Sunday, January 25, 2009
Toyota snatched the 'world no. 1 automaker' crown away from General Motors (GM) with the latter's 2008 sales volume falling behind that of the Japanese major. This is the first time since early 1930s that GM has had to relinquish its Numero no position in the global automotive industry. GM sales fell by around 11% in 2008 to 8.35 million vehicles, about 620,000 fewer than Toyota’s 8.97 million vehicles. GM had been the undisputed champion among global automakers since it overtook Ford in 1931, two years before Toyota began making cars in Japan. The two companies had traded places from one quarter to the next in recent years. GM was widely expected to slip to the second spot in 2007 but held off the challenge from Toyota by about 3,000 vehicles.
Microsoft announced disappointing second-quarter results that missed Wall Street estimates and refrained from providing guidance for the coming quarter, citing uncertain economic environment. The software major also said that it will cut up to 5,000 jobs, or 5.5% of its global workforce, over the next one and a half years. Microsoft will slash 1,400 jobs immediately, with the rest of the cuts coming by June 2010. The company also said it will freeze employees' pay in 2009. Microsoft said it will save about US$1.5bn in operating expenses and US$700mn in 2009 capital expenditure from the twin measures. The job reduction is the first such announcement in Microsoft's 34-year history.
Japan's exports registered their biggest fall on record last month, sparking concerns that local companies will be forced to eliminate more jobs and shut more factory lines, driving the world's second-biggest economy deeper into recession. Exports plunged 35% to 4.833 trillion yen (US$54.15bn) in December as against 7.434 trillion yen in the same month a year earlier, according to provisional figures released by the Finance Ministry. This was the sharpest decline since 1980, the earliest year for which there is comparable data. The December drop eclipsed a record 26.7% decline set the previous month. Economists had predicted a 30% contraction. Imports shrank 21.5% to 5.153 trillion yen in December, resulting in a trade gap of 320 billion yen, its third straight month of deficit. Japan's shipments to the US, China and Europe fell by the most ever, as the global recession sapped demand for it's cars and electronics.
The British economy officially slipped into a recession in the quarter ended December, as credit markets seized up in the wake of the housing meltdown, leading to contraction in manufacturing as well as services industries. GDP shrank by 1.5% in the final three months of 2008, the Office for National Statistics reported. The figure was weaker than the 1.2% decline that economists on average were expecting. The economic contraction follows a decline of 0.6% in the quarter ended September, meeting a widely used definition of a recession as two successive quarters of shrinking GDP. This is Britain's first recession since 1991. It was the worst performance since the second quarter of 1980, when the country was in the middle of steep downturn. On an annual basis, UK's fourth-quarter GDP shrank 1.8% following a 0.3% year-on-year rise in the third quarter. In the whole of 2008, the British economy grew by just 0.7%, the weakest annual performance since 1992.
John Thain, the former CEO of Merrill Lynch will step down from its position just days after the Wall Street firm reported a huge loss in the fourth quarter, hurt by the persistent turmoil in the financial markets. Thain met Bank of America CEO Ken Lewis in New York on Thursday. They mutually agreed that the situation was not working out, and that Thain would resign, said Bob Stickler, a spokesman for Bank of America. Thain was set to oversee Bank of America's investment banking and wealth management operations following its purchase by the banking giant in mid-September. "This is a change of leadership, not a change in the direction of the business," Stickler said. "We are very happy with how business has performed since the acquisition closed on January 1." Merrill lost US$15.3bn during the fourth quarter, forcing Bank of America to ask the US government for billions of dollars in extra support to close its acquisition of the brokerage firm.
The global economic slump has taken a toll on the Chinese economy, with its gross domestic product (GDP) expanding at the slowest pace in seven years, the government said. The latest sign of slowdown in the world's fastest growing major economy will increase pressure on the Chinese government to announce more stimulus measures, including further rate cuts. China's economy expanded 6.8% in the fourth quarter, the statistics bureau in Beijing said today. That matched the median estimate of economists, but was much slower than the 9% gain in the previous three months ended September. GDP in the whole of 2008 stood at 9% compared with the 13% expansion in 2007 that pushed China past Germany to become the world’s third-biggest economy. Urban fixed-asset investment rose 26.1% last year, the data showed, compared with a 26.8% increase in the first 11 months.
The UK government stepped up its efforts to shore up the nation's ailing banking system and unclog the credit markets, sending shares in London higher even as the pound sterling slid against the euro and the dollar. Chancellor of the Exchequer, Alistair Darling announced the second British bank rescue in three months, proposing insurance to underwrite mortgage-backed debt and toxic assets, and reversing plans to shrink Northern Rock's lending. The British Treasury also said it will increase its stake in Royal Bank of Scotland Group Plc (RBS) as it converts the £5bn (US$7.4bn) of preferred shares it bought last year to ordinary stock. The UK government will extend a Bank of England (BOE) program to inject money into the financial system. "The likely impact of this announcement on the public finances will be mostly temporary, as investments will be held for no longer than is necessary to ensure stability and protect taxpayer interests," the Treasury said.
Shares of Royal Bank of Scotland Group (RBS) plunged in London after the British bank said it may post a loss of as much as £28bn (US$41.6bn) for the year 2008, the biggest ever reported by a UK company, as the credit crisis worsens. The loss would surpass Vodafone Group Plc’s £22bn net loss in 2006. Britain's biggest government-controlled bank may post a full-year loss before exceptional goodwill impairments of as much as £8bn, Edinburgh-based RBS said in a statement. In addition, the bank may write down the value of past acquisitions by as much as £20bn. The bank said it expects to post £8bn of credit market writedowns for the year 2008, boosted by losses on US collateralized debt obligations (CDOs). Credit impairment losses may total as much as a further £7bn, including a £1bn loss on its loan to bankrupt chemical maker Lyondell Chemical Co. "The dislocation of credit markets and the global economic downturn continue to hit RBS hard," CEO Stephen Hester said. "Significant uncertainties and risks inevitably remain." "We can all be sure there will be further significant credit losses, but we can’t be sure of what amount and what timing," Hester said.
Shares of Educomp Solutions nose-dived after reports surfaced that the company may have fabricated its accounts overstating its turnover and profits to boost its shares and the promoters exited when stock prices reached its peak. However, the Managing Director, Shantanu Prakash clarified saying that rumours about directors quitting the company and promoters pledging stake were baseless. The promoters of the company have not pledged any shares and just 5% of their stake has been sold over three years for personal needs, added Prakash. The company also lodged a complaint with the Economic Offences Wing (EO) of the crime branch to probe into the sharp fall in its share price this week. The company also held a conference call to clarify several market rumours regarding its accounting practices. The stock hit a 52-week high of Rs. 4,799 on January 21, 2008 and a 52-week low of Rs. 1,515 on October 27, 2008. This week, it lost 16.3% to end at Rs. 2,088. It is down 33.5% in a month.
The Government will present an Interim Budget on February 16, according to a Parliament communiqué. Railway Minister Lalu Prasad Yadav will present an Interim Railway Budget on February 13, the second day of the coming Parliament session. The parliament session, which will be the last one of the 14th Lok Sabha, will begin on February 12 with the customary joint address of the parliament by President Pratibha Patil. It will continue till February 26. The Congress party-led multi-party coalition is expected to give an overview of the economy and highlight its achievements. It is expected to seek the parliament's approval in the second half of February to draw funds from the Consolidated Fund of India for meeting expenses until the new administration presents a full-fledged budget. The UPA government's term expires in May. The general election is likely to take place sometime in April-May. The interim budget may include some indirect tax changes, but it is unlikely to contain direct tax proposals. The new Government will announce a fresh budget for the remainder of the fiscal year 2009-10 once it takes over. According to reports, the Government may also try to pass some pending bills during the coming parliament session.
The bears seem to be chanting Yes We Can. The Obama magic seems to have vanished at the bourses as US markets recorded their worst Presidential inaugural day decline. Monday is a trading holiday for Indian market on account of Republic Day. The weekend will have a couple of big ticket results like ICICI Bank, HUL and SBI.
Next week will see the RBI make some less aggressive measures when it announces its monetary policy on January 27. A lot however, will hinge on the global cues. The results will continue to impact individual stock movements but will not have a bearing on the broader market, unless another rumor or scam surfaces. The F&O expiry will of course increase the volatility.
The two fiscal stimulus packages announced by the Government in the past two months are enough to boost India's economic growth, Planning Commission deputy chairman Montek Singh Ahluwalia said. "The Government and the RBI are coordinating the efforts and I do not think there is a need for another stimulus package," he added. "The Planning Commission thinks whatever has been done is sufficient." On January 2, Ahluwalia had unveiled a second stimulus plan, including steps to inject capital into banks and finance firms, besides allowing overseas investors to double purchases of debt. On the same day, the RBI cut interest rates for the fourth time since October. The central bank is scheduled to undertake a quarterly review of its annual monetary policy on January 27 in Mumbai. The plan panel's deputy chief has already ruled out any further tax cuts to the industry during the current fiscal year.
The Securities & Exchange Board of India (SEBI) on January 21 announced that company promoters must disclose shares pledged with the financial institutions and the disclosure should be event-based as well as periodic. "To enhance the disclosure requirements, SEBI Board, in its meeting held today, decided to make it mandatory on the part of promoters (including promoter group) to disclose the details of pledge of shares held by them in listed entities promoted by them," SEBI said in a release. "Such disclosures shall be made as and when the shares are pledged (event based disclosure) as well as by way of periodic disclosures," it added. The capital market regulator would make necessary changes in the relevant regulations and the listing agreement to accommodate the new measures taken on pledging of promoter shares, SEBI chairman CB Bhave told a news conference in Mumbai after a board meeting. He also said there will be no limit on the number of shares that can be pledged by the promoters. Disclosure norms on shares pledged by the promoters need to be enhanced further, Bhave added, as pledging of promoter shares affects other shareholders in the company. "Details of pledge of shares and release/ sale of pledged shares shall be made to the company and the company shall in turn inform the same to the public through the Stock Exchanges," SEBI said.
CFA Institute, the global association for investment professionals,released the results of a global member poll on these two questions:
1.What impact has the crisis had/may it have on your career and/or your firm?
2.Professionally speaking, could you have done anything to help mitigate the current crisis for your firm or your clients?
Nearly 1,700 members responded to the poll. On the first question, 71 percent of respondents said their bonus had been or might be reduced or eliminated, 39 percent said their firm had laid off or might lay off others, and 57 percent said their workload had or was likely to increase. Only 3 percent said the crisis had had no impact.
Regionally, there are a few significant and notable differences. In general, those in the Americas (Canada, United States, and Latin America) region and the Europe/Middle East/Africa (EMEA) region seemed to have been impacted to a greater extent than members in the Asia Pacific region when it comes to increase in workload, layoffs in the firm, losing clients, and firm acquisitions and shut downs. A significantly higher proportion of those in the EMEA region indicated their bonus had been or might be reduced/eliminated (77 percent) compared to those in the Americas (68 percent) region.
“Undoubtedly this is a tough period for the entire world. Career opportunities cannot be compared with those in the past. This means that investment professionals would need to stay competitive and be adaptive to changes, including the possibility of relocation, probably more so than ever before. Hopefully this is a time when CFA Institute can especially help our local members by providing them with more lifelong learning opportunities and connection with the global CFA Institute membership network,” said Dr. Ashvin P. Vibhakar, CFA, managing director, Asia-Pacific Operations, CFA Institute.
As to the second question, 40 percent of the respondents said there was nothing they could have done to help mitigate the crisis, but 40 percent said they could have better understood the various risks in the market. Only 12 percent said they could have exerted greater clarity in communications to others about security attributes.
A significantly lower proportion of members in the Asia Pacific region indicated there was nothing they could have done to help mitigate the current crisis for their firm or clients (23 percent) compared to the Americas (45 percent) and EMEA (38 percent) regions. The Asia Pacific members indicated they could have had a better understanding of the various risks in the market and could have done better research on underlying investments.
“The historic meltdown of the global capital markets is the result of a number of factors, including the actions, and inactions, of a variety of market participants. In many ways, the current collapse echoes the mistakes made in past crises: ignorance of risk coupled with widespread use of leverage,” said Dr. Vibhakar.
The fourth largest IT major inflated staff numbers by well over 10,000 people, Andhra Pradesh’s public prosecutor Ajay Kumar told a local Hyderabad court. What's more, the erstwhile promoters and management siphoned off money, at an average of Rs200mn a month as salaries to fictitious accounts, for at least five years. Enough evidence is also emerging on large scale fund diversion and fictitious bank deposits to the tune of Rs33.6bn. The possibility of insider trading by the promoters could not be ruled out either, Kumar told the court. Disgraced Satyam founder B. Ramalinga Raju also bought lands not only in India but in other countries also, prosecutors told the court. Kumar also said that former Satyam CFO, Srinivas Vadlamani, had confessed to the fraudulent activities. Raju’s lawyer, Bharat Kumar denied all allegations, saying that no written application of Raju’s and Vadlamani’s confessions was produced before the court.
A local court on Friday posted the hearing on bail petitions of Ramalinga Raju, and its ex-CFO, Vadlamani Srinivas, to January 27. The chief metropolitan magistrate posted the bail plea of B Rama Raju, brother of Ramalinga Raju and former MD of Satyam, to January 28. Separately, the Andhra Pradesh CID arrested Gopal Krishna Raju, general manager of SRSR Holding, through which Ramalinga Raju's family held a stake in the IT firm. SRSR Holding is owned by Ramalinga Raju's sibling, Suryanarayana Raju, whose house was also searched by the police with regard to the Rs78bn accounting fraud in the IT major. In related development, the Registrar of Companies (RoC) filed a caveat in the Andhra Pradesh High Court with regard to the Company Law Board orders restraining former whole-time directors, chairman, chief financial officer and company secretary of Satyam from selling or mortgaging their assets.
Tarun Das, one of the government nominees on Satyam board, and the Government admitted to receiving several approaches from potential suitors. Larsen & Toubro (L&T) increasingly emerged as a strong contender for buying Satyam, though the company denied any such move. L&T chairman A.M. Naik also met top government officials in New Delhi to discuss the Satyam issue. The engineer major also increased its stake in the Hyderabad-based company from 4% to 12%, claiming that it was doing so to protect its interest. Reports suggested that Tech Mahindra, Patni (along with PE firms), Essar group and iGate Global remained in the hunt for acquiring Satyam or parts of it. Separately, Infotech Enterprises said that some of Satyam's customers had approached it but refused to name any of them. Some clients notified Satyam that if uncertainty persists they could terminate their relations with the company.
The new board of Satyam said that additional funding arrangements and the appointment of the top management were in the final stages of being concluded. The board said that it had narrowed the shortlist of candidates for chief executive and chief financial officer to the final three and the decision would be made in the coming week. Existing customers continue to release new work orders and collections from receivables were robust, it said.
Value retailers were, for some time, a preferred option among retail stocks based on the belief that they fare better during tough times. But recent numbers from Vishal Retail, a value retailer present in 181 stores across most Indian states, suggest that not all value retailers are well-placed to weather the slowdown.
Despite its very low valuations, investors can consider selling this stock. The company’s sales growth appears set to slow down sharply, as its same-store sales moderate and it scales back on expansion plans.
A slowing topline, given the thin margins and a high debt burden, may lead to a deteriorating profit picture, pointing to earnings uncertainty for the next couple of years. The stock has fallen precipitously from our earlier ‘Book Profits’ recommendation at Rs 689 (June 22, 2008) and now trades at Rs 53. It is valued at a PE of four times its trailing 12 month earnings with an enterprise value of 0.6 times its 12 month sales and 0.5 times its estimated FY-10 sales.
Space addition was aggressively pursued, its store network surging from the pre-IPO 49 to the current 181. Vishal had floated its IPO in mid-2007, raising about Rs 110 crore, primarily to fund space expansion. Of this, Rs 104 crore, besides debt, was employed for the purpose.
Successive quarters, post-IPO, saw revenues on the rise, and sales in the quarter ended December 2008 increased 24 per cent over the same period last fiscal. But this is clouded by the fact that sales have been weakening sequentially, shrinking by 5 per cent in June quarter and again by 6 per cent in December quarter of this fiscal.
Vishal’s sales in North India, especially, have been severely affected; its concentration in that region has dealt quite a blow to sales. The company’s focus on Tier-III cities — 139 of its 181 stores — means an overall yield per square foot that is lower than peers. Over 50 per cent of Vishal’s sales come from apparel retailing, where spending has been vulnerable as consumers feel the pinch on their household budgets.
Reliance on existing stores
In the light of slowing consumer spending, and narrowing discretionary spending evidenced by low turnover in the consumer durables segment, Vishal is restricting expansion plans to about 5-10 per cent on a year-on-year basis.
Any addition to retail space will be undertaken through franchisees. Franchise stores currently number 13, and have not contributed significantly to the company’s expenses or margins as yet.
Cutting back expansion means that Vishal will have to rely for its growth on sales generation from existing stores rather than additions as has been the case thus far. The picture on this is not confidence-inspiring, as same-store sales growth for the first two quarters of FY-08 was just 7-8 per cent and then turned negative in the third quarter.
There has also been a drop in daily footfalls on a quarterly basis by about 7 per cent. Vishal has managed a marginal increase in conversion rates, but given an overall slowdown in spending, this aspect offers little cheer.
Viewed in relation to its peers, Vishal has performed reasonably well at the operating level, with margins for the past two quarters at 12 per cent. It has been able to bring down operating costs by re-negotiating rentals with landlords; in some cases managing a 40-50 per cent reduction in rates.
Added to this, it has reduced areas in some stores, and cut down on its warehouse space by nearly half. Logistics has been redesigned in an effort to make it more cost efficient. Using the franchisee mode of expansion in place of owning new stores will require almost nil capex requirements and reduced expenses on power and rentals. Such cost controls may not be possible with owned stores.
However, despite these measures, with the deceleration in sales, high interest costs and depreciation have cut net profit margins down to less than 1 per cent in the December quarter. Debt rose by 44 per cent , with interest payouts more than doubling in the past year. Fixed assets increased 34 per cent in FY09, having already doubled in FY08, pushing up depreciation costs by 80 per cent in a year.
Even so, asset turnover has steadily declined in the past three years, a trend mirrored by inventory turnover. Vishal aims at minimising inventory levels by bringing them in line with sales and will attempt clearing out stocks via discounts. While this may unlock working capital, it will have negative margin implications.
Burdened by debt
Vishal’s debt equity ratio is fairly high at 2.6 times. However, it is the interest cover which is more of a concern, having shrunk from seven times to 2.6 times in three years. A portion of debt is due to be repaid this March, and the company has stated that it proposes to roll over debt, for the second time since last year.
Given the more stringent environment now prevailing on bank credit, this may pose challenges, especially given its weak operational cash flows and depleting interest cover. Benefits from extending credit period allowed to it by other creditors may also not improve cash flows significantly.
The markets displayed a declining trend this week as the Sensex hit a lower high and low on each day. The index opened at 9,382, touched a high of 9,410, before slipping slowly and steadily to a low of 8,632 — an intra-week range of 778 points. The Sensex finally ended the week with a loss of 7 per cent (649 points) at 8,674. In the process, the index has now shed nearly 14 per cent (1,284 points) in the last three weeks.
Among the index stocks, Tata Steel, Mahindra & Mahindra and DLF slipped around 18 per cent. ICICI Bank, Ranbaxy, Hindalco, Maruti, Reliance Communications, Tata Motors, HDFC, Grasim, Larsen & Toubro, SBI, Reliance Infrastructure and Wipro dropped by 10-14 per cent.
This shows that the action was more stock specific, while the broader market slipped at a lower pace. This was unlike the January 2008 or October 2008 crash, when the broader indices too came crashing in line with the stock prices.
Under the given circumstances, many stocks, including index heavyweights, are in the oversold zone, while the index has not reached the oversold zone. The 14-day RSI (Relative Strength Index) of Sensex is still around 44 per cent. A RSI of less than 30 per cent is said to be oversold.
Secondly, the Sensex is close to its monthly S3 (support) of 8,580, and the quarterly support of 8,435. The October low was at 7,697. There seems to be a chance for the Sensex to find some support around 8,435-8,580. If it happens, then the index may form a slightly higher bottom for the time being. In case, the support zone is broken, then the index may tumble to the 7,550 to 6,700 levels.
In the coming week, the Sensex is likely to face resistance around 8,970-9,065-9,155, while it may find support on the downside around 8,380-8,285-8,190.
The NSE Nifty moved in a range of 207 points, from a high of 2,868, the index dropped to a low of 2,662, a fall of 207 points, and ended with a significant loss of 150 points at 2,679.
The Nifty is expected to find considerable support around the 2,575-2,625 levels. A sustained stay above the 2,755-mark will strengthen the index.
Investors can consider buying the shares of Zee Entertainment Enterprises (Zee), given the company’s leading position in the general entertainment category, its reasonable profitability picture compared to peers and steady business prospects.
The stock’s large cap status may also make it a preferred option in the media space. Zee is a broadcasting player with a large bouquet of channels, prominent among them being Zee TV.
These channels cater to a wide variety of audience across entertainment segments. Among players in the broadcasting business, Zee is one of the very few profit making companies. At Rs 92, the stock trades at 10 times its likely 2008-09 earnings. Considering the fact that advertising revenues may come down on the back of an economic slowdown, the company may still be able to grow earnings by 15-20 per cent over the medium term.
Zee’s good standing in the general entertainment space, substantial growth likely in subscription based revenues on the back of cable digitisation and DTH platforms and gains from movie channel Zee Cinema provide scope for earnings growth over the next couple of years.
The company’s December quarter numbers, though, were below expectations with advertising revenues falling 5.9 per cent over the previous quarter, and a marginal growth in subscription revenues. Zee appears to have factored this slowdown, and has indicated a 15 per cent growth in advertising revenues for the full year.
Digital subscription to drive growth
Subscription-based revenues contribute nearly 40 per cent of Zee’s revenues. This segment has been growing at over 30 per cent over the last few quarters. This has slowed down in the December quarter, but the company still hopes to grow revenues from this segment by 23 per cent over 2007-08.
This growth thus far has been largely on the back of increased digitisation in cable television networks around the country and increasing penetration of newer platforms such as DTH (direct to home). Over half the company’s subscription revenues are derived from overseas and allows opportunity for Zee to grow revenues by increasing the user charges.
Conditional access system or viewing satellite channels through set top boxes may continue to make headway over the next few years. The Telecom Regulatory Authority of India has made conditional access in 55 cities across the country by 2011. This will mean better reporting of revenues by cable operators and in turn a better share of revenue for broadcasters such as Zee.
The company has gone on a deactivation drive, to recover dues from a section of cable operators; which may improve the receivables position.
This apart, the steady headway of DTH is also a positive for Zee. By the end of 2008, the country had as many as 10 million subscribers on this platform; DTH operators estimate that this will double by 2009. Apart from Dish TV and Tata Sky who are established players in DTH, new entrants such as Reliance – Big TV and others such as Sun Direct and Bharti Airtel may expand the overall DTH pie. All these ensure a larger opportunity for the company to garner advertising revenues.
Broadcasting business stabilising
On the advertising revenue front, a slowdown does appear likely. But players such as Zee who have an entrenched position in the category, a larger proportion of original content and a diversified portfolio of channels may remain the preferred options for advertisers, even if the overall pie grows at a lower rate.
In this context, it needs to be noted that the company’s flagship channel Zee TV no longer accounts for the lion’s share of advertisement revenues for the company.
Other channels in its bouquet such as Zee Cinema, which maintains its leadership in the Hindi cinema genre, Zee Café’ and Zee Studio have also started to contribute significantly (nearly half) to advertisement revenues.
But Zee TV by itself has seen lowering TV viewership rating points in the general entertainment category over the last couple of quarters. Colors, a newly launched channel has managed to pip Zee TV to the second spot just behind Star Plus.
This might be discomforting for Zee, as a lower rating may mean lesser ad revenues. But the gulf between Zee TV and channels such as Sony and NDTV Imagine, both of which are struggling with lower viewer-ship, is quite wide. SET Max though may garner higher ratings during the IPL cricket season. But this will snatch viewership across all channels.
As the environment for smaller players and new entrants becomes more challenging and funding remains difficult to access, new entrants may find it difficult to sustain heavy investments.
Being an established player and with more original programming hours than its rivals, Zee TV appears well placed to ride out competition and still attract advertisers. It still has as many as 15 programmes in the top 50 viewed programs according to media rating agencies. In the cinema genre, Zee Cinema, has managed to retain a market share of 34 percent, despite a host of new launches in this segment.
The company has also not adopted any knee jerk reaction to claw back to the top slot. Zee Next one of its recent channel launches has been put on maintenance mode with no significant investments lined up.
On advertising revenues per se, though financial advertisers (barring insurance players) have cut back, FMCG and telecom players continue to spend on advertising.
The Rallis India stock is a value buy for conservative investors looking to add to their portfolio. Rallis India’s profits over the past four years have been aided by a sizeable “other income” component. But there is now the prospect of a substantial improvement in core earnings as the company’s product launches, distribution alliances and restructuring efforts of the past four years begin to bear fruit.
The stock has escaped nearly unscathed from the market meltdown, and features a low FII interest and a substantial holding by domestic mutual funds.
At Rs 370, Rallis India trades at about seven times its trailing 12-month earnings (about Rs 56 per share, excluding exceptional items). That is at a discount to industry peers such as Monsanto India (12 times) and BASF India (nine times).
Rallis India has a leading share in the domestic crop protection market, with a small portion of its revenues derived from seeds, nutrients and leather chemicals.
As with other Indian producers, Rallis India’s strengths lie in reverse engineering of molecules, low-cost manufacturing and an extensive distribution network. The advent of the product patent regime in 2005 and increasing competition from MNCs (they enjoy superior research capabilities and access)contributed to thinning margins for Rallis in recent years. The launch and rising acreage of Bt cotton also cut pesticide use in this crucial segment.
Products and alliances
However, Rallis has countered these threats through a two-pronged strategy. To start with, it has forged strategic alliances with global life science majors such as E.I.Du Pont, Syngenta, Nihon Nohyaku, FMC and Maktheshim Chemicals, opening up its access to new molecules and formulations from their portfolio.
The strategic alliances have also helped Rallis emerge as a key toll manufacturer of agrochemicals for the global players, with nearly a fourth of its revenues now coming from exports.
Aided by the alliances, Rallis has strengthened its product pipeline by adding new-generation products to target non-cotton staples such as paddy, vegetables, pulses and wheat. New products that target sucking pests have also helped sidestep the Bt cotton threat.
The product portfolio now features as many as 26 branded insecticide formulations, 10 herbicide and nine fungicide products. The year 2007-08 alone saw four product launches of which those such as Takumi (insecticide targeting caterpillar attacks),
Applaud (an insect growth regulator for paddy) and Taqat (a vegetable fungicide) were among the successful ones. Given the possibilities for geographic as well as crop diversification, recent product launches may have substantial potential to scale up revenues in the coming years.
These efforts have been supplemented by a financial and operational restructuring. Between 2002 and 2008, the company has exited unrelated businesses, systematically rationalised its manufacturing facilities and disposed off its surplus land and assets.
These generated steady cash flows (the “other income” component in its numbers) which have been deployed in paying off debt, even as working capital requirements have been reduced significantly. With most of the long-term debt paid off, Rallis’ debt:equity ratio has fallen from a peak of over 8:1 five years ago to a negligible 0.1:1 now.
The above initiatives appear to be reflecting in Rallis’ numbers, with operating profit margins and sustainable earnings registering a sharp improvement over the past two years.
For the nine months ended December 2008, Rallis India saw a 77 per cent growth in operating profits (excluding exceptional items) on the back of a 23 per cent expansion in sales; its operating profit margins at 15.9 per cent, up from 11 per cent last year.
While the company’s expanded product pipeline may help sustain the higher profitability, last year’s good monsoon, higher acreages of key target crops such as paddy and cotton and the generous increases in minimum support prices may translate into strong demand and sales growth for Rallis in the year ahead.