rs 175-195, at the cut-off price. The asking price for the offer appears reasonable in relation to listed peers as well as the company’s own financials and growth prospects.
At Rs 195, Gokul Refoils would be valued at a price-earnings multiple of about eight times its estimated FY08 earnings and at about six times FY09 earnings, using conservative assumptions, on the diluted equity base. Solvent extraction and edible oil players of a similar or much larger size such as Agro-Tech Foods and Ruchi Soya trade at valuations of 11-15 times current earnings.
The company’s expansion projects are likely to scale up contributions from the current fiscal. However, the offer is suitable only for investors with a high risk appetite, as the edible oils business is characterised by thin margins and is exposed to commodity price fluctuations as well as policy changes.
Gokul Refoils is a marketer of edible oils such as palmolein, soyabean oil and cottonseed oil, mainly in bulk form, to domestic retailers. It also exports de-oiled cake, a by-product of oil extraction and is present in the vanaspati business.
The company’s present capacities include 1,280 tonnes per day (tpd) of seed processing and solvent extraction capacity and 1,200 tpd of oil refining capacity. Partly financed by the offer proceeds, these will be stepped up to 2,780 tpd and 1,500 tpd, respectively.
In the three years to 2007-08, Gokul Refoils managed a 21 per cent annualised growth in sales with a higher 46 per cent growth in profit. Operating profit margins, though thin, have improved from 3.5 per cent to over 6 per cent in this period.
Trading activities, shifts in the product mix, and a gradual increase in retail sales (38 per cent of sales in 2007-08), relative to bulk sales, appear to have aided margin expansion. However, given that the margins managed by the peer group hover in the 2-3 per cent range, the sustainability of current OPMs remains to be seen.
In this context, the recent capacity expansion, apart from building scale (crucial in this volume-driven business) may aid margins by improving utilisation. The soybean crushing plant is a backward integration move. The addition of refining capacity in proximity to the Western ports will provide the flexibility to source imported crude oil, to tide over any shortfalls in domestic availability of oilseed. Plans to set up a Singapore subsidiary may help sourcing and open up export avenues for de-oiled cake.
Branded foray risky
Expansion plans apart, Gokul Refoils plans to enhance its retail presence by establishing a larger distribution network and investing in brand-building efforts. Though the company claims a distribution presence in 19 States and has managed to ramp up proportion of retail sales from 18 to 37 per cent in two years, establishing a foothold in the branded edible oil market on a national scale may prove extremely challenging.
This business is highly competitive with strong regional brands as well as established commodity trading houses in the fray; Gokul may find it difficult to sustain the promotional spends required by foray over several years. The branded edible oil market is extremely price-sensitive and requires dynamic pricing to build as well as retain market shares. Changes in tariff values or duty structure by the government also have the potential to impact margins.
At this juncture, the sharp increase in global edible oil prices and the firm outlook for the same do pose risks to edible oil market and could result in slower growth rates.
However, as the category tends to be quite income elastic, substitution, rather than low offtake, would be the key risk for individual players. In this respect, Gokul’s flexibility to alter its product mix between various edible oils should help reduce substitution risks to some extent.