Sunday, May 17, 2009
After the fractured mandate that the exit polls had thrown up, the election results will pleasantly surprise the markets. At the time of writing this report, we just have the leads and the UPA is leading in 256, while the NDA is leading in 166. This lead is unassailable. The markets will like this.
These are my submissions
* There will be continuity of policies
* The UPA will not need the crutches of the Left.
* Therefore, will be able to carry out whatever reforms it wanted to do
* The markets will open with a huge upward gap, likes of which has never been seen or heard in our markets. We could even hit the upward circuit breaker.
More investors are outside of the markets, waiting to enter. Some will pay a hefty price and enter. Others will remain spectators. On the FII front there was ample money waiting to come in once the event was over. This verdict re-assures the global investors of the continuity of the policies accompanied by more reforms. The FIIs will now rush in.
While India specific money will have no option but to enter now, the money demarcated for the emerging markets can go to other countries in the basket where the markets are reacting.
The global rally in stocks seems to be coming off. The S&P 500, the Dow and the Nasdaq Composite all retraced their steps on a weekly basis. The Nasdaq infact, ended its nine week running streak. This is something that can effect our markets, once the markets do a mandatory jig Monday.
As a new Government is formed, it does have the potential of giving a further fillip to the markets by various announcements. After the initial euphoria dies down the markets will correct a bit and soon expectations about the budget will start building.
Our idea of investing in PSUs, advised with NDA in mind, holds true even with UPA in power. Nothing stops the UPA from doing what it wants in the sector now. The only constraint it has is its own imagination.
With left doing a vanishing act, the Nuclear Deal is intact and power stocks will do well. Power also find mention in the Congress Agenda. So this is the sector that will see more action.
Infrastructure and Real Estate will see improved valuations as the funding problems get solved and the sectors get re-rated.
The pending bills in the parliament, kept in the cupboards to save them from the wrath of the Left, will be dusted off and brought back to vote. So you could see FDI limits being raised for Insurance and Banks being restructured.
More importantly, rising tide will raise all boats. So 99% of the stocks will shoot up with no immediate change in fundamentals.
For someone who is outside the market, its going to be painful entering the markets, but there is little choice.
Anyway, to come back to Election 2009, let me present some blunt home truths:
* This was a positive vote for the Congress, including Sonia and Rahul.
* The contribution of Manmohan Singh to the victory was significant. In hindsight, he was the unquestioned winner of the "weak" versus "strong" debate.
* It was Manmohan's perceived decency that mattered to the electorate.
* The under-30 youth vote went overwhelmingly in favour of the Congress. The Congress reinvented itself as a party where youth matters; the BJP was seen as hidebound.
* The media helped project Congress as wholesome; the BJP was seen as ugly. Varun Gandhi may have won Pilibhit but he lost the BJP lakhs of votes nationally.
* The middle class vote deserted the BJP and gave Congress the extra cutting edge--just see the margins of victory in Delhi.
* The loan waiver and NREGA helped blunt possible anti-incumbency.
* People voted by and large on national lines. This was not an aggregate of state elections. There was a national swing in favour of the Congress.
* In UP, we are seeing the restoration of the Congress coalition which was broken in 1991. Both BJP and BSP are likely to be casualties.
What are the specific lessons for the BJP?
* The party must recognise that this was a political failure and not merely a defeat caused by management shortcomings.
* The so-called "Hindu" appeal may work in specific areas (Pilibhit, Mangalore, Azamgarh, Kandhamal, et al) but it is perceived as divisive elsewhere.
* The ugly face of Hindu extremism puts off the middle ground.
* There is no such thing as a Hindu consciousness that exists today. The nationalist middle ground has shifted to the Congress.
* The BJP leadership is seen as completely unresponsive to youth aspirations and modernity.
* There is a tendency of the BJP to preach to the committed and not reach outwards.
* In caste terms, we are witnessing a definite drift of the upper castes to the Congress.
* The OBCs are now the bedrock of the BJP but this has not been formally acknowledged.
* The RSS-isation of the BJP organisation post-2005 has created serious distortions.
* The integrity quotient of the BJP is now at par with that of the Congress. This is a problem that the moral guardians of the party have wilfully turned a blind eye to.
What should the BJP do immediately?
* Recognise the magnitude of defeat and not live in denial (as happened in 2004).
* There has to be some visible demonstration of the fact that the party has responded to the message. Advani was right to step down and the Parliamentary Board was wrong to reject it. There is still a very important role for Advani but his position is that of a mentor.
* There has to be a revamp of most state parties. Young, dynamic MLAs and MPs must be given organisational responsibilities.
* The RSS-non-RSS divide in the party must be bridged. Those who never attended shakhas can't be treated as second-class members.
* The BJP must focus on the policy debates in the coming two years. Interventions in Parliament must be given due importance. The Leaders of Opposition in both Houses must be chosen accordingly.
* The party needs to project a modern, cosmopolitan face as national president to woo back the middle classes. What is needed is a picture of wholesome sobriety. The sooner this is done the better.
* A culture of frankness and debate has to return to the party. The miscalculations resulting from telling the leadership what it wanted to hear were colossal.
* Modi has to add the OBC tag to his appeal. His pronouncements must become more measured. He has to work on his national acceptability.
* Stringent norms of fund collection should be set. The private war chests have caused havoc to the functioning of the party.
by Swapan Das Gupta
Consider a situation where you have to buy a stock at, say, Rs 100. See it climb to Rs 200 and then plunge back to may be Rs 80 in no time.
Then it takes months or may be years for that stock to reach Rs 200. You rue your decision not to sell when the stock had touched Rs 200.
Investor behaviour is motivated by greed. That makes us think that a rising stock will climb further. But until you sell, the capital appreciation is only on paper and, therefore, likely to vanish if prices start tumbling.
Yet, the right time to unload shares is one of the toughest calls an investor has to make. Even investment analysts and fund managers admit it can be difficult. Here are a few guidelines you can follow while making the decision:
Targeted return: Whenever you buy a stock maintain a target price at which you will sell the stock partially or fully. When the target price of your stocks has been reached, taking a selling decision is easy.
The targeted return could be 25 per cent or 40 per cent, based on your risk appetite or it could be based on what you think is the fair value for the stock. This discipline of booking profits will stand you in good stead as you will accrue profits, without giving in to greed during a rising trend.
Stop-loss trigger: By having a stop loss trigger you sell a stock, not to book profits, but to minimise your losses. A stop-loss sell order is a contingent order that will get triggered only if the stock does fall to a particular price.
For instance, the stock you have decided to sell is quoting at Rs 100. You have reason to believe that the stock will go up but you need to protect your profits.
So you may place a stop-loss order for the stock at Rs 80 as trigger i.e. in case it goes below Rs 80 you will compulsorily sell it.
Stipulated time or event: It may happen that you are targeting a specific sum for a particular event like a child’s education, marriage or vacation. In case you have an opportunity to realise this sum before the time period is over, you can do so and park it in a safer avenue such as fixed deposits, bonds.
By doing this, you may avoid exposing your investments to the volatility in the stock market closer to your goal.
Asset allocation: Sometimes, because of a relentless rise in a particular stock or stocks, the weight of that stock or stocks in your portfolio could rise substantially, making your portfolio lopsided.
Prudence demands that you reduce exposure to the stock to rebalance your portfolio. The change in asset allocation could also be due to change in preference with growing age.
As you grow older, try to increase the percentage of fixed income instruments in your investment portfolio.
Changes in fundamentals of the stock: There could be fundamental reasons why you should think of selling the stock that you have long owned. It could be a sudden about turn in the company’s financials or prospects — the loss of market share, declining margins, or liquidity problems that peg up the risk of holding the stock. By selling out now, you may get a chance to buy later at a lower price.
Mismanagement: In case you come across any mismanagement in the company or issues of corporate misgovernance then it is better to get rid of the stock at the earliest opportunity.
The Satyam Computer stock has been the sole stock not to participate in the recent market rally. A lesson that companies which lack in corporate governance may not benefit you in the long run.
New investment avenue: Another reason to sell your stock could be the opening up of a new investment avenue that can deliver better returns than your existing investment. While evaluating returns it is also necessary to evaluate risk, an investment that delivers a 12 per cent return with no risk may be superior to one which delivers 15 per cent with risk to your capital.
The above are some of the triggers for selling. There can be a few more which may be relevant to individual investors.
Whether it is a bull phase or a bear market rally, there will always be stocks in your portfolio that merit selling or replacing with other options.
Long term wealth creation requires you to be, not a passive investor, but an investment strategist who aims to maximise gains.
Booking of profits is not a bad idea at all; after all, it leaves you with liquidity, which can be handy when there is an opportunity to buy.
With a 14 per cent return over the past year, the Maruti Suzuki stock has outperformed the BSE Auto index (17 per cent decline) and has turned out to be one of the best defensive picks. At Rs 848, the stock discounts its four quarter earnings by 19 times. Strong performance has pushed its valuation to a premium over the entire auto pack (about 17 times), limiting possible upside over the medium term. However, shareholders of the company can remain invested for its strong earnings visibility.
With value-for-money offerings in the sedan segment and price increases to offset input costs, the company’s top-line for 2008-09 registered a growth of 13 per cent, beating the automobile slowdown. However, net profits have disappointed, declining by 30 per cent due to higher material costs, a change in depreciation policy and forex losses. With sustained sales growth in April 2009, planned launches and good export prospects, the company appears well-placed to deliver continued sales growth this year. Easing margin pressures, as commodity price declines filter in, suggest that the company is on track to deliver better earnings performance.
Strong product portfolio
Maruti’s key advantage lies in its focus on the passenger vehicle segment, which has weathered the slowdown better than commercial vehicles. Products at almost every price point — Alto, WagonR, Zen Estilo, Swift and A-Star — make the company a market leader in the hatchbacks (A2) segment. Intense competition and tight credit availability that prevailed for most of last year muted its sales growth in this space to 2.4 per cent. But with credit crunch easing out, this segment has shown better growth since the beginning of 2009 (10 per cent increase in sales between December 2008 and April 2009). Maruti has enlarged its market share in this segment to 59 per cent this year as against 53 per cent last year. Swift and the recently launched A-Star have helped these gains. The launch of Ritz this week may strengthen Maruti’s position in the hatchback market, as it occupies a price point between Swift and A-Star.
While the hatchback segment witnessed a slowdown last year, it is the sedan or the A3 segment that has delivered surprising growth for Maruti. Driven by launches of SX4 and Swift DZire (the sedan version of Swift), this segment has grown by 53.9 per cent. The sedans have been less vulnerable to the credit crunch, given that a higher proportion of purchases is funded by cash. The Sixth Pay Commission revision has also aided cash purchases in this segment.
Concerns however remain on Maruti’s entry-level models such as Maruti 800 and Alto. Preferred by the urban middle-class, these cars may face challenges in 11 cities, including Delhi, Mumbai Kolkata and Chennai, after a change in emission norms to Bharat Stage IV mandated by October 2009.
The company may have to either re-engineer these versions or phase them out in these cities to meet the new norms. As of now, there is not much clarity about what it plans to do in this regard. The Tata’s Rs 1 lakh car, the Nano, has also been perceived as a threat to Maruti’s entry level models. About 50 per cent of the bookings for the Nano are estimated to be for its high-end variants which are relatively close to Maruti 800 and Alto in terms of performance.
With the on-road price differential (in Delhi) of about Rs 35,000-Rs 50,000 between Maruti’s entry-level models and Nano’s high-end version, competition from this source cannot be ruled out.
Mighty export ground
Domestic sales apart, exports too are seen as a key growth driver for Maruti over the next couple of years. Engineered to suit European standards, A-Star has lifted Maruti’s exports by 32 per cent for FY09. Exports accounted for 10 per cent of the company’s sales volumes in the last fiscal.
Maruti has a contract with Nissan to manufacture 50,000 of A-Star under the ‘Pixo’ label in Europe and a tie-up with Suzuki to ship 10,000 units of the car to Latin America, Algeria, Australia and some African nations.
Favourable incentives offered by the European countries, for fuel-efficient small cars to replace the older ones, give ample room for the company to expand its export volumes. Maruti has reached 38 per cent of its export target (two lakh units by fiscal year 2010-11) so far. The launch of Ritz (another model that may suit European requirements), could also hold potential.
The year 2008-09 ended with a sales growth of 13 per cent, while total volumes grew by 3.6 per cent. Excise duty cuts aided sales margins. High-cost pressures from some raw materials such as steel, aluminium alloys and rubber, and a change in product mix in favour of diesel variants (particularly in Swift and DZire), resulted in the operating profits declining by 48 per cent on a year-on-year basis. The net profits shrank by 30 per cent.
Forex losses incurred in FY-09 may be viewed as a one-off profits dampener since they were on account of import contracts for raw materials. The company has been slow to benefit from softened commodity prices since it has entered into long-term agreements for raw materials.
The effect of lower input costs will trickle in by the first quarter of this fiscal. With initiatives to localise vendors, operating profits are expected to grow by 20-30 per cent in 2010-11. On a sequential basis, the company has seen 33 per cent increase in sales volume and a 19 per cent increase in net profits for the March 2009 quarter.
Investors with a long-term perspective can consider accumulating the stock of Piramal Healthcare on declines related to the broad markets. A well-entrenched presence in the domestic formulations business helped by a dedicated field force of over 4,000 and the strengthening position of its Indian custom manufacturing division lend stability to Piramal’s prospects, even as its overseas CRAMS assets may lower contributions.
At current market price of Rs 253, the stock trades at about 11 times it likely FY10 per share earnings. This appears reasonable, considering the company’s growth rate and its strong footing in the domestic market.
For the year-ended March 09, Piramal’s contract manufacturing business clocked a growth of 5 per cent, of which revenues from its global assets fell by over 15 per cent. Slowed investments by big pharma companies, de-stocking of inventories and drying up of funding for smaller biotech firms pushed down the revenues from the global CRAMS business.
To offset that and to streamline its production, Piramal recently announced the closure of its Huddersfield facility and moved those contracts to its low-cost Indian facility. While in the near-term this may dent the segment’s revenues, it is likely to lift overall margins.
For the year, the segment’s revenues from facilities in India have grown by over 74 per cent. That said, it is the contribution from the company’s healthcare solutions (domestic formulations) that will lend stability to its overall growth.
Piramal reported a net sales growth of over 14 per cent last year, driven primarily by the strong performance put in by the domestic formulations business. Its revenues grew by about 24 per cent, outperforming even the market growth rate of 10.1 per cent.
That the company expanded its market share to 4 per cent this year from 3.6 per cent earlier (ORG IMS MATMarch 2009) also points to the strengthening position of Piramal in the domestic market.
This business is likely to be the key growth driver for the company, given its focus on volumes and product launches. The management looks towards a growth of 14-16 per cent for this segment.
It, however, has lowered its revenue guidance for the global critical care segment (GCC) for the current fiscal to $55-60 million, as Minrad International Inc, which Piramal acquired recently, may not be able to launch Desflurane this year (Baxter has sued the company’s bottle closure system). The launch of Desflurane would, therefore, be a key trigger for this segment.
Investors can consider buying the stock of Elecon Engineering, which manufactures industrial gears and material handling equipment.
While slowing order inflows, especially in its industrial gears segment, absence of any material progress in its new windmill and windmill gearboxes venture, besides the increasing pressure on its working capital had kept the company from meeting its FY-09 guidance, with the economy now showing signs of revival, the tide may be turning for Elecon too.
At the current market price of Rs 56, the stock trades at about 8 times its likely FY-10 per share earnings. Investors however can accumulate the stock in lots on declines, as it may take a couple of more quarters for the order flow scenario to improve for Elecon.
The company’s order book at end-March 09 quarter stood at about Rs 1,629 crore (about 1.7 times its FY-09 revenues), registering a growth of over 26 per cent year-on year. It has since added over Rs 200 crore worth orders from different companies. But even as the order book cover lends healthy visibility to its revenue, what remains a concern is that the order booking has been weak. While most companies in the capital goods space have also reported weak order inflows, for Elecon, the concern arises from delay in execution of a Rs 400-crore order included in the current order book.
This order, bagged in August 2008 from Bramhani Industries, was put on hold by the latter. This issue, however, may be addressed soon as the management expects the order to take off in the next couple of quarters.
Besides, considering that some of its user industries such as steel, power and cement have begun showing signs of bottoming out, a revival in these sectors could mean a renewal of order flows for the company. The company has so far received business-related inquiries worth Rs 3,000 crore.
Industrial capex key to growth
Driven by the economic downturn, most companies have either postponed or significantly cut down their capex plans for the year. While some pockets of the economy have sprung back, registering good numbers, there appears no clear trend of companies coming forward to announce major expansion plans or other capex spends. This does not bode too well for Elecon, given its exposure to industrial capex.
The company’s industrial gears division, which owes its fortunes to the increasing spends by its user industries, reported a 30 per cent decline in revenues for the March-09 quarter as against the same quarter last year.
The facility also clocked lower utilisation levels of about 25-30 per cent. This was also partly due to the deferment of some orders last quarter, which will most likely get reflected in its current quarter revenues. The division currently has an outstanding order book of about Rs 239 crore only (executable over three-five months). That industrial gears enjoy higher margins also makes it imperative that the company receives more orders from the gears segment.
The windmill gearbox segment revenues will also from now be covered under the industrial gears division; the gearbox facility is currently ready and the management expects to procure orders for the same soon.
Elecon’s material handling division (MHE) appears to be the only division on a firm footing for now. This division, which also makes up a bulk of the total order book, may continue to drive the company’s growth. Sustained spends by companies such as BHEL in the power sector with which Elecon enjoys a good rapport, may help the division hold its ground. This may also bode well for the industrial gears division (as MHE uses gears) to some extent.
For the year ended March 09, Elecon managed a revenue growth of over 16 per cent, helped primarily by the strong growth in its MHE division (grew 25 per cent). The gears division reported flat growth. Falling revenues from the gears division have led to a greater share for the MHE division in the overall revenue pie.
The material handling business now has a share of about 60 per cent from 55 per cent last year, while the industrial gears division’s contribution has fallen to 40 per cent. On the margin front, Elecon improved its performance by 1.2 percentage points to 17 per cent, helped by lower raw material prices.
The company is likely to sustain (or marginally improve) profit margins once it exhausts its current raw material inventory (mostly by second half of the current fiscal). Net profits, however, fell by 15 per cent. Higher interest outgo and depreciation, besides lower revenues, led to the decline in profits.
Delay in windmill initiative
There has not been any material progress in Elecon’s touted entry into the windmills and windmill gearboxes business.
While the company had earlier begun prototyping for windmill gearboxes of about 1 MW range for its customer and installed six wind turbine generators in Gujarat and supplied four in Maharashtra, the development so far has not been impressive. This scenario may, however, change in the next few quarters as the management indicated that the issue of certification for its windmills has been resolved recently. The management expects to make Rs 50 crore revenue contribution from the windmill segment this year.
UltraTech Cement continues to be a preferred exposure within the cement sector due to the advantages of operating in the West, which is showing high demand growth, and relatively low new capacity additions in FY-10.
The company’s ability to expand margins by saving on fuel costs and additions to captive power capacity are also in its favour. At Rs 567, enjoying seven times trailing earnings, the stock valuation remains reasonable and is at discount to ACC which trades at nine times.
Though all-India cement despatches have grown by a stronger-than-expected 8.2 per cent in FY-09, the bunching up of fresh capacities in 2009-10 make the current year a challenging one for the sector.
A total of 50 million tonnes of capacities are estimated to be added in FY-10. The pace at which demand will grow to absorb these supplies is something to watch out for.
West, a strategic location
At 5.3 million tonnes, UltraTech’s sales volume recorded a robust 11 per cent growth in the March quarter.
Its peers, ACC and Ambuja Cements, saw a lower growth at 6.1 per cent and 5.8 per cent. Being positioned in the West, the company made the best out of the higher demand in this region in recent quarters.
Year-to-date till March, the western region has shown the highest growth in despatches at 11.74 per cent growth compared to the all-India average of 7.96 per cent.
Further, of all the pockets in the country, the West will be seeing the least capacity expansion in FY-10. Of the total 50 million tonne of capacity expected to be added in FY-10, over 80 per cent will be in the North and Southern pockets . This is likely to safeguard the region from excess supplies and Ultra Tech from a sharp price correction.
With the commissioning of two grinding units of 1.2 million tonnes per annum (mtpa) each in the March quarter, UltraTech’s capacity stands at 21.9 million tonnes. This is expected to rise to 23.1 million tonnes by June 2009, with the commissioning of a grinding unit, work for which has already begun. Interest expenditure in the March quarter stood higher by 60 per cent over the previous year on borrowings for the capex.
However, the interest coverage stands at a comfortable 14 times. Further, for the full year FY-09, cash profits were higher on higher depreciation (up 36 per cent) on additions to the cement and captive power capacity. Cash profit for FY-09 was Rs 1,481 crore against Rs 1,228 crore for FY-08.
High realisation builds hope
The strong cement offtake in the region saw prices increasing by Rs 7 per bag in March to Rs 255 per bag.
But, however, this is much lower than the prices in the South where a 50 kg bag is sold at Rs 270-75; this could mean leeway for further increases.
In the March ‘09 quarter, however, the company’s overall realisations came down by Rs 8 per bag on substantial decrease in export realisations of clinker.
Saving in cost
The addition of 192 MW to the captive power capacity may lead to further savings in costs in the quarters to come. With this, UltraTech’s captive power would meet 80 per cent of its total requirements.
Also, the sharp decline in thermal coal prices in the international markets has already begun to reflect in the March quarter numbers with power-fuel expenses declining by 23 per cent sequentially and operating profit margins expanding by 230 basis points to 30 per cent.
Coal prices continue to hover at low levels. From $78 per tonne in December ($190 per tonne in 2008), prices have now fallen to $66 per tonne and there is scope for some further saving on fuel as sea freight rates also linger at low levels. (The company imports nearly 40 per cent of its coal requirements.)
In the March ’09 quarter, UltraTech’s sales was up 15.5 per cent supported by strong despatches growth.
Aided by sales, net profit too leaped higher by 9.4 per cent. However, the margins were wringed on high cost opening inventory (stock adjustment charges were higher by 190 per cent), higher raw material expenses (up 16 per cent) and higher power-fuel costs (up 10 per cent). The operating profit margins contracted by 1.9 per cent points.
1. Nation is Center Left on socio economic issues and entitlements Nehru Gandhis credibility on entitlements is BJP’s biggest challenge next 5 yrs in states where it does not have strong regional leaders
2. BJP’s maxing out in its strongholds is second biggest challenge for unless it breaks dramatic new ground, attrition in next cycle in strongholds will further hurt
3. Strategy for BJP next 5 years has to be to go local in Andhra, Kerala, TN, WB to occupy the space of political opposition, UP seems distant given current 4th place status
4. Riots have consequences we can no longer be in denial on VHP’s conduct. There has to be accountability for the rot in Orissa.
5. If Uttar Pradesh can still gift 20 each seats to BSP, SP and Congress it points to how uninspiring the BJP’s UP Leadership is. It is time for state leadership overhaul, and the need of the hour is for an Obama like inspiring leadership with no baggage and lots of credibility to counter Rahul Gandhi who will loom large on Uttar Pradesh.
6. Unless BJP breaks ground at the pan India level the central government could be lost to it for another generation there in lies the biggest risk in not focusing on a Pan India strategy with an emphasis on going local in new states
7. Sooner the BJP adopts inner party democracy of the variety Rahul Gandhi is experimenting with to bring new support base especially in states where it needs to break ground.
8. Friends of BJP is a good start to engage the Cosmopolitan Urban voterthis should have started immideately after 2004 debacle it is many years late.
9. At the national level the BJP needs decisive central leadership that can act on all this with a sense of mission and vision. The BJP must not make the same mistake of choosing a stop gap compromise leader to postpone tough decisions.
10. Last but not the least, it would be in complete denial if it did not ask tough questions of how Acts of Adharma in the name of Hindutva have been condoned and the relevance of Hindutva as an ideology to guide on Socio-Economic issues.