ACC

ACC may be a good stock to accumulate on declines for investors looking at long-term returns. The stock’s PE multiple of seven, at a Price of Rs 501, factors in only moderate growth expectations. The company’s enterprise value per tonne is Rs 4,076 down from Rs 8,459 in December 2007.

Accelerated growth in despatches in the Northern region in recent months, easing cost pressures and a tighter supply situation as major capacity additions are rescheduled, suggest that ACC’s revenues and profits could see improvement from the December quarter of 2008.
Demand is strengthening

The stimulus measures announced by the government and a post-monsoon improvement in demand appear to have contributed to a pick-up in cement despatches in the Northern region in recent times. The region saw a 20 and 23 per cent growth in despatches in November and December respectively on a year-on-year basis, albeit on a lower base.

The other key region to see strong growth was the East, where despatches rose by 22 per cent in November and 10.3 per cent in December. ACC accounts for a lion’s share in these markets. Of the total 22.4 million tonne capacity, the company’s plants in North and East make up 14.36 million tonnes. In addition to these, ACC also has plants in New Wadi and Madukkarai in South and Chanda in West.

This lets the company draw benefits of strong prices in South as also strong demand in the North. The Gujarat government’s “Vibrant Gujarat” initiative that has drawn a reported Rs 12 lakh crore investment to the State could also see the demand for cement increasing in the region.

ACC is already working on its plan of adding a 3 mtpa capacity to its existing plant in Chanda (Maharashtra) by 2010. On commissioning, it will feed the infrastructure and other projects in the Western region.

ACC may be a good stock to accumulate on declines for investors looking at long-term returns. The stock’s PE multiple of seven, at a Price of Rs 501, factors in only moderate growth expectations. The company’s enterprise value per tonne is Rs 4,076 down from Rs 8,459 in December 2007.

Accelerated growth in despatches in the Northern region in recent months, easing cost pressures and a tighter supply situation as major capacity additions are rescheduled, suggest that ACC’s revenues and profits could see improvement from the December quarter of 2008.
Demand is strengthening

The stimulus measures announced by the government and a post-monsoon improvement in demand appear to have contributed to a pick-up in cement despatches in the Northern region in recent times. The region saw a 20 and 23 per cent growth in despatches in November and December respectively on a year-on-year basis, albeit on a lower base.

The other key region to see strong growth was the East, where despatches rose by 22 per cent in November and 10.3 per cent in December. ACC accounts for a lion’s share in these markets. Of the total 22.4 million tonne capacity, the company’s plants in North and East make up 14.36 million tonnes. In addition to these, ACC also has plants in New Wadi and Madukkarai in South and Chanda in West.

This lets the company draw benefits of strong prices in South as also strong demand in the North. The Gujarat government’s “Vibrant Gujarat” initiative that has drawn a reported Rs 12 lakh crore investment to the State could also see the demand for cement increasing in the region.

ACC is already working on its plan of adding a 3 mtpa capacity to its existing plant in Chanda (Maharashtra) by 2010. On commissioning, it will feed the infrastructure and other projects in the Western region.

Simplex Infrastructures

We reiterate a buy on the stock of Simplex Infrastructures (Simplex) for investors with a two-three year perspective. The company’s strong business and financial fundamentals — arising from its diversified business, presence in the relatively low risk business of contracting and superior return on equity — support its prospects in the construction space.

Simplex is unlikely to grow at the scorching pace (62 per cent compounded annual growth in earnings over the last five years) seen in the past; in other words, it may no longer witness the ‘mid-cap rate of growth’ witnessed from early 2000.

However, the company’s order-book and strong execution skills are likely to offer a more sustainable earnings model. Further, there remains substantial potential for higher spending in infrastructure and housing in the Indian context.

Contractors such as Simplex, with superior execution skills are likely to benefit from the long-term spending in these sectors.
Why the correction?

At the current market price of Rs 137, the stock trades at six times its trailing 12-month earnings. For the half year ended September alone, the company’s adjusted net profit grew by 82 per cent.

We believe that the steep correction witnessed by the stock over the past few months, is the result of an en masse de-rating of the infrastructure space.

While some among the infrastructure-developer players do face concerns in terms of slower order flows and shrinking IRRs, a steep hike in raw material costs and stretched working capital were the predominant risks seen in the contracting space.

However, with the liquidity situation easing, fears on the second score may be overdone.

Further, while September numbers did show some contracting companies give in to cost pressures, Simplex’s financials suggest that it handled these pressures better than the rest.

With the recent trend of declining cost of borrowing, improving liquidity and sharp reversal in commodity prices, the risks to earnings faced by the contracting companies may also partially abate.
Diversification helps

Simplex’s order-book, at Rs 10,700 crore, witnessed a growth of 50 per cent in the first half of FY09; impressive, at a time when orders especially from the private sector have been on the decline. Interestingly, building and housing accounts for as much as 28 per cent of the order book.

However, a good part of this comes from overseas projects, especially in West Asia, where the building activity was hectic until recently.

With the global economic recession beginning to be felt in West Asia as well, a slowdown in the construction activity in this region appears imminent.

The company appears to have anticipated this as it has diversified its presence into other segments as well. Urban infrastructure, power and other transport projects together account for a chunk of the order book.

The company has also shifted focus back to its core business in these tough times. Piling and ground engineering works, the key strength for Simplex, has once again gained ground, with the segment contributing 16 per cent to H1FY09 sales as against 10 per cent in FY08.

Overall, infrastructure projects would be the biggest revenue driver followed by industrial and building segments.

To this extent, the company’s exposure to sectors that have slowed down appears limited. In the long-term however, we expect Simplex to benefit from a gradual revival in the domestic housing construction.

Simplex has protected close to 90 per cent of its future revenues through price escalation clauses.

Nevertheless, the steep commodity price hikes, together with booking of mobilisation expenses for projects for which revenues are yet to be booked, led to about 120 basis points dip in operating profit margins to 8.7 per cent in the September quarter.

We expect OPMs to improve over the next few quarters for the following reasons: One, the benefit of a decline in commodity prices may be reflected in the financials with a lag of a quarter or two.

Two, the effect of a higher share of overseas orders (26 per cent of total order book) is likely to provide superior margins, once these translate into revenues.

On the bottomline, however, net profit margin may remain muted for sometime as higher depreciation (as a result of new assets) and interest costs may act as a drag.

On the latter, while the cost of borrowing could well decline, the quantum of borrowing, especially for working capital purposes, may remain high for sometime.

This premise is based on the likelihood of private sector clients (who account for about 60 per cent of expected revenues) needing longer periods to pay their dues or, in other words, higher debtor days as a result of the less robust industrial growth.

Weekly Stock Picks - Jan 18 2009

Buy Reliance Capital

Buy Tata Power

Buy Reliance Infra

Buy NTPC

Buy Bharti Airtel

Investing in 2009

I know someone who is constantly on the line with his broker, forget global recession and FII exits. Many of his calls on the market hit home and he books small profits in these trades. The beauty of it is that this (besides the endless gazing at the charts) is all that he does for a living, and continues to do it rather well, if you consider that he has accumulated a big chunk of wealth. This is his trade, his occupation and his calling.

It's not mine, for sure. While I agonise over numbers, management quality and macro-environment, my friend wants to buy what his rumour network tells him. And he sells this stuff the minute he's got news that his punter friends are exiting the counter.

I don't like this style of batting. It sounds like he's a pinch hitter, who plays across the line every time, and wants a boundary for that. No, investing is not a 20-20 fixture or a 50-over ODI. It's a Test match. If I want a better average (as opposed to doing well only today), I'd rather accumulate ones and twos. And wait for the loose ball.

Sometimes my friend buys really screwed-up stocks. He thinks there's serious money to be made by being a kabaadiwaala in the stock market. And, indeed, there is. Just look at what IFCI, RNRL, IOL Broadband, Oswal Chem and other such items did for their shareholders in the recent bull run. To this I say: when we buy a share, we allocate capital to it. We must allocate this capital to a business that has the potential to become more valuable over time and not just get traded at a higher price.

Often, short-term price movements do not favour the rational investor. Mr Market seems to have a mind of his own and is willing to bet against you. Patience, backed by conviction, is the best way out. My friend usually exits his 'bad timing' trades at a 10% loss if the promised action goes against him. That's because he doesn't know why he entered the stock in the first place! Sometimes you do know why and still end up with an egg on your face. An analyst in my team recommended a sell last week on NTPC based on what I thought was impeccable reasoning. It was up 5.3% by the afternoon!

Imagine the agony of the early stage investors in Bharti Airtel, which did not budge for several months before it galloped from the mid-forties to four digits across five stupendous years. Their conviction was based on an understanding of how the telecom business could evolve and Bharti's ability to garner market share and deliver profits. My friend would have sold this 20-bagger at a mere 20% gain!

Investing is not just about winning and losing at the sweepstakes, but also about how you win and lose. Because that, and that alone, is what determines your average score, not the great trade you did last April.

Dipen Sheth

Satyam saga continues...

The Government appointed six members on the new board of tainted IT major, Satyam Computer Services. The new directors on the Satyam board are, HDFC group chairman Deepak Parekh, former NASSCOM chief Kiran Karnik, ex-SEBI board member C. Achuthan, CII mentor Tarun Das, former ICAI president TN Manoharan, and LIC's Suryakant Balakrishna Mainak. The new board then hit the ground running in a bid to bring the company's operations back on track. It appointed KPMG and Deloitte to restate Satyam's forged accounts. However, ICAI later claimed that the two firms are not registered with it and are not allowed to do audit work in the country. The government appointed board also simultaneously started looking for a suitable CEO and a CFO to run the company.

A Hyderabad court posted to January 19 hearing on a petition by market regulator SEBI seeking permission to question former Satyam chairman B. Ramalinga Raju and two others. The petition was filed before a magistrate court seeking permission for interrogating Raju, MD Rama Raju and former CFO Vadlamani Srinivas. P.K Reddy, lawyer of market watchdog SEBI said the judicial custody of disgraced Satyam promoter was delaying it's probe into the case. Meanwhile, a team of the Serious Fraud Investigation Office (SFIO) examined the records available with the Crime Investigation Department (CID) of Andhra Pradesh Police as part of its ongoing probe into the multi-crore fraud in Satyam. SFIO has been given three months to unravel the Satyam mystery.

In his confession recorded by the Andhra Pradesh police, the disgraced Satyam chief said, "For about seven years, we wanted to show more income in the accounts to avoid others from getting involved in company affairs and any possible hostile acquisition." Raju also said he had manipulated the balance sheet to attract more business. But, Vadlamani said that the software firm's fixed deposits were unreal and fictitious and managed with an understanding between the audit section and the top management.

Price Waterhouse, the statutory auditor of Satyam, said that its audit report is inaccurate. The audit arm of PricewaterhouseCoopers said that since the Satyam chairman admitted that the financial statements were inaccurate, it may have a material effect on the veracity of the company's financial statements presented to us during the audit period. "Consequently, our opinions on the financial statements may be rendered inaccurate and unreliable," PwC said.

Satyam denied reports that executives Ram Mynampati, Virender Aggarwal and Keshab Panda had left the country to avoid investigation. The company said they were currently meeting customers in their regions to assure them of the company's commitment. Reports said that the top executives, including these three, sold Satyam shares in the six-month period before the fraud broke out. Initial investigations by the Registrar of Companies (RoC) into the scam also revealed large-scale selling of shares by institutional investors just days ahead of Ramalinga Raju's startling confession. Global investment banking major Lazard sold a major chunk of its stake in Satyam and was likely to sell further in the coming days if it is not given a board seat.

The Government, which was believed to be considering financial assistance for Satyam, dropped the idea amid growing suspense over the extent of financial irregularities in the company's accounts. Later, Deepak Parekh revealed that the company had Rs17bn in receivables and had also paid salaries to its staff in the US. He also said that KPMG and Deloitte will take 8-12 weeks to restate Satyam's accounts.

Jain Irrigation Systems

Jain Irrigation Systems

AllCargo Logistics

Shareholders with a long-term perspective can retain their exposures to the stock of Allcargo Global Logistics. While there is no denying that the company would also have to face the effects of the global economic slowdown, its unique business model plus presence across major ports in India places it in a better position to tide over the challenge.

Besides, its access to private equity money (Blackstone Group LP) to fund its expansion plans — an option that is no longer easy to come by — may also help it score over its competitors.

The company’s stock price, however, appears to have captured these factors. At the current market price of Rs 650, the stock discounts its CY-09 per share earnings by over 12 times, leaving little room for significant appreciation in the medium term.
Increased opportunities

The ongoing economic slowdown, which has forced most companies worldwide to tighten their belts could well translate into increased business opportunities for Allcargo given its leadership position in the domestic LCL (less-than-container load) segment.

Apart from reaping benefits from the shift of air cargo to ships, Allcargo may also see rekindling of interest in its LCL service offering. Aimed at large and small exporters and importers with cargo not enough to fill an entire container, this service may now find more takers.

Companies looking out for ways to manage costs are likely to switch to LCL freight forwarding as that will not only enable them to hold lesser inventory, but will also help them cut down on their logistics expenses.

Another factor in Allcargo’s favour is its relative insulation from the impact of a sudden plunge in freight rates vis-À-vis shipping companies whose margins suffered when freight rates plunged last year.

Allcargo’s margins are dependent only on its consolidation margins; the freight rates are merely passed through to clients.
CFS business to drive long-term growth

With an extensive presence in 23 cities in India and 120 offices in 65 countries, Allcargo can deliver and receive cargo to and from over 4,000 locations across the world.

The company also has a significant presence in the high-margin CFS segment — in JNPT, Chennai and Mundra ports. Including JNPT, which enjoys the highest volumes in the country, the company’s presence in Mundra also holds potential, what with Gujarat turning into an investment hot spot among Indian industrialists.

Having a presence in Chennai may help it rake in higher volumes once the manufacturing sector picks up. It has already expanded its Chennai CFS capacity from 50,000 TEUs to 84,000 TEUs.

The CFS business, which derives revenues from the rentals for containers stored on its premises, pending customs clearance, had benefited significantly from the increased dwell time last quarter.

From an average of 11 days, the dwell time had increased to 16 days in JNPT and 15 days in Chennai. Attributed mainly to the delayed payments and reluctance of banks to extend line of credit, the increased dwell time of containers had helped Allcargo (other CFS players too) rake in better realisations and margins. While sustaining this may no longer be practical, the company may still continue to enjoy decent margins.

Allcargo also has a presence in the equipment hiring business, by virtue of the merger of Transindia Freight Services with itself. This division undertakes the movement of containers principally from port to CFS and vice-versa and factory-stuffed containers from factories to the port. Presence in the equipment business has helped Allcargo not only broad base its service offerings but also expand its revenue base. The management has expended about Rs 100 crore towards building the equipment bank (cranes) for this division.
Capex funding in place

The company plans to spend Rs 140 crore, spread over the next year and a half, towards establishing CFS (container freight stations) and ICD (inland container depots) in Dadri, Hyderabad, Nagpur and Goa.

These will be funded through a mixture of debt and private equity money (Rs 242 crore) that the company had raised in February last year by selling 10.4 per cent stake to Blackstone Group LP.

While the next round of fund infusion from Blackstone is due only in September 2009, Allcargo may, till then, take the debt route to fill the funding gap. While this temporary preference for debt may not pose any immediate concern for the company (debt-to-equity ratio well below normal), it can become worrisome if the Blackstone PE deal is called off in the interim period; this poses a major risk for the company.
Financials

For the quarter ended September 2008, the company reported sales and earnings growth of over 56 per cent and 150 per cent respectively.

EBITDA margins for the same quarter expanded by a percentage point to 11.3 per cent. On a segmental basis, the company’s MTO business registered a sales growth of 60 per cent. There was, however, a sequential decline in volumes.

As this segment remains the main contributor to revenues (64 per cent in Sep ‘08), its performance in the coming quarters will need to be carefully monitored. The CFS segment, which made up for over 29 per cent of the total revenues, almost doubled its revenues, benefiting from the increased dwell time at ports.

The fledgling equipment division made up for the rest. Profit numbers of ECU Line, the company’s Belgium-based subsidiary, also witnessed a growth of over 160 per cent.

A slew of cost-cutting measures taken by the company last quarter have helped it keep a tab on cost overheads despite increase in revenues.