Sunday, June 28, 2009
The stock of Sintex Industries offers a good investment option for investors with a two-three year horizon. From being a plastic storage tank manufacturer, Sintex has become a diversified producer of plastic products that cater to a range of sectors. Its product offerings range from pre-fabricated structures, monolithic construction sheets, industrial storage containers and plastic moulding, to textiles.
The diversified product portfolio gives the company leeway to tap the recovery in sectors such as housing, infrastructure and automobiles better than other pure plastics companies. Currently at Rs 222, the Sintex stock trades at nine times its trailing four quarter earnings.
Plastics: money spinner
About 87 per cent of Sintex’s total revenues are generated by its plastics business. This business is spilt into two segments —building materials (41 per cent of overall revenues) and mouldings (46 per cent).
Pre-fabricated sheets, monolithic construction material and overhead storage tanks constitute the building materials business. As the concept of low-cost housing is grabbing more attention , Sintex has been focussing on this segment. It has bagged a couple of State government orders executable this year. The company appears well-positioned to tap the low-cost housing segment.
The company also produces telecom shelters and its major customers are Bharti Telecom, Reliance Communication and Tata Communication. Given the slower pace of tower rollouts over the past year, this segment has seen muted growth. Expansion of order-book here depends on tower capex plans of these telecom companies.
The moulding business caters mainly to industrial users in segments such as automobiles and consumer goods. Sintex’s acquired arms — Nief Plastics, Wausaukee Composites and automotive products division of Bright Brothers— are also housed in this segment and have expanded the company’s business horizons to the automobiles, electrical, medical instruments, defence and aerospace sectors. Valeo, Renault Schneider, Caterpillar, GE Medical Systems and Alstom are some of its clients.
The acquisition of the automotive division of Bright Brothers has widened Sintex’s customer base in the Indian automobiles component industry. Mahindra and Mahindra, Maruti Suzuki, Tata Motors and Honda Siel Cars are among the company’s noted customers.
In the December quarter of 2008-09, the plastics division posted a 84 per cent year-on-year increase in sales revenue on a consolidated basis. However, total revenues from this division dipped by over 12 per cent last quarter compared to the March quarter of FY-08.
This can be attributed to production cuts put in place by many automobile companies in the last quarter of FY-2009 and the price cuts demanded by many of Sintex’s customers.
PVC resins, plastic granules and powder are the major raw materials for the plastics division and they make up over 74 per cent of the total production cost. Materials are procured from suppliers such as GAIL, Reliance Industries and Haldia Petrochemicals.
The prices of these materials closely follow those of crude oil. The spot price of crude oil declined by 60 per cent in the third quarter of FY 09 after peaking in July 2008.
The softening input costs forced the company to slash prices on its finished products. Much of the discounts were offered in the last quarter of FY 09.
Given that the company operates on three-four month sourcing contracts for materials, margin pressures were highest in the December and March quarters, with the company taking inventory write downs in December.
March numbers, however, showed sequential improvement, with operating margins improving from 12 per cent in the last quarter of FY-08 to 17 per cent, thanks to a 13 per cent decline in total expenditure.
Textiles: Under pressure
Sintex operates in yarn-dyed structured fabrics. This includes men’s shirting fabrics, yarn-dyed corduroy and home-furnishing materials. Some of the priced customers in this segment are ColorPlus, ITC Wills, Ann Taylor, Marks & Spencer, Pantaloons, Louis Philippe and Van Heusen. Much of the operations in this segment cater to the domestic market.
The uncertainties that cloud the outlook for the retail industry, may put Sintex’s textiles operations under pressure this fiscal. For the year ended March 2009, textiles business contributed to 12 per cent of the company’s total revenues.
Net sales of Sintex grew at a compounded annual rate of 33 per cent between 2004 and 2008. Its net profits grew at 45 per cent in this period.
However, the March quarter of FY-09 saw its net sales decline by 10 per cent, though the net profits registered a growth of 22 per cent, on a consolidated basis.
Due to price cuts offered to customers, the operating profit margins fell marginally to 16 per cent (from 18 per cent) in this quarter.
With crude oil prices recovering substantially from their lows, pricing pressures may ease off even as input costs also witness some increases.
The signs of a possible mild recovery in the automobiles and the housing sectors coupled with further moderation in input costs will be the major revenue drivers.
Food will get more expensive in the coming weeks. One reason is the tense monsoon situation, which is making trade volatile because no one knows where things are going. Two, Raksha Bandhan, Janamashtami and Ganesh Chaturthi are in August itself, a month before schedule. Id and Navratri follow in September.
Festivals mean higher demand for cooking oil, rice, sugar, besan, maida, dry fruits, milk and spices. Can India cope? That is the question bulls are punting on. And what does it mean for your wallet? I did a bit of crystal ball gazing to help you get a fix.
Cooking oil: Prices will go up by at least Rs 2/kg in August to cope with festival demand. MRP, which is what you and I pay, will rise proportionately too. This figure is valid only if the monsoon eventually turns out to be okay; and the government does not impose customs duty on imported crude palm oil in a moment of madness.
If the monsoon fails, and the rain-fed soya and groundnut crops get decimated, India would become even more dependent on imports. The only limit would be the Indian consumer's ability to pay for it. Expect to pay at least Rs 55/kg.
Sugar: We are reeling under a short supply. Yet prices haven't risen as much as TV channels would have you believe when they discuss sugar equity stocks because of the government's decision to clear out local godowns before importing.
Now these godowns are virtually empty. As India's new crushing season starts only by October, imports will have to gain pace. But international prices are much higher than Indian prices. So Indian prices will have to rise too for importers to get into action.
The rule of thumb: you will pay the international price of raw sugar plus Rs 3/kg for processing and transportation. If you use Equal, this may not bother you now. But think of cola, chocolate, ice cream, biscuit and bread companies. They will make you pay. Eventually.
Maida: Maida will remain affordable, thanks to abundant wheat. Demand for maida rises in July when school tiffins again get stuffed with bread, noodles, and biscuits. But this year plenty of wheat and competition will keep things in check, festivals or not. Maida is selling now for around Rs 13/kg. Expect it to be at Rs 14.50/kg in August.
Chana and besan: They are affordable but won't stay that way. India needs to import chickpeas and the world market is rising. So, local prices would have to keep pace too. Expect besan to become more expensive between July-end and Diwali. That means higher cost for halwais and namkeen makers.
Rice: Like me, if you love the finer varieties–basmati, ponni, sona masuri, you must already be paying through your nose for them. Alas, things won’t get any better. This is not because of the rains, by the way. Instead blame it on the government's hugely successful procurement programme.
The MSP for basic varieties of rice is now so attractive that farmers prefer them over superior varieties bought exclusively by traders and rice mills. Lower production of the finer varieties means higher prices for you, me and NRIs who can't bear to eat any other kind.
Pulses: Pulses are hardy crops and can make do with very little water and inputs. So unless there is a drastic failure of rains across entire western and central India even after July 15 (highly unlikely), prices won’t be astronomical.
Even so, urad, moong and tur will become at least 10% more expensive in August to bring India at par with world prices and accelerate imports.
Expect to pay not less than Rs 50/kg for tur to your grocer, if he is an honest fellow.
Milk: This one is a no-brainer. Poor rains have left cows and buffaloes with little to eat. There is hardly any fresh green grass, so vital for optimum milk production. Fodder crops are also affected. In major milk producer Gujarat, fodder is 25% more expensive. That has forced dairies like Amul to pay farmers 20% more for milk. Ghee is already 40% more expensive than last June. But I can’t see a respite. Ditto for paneer and khoya.
Dry fruits and condiments: Cashews are expensive because the world has produced less this year and we import 6 lakh from Africa every year as desi cashew meets just half of total Indian demand. So, international prices play a hefty role.
Cardamoms are significantly more expensive because poor rains have hit local crop. Cloves could touch an amazing Rs 400/kg here because major exporter Brazil has a smaller crop. Thank god a little of all this stuff goes a long way.
Meat and eggs: An egg now costs Rs 3 because poultry farms are producing less. At the same time, Gulf countries such as Oman have lifted a ban on Indian egg and live chicken. This means a lot of eggs will get converted to powder for export. Chicken and buffalo meat are expensive because animal feed is soaring.
In short, carbs, proteins, fats and sugar are all set to become costlier. At a time when most of those deep discount grocery chains have shut shop and left your neighbourhood. Poor rains will be only part of the problem. A far bigger reason will be the rise in international prices to which we are now inextricably linked.
Rising incomes and population, coupled with stagnant farm yields, have left India increasingly dependent on foreign farmers to supply it with food. It is a reality from which there is no escape as the demand genie is unlikely to go back into the bottle. A good monsoon only affects the degree of our dependence. The bulls know this.
via Economic Times
Cheap valuations and a strong shot of liquidity both had a hand in the Sensex staging a breathtaking 81 per cent rally since March. Of the two, the role played by the gush of liquidity cannot be overemphasised as foreign institutional investors (FIIs) and mutual funds together pumped in over Rs 31,160 crore into equities.
But with the trend of FII buying turning into selling over the past couple of weeks, are we heading for a dry patch yet again?
While it is India Inc’s growth prospects that may decide the market’s long-term outlook, it is liquidity that will call the shots in the near term. We look into the trends in the money trail and what they portend.
FIIs in re-balancing mode
After piloting the rally from April to May, FIIs turned net sellers in Indian stocks over the last two weeks, pulling out a total of over Rs 3,670 crore (or $757 million).
In addition to selling in the cash market, they have also significantly reduced their exposure in derivatives. So are FIIs then turning negative on India?
A look at the recent fund flow data released by fund tracker EPFR Global suggests fund flows have been interrupted, calling for caution; but it is early days yet to call it a reversal.
In its latest release for the week ended June 24, EPFR reported investors pulling out a net $1.87 billion out of funds focussed on Asia excluding Japan, Latin America, Europe Middle East Africa and the diversified Global Emerging Markets Equity Funds, driven by doubts about the timing of a recovery in the global economy.
This is the first instance of outflows from emerging markets since March when the rally began. It contrasts with the average inflows of $3.2 billion into dedicated emerging market equity funds in the weeks from April 30 to June 10, when money flowing out of US money market funds had bypassed developed markets only to pour into emerging market equity funds.
The India Equity Funds too now report outflows, after taking in money until last week. While a part of the recent domestic selling could be attributed to the not-so-cheap valuations of equities and the upcoming Union Budget, an event risk some of them may like to steer clear of, recent outflows also suggest a moderation in risk appetite, a key to fund flows into stock funds in general and emerging markets in particular.
The June 24 week brought signs that Money Market and US Bond Funds reported fresh inflows helped partly by interest rate hike expectations. The two fund groups absorbed $25.9 billion and $1.72 billion, respectively, during the week, showing renewed preference for a safe haven.
However, it cannot yet be concluded that this marks the end of inflows into our markets. For one, despite the flight of capital towards safer options, dedicated BRICs (Brazil, Russia, India and China) Equity Funds continued to attract inflows and extended their winning run last week too.
There are other indicators of global investors remaining keen on India. The number of FIIs and sub-accounts registered with SEBI has been on the rise. From 1,594 FIIs and 4,872 sub-accounts in December 2008, the count now stands at 1,668 and 5,162, respectively.
Many fund managers and investment bankers reckon that foreign investors who missed out on the recent rally in Indian equities may be waiting in the wings for a correction in valuations. Some experts peg the idle cash waiting to be deployed globally at about $4 trillion.
Fine print: Broader fund flow patterns do suggest that the FII money that has been driving this rally came from genuine global investors keen on pegging up their India exposure.
That, however, does not mean that the current rally was devoid of its share of flab. There has been increasing noise about ‘speculative’ money finding its way into our markets.
Experts believe that issues of participatory notes by foreign institutional investors have been on the increase in the last six months. While there aren’t any numbers available on this, it, nevertheless, may remain a point of concern, regardless of how the fund flows pan out in the coming weeks.
Besides, with interest rates in most developed countries until recently at record-low levels, there is also a lurking fear of money made through carry trades entering EMs such as India. Should interest rates begin to climb again as central bankers reverse easy money policies, fund flows could easily be curtailed.
Domestic funds in for long haul
While FII inflows in fuelling the current equity rally has been widely written about, the contribution of mutual funds in delivering the markets through the rout of 2008 has been less acknowledged.
While FIIs were busy selling Indian equities — they net sold equities worth over Rs 52,987 crore in 2008 — mutual funds stepped in with net inflows of Rs 14,112 crore. Even in March this year when the markets hit their trough, while FIIs put in about Rs 530 crore, MF net inflows were almost thrice that at Rs 1,475 crore.
Domestic fund flows from hereon may well pick up if recent inflows into mutual funds sustain.
Mutual funds have, following the recent surge in equities, mobilised gross inflows of Rs 4,796 crore in May alone from the sale of open-end equity schemes. This is by far the highest such inflow since March 2008, when existing equity MF schemes notched up sales of Rs 10,345 crore.
Even new equity MFs appear to be making their presence felt, with a new fund recently collecting over Rs 800 crore, and more offerings lined up. May also marked the first month in 2009 when equity MF sales grew on a year-on-year basis. In addition to this, with equity NAVs also expanding in tandem with the equities surge there is also that much more corpus available for investing.
Besides, mutual funds put together are estimated to be sitting on a significant cash pile, pegged at about 13 per cent of the total assets under management.
While fund managers have deployed cash in the rally — cash as a percentage of the total AUM was as high as 20 per cent in March — they still have enough liquidity on hand.
Fine print: History shows us that given their sheer clout, in the event of a broad-based sell off by the FIIs mutual funds can do little to keep the markets from crashing. History also shows us that mutual funds haven’t been the best timers of the market cycle.
So, while it isn’t wrong to be gung ho about the industry’s increasing AUMs (assets under management) and cash levels, it may not be entirely right to extrapolate this into a bullish market outlook.
Funds are also unlikely to keep on buying if they find FIIs in exit mode. So, while the cash sitting idle with domestic mutual funds will sooner or later find its way into the stock markets, it is the fund flow patterns of global investors that may exercise a greater influence on the near-term direction of the markets.
India story: To what extent India looks attractive to global investors will depend to a great extent on whether India does manage to deliver on its promise of being one of the strongly growing economies in a recession-hit world.
In this respect, the signals of recovery being flashed by the manufacturing sector and the IIP are positive and will need to be closely watched for sustainability.
A policy push for reforms and a roadmap on the fiscal deficit may also be keenly watched by FIIs. Another trigger to watch out for may be earnings upgrades for Indian Inc, with downgrades coming to an end.
Risk appetite: Risk appetite plays a big role in determining the quantum of flows that emerging markets, including India, can attract. While the first signals to the ongoing stock rally came from reviving risk appetite for global investors, the latest data suggests that some of that risk-taking ability may have waned.
For the week ending June 25, investors put in $25.9 billion into Money Market Funds, in stark contrast to the $55 billion of outflows from the same fund group in the previous week (ending June 17).
Whether this signals a mere moderation in risk appetite, a brief phase of profit taking or a reversal is difficult to say at this point of time.
If the BRIC or emerging market pack, long touted for their growth potential, do exhibit signs of continuance in their revival, it may only be a matter of time before investors’ money begins its chase these markets again. However, till such time, a reversal in commodity prices, spike in gold or the dollar will be the key signals of their falling risk appetites.
Rupee-dollar parity: The steady appreciation of the rupee against the dollar has been a key supportive factor for the recent rally, with the BSE Dollex managing a 108 per cent return in this rally compared to the Sensex return of 90 per cent.
Though the fund flows into stock markets had kept the rupee strong against the dollar, not to mention the intrinsic weakness in US currency overseas, any reversal in that may trigger outflows.
While the US Federal Reserve hasn’t so far tinkered with the interest rates, there is growing expectation of it hiking the rates sooner than expected. This may, in turn, strengthen the dollar and reduce returns for FIIs from Indian stocks.
The year 2008 was one of drought as far as Initial Public Offers (IPO) goes. But with a revival of sorts in the markets, quite a few of these are lined up, with one — that of Mahindra Holiday and Resorts — already through. Investing in an IPO is a shade trickier than an existing company since not much information about it — financial or otherwise — will be publicly available. This is where, as a rule, the prospectus comes in as the best possible source of comprehensive information on the company.
Since the bulky document may appear a tad intimidating to the new investor, here are a few guidelines on how to pick relevant information, and what to base your investment decision on.
Any issue prospectus will be divided into seven sections — risk factors, an introduction to and detailed information about the company, financial information, details on the issue, legal and other regulatory information. Of these, the company background and business model, the industry it operates in, purpose of the issue, financial performance and risk factors are areas you should concentrate on.
The section ‘About the Company’ gives a detailed description of the nature of the company and its business models; understand how and where the company accrues revenue, and if it is sustainable.
This includes going back to the history of the company, since it explains how the company has developed over the years, acquisitions made, milestones crossed, subsidiary activity, all of which are indicators of the consistency of performance and sustainability.
If possible, compare revenue models with those of existing peer companies to identify if, and where, the company has an advantage. If any competitor is already listed, use it as a comparison for performance, valuations, financials, and strategies.
Also included in the business section is an overview of the industry. Scrutinise it thoroughly to get a grip on the future of the industry and the company’s own prospects within it. As far as financials go, analyse these as you would for any other company.
The company will list its ‘strengths’ — what it considers as an edge over peers — again in the business section. Give these a once-over, paying attention to the details only if the said strength stands out — for example, Gitanjali Gems has a diamond sourcing agreement with Diamond Trading Corp, a key strength since the company is ensured of access to good quality rough diamonds which most peers do not enjoy. Sizeable market share (check source of data here), backward integration, and so on, are other factors favouring the company.
Take the strengths with a pinch of salt, since companies sometimes tend to paint a brighter picture than what they actually are. Conclude yourself if the point given in reality works in the company’s favour significantly.
Risks detailed are wide-ranging, from an economic scenario to company-specific, which must be noted to understand potential downside to your investment. Risks are explained at the start of the prospectus.
Some risks given are general in nature and can be ignored, such as political instability, natural calamities, competition from peers and such, which are usually applicable to all companies, regardless of industry.
Legal issues that have a significant bearing on the functioning of the company, are also given here — for example, Mahindra Holidays has a resort in Munnar, where the land is under legal proceedings since it was said to be agricultural.
Now if the case goes against Mahindra, it will mean closure of a flagship resort and loss of revenue from it.
Understanding such material legal proceedings allows you to skip most of the section on legal issues that appears later in the prospectus. For example, legal issues regarding taxes, labour and such need not be combed through.
The purpose of the issue is explained in depth, and companies are required to explain the utilisation of funds raised in subsequent annual reports.
Proceeds from the issue can go towards any number of purposes, from repayment of debt to working capital, from capacity expansion to company acquisitions besides covering issue expenses.
Fund utilisation should, as far as possible, contribute to revenue generation and earnings expansion.
For example, companies may raise funds to either ramp up production capacity which may lead to increased sales, or to pay back high-cost debt resulting in lower interest costs and more leveraging capability; or for acquisitions that may add to revenues. However, the time taken to accomplish the stated objectives needs to be gauged.
Check the amount of funds set aside for issue expenses, which include advertising and promotion, printing of the prospectus and so on. Check also whether the proceeds of the IPO go entirely to the company; some IPOs involve a stake sale by the promoters in which case funds raised would not accrue to the company.
Other sections you can glance through are the regulations and policies the company is subject to, the management team and the relevant experience they hold and the instructions to bidders in the section detailing the issue — just to make sure you don’t inadvertently mess up your application.
via Business Line
Construction and infrastructure development company Pratibha Industries, is likely to emerge as one of the key beneficiaries of the Budget spending on urban infrastructure.
The company’s strength in water sanitation/transport projects and its success in other urban development projects are likely to ensure that it translates the above opportunity into revenues. That the company has weathered the slowdown far better than most of its peers is discernable from its robust 31 per cent growth in consolidated net profits for FY 2009.
Investors with a two-year perspective can consider investing in the stock, which currently trades at 4.5 times its estimated per share earnings for FY 2010. Given the order book, the sector prospects and Pratibha’s track record of 53 per cent annualised earnings growth over the last three years, the company should be able to comfortably beat the expectations. Small-cap stocks tend to be quite vulnerable to market corrections; investors can therefore consider a strategy of booking profits, on achieving target returns in this stock.
For the fourth quarter ended March 2009, Pratibha’s order intake witnessed a slowdown, perhaps on the back of fewer projects awarded before the elections. We expect this scenario to reverse over the next two quarters as order flows are likely to revive once the Budget charts out the spending plan on urban development.
The current order book of Rs 2,100 crore already lends revenue visibility over the next couple of years. With strong presence in the high margin water supply project, Pratibha has traditionally enjoyed superior operating profit margins. Besides, backward integration through in-house SAW pipe division (used in water, sewerage and oil and gas transport) has ensured a better cost structure that enables superior profitability.
While commodity price hikes last year did impact the company’s margins, softening of input prices ensured a 3 percentage-point expansion in margins to 12 per cent in the March 2009 quarter, compared to a year ago.
While water-related projects account over 60 per cent of the company’s current order book, Pratibha has made an earnest attempt to diversify its business profile. As a result, the company has been bagging tunnel and airport projects as well as road and other urban municipal works.
While water projects would continue to remain a key driver for earnings, the diversification could mean lower exposure to projects that hold lucrative profit margins. However, this could well be offset by high volumes, given the spending expected (Rs 11,842 crore for 2009-10) under the Jawaharlal Nehru Urban Renewal Mission.
Investors targeting higher returns can consider exiting the UCO Bank stock after its 81 per cent gain from its March lows.
The stock is not among our preferred exposures in the banking space given its relatively thin margins, which may compress further as yields harden.
The bank may under-perform peers over the next few quarters as treasury gains taper off, even as a lower credit-deposit ratio and scarce low-cost deposits hurt margins. At the current market price of Rs 39.80, the stock trades at 3.8 times the FY-09 earnings and 0.8 times its March 2009 book value.
The price-to-book value (P/BV) is at a discount to larger public sector banks and at a premium to smaller banks such as Allahabad Bank, Vijaya Bank and Syndicate Bank. Despite having market Beta close to 1, underperformance of the bank vis-À-vis its peers may continue.
UCO Bank operates on lower spreads (net interest margin of 1.75 per cent for 2008-09) and has a relatively low proportion of low-cost deposits (24.1 per cent) in its deposit base.
The cost-income ratio (54.9 per cent) is relatively high, while the profitability ratio (ROA of 0.59 per cent) is modest. Limited Tier-1 capital despite a Rs 450 crore capital infusion by the government and low provision coverage (45.75 per cent) have constrained UCO Bank’s financial performance.
UCO Bank, a mid-sized Kolkata-based bank has performed well in terms of earnings in the last few years despite relatively higher levels of non-performing asset (NPA).
The bank’s net profits grew by 44 per cent compounded annually in the period 2006-08 while the advances grew 21 per cent during the same period. For the year ended March 2009, the net profit grew by 35.4 per cent.
Net interest income grew by 10 per cent in a year even as advances grew by 25.2 per cent, as net interest margins compressed to 1.75 per cent in 2008-09 (1.86 per cent in 2007-08).
Higher growth in other income (32 per cent) owing to treasury gains (49 per cent growth), strong fee income growth (21 per cent) and lower operating expenses led to higher profit growth.
The asset quality has improved significantly as the bank’s GNPA ratio fell from 2.97 per cent to 2.21 per cent due to prudent lending by the bank; but the provision coverage is still among the lowest at 47.5 per cent. The net NPA ratio is at 1.18 per cent, still higher than many peers.
The bank’s restructured assets also grew by 180 per cent in a year and form 3.5 per cent of total advances in 2008-09. The bank took a hit of Rs 97 crore on the fair value of the restructured portfolio. The bank’s low capital adequacy ratio resulted in it being one of the recipients of the re-capitalisation package from the government.
The bank has already received Rs 450 crore out of Rs 1,200 crore to meet its Tier-1 needs. But despite this and the reduction in risk weights by the RBI on certain sectors, the CRAR stood at 9.75 per cent according to Basel 1 norms and 11.9 per cent (Basel 2) with Tier-1 capital (6.48 per cent), just above the RBI-mandated 6 per cent.
The residual portion of the re-capitalisation package (Rs 750 crore due) may give it higher headroom on fund-raising, but may remain a constraint on advances growth. The recent capital restructuring also led to government stake falling from 74.98 per cent to 63.59 per cent.
Sustainability of the bank’s strong pace of net profit growth will depend on advances growth and its ability to source low-cost deposits and contain the overall costs.
While credit transmission, according to the latest RBI data, does not look encouraging, getting low-cost deposits has become a challenge for most banks with competitive hotting up and private peers also eyeing the same clients. The slow pace of technology adoption at UCO Bank may also make it challenging to improve its low-cost deposit base in such a scenario.
In 2008-09, the bank had a incremental credit-deposit ratio of 67 per cent, which is on the low side, leading to investments of residual deposits in low-yielding assets, putting pressure on margins. Asset quality concerns may creep in as the deadline for the restructuring nears. The bank may be more vulnerable than its peers due to its lower provision coverage.
While the bank has a network of 2,069 branches, it is still not completely CBS-enabled (almost 49 per cent of the branches as of March 09 were yet to be CBS-enabled). While the fee income looks sustainable, going forward, other income components may take a hit.
If the yields rise, there is probability of losses on the treasury portfolio. Fee income may see growth once the bank becomes 100 per cent CBS-enabled. The bank is also looking to venture into insurance business in the coming months.
Investors with medium-term perspective can consider buying Strides Arcolab stock.
The structural down trend that commenced in February 2007 at Rs 396, appears to have halted around Rs 60. The stock is in a nascent intermediate term uptrend since then that has yielded almost two-fold gains.
The stock has not succumbed to the correction witnessed in the market over the last two weeks and the recent uptrend has been backed by good volumes during the advancing weeks. It is currently holding well above its 50 and 200 day moving averages and both daily and weekly momentum indicators are showing strength.
In medium-term, Strides Arcolab stock has the potential to move up to Rs 205 where the key resistance is pegged.
Medium-term investor can buy with the stop at Rs 118. Short-term traders can buy with a target of Rs 163 and stop at Rs 139.
Siemens India may have taken the stock market by surprise, with revenues back on the growth track and profit margins showing a visible improvement for the quarter ended March 2009 (the company’s second quarter) compared to a year ago numbers.
The stock has climbed by 44 per cent after the declaration of its quarterly results on April 30. The Siemens stock has also returned 150 per cent since the market lows in March 2009.
Investors can use this opportunity to take some profits from their holdings in the stock of Siemens as not everything may be rosy for this diversified engineering company as yet.
At the current market price of Rs 498, the stock trades at 17.5 times its trailing per share earnings. The valuations appear to be at a premium given the muted growth prospects in the medium term.
A stagnant order-book, effects of selling some of the more profitable units to the parent and the struggle to free itself from issues such as high project costs and sub-contract issues suggest that the company may still be on a consolidation phase.
Investors with risk appetite can consider retaining their trimmed holding with a two-three-year perspective.
Robust order flows expected for its power division and a slow revival in capital expenditure spending by industries may result in improved earnings prospects for the company.
Siemens India is a 55 per cent subsidiary of Siemens AG. Energy and industrial sectors are the key revenue generators for the company while healthcare and real estate are the other relatively smaller divisions
The industry segment, consisting of automation, switchgears, signalling systems, and building technologies witnessed tepid growth for the quarter ended March 2009.
This was the result of a slower revival in capex spending; nevertheless, the energy segment — driven by revenue from power transmission and distribution and oil and gas (in that order) — has been the key contributor to revenue growth in the latest ended quarter, after a weak quarter in December.
Aided by write-backs
For the quarter ended March, the company’s revenue grew 10.5 per cent to Rs 2,368 crore. Net profits for the period stood at Rs 225 crore.
The figures on a year-on-year basis are not fully comparable, as Siemens had provided for some losses in the year ago financials, on the back of an estimated increase in input costs. In the just ended quarter, a part of such provisions were written back, leading to a surge in operating profits for the quarter.
Operating profit margins have, therefore, moved from abysmally low levels to a more reminiscent 14 per cent norm. With commodity prices much lower than a year ago, the company may be able to keep its input costs at bay sustaining the above margins.
The supernormal net profit growth, for the quarter is not a sustainable number for the above reasons.
Order intake troubles
While revenue growth imparts some positive signals, the order intake of Siemens has not been all that healthy. The company did not participate in a number of project bids that they might otherwise have qualified, due to concerns over profitability of the projects and customer payments.
While Siemens has had trouble with costs overshoots in the past, the recent slowdown may have only accentuated their cautious view.
Like many other companies dependent on the power sector, the January-March or the second quarter (Siemens has a financial year ending in September) has, historically, been the best one for order flows for Siemens, with government companies typically placing orders to meet target at the close of the financial year.
The order inflow was down 6 per cent to Rs 1,850 crore for the latest ended quarter compared with December.
On a year-on-year basis, the order accretion was down 20 per cent, providing an indication of the extent of slowdown.
Siemens’ dependence on export for a good part of its revenues (40 per cent) may have also been another reason for the slowdown in order intake, as industries across globe curtailed spending.
The slowdown in order intake, not really a short-term phenomenon, has resulted in a stagnant order-book position for 10 quarters now.
The current order book of Rs 9,700 crore does not compare too well with the Rs 9,570 crore of orders a year ago. For investors, a pick-up in order intake and execution of existing projects on a quarterly basis may be the key aspect to look out for, over the next three-four quarters to gauge any signs of a complete recovery for the company.
While Siemens’ transmission business by far demonstrated superior profit margins, it perhaps came on the back of write-backs discussed earlier. The margins in the industrial division contracted; little surprise what with weaker industrial growth.
Siemens has been selling a number of units that it considered non-core over the last couple of years. While such moves may not always be profitable, we believe that Siemens’ core business holds sufficient potential, even stripped of the other businesses.
Power transmission and distribution space, for instance, offers opportunities aplenty given Power Grid Corporation’s capex plan of about Rs 24,000 crore over the next couple of years.
Note that Siemens’ product range in this space is wider than ABB’s. The company’s recent order wins suggest that this segment may see improved order flows.
The company’s mobility division — offering electrical solutions to the Railways — is another small, yet fast growing sector that holds potential.
With a domestic manufacturing base and superior technology, this segment is well-placed to win orders for railway projects.
Its success so far in the Mumbai Railway Vikas Corporation’s Phase I of the suburban railway project is likely to lend sufficient qualification not only for the next phase, but also for similar projects.
The challenge lies in Siemens tapping the above opportunities and getting its project cost estimations right, thus preventing any erosion to profitability.
Smart gains on Friday helped the Sensex close the week on a positive note. The index dropped to a low of 14,017 in the early part of the week due mainly to significant weakness in the Reliance and ONGC scrips. However, the index rallied to a high of 14,782, up 765 points from the week’s low.
The Sensex finally closed the week with a gain of 1.7 per cent, or 243 points, at 14,765. More action was seen on the National Stock Exchange (NSE) with futures & options expiry on Thursday and the Nifty going free-float a day later.
Among the Sensex stocks — Jaiprakash Associates was the major gainer, up nearly 10.5 per cent. Larsen & Toubro, ACC, HDFC, Grasim, ICICI Bank and Bhel were the other major gainers. On the other hand, Sun Pharma crashed 13 per cent. Ranbaxy, Tata Steel and Mahindra & Mahindra were the other prominent losers.
With the Railway Budget to be presented by the next weekend, and the Union Budget a couple of days later, the entire focus is likely to be on these major events. A clear direction for the markets may emerge after the presentation.
Technically, the Sensex looks set to re-test the 15,000-mark, and is likely to show strength above the 15,250-level only. On the downside, the index may find support around 14,300-14,470.
The NSE Nifty moved in a range of 209 points, from a low of 4,413, the index moved up to a high of 4,352, before settling with a gain of 62 points at 4,376.
The Nifty is likely to face some resistance around its short-term (20-days) daily moving average at 4,450. The mid-term trendline support is seen around 4,050. This week, the index may find support around 4,300-4,250