Hotel Leela, Royal Orchid Hotels
Sunday, June 15, 2008
Bafna Pharmaceutical 40 7 to 10
Avon Weighing 10 5 to 6
Sejal Architectural Glass Ltd. 105 to 115 18 to 20
First Winners Ind. Ltd. 115 to 125 3 to 5
Archid Ply Ind. 70 to 80 6 to 8
Lotus Eye Care Hospital 38 to 42 3 to 4
The shares of IT software and services company NIIT Technologies Ltdhave been drubbed in the past year due to lacklustre financial performance, belying hopes that the surge in revenues and profit in the fiscal year 2006-07 would be sustained.
Its consolidated revenues fell 5.8% sequentially in the June quarter, were flat in the September quarter and rose by 1.7% in the third quarter. Operating profit growth was worse, marking a decline of 20.4% in June, and rises of 0.2% and 4.2%, respectively, in the next two quarters. Given the backdrop, the sequential revenue growth of 6.3% in the March quarter seems decent. Operating profit growth was marginally lower at 5.2% as margins fell by about 20 basis points.
The company has provided for a mark-to-market loss of Rs6.7 crore for its forex transactions, as a result of which net profit fell by 10.7% sequentially. The markets don’t seem worried about the forex loss, and are focusing on the improvement in operational performance last quarter. Its shares have jumped by 16% since the company announced its results on Wednesday.
Besides the increase in revenue and profit growth rates, the company also announced a jump in fresh orders to $81 million (around Rs348 crore today) in the last quarter. In the December quarter, orders stood at $59 million, up from $49 million in the September quarter, and $41 million in the June quarter. But note that there seems to be a seasonality about fresh order intake, since in the March quarter a year ago, it stood at $72 million. The executable order book stood at $113 million, about 10% higher than $103 million a year ago.
The recent improvement in the fortunes of NIIT Tech shareholders—the shares have risen 65% from lows of Rs86 in March this year—comes from an extremely low base. The stock has fallen from Rs375 in October last year. Even after the recent rise, the company is valued at just six times of past earnings.
The current valuations seem fair considering earnings grew by just 5% in the year to March. What’s more, losses related to forex hedges may only mount in the near future. If the company reported mark-to-market losses of Rs6.7 crore at the rate of Rs40 a dollar at the end of the March quarter, its losses would increase if the rupee remains at current levels of about 43 to a dollar.
The company has hedged $236 million, which is as high as its annual revenues. Investors excited about the slight improvement in performance in the March quarter need to be mindful of this risk.
Boston Analytics: market trends for May
Equities research firm Boston Analytics’ India stock market diary for May highlights some interesting market trends.
They sort their index universe on the basis of market capitalization, rice-to-book (P/B) value, three-months momentum and economic sector. Each of these segments is then further divided into 20 portfolios. For instance, the universe of stocks sorted by market capitalization is then divided into 20 portfolios depending on how much the companies’ market cap is. Portfolio 1 consists of the 5% of companies with the largest market cap, while portfolio 20 consists of the 5% of companies with the lowest.
Interestingly, the highest returns in the last 12 months have been given by the companies in the 20th portfolio, or the smallest firms. These firms’ 12-month return is 71.38%.
Generally, the portfolios in the bottom half, or the smaller firms, outperformed the market over a 12-month period. However, the reverse is true if returns are taken year-to-date. Simply put, volatility is much higher for the small-cap firms.
However, all the portfolios posted negative returns in May. The portfolios in the bottom half (smaller firms) outperformed the market by a small margin of 0.42%. The top half of the portfolios underperformed the market by a small margin of 0.38%. While small firms did well when the market was moving up, they are likely to do much worse now that the market is moving down.
Boston Analytics has also sorted its index universe on the basis of valuation, taking P/B value as the criterion. However, despite the market correction, value stocks in the lower portfolios, or those with lower P/B ratios, underperformed the firms with higher P/B value.
The verdict: “current investor sentiments were indifferent to higher book value stocks”.
The Index Committee of the Bombay Stock Exchange, has decided to revise the composition of the BSE indices.
While the revision in the Sensex will be effective from July 28, revisions in the BSE-100, BSE-200 and BSE-500 will become effective from June 23, an exchange statement said here today.
Among the Sensex scrips, Sterlite Industries and Tata Power Company were included while Ambuja Cements and Cipla were excluded.
In the BSE 100 indices, the BSE has decided to include scrips of Asian Paints, Bajaj Auto, Bajaj Finserv, Educomp, Housing Dev & Infrastructure, MMTC, Mundra Port, National Aluminium, NMDC, Reliance Power and Welspun Gujarat Stahl Rohren.
Among the leading scrips which are excluded from the BSE 100 list are Bharat Electronics, Glaxosmithkline, i-Flex Solutions, Patni Computers, Titan Industries and Ultratech Cement.
The BSE 200 indices will have Adlabs Films, Bajaj Holdings, Bajaj Auto, Bajaj Finserv, Chambal Fertilisers, Edelweiss Capital, Essar Shipping, Godrej Industries, Gujarat Mineral, Gujarat NRE Coke, Indiabulls Securities, IRB Infrastructure, Jai Corp, Jubilant Organosys, LIC Housing Finance, MMTC, Mundra Port, NMDC, Rural Electrification Corp, Rei Agro, Shree Renuka Sugars and Shriram Transport Finance.
Investors can consider investing in the initial public offering of Lotus Eye Care Hospital (Lotus) with a two-three year perspective. The business of running eye-care hospitals is resource intensive and highly skill-dependent but there is potential given the rise in diseases related to eyes.
At present, Lotus has its super-specialty hospital at Peelamedu (Coimbatore) and three other network hospitals at Tirupur, Salem and R S Puram (Coimbatore). This gives it nine operation theatres and three LASIK equipment along with total bed strength of 120, excluding eye-camp beds.
Given the superior operational as well as profitability metrics displayed by Lotus in the last three years and experienced management, the company could be expected to leverage the strong demand for quality eye-care, albeit within its region-specific limitations.
Earnings could be ramped up when Lotus sets up two primary eye care (preliminary) units in Bangalore and one in Chennai, secondary eye care units each at Coimbatore (R S Puram), Tirupur and Karur, and a tertiary care ( for handling complicated eye diseases) unit at Salem.
Lotus’ Rs 55 crore capex plan is expected to be funded with IPO proceeds (Rs 42 crore), internal accruals (Rs 3 crore) and debt (sanctioned term loans aggregating to Rs 10 crore).
The fruits of a significant portion of the project are expected to show up only from September 2009.
At the price band of Rs 38-42 per share, the issue is priced at about 19-21 times the likely FY10 per share (post-issue) earnings.
While the comparatively small size and limited scale of Lotus may seem as a concern when seen in light of its listed peers such as Kovai Medical Centre and Hospital, and Dr Agarwal’s Eye Hospital — Lotus’ focus on eye care (operations are mostly day-care) is expected to help it maintain higher margins, as well as profitability.
Lotus earns 60-65 per cent of its revenues from surgeries and is expected to gain from the demand for private medical care providers in the ophthalmology space. Industry-wise, cataract surgery, refractive surgery and glaucoma procedures account for 90 per cent of the surgical operations in the eye-care space.
With the use of superior technologies such as LASIK (Laser-Assisted In Situ Keratomileusis) and Zyoptix, companies such as Lotus have been able to enjoy better margins and high rates of success.
The network of primary and secondary eye-care units are expected to ramp up revenues through own primary care referrals and individual practitioners, while the two tertiary care hospitals would ideally deal with more complicated cases.
Risks to the offer include the expected competition from local speciality hospitals operating in the eye-care space, longer time-periods to complete capex, higher than anticipated depletion of margins, appointment as well as retention of qualified personnel at new and old units. Any adverse developments to the image of the business may also present risks to our recommendation.
The offer, managed by Keynote Corporate Services, closes on June 17.
Investors with a high risk appetite can consider investing in the initial public offer of Archidply Industries. This wood panel and decorative surfacing products manufacturer operates in an industry that is highly unorganised and fraught with regulatory issues. Archidply, however, inspires confidence through its presence in relatively high-end and more customised interior products and its environment-friendly measures to procure sustained sources of raw materials as well as make eco-friendly products that are within the regulator’s permissible ambit.
The offer price band of Rs 70-80 discounts the per share earnings for FY2008 (on the pre-issue equity base) by 7-8 times. While its larger peer Greenply trades at similar valuations, Archidply’s expansion plans through the offer are likely to be earnings accretive over the next two years. The pricing also appears justified given the superior profit margins and return on equity enjoyed by the company.
On the business and offer
Archidply manufactures engineered interior products used in commercial and residential buildings. The company started its manufacturing activities after the merger of a promoter group company — Mysore Chipboard — with itself.
Archidply’s products include a wide range of specialised plywood such as marine and fire retardant plywood, particle boards, decorative laminates and veneers. The company plans to raise about Rs 50 crore for setting up a new manufacturing facility in Karnataka and to set up a medium density fibreboard facility in its existing unit in Uttarakhand.
The business of plywood has high uncertainties due to the large number of unorganised players; there are also regulatory curbs in production of environmentally less-friendly products and in sourcing of raw materials. Archidply appears well placed to tackle these issues.
For one, the company does not restrict its products to retail customers alone. Its clients include corporates, architects as well as modular furniture makers such as Godrej and Featherlite. Its products are also slightly premium given the sophisticated combination of waterproof, fire resistant as well as low gas emission plywood. We believe that the above products would address a more brand and quality conscious market that is different from the segment that unorganised plywood players cater to.
The company also plans to move to value-add products such as ready-to-assemble furniture components and designer doors. These products appear to be aimed at tapping the huge real estate activity in the commercial space. With tight deadlines for construction and a need to optimally utilise space, these products could well be in demand.
On the raw materials front, the company procures renewable plantation timber grown in coffee estates and farm grown plantation timber, thus preventing any environmental curb on its raw material source.
While the company’s capacity addition may appear uncalled for, given that it is yet to fully utilise its existing capacities, the move appears to be a safeguard measure.
The Supreme Court has placed restrictions on issue of new licences for manufacture of plywood and other wood-based products.
This appears to be the reason for Archidply’s move to ramp up capacities before its licence expires. The restriction also poses a higher entry barrier for even organised players wanting to expand in new places.
The present scenario is, therefore, likely to ensure less competition for organised players such as Archidply. On the flip side, the company may suffer if the increased capacities do not find demand.
Archidply’s revenue grew at a compounded annual rate of 89 per cent over the last two years to Rs 147 crore in FY 2008. This places the company next to top players such as Greenply Industries and Century Plyboard. The company’s operating and net profit margins at 18.5 per cent and 10.3 per cent respectively, are however far superior to those of peers.
Archidply could be incurring lesser transportation costs compared to its peers as it has an integrated facility in the North and the South (catering to respective markets) as against most other players who have facilities in the North and eastern India.
Further, Archidply appears to have had an early start in the high-potential particleboard market. This product uses plywood by-product and agri fibre as raw material and is more cost effective and environment friendly. Equipped with capacities (for this product) higher than even Greenply’s, the company could have scored higher margins on this front as well.
Archidply’s market share at 8 per cent still remains low, despite being the third largest organised player in terms of revenue. Market penetration clearly poses a challenge. The company is yet to get licence for starting the medium density fibre plant for which a part of the offer proceeds would be utilised. Given that it qualifies under the norms for the same, the risks may not be high.
The small market cap of Rs 155-175 crore (at the offer price) could subject the stock to high volatility under the present market conditions. Investors can consider exiting their holdings if their target return is met shortly after listing. The offer closes on June 17.
Investors with a three-year perspective can consider investing in the stock of BGR Energy Systems.
The recent results posted by the company and the strong growth in order book belie fears of a slow down in the engineering services space. BGR’s well entrenched position as an EPC player in the power segment and a multi-equipment supplier in the oil and gas segment makes it a good proxy for the energy sector.
The current market price, at a sharp discount to its offer price of Rs 480, provides an attractive entry point. The stock currently trades at about 13 times its expected per share earnings for FY 2010.
BGR has an order backlog of Rs 3,212 crore and secured 46 per cent more orders than the previous year. This order growth inspires confidence at a time when some companies in the engineering sector have reported slowdown in the growth of order intake. Order inflows are key indicators of any slowdown in the sectors serviced by engineering companies. BGR’s strong order intake is indicative of capex spending in the power and oil and gas space.
Of the total order book, power EPC and balance of plant (BOP) segment account for 85 per cent. BOP involves other works in a power plant excluding the key equipments boiler-turbine-generator (BTG). BGR has managed to stay competitive in this segment as it manufactures in-house 40-50 per cent of the products needed to execute a BOP.
The company has recently stated that it would soon announce its entry into the BTG segment as well, through foreign tie-ups. This segment, currently dominated by a few players such as BHEL, would enable forward integration. If successful in this planned foray, BGR could be among the few integrated solutions provider for power plants.
Therefore while the company would continue to receive orders in the oil and gas space, we expect the power segment to be the key contributor to revenues over the next few years.
BGR Energy’s sales for the year ended March 2008 grew by 190 per cent to Rs 1,521 crore, while net profits registered a 223 per cent jump. Operating profit margins, however, declined 100 basis points to 10.2 per cent. The company has written off some losses from its Kochi road project, although the same is still under arbitration. We believe that this one-time write-off could be the reason for the dent. On the raw material front, while bulk buying of steel and price escalation clauses could provide some relief, any further hike in cement prices could pose a risk to margins.
via Business Line
The FMCG sector has been among the more resilient ones in the recent market meltdown, with the BSE FMCG index losing only 2 per cent so far this year.
Though market fancy for FMCGs has been driven partly by its “defensive” connotations, there has also been an improvement in sector fundamentals. FMCG companies reported an average sales growth of 17 per cent for 2007-08, up from 12 per cent last year.
Thanks to price increases on several products, they also managed to improve or hold profit margins despite rising input costs and closed the year with a 36 per cent surge in net profit, among the highest recorded by any sector this year.
Multiple drivers have pushed up demand for FMCGs. Strong rural/semi urban demand has buoyed the growth rates for toothpastes, shampoo and hair oils, urban “uptrading” aided demand for premium skin and hair care products; and food categories finally lived up to their potential by recording strong growth.
However we expect a bigger divergence in performance hereon. High input costs could compel companies to hike prices further. Yet, FMCG makers may not enjoy uniform pricing power. Companies in ‘staple’categories such as soaps or shampoos may find it more challenging to hike prices than those in premium, urban-centric categories such as , personal products or foods.
The current valuation gap between stocks such as Nestle and Hindustan Unilever and others such as Marico and Dabur, also argues for a portfolio rejig.
Preferred picks: Buy recent underperformers such as Marico Industries and Dabur India and take partial profits in Nestle India, GSK Consumer and Hindustan Unilever.
The president of the European Central bank, Jean-Claude Trichet, on Monday last called on oil producers and consumers to learn from past mistakes if world economies were to avoid a repeat of the high inflation and unemployment that followed the first global oil shock in 1973.
That year is widely acknowledged as an economic watershed, a time when an OPEC oil embargo led to a spiral of higher prices, recession in world economies and a wrenching contraction in the early 1980s that finally put an end to a decade of sharp inflation.
No one, whether the consumers or oil suppliers, would want to repeat that history, Trichet said, adding there is a joint interest in behaving as properly as possible. In the entire South-East-Asia, policy-makers are facing their toughest economic challenge in a decade — surging inflation and slowing down of growth.
The governments are yet to embrace the proven micro-economic policy response — aggressive monetary tightening. Instead, they are favouring stop-gap administrative measures such as price caps on essential commodities, based on, probably, an inappropriate logic.
In fact, with today’s price surge being seen as temporary, over-reacting to it could undermine the already weakened economic growth. Asian central banks are sitting on the fence. The scenario has an uncanny similarity with the US situation in the 1970s. The markets witnessed a bloodbath last week, with both the Nifty and the Sensex touching their lowest-ever levels in 2008.
The weak sentiment was mainly driven by extreme negative global cues seen both in the US and the Asian markets against the backdrop of a sharp rise in global crude prices. Also RBI’s action of hiking the repo rate by 25 bps in the middle of the week contributed to the negative market sentiment, as indications of a marginal interest rate hike in the near term are now getting confirmed.
Global crude oil prices witnessed further volatility and a sharp rise last week on the back of a weakening dollar and news reports that supplies could get further hit in the coming months as Nigeria — a major oil producer — was likely to see supply constraints due to labour unrest.
With oil prices unlikely to cool down in the near term, this is certainly a bad news for the Indian markets, as this will have a direct impact on India’s trade deficit because almost 70% of the crude oil requirements is still imported.
However, some good macro news at the weekend included a strong IIP growth for April ’08 at 7%, as compared to 3.9% in March ’08, beating analyst forecasts which had projected the IIP growth target at 5.6%. This boosted market sentiments moderately and the increase was largely aided by a strong growth coming in from the manufacturing sector and in particular a pick-up seen in the capital goods sector.
The outlook for the next week continues to remain negative and volatile. This is because despite the sharp sell-off seen in the broad indices last week, the overall leveraged positions in the market on the F&O side continue to remain high and are a matter of concern going ahead. The markets have convincingly failed to rise and most stock rallies have proved to be short lived.
A major concern would be the current week’s inflation number which is likely to touch around 10% since this will factor in the petrol, diesel and LPG price increases. How the government manages to cool off inflation in the coming days will be keenly awaited by the markets. More importantly, the repo rate hike of 25 bps is just one of the tools the RBI has initiated to curb inflationary pressures in the economy and many more measures may be rolled out before the next review policy on July 29, 2008.
More specifically, although small intermediate rallies are not ruled out, the markets have clearly not made a decisive bottom and some more pain could be left before the markets stabilise and a clear uptrend begins.
via Economic Times