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Sunday, August 17, 2008

Mercator Lines

Mercator Lines

Bharti Airtel - the 4th largest mobile operator in the world

India’s largest private telecom company Bharti Airtel today said it has crossed the 75 million customer mark to become the fourth largest in-country mobile operator in the world.
Bharti Airtel is now behind China Mobile, China Unicom and American AT&T in terms of subscriber base, a company statement said.
The subscriber figure include customers from all business units of the company--mobile services, telemedia services and enterprises services-- the statement said. The mobile services devision has a customer base of 72.07 million as of July, 2008, it added.
The mobile business provides mobile and fixed wireless services using GSM technology across 23 telecom circles.
Commenting on the landmark Bharti Airtel CEO and Joint Managing Director Manoj Kohli said, “We are happy to have achieved this milestone of being the largest integrated telco in the country, in customer terms. For us, the benchmark of real leadership is customer delight and would like to thank all our customers for placing their faith in us.”
The company had crossed the 60 million customer mark in February 2008 and the 50 million mark in October 2007, thereby becoming one of the fastest growing telecom companies in the world, the statement added.
China Mobile with 414.5 million customers as on June 2008 is at the No 1 position followed by China Unicom with 170.7 million subscriber base.
AT&T is marginally ahead of Bharti with a subscriber base of 72.9 million in June this year.

Gwalior Chemical Industries

Gwalior Chemical Industries

Genus Power Infrastructure

Genus Power Infrastructure

IPO Pipeline

IPO Pipeline

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Valueline Aug 2008

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New F&O Stocks

Kalindee Rail Nirman Engineers

Investments with a two-year perspective can be considered in the stock of Kalindee Rail Nirman Engineers, which is engaged in the business of signalling, telecommunications, gauge conversion and track-laying for the Indian Railways. A direct beneficiary of the higher government spending on rail infrastructure, Kalindee stands to benefit significantly from initiatives such as setting up of dedicated freight corridors, increased outlay for gauge conversion and the rollout of Metro rail projects in major cities.

At current market price of Rs 209, the stock trades at a reasonable valuation of about 12 times its likely FY09 per-share earnings. This is attractive considering that the company’s revenues are relatively shielded from slowing economic growth as the investments in rail infrastructure — a must to bolster the economy — may be the last to see any downturn. Given the stock’s small-cap status, investors must consider accumulating the stock in lots.

The proposed setting up of dedicated rail freight network across the country’s main business centres — from Ludhiana to Dankuni near Kolkata, and from New Delhi to Nhava Sheva near Mumbai — offers a large opportunity for Kalindee, which has an established relationship with Indian Railways in this line of business.

Besides this, Kalindee may also benefit from the Railways’ target of setting up new lines and gauge conversion projects. A major growth driver for Kalindee may come from the proposed rollout of metro rail projects. Having successfully implemented the rollout for the Delhi Metro Rail Corporation, Kalindee now stands a good chance of procuring similar orders from Metro rail projects in both Mumbai and Bangalore.

That Kalindee has, in the last two years, managed a compounded growth of 66 per cent and 98 per cent in revenues and profits, lend confidence to its ability to convert opportunity into business. It currently has an order book of Rs 400 crore and expects to add significantly to it in the coming quarters. The company’s June quarter numbers have also been strong, amid slowing numbers for many other infrastructure and capital goods majors.

During the quarter, the company posted 42 per cent increase in profits backed by 23 per cent growth in revenues. Operating margins, which had come under pressure the previous quarter due to the rise in steel price, improved this time around. Helped by the reimbursement of the increased raw material expenses incurred last quarter (on contracts that were covered by the price escalation clause), operating margins in the June quarter were pegged at a healthy 13.4 per cent.

In terms of risk, Kalindee’s profitability remains susceptible to rising steel and cement prices. Further, there may also be a risk of higher borrowings or equity dilution in the near future, given that the company is looking to raise funds to meet working capital requirements for its new orders.

Monsanto India

Investors with a two-three year horizon can buy the stock of Monsanto India, a leading producer and marketer of agricultural inputs.

From being a leading player in the agrochemicals business — which is subject to high competition and pricing pressures — Monsanto India has increased its presence in the lucrative hybrid seeds business, targeting crops such as corn, cotton and oilseeds.

The market for hybrid seeds offers potential for strong revenue growth and high margins.

Access to the research efforts and brand portfolio of the parent, which is a global leader in seeds and traits, is a strong competitive advantage in a business where investments in R&D and the gestation period to develop new strains, present the key entry barriers. At the current market price of about Rs 1,594, the stock trades at a price-earnings of about 14 times its estimated earnings for FY09.

This appears justified, considering the high domestic growth potential of the seeds business, the premium valuations enjoyed by life-sciences companies globally and Monsanto’s strong balance-sheet. Any decline in stock price to Rs 1,400-1,500 levels linked to broad markets would present an even better opportunity to add the stock to your portfolio.

Given the relatively low trading volumes in the stock, timing your purchases carefully may be necessary to maximise returns.
Restructuring for focus

After managing a consistent year-on-year growth in both sales and profits in the five years to 2004-05, Monsanto India saw its growth rates falter over the next two years, as it dramatically restructured its business. It forged a gradual exit from the more competitive and price-sensitive segments of the herbicide business and re-aligned its portfolio more closely with that of the parent — which is focussed mainly on seeds and traits.

Monsanto divested its Leader herbicide in 2006 and herbicide brands such as Machete, Lasso and Fastmix (Butachlor and Alachlor) in 2008. Profits of Rs 45.8 crore from some of these divestitures in 2007-08 significantly bolstered Monsanto’s net profit; this was distributed to shareholders through a special dividend of Rs 180 per share in 2008.
Cashing in

This restructuring has left Monsanto with hybrid seed brands — Agrow and Dekalb — and the Roundup herbicide business, all of which are leading products in the parent’s portfolio.

Over the past year, specific focus has been placed on Dekalb corn hybrids where Monsanto’s seeds target traits such as higher yield, oil content and longer shelf life. Corn is a very lucrative target crop in the Indian market and allows seed marketers to charge a significant price premium. Rising global prices for corn spurred by bio-fuel related demand and increasing use of corn by the food processing and animal feed industries has led to strong export as well as domestic demand for Indian corn.

High prices, combined with a short cycle, make corn an attractive cash crop for the farmer, paving the way for rapid adoption of hybrids (40 per cent of planted area) in the domestic market. Monsanto already claims a 39 per cent share of the corn hybrid market in India and hopes to further increase its share by targeting new regions (Northern states have lower rates of hybridisation than the southern ones) and traits.

In this respect, access to the parent’s product and research library lends a significant edge to Monsanto over other domestic players. Expansion in other target crops such as cotton and soybean also offers growth potential.
Better mix

The changed profile has left Monsanto with a business that is less import-intensive and volume-driven; with significant scope for improvement in profit margins (currently at 24 per cent).

The strong growth in the seeds business has already made up for recent divestitures; with the company recording profits after tax (leaving out exceptional items) of about Rs 64 crore in 2007-08, on sales of Rs 384 crore, re-establishing the earlier growth trajectory.

High margins and strong operating cash flows in recent years have ensured a zero-debt status for Monsanto India, with the company not taking recourse to any infusion of capital — either equity or debt — over the past ten years. This provides further justification for a valuation premium for the stock, in the current scenario of tight credit and rising interest costs.

The key risks to investors in the Monsanto India stock arise from the regulatory and weather-related risks that characterise the seeds business. In this context, the controversial Bt Cotton business, which Monsanto is usually associated with, is not part of the listed entity and is vested in a separate joint venture. Several MNCs in the agrochemical space have sought to delist their Indian arm. Such a move remains a possibility for Monsanto India as well. The Indian arm could also be impacted by any strategic decisions taken by the parent.

A recent move by the global parent to transfer the rice, sunflower and millet seeds businesses to an acquirer — Devgen — has seen Monsanto India also exit these crops in India. However, the more lucrative corn, cotton and soybean crops remain in the company’s fold.


Investors with a one-year horizon can hold on to the HDFC Bank stock. Though the bank has sound financials, concerns about rising interest rates, higher cost of funds and compressing spreads have cut down valuations for banking stocks.

The stock has generated a 35 per cent CAGR over the past five years. One can only reap the benefit of this investment once inflation subsides and interest rates cool off.

HDFC Bank trades at a P/BV ratio of 3.6 and a price-earning multiple of 25 times its FY-08 earnings; and at a P-E multiple of 17 times and P/BV ratio of 2.5 times its FY-10 forward earnings.

Though the valuations look pricey compared to peers, they appear justified in the light of the consistent performance and superior margins. HDFC Bank, which was among the first new-age private banks, is now the seventh largest in terms of assets and third largest by market capitalisation.

The bank’s access to low-cost deposits, successful ventures into high-yielding businesses and sound risk management systems have helped it grow its net interest margins strongly in recent years.

The bank’s profit-after-tax has grown at a CAGR of 33 per cent from 2003-04 to 2007-08, driven by net interest income growth at 43 per cent and ‘other income’ growth of 47 per cent.

The net interest margin improved from 3.7 per cent in FY-06 to 4.3 per cent in FY-08, rating it the best even among private peers, while the gross NPA/advances was maintained at 1.2-1.3 per cent. The contribution of retail loans to the mix rose to 58 per cent in FY-08 from 46 per cent in FY-05.

For FY-08, the net revenue improved by 50 per cent mainly due to the profits on investments and ‘other income’. Operating expenses have increased by 50 per cent year-on-year with increase in employee costs and branch expansion; marketing costs and other operating expenses have also risen because of the growth in credit-card and retail businesses. Low-cost deposits (CASA)/total deposits stood at 54.5 per cent in FY-08. As HDFC Bank’s bond portfolio has a larger proportion in the held-to-maturity category (81 per cent in March 2008), the bank appears to have booked lower losses in the bond portfolio. Strong management systems to monitor credit, market and operational risks are also a plus.
Merger implications

HDFC Bank’s financial results for the June quarter were closely watched by the market, on account of the merger of Centurion Bank of Punjab (CBoP), which weren’t fully known.

The numbers showed growth in revenues offset by higher costs, with clear signs of earnings dilution. HDFC Bank’s net profit grew 44 per cent over last year, aided by total income growing at 60 per cent and net interest income at 75 per cent; this was mainly because of the increase in the size of the balance-sheet, post-merger. Higher provision for CBoP’s NPAs, higher employee costs and other integration costs of branches and technology appear to have driven up HDFC Bank’s cost-structure, with the cost-income ratio rising from 50 per cent to 56 per cent sequentially.

While CBoP’s provision coverage was at 55 per cent of NPAs (in the latest available financials for December 2007), HDFC Bank has maintained it at 67 per cent. The higher provision coverage of 67 per cent in the combined balance-sheet suggests that HDFC Bank has increased provisioning on the merged bank’s assets. HDFC Bank had to set aside Rs 77 crore for the mark-to-market loss of the bond portfolio.

Gross NPAs rose by 20 bps as a percentage of gross advances. Capital adequacy ratio has reduced to 12.2 per cent from 13.6 per cent, indicating the higher risks, post-merger. Though the merger has diluted HDFC bank’s balance-sheet in terms of low-cost deposits and NIMs, it is still better-placed vis-À-vis its peers.

Going forward, the key benefits for HDFC Bank from the merger will arise from CBoP’s presence in Kerala, several western states and Punjab, Haryana and Delhi.

Post-merger, HDFC Bank has access to 412 additional branches, a 50 per cent increase over the existing network, helping it to catch up with ICICI Bank in branch network. The merged bank has a strong presence in metros as well as in Tier-1, Tier-2, and semi-urban areas. The SME segment which contributes 19 per cent of the total advances is also a window of opportunity for HDFC Bank.

But CBoP’s larger exposure to retail advances (60 per cent), two-wheeler loans, commercial vehicle loans, personal loans and mortgage loans, may peg up credit risk for HDFC Bank, in a scenario of rising interest rates, where concerns about retail delinquencies are on the rise. Though HDFC Bank has started to go slow on retail lending, the exposure is already significant and any slowdown may impact overall growth. The bank hopes to complete the integration process by FY-09, with the full benefits of the merger expected to be reaped after FY-10.
Outlook and Risk

The conversion of warrants issued to HDFC (to maintain the latter’s stake in the bank), may be earnings-dilutive. The CBoP merger has offered HDFC Bank a substantial opportunity for inorganic growth, which may not be available to competitors. The bank already has a track record of successfully integrating Times Bank with itself in 2000. The bank’s ability to transfer its current efficiency to the acquired business will be a critical factor.

HDFC Bank also appears better-placed among its peers to manage higher reserve requirements and rate hikes, cost of funds and retain healthy NIMs.

The only real concern is capital adequacy, which has come down sharply. From a sector perspective, the key risks to earnings arise from further hikes in interest rates and unexpected increases in credit risk (NPAs), which could keep valuations depressed.