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Sunday, November 08, 2009
M&M Finance
Investors with a high-risk appetite can consider fresh exposures in the stock of Mahindra and Mahindra Financial Services (M&M Finance). A 61 per cent subsidiary of auto company, Mahindra & Mahindra, M&M Finance is an asset financing non-banking finance company (NBFC). From being a captive financier of M&M’s vehicles, it has come a long way by diversifying into other segments such as commercial and pre-owned vehicles.
At the current market price of Rs 253.5, the stock trades at a modest 9.4 times its estimated FY-10 earnings and 1.82 times its adjusted book value as of September 30, 2009. In addition to modest valuations and earnings growth potential, high levels of capital adequacy, diversified presence in the auto segment, significant branch network with presence predominantly in the rural and semi-urban areas place the company in good stead. Strong sales in the auto segment and M&M’s extensive rural reach have contributed to the loan book growth for M&M Finance. Easing liquidity (enabling lower borrowing costs) and improvement in average collections led to strong earnings growth.
The company may continue this momentum as the automobile sector continues to grow at a strong pace, after being one of the earliest sectors to chart a recovery. The company’s gross non-performing assets stood at 9 per cent as of September. While stretched repayment cycles may lead to a higher NPA number, this may not always entail a higher default rate. High levels of NPA provision coverage and high levels of capital adequacy (17 per cent) also shield the company, to some extent, from any systemic adversities.
Business and Financials
The company’s advances book is well-diversified, comprising lending to buyers of utility vehicles (35 per cent of the portfolio), tractors (23 per cent), passenger cars (28 per cent), commercial vehicles (9 per cent) and pre-owned vehicles (5 per cent). Disbursements are increasing from the other segments while the tractor segment has seen a steady decline. However, the acquisition of Punjab Tractors by M&M may help M&M Finance increase disbursements to the tractor segment.
While captive lending may allow for an assured customer base, the company may face competition from other asset-financing peers as it tries to diversify especially into cars and commercial vehicles. Tractors, utility vehicles and refinance division are somewhat shielded from this threat with fewer organised players in this segment. To diversify its revenue mix and leverage on its branch network, the company has started an insurance broking and rural housing finance subsidiary. These subsidiaries have begun contributing in a small way to the company’s bottomline. With significant presence in the rural areas, M&M Finance may be able to pose stiff competition to housing financing companies and banks.
While the company’s borrowing profile of the company is quite diversified, it has increased its dependence on bank loans in the last few quarters due to unavailability of other avenues of financing. Bank loans, as a proportion of total borrowings, rose from 21 per cent to 39 per cent in the last 18 months. Securitisation is another funding avenue, as they fall under priority sector lending for banks. The RBI’s new directive that allows banks to assign risk weights for NBFCs according to their credit rating (instead of a standard weight) may reduce the borrowing costs for players such as M&M Finance with reasonable ratings (AA stable).
With this rating, banks can assign a 30 per cent risk weight to loans to M&M Finance compared to the existing 100 per cent risk weight, saving them capital.
Financials
M&M Finance’s net profit grew at an annual rate of 29 per cent during the period 2005-09 aided by a strong loan book growth of 24 per cent. For the six months ended September 30, 2009, the company has seen 9 per cent increase in disbursements. Improved spreads on the back of high yields and fall in borrowing and credit costs led to net profit growth of 79 per cent for the half year ended September 2009. Improving disbursements on the back of strong auto sales led to higher profit growth.
M&M Finance’s gross spreads are lingering at 11.1 per cent, but adjusted to the write-offs and provisions, net spreads look depressed at 3.8 per cent. Nonetheless, net spreads are likely to improve as provisions fall. Better collection efficiency may also lift profitability. While risk-aversion prevented the company from increasing the exposure to non-M&M financing in the past few months, the worst appears to be over on that score and the company may see higher disbursements from now on. Financing of pre-owned vehicles still forms a small portion but has huge potential, given the high yields.
Outlook
A significant part of M&M Finance’s business still relies on the parent’s performance. Improved domestic sales by M&M may be a key upside. M&M utility vehicles and tractor volumes grew by 44 per cent and 27 per cent respectively for the quarter ended September 30, 2009 which indicates strong automobile growth.
Strong presence of M&M Finance in the northern region where mechanisation has made greater progress and where reliance on irrigated land is higher, may shield the company’s books from higher slippages.
Wariness of banks and other institutions in lending to tractor and pre-owned vehicle buyers gives the company access to high-yielding assets. The company expects a15 per cent annualised growth for auto financing loans during 2008-12, which may well be achievable as the economy revives and private consumption (cars and utilities) and investment (tractors and CVs) improves. Any rise in interest rates may lead to higher slippages for the company which may put pressure on the spreads, going forward.
via BL
Zee Entertainment
Zee Entertainment stands to gain substantially from the channels it would get to own after Zee News de-merges and transfers them to the former.
Despite some equity dilution that the share swap ratio (Four Zee Entertainment shares for every 19 Zee News shares) entails, the six regional entertainment channels that Zee Entertainment would own could well be earnings-accretive for the latter. The share swap ratio has factored in the current market price of both the companies. The arrangement is to be completed by January 2010.
Investors who may have felt that the Zee Entertainment stock (Rs 242.1) was turning pricey at about 24 times FY10 can now look to hold the stock as, post-acquisition of the channels, its valuation multiple would shrink to around 19 times its likely FY11 earnings.
The stock can also be accumulated on declines linked to the broader market with a two-year horizon.
Huge beneficiary
Of the six channels that are to be transferred to Zee Entertainment, at least four hold immense potential. Zee Marathi is a market leader in terms of viewership while Zee Bangla is second in its market. Zee Telugu and Zee Kannada also figure among the top few viewed channels in the respective regions, according to data from TAM Media Research.
Zee News generates over 79 per cent of revenues from advertising, which is driven mainly by its regional viewership.
With regional advertising holding the key for most media companies — both print and television — in driving revenue growth, Zee Entertainment would benefit by the addition to its bouquet.
Evidence to this fact is that Zee News has seen its advertising revenues grow by 26.4 per cent in the latest September quarter compared to a year ago, whereas Zee Entertainment, with a pan-India reach, has seen a fall of 13 per cent on this front. The regional entertainment channels that Zee News is hiving off have contributed 65.2 per cent (or Rs 340.3 crore) of its revenues and 95.3 per cent (or Rs 79.7 crore)of its operating profits (EBITDA) based on FY09 numbers. The profitability has only improved in the first half of the current fiscal.
Zee TV has consistently been among the top two-three channels in the Hindi general entertainment space, the biggest and most lucrative genre.
This space is characterised by concentration among the top three as the gulf in viewership between them and channels such as Sony Entertainment and NDTV Imagine, is quite wide.
Zee Cinema, another property, also garners top viewership. These augur well for advertising spends of companies that look for slots that rake in maximum watchers.
Advertising apart, Zee Entertainment derives 45 per cent of its revenues from subscription. With the penetration of DTH and the digitisation mandated by the telecom regulator, this segment will also be a key revenue driver.
This creates a highly desirable mix aided by strength of the regional channels that it would own in growing advertising revenues.
Over the past year, the company has also reined in its biggest cost component incurred in programming and operating.
Though this acquisition would entail a dilution of 11.6 per cent for Zee Entertainment, the addition of the new channels to its offerings would more than compensate for this over the next two-three years.
Low on potential
From Zee News’ perspective, it is giving away its best channels in this scheme of arrangement.
Shareholders may retain the shares till they receive Zee Entertainment shares and may offload their holding in Zee News thereafter.
In any case at the current price of Rs 52.4, the market may have already factored in the swap ratio. After the demerger, Zee News would be left with channels that do not command substantial viewership.
Zee News is a distant fourth in the Hindi News segment, which has more than 10 players; Zee Business, second in the duopoly hindi business segment, commands little over half the viewership of market leader CNBC Awaaz. Zee Tamizh, Zee Punjabi and Zee 24 Gantalu have had little progress in garnering television rating points (TRPs) in their limited period of operations.
All this is likely to have a telling effect on advertising revenues that was the key to Zee News’ growth story.
News by itself does not garner the kind of viewership that general entertainment as a genre does.
A standalone news entity would be faced with an uphill task in scaling up revenues on its own , let alone generating profitability.
Most of the big news channels of large media houses have not turned profitable despite many years in operation, indicating the uncertainprospects that this genre faces.
via BL
Hero Honda reports flat growth in Oct sales
Hero Honda Motors Ltd. said that its sales for October increased marginally to 354,156 units from 352,449 units sold in the corresponding period last year. Hero Honda registered a more than 3% growth in retail sales during the festival period (first day of Navratras to Diwali) over what it calls "the exceptional record retail sales" clocked during the same period last year. "We are happy to have clocked this healthy sales number in October given the large base of the previous year. It comes on back of a record retail sales achievement during the just-concluded festival season," Sr Vice-President (Marketing & Sales) Anil Dua said.
Larsen & Toubro
Investors with a 2-3 year perspective can consider accumulating the stock of Larsen & Toubro on declines linked to broad markets.
While slower order execution over the first half of 2009-10 may moderate the current year’s revenue growth, 2010-11 could well be a year of high growth as bunched-up orders translate into sales.
Record order inflows, successful entry into the lucrative power segment and ability to tap attractive funding channels are key positives to the business, mitigating concerns of slowing growth. At the current market price of Rs 1,576, the stock trades at 19 times its estimated consolidated per share earnings for 2010-11.
Tepid growth
L&T’s revenue from its continuing businesses grew by a tepid 7 per cent for the September quarter over a year ago, raising concerns of slower order execution. The management has clarified that the slowdown was a result of delay in clearance for some of its infrastructure projects.
Besides, the changing mix of orders, with an increasing focus on power projects, may also mean longer execution cycles compared with infrastructure/civil projects.
Swift shift
L&T’s ability to quickly foresee the slowdown witnessed last year and shift its focus from projects focussed on private spending to those relying on public spending requires mention. Orders from the public sector, which accounted for 50 per cent of the company’s projects 2007-08, stood at 80 per cent in 2008-09. While government orders continue to be high, the September quarter order inflows suggest that private projects are once again taking centre-stage.
After setting a record in the September quarter, order inflows have gained further traction in the current quarter; order book is close to Rs 89,000 crore (2.2 times consolidated revenue for FY-09). While power projects would be the key driver of revenues over the next couple of years, increased contribution from the hydrocarbon space is also becoming evident in the company’s portfolio. This could mean superior profit margins. Operating profit margins expanded by 1 percentage point to 10.2 per cent in the September quarter over last year.
L&T’s electrical & electronics segment as well as the machinery and industrial products division have not so far shown much promise . An improvement on this front could further elevate profitability. Recently-issued FCCBs and institutional placement have fetched about Rs 2800 crore; keeping its leverage low, while at the same time ensuring funds for the power, port and forging facilities.
via BL
Deccan Chronicle, Dabur India, Dishman Pharma, EIH Hotels, Elecon Engineering, EMCO, Entertainment Network, GMR Infrastructure Deccan Chronicle, Dabur
Nifty may move in 4,640-4,900 band
In a week marked by high volatility, markets corrected sharply only to bounce back with greater strength. Last week, it was mentioned that the markets might stage a July-like recovery amid high volatility. Although, markets have bounced back sharply, chances of a full recovery look remote currently. Going forward, one needs to watch the 15,530-15,640 zone for the Sensex as crucial for the current upmove to remain intact. As and when it comes below this level, the index is likely to test its long-term support of 14,800.
The BSE benchmark index tumbled to a low of 15,331 at the start of the week. Thereafter, the index rallied to a high of 16,284 — a sharp recovery of 953 points. It finally ended the week with a gain of 262 points at 16,158.
Among the index stocks, Bharti Airtel zoomed 9.5 per cent to Rs 320, and Jaiprakash Associates soared 8.5 per cent to Rs 228. ICICI Bank, Tata Steel, Mahindra & Mahindra, Maruti and Sterlite were the other major gainers. On the other hand, Tata Power slipped over 5 per cent to Rs 1,343. ACC, Hindustan Unilever, ITC and Hero Honda were the other prominent losers.
The near-term support and resistance for the index is at 15,900 and 16,500, respectively. Positive news flow on the disinvestment and economic front is likely to act as boosters. However, the global cues will continue to have a dominant effect on markets in the short term. The NSE Nifty moved in a range of 298 points, from a low of 4,539, the index surged to a high of 4,836, before settling with a gain of 84 points at 4,796.
The Nifty is likely to find considerable support around 4,640 and resistance around 4,900. Technically, the short-term trend is still bearish as the index hovers below its short-term (20-day) and mid-term (50-day) moving averages which are currently at 4,885 and 4,928, respectively.
The Nifty’s low of 4,539 last week seems to be a perfect support on the monthly and yearly charts. Hence, the probability of the index breaking slipping this level may become slim once the index firms up above the 4,900 level. 4,525 is the crucial support for the Nifty on the monthly and yearly chart, after which the index may drop to the 3,900 level.
via BS
Punj Lloyd
A repeat instance of cost overruns by Punj Lloyd’s subsidiaries, albeit with a different client, has sprung a surprise on investors. This comes after the management’s comments in the June quarter that the company has made adequate provisioning for other projects where it anticipated cost overruns. Slow-moving contracts in Libya and Jurong Island also cast doubts on timely execution of projects.
Volatility and unpredictability on the cost front and uncertainty in revenue growth as a result of delayed projects reduces comfort from an investment perspective, even as Punj Lloyd continues to be well placed to bag more orders in the oil and gas and infrastructure space.
Investors can consider exiting the stock of Punj Lloyd on the back of recent developments. The company’s performance over the next two quarters, coupled with the outcome of the troubled contracts, would determine the company’s growth prospects over the medium-term.
At the current market price of Rs 212, the stock trades at 20 times its likely per share earnings for FY-10. The recent happenings pose a challenge for earnings to keep up with this valuation.
Slipping up
Punj Lloyd’s consolidated sales for the September quarter fell 2 per cent while net profits dropped 63 per cent to Rs 52 crore, over its year-ago numbers. The company has stated that orders from Libya, which account for 37 per cent of its current order book, yielded neither revenues nor profit margins in the September quarter. The revenue booking is expected to begin in the third quarter. Given the large-size of these orders (Rs 9,850 crore), any further delays in the execution of projects in Libya would dent revenue growth.
Punj Lloyd’s profits plunged as a result of a fresh case of cost overrun, this time for an Engineering Procurement and Construction (EPC) contract for a bio-ethanol plant for its client, Ensus. The company was forced to book cost overruns of Rs 104 crore, claimed to be a result of low productivity and delays attributable to sub-contractors. Neither the agreement with the contractors nor the local laws provide scope for claiming the same from them.
There are two discomfiting factors to this event: One, the earlier project in which cost overrun was incurred was a legacy order of the overseas subsidiary, Simon Carves. That is, the order was bagged before Punj Lloyd acquired the company. This bio-ethanol plant project is, however, stated to have been bagged post acquisition — which suggests that the project may have been verified for its feasibility by Punj Lloyd as well. Two, a less significant Rs 30 crore was booked as losses from the current project in the June quarter itself; this did not however find any separate mention in that quarter. These two factors cause some uneasiness from a standpoint of greater transparency.
Punj Lloyd’s woes came to light in December 2008, when its auditors qualified non-provision of certain costs. This issue later ballooned into Rs 430 crore of losses by FY-09. The company meanwhile had to provide for Rs 360 crore of additional costs incurred in ONGC’s Heera project in March ’09. There appears more hope for recovering this, as changes in specifications and resulting excess costs are common in such projects.
The company is once again facing trouble on a project awarded by Ensus. Another £16 million (Rs 125 crore) might be demanded by the client as liquidated damages. Punj Lloyd’s management hopes to enter into a production-sharing agreement with this client as the plant is being built with a 15 per cent additional capacity than was planned originally. Even if such a favorable pact is entered into, the cost recovery may be over two years. The litigation with the earlier client, SABIC, and the negotiation with the present one, may affect the earnings growth of Punj Lloyd over the next few quarters.
Strength in order book
The biggest strength for Punj Lloyd currently is its healthy order book of Rs 26,808 crore (2.2 times FY-09 consolidated sales), originating largely from infrastructure and hydrocarbon segments. The order inflows though, have declined sharply compared with a year ago. We believe that oil and gas projects would, however, provide traction to the company’s order intake. Such orders, typically pipelines and storage tanks, may provide lucrative margins than infrastructure projects. Operating profit margins for the September quarter fell 3 percentage points to 7.2 per cent.
Another concern on the financial front is the mounting interest cost, despite raising funds through qualified institutional placement and non convertible debentures. Clearly, working-capital requirements appear stretched.
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