Sunday, April 04, 2010
Intrasoft Technologies Ltd., which operates the website www.123greetings.com, has fixed the issue price for its IPO at Rs 145 per share. The issue which opened for subscription on March 23, and closed on March 26, received a good response from investors and was subscribed 18.95 times. The overwhelming response was seen from non-institutional investors, their reserved portion got subscribed 21.60 times followed by retail and qualified institutional investors, which portion overbid 13.51 times and 21.97 times, respectively. The company has raised Rs536.5mn through the issue of 37,00,000 shares. The issue constitutes 25.12% of the fully diluted post issue paid up equity share capital of the company. The proceeds from the IPO will be used fund the company’s requirements for branding & promotion, purchasing a corporate office in Kolkata, investment in technology infrastructure and for general corporate purposes. Collins Stewart Inga Pvt. Ltd. and Anand Rathi Advisors Ltd. were the Book Running Lead Managers to the issue.
Cairn Energy India Pty. Ltd., a subsidiary of Cairn India Ltd., plans to drill up to 14 wells in three offshore blocks on the west and east coasts of India by September. Cairn, the operator in these three blocks, is planning to conduct drilling campaigns in these three blocks during Q3 (July-September) 2010. CB-OS/2 (in Cambay Basin) and Ravva (in Krishna-Godavari Basin) are producing blocks while the Palar block is an exploratory one. Cairn holds 40% operating interest in the Cambay Basin block, while Oil & Natural Gas Corp (ONGC) holds 50% interest and Tata Petrodyne owns the remaining 10%. The UK-based company plans to drill two firm wells in this block and another optional well during July-September. On January 28, Cairn had said that average gross production from the CB/OS-2 block during October-December 2009 stood at 12,744 barrels per day of oil equivalent, including 8,998 barrels of oil and condensate and average gas production of 22.48 million cu ft per day. In Ravva, Cairn plans to drill six wells and two optional wells. Cairn holds 22.5% operating interest in the Ravva block. ONGC owns 40% interest, Videocon Industries 25% and Ravva Oil (Singapore) 12.5% stake. Average gross production from the Ravva field during October-December 2009 stood at 38,668 barrels of oil equivalent daily, comprising 30,957 barrels of oil and 46.26mn cu ft of gas daily.
Maruti Suzuki India Ltd. sold a total of 10,18,365 vehicles in FY10. This is the first time in Indian automobile history that a car company has sold over a million units in a financial year. This included 8,70,790 units sold in the domestic market, the highest ever by the company in a fiscal. The export sales of 147,575 units in the year were the highest ever annual exports by the company. The total sales numbers in 2009-10 mark a growth of 29% over the previous financial year.
Maruti Suzuki’s total sales in 2008-09 were 792,167 units. The domestic sales in A2 segment grew by 23.8% in the fiscal year 2009-10 while in the A3 segment the sales growth was 30.8%, as compared to 2008-09. The export numbers in FY10 were led by the A-star, Maruti said. This fuel efficient compact car clocked over 1.27 lakh export sales in the fiscal.
During March 2010, Maruti Suzuki sold a total of 95,123 units, up 11% over March 2009 when the company had sold 85,669 units. The March 2010 numbers include domestic sales of 79,530 units and the highest ever monthly exports of 15,593 units. The previous highest monthly exports were in August 2009 at 14,847 units.
India's food inflation rose marginally at 16.35% in the week ended March 20 as against 16.22% in the previous week, the Government said. The index for Food Articles group rose by 0.6% to 284.7. At the same time, inflation in the Non-food Articles group fell to 12.57% from 13.06% in the previous week. Inflation for the Primary Articles group stood at 13.86% in the week under review as against 13.88% in the week ended March 13, the data showed. It was at 5.2% during the corresponding week of the previous year. The WPI for this group rose by 0.4% to 283.4. Fuel & Power inflation increased a little bit at 12.75% in the week ended March 20 versus 12.68% in the previous week.
The index for this major group rose marginally to 361.8 from 361.7 in the preceding week. India's annual wholesale inflation rose to 9.89% in February, compared with 8.56% rise in January and 3.50% a year ago. Headline inflation, which was initially driven by high food prices, is now spreading to other segments of the economy. Inflation in manufacturing accelerated to 7.4% in February from 6.5% in January. With inflation spreading to non-food items, the Reserve Bank of India (RBI) is likely to further tighten its monetary stance in its forthcoming annual policy on April 20. The RBI recently raised the repo and the reverse-repo rates by 25 basis points to 5% and 3.5%, respectively, to contain inflation. Bankers say they will wait for RBI's annual monetary policy to decide on hiking interest rates.
After making new 52-week highs the main indices have yet again struggled for direction amid lack of follow-through buying. This has happened despite FII inflows having been positive and stable global markets. Economic reports, both local as well as global point to acceleration in the recovery process. Among the pressure points include high unemployment in the US and fiscal mess in Europe. Also, Japan continues to grapple with deflation and China is facing a potential bubble.
As far as India is concerned, things appear to be quite benign. And, though inflation remains a big worry along with its adverse fallout on interest rates, the policymakers are likely to be pro-active enough to prevent significant mishaps. The immediate catalyst for our market, as also for global equities will be the latest quarterly numbers and guidance from corporates for the coming quarters.
The markets are looking for further improvement in the earnings outlook. Therefore, any material disappointment on this front may lead to some cooling though there is no need to panic as such. The bias remains in favour of the bulls but some concerns prevail on valuations, which may keep the market in a limbo for a while before the bulls recharge the rally. So, it is going to be testing times and we would urge you to stay on sidelines before the clouds clear up a bit more.
As expected, the markets recorded fresh two-year peaks at the start of the week, and consolidated later. The Sensex touched a high of 17,793, then fell to a low of 17,489 before settling with a gain of 48 points at 17,693. In the process, the index has extended its winning streak to the eight straight week. The Sensex has rallied over 11 per cent (1,777 points) during the period.
The markets closed the financial year 2009-10 on a positive note. While the Sensex surged over 80 per cent during the year, the index was up 6.7 per cent in March 2010.
HDFC, up nearly 7 per cent at Rs 2,782, was the top gainer among the Sensex stocks this week. It was followed by DLF, Sterlite, Tata Motors, Hindalco and NTPC, up 3-5 per cent each. On the other hand, Infosys shed nearly 4 per cent to Rs 2,671, followed by Hero Honda, Hindustan Unilever, Bharti Airtel and TCS down 2-3 per cent each.
Going forward, the first two days of the week will be crucial for the index to sustain the rally. In case the markets end up on these two days, then the Sensex may rally sharply towards the end of the week, which includes the possibility of the index crossing the 18,000-mark. On the negative side, a weak closing on the first two days could escalate selling in the latter part of the week.
Crucial levels during the week are resistance around 17,800-17,880, above which the index may spurt up to 18,050-18,350 during the course of the month. On the downside, the index is likely to seek support around 17,575-17,500.
The NSE Nifty moved in a range of 94 points, from a high of 5,330, the index dropped to a low of 5,235, and finally settled with a gain of 17 points at 5,291.
The Nifty may face resistance around 5,325-5,350, while it may find support around 5,255-5,230.
The index continues to exhibit bullishness. The short-term moving average is currently at 5,196 (20-days) and the medium-term moving average is at 5,020 (50-days).
Investors can retain their investments in premium retailer, Shoppers' Stop (SS). At Rs 393, the stock trades at 35 times estimated consolidated per share earnings for FY-10, lower than comparable retailers such as Trent.
The company has started making profits after the losses of the previous financial year. Same-store sales growth has moved into the positive territory.
Consumer spending in lifestyle retail has shown sustained revival; this is the segment in which Shoppers' Stop wholly operates.
Even so, valuations remain on the high side and investors are advised against entering this stock at these levels. Sales growth is yet to match that seen in earlier years.
While margins have improved, it came about largely due to cuts in manpower and interest costs, both of which are not likely to remain low. Margins remain on the low side compared to peers. Stores are also centred in the competitive bigger cities, even as bulk of purchasing power lies in smaller towns.
Shoppers' Stop manages varied stores chains — from its flagship Shoppers' Stop offering apparel and accessories; Crosswords offering books and music to Mothercare (a UK-based brand) addressing needs of infants, mothers and toddlers; MAC Clinique offering cosmetics and hypermarket HyperCity. Smaller chains include HomeStop (home solutions), Nuance (airport retail) and TimeZone (entertainment centres).
Shoppers' Stop had entered nascent retail avenues such as catalogue and airport retailing, besides food and beverage retail in a diversification bid and to tap different markets.
However, on grounds of poor performance, it has since exited catalogue retail and handed over its food and beverage chain to Café Coffee Day. These moves may help improve margins.
Being among the early movers in organised retail, Shoppers' Stop has carved out, and maintains, a healthy brand image.
Customer loyalty is a key factor that drives sales with almost 70 per cent stemming from its First Citizens Club loyalty programme.
Number of club members grew from one million in 2007-08 to 1.4 million now. Private brands such as STOP also enjoy fairly good brand presence.
The company's additions to retail space were never aggressive.
Total retail space rose from 1.6 million sq. ft in March 2008 to the current 1.9 million, across formats. It has added about 11 lakh sq. ft of retail space in the nine months ended December 09.
The company, therefore, did not suffer the heavy debt, store closures and substantial scale back of expansion plans that beset a good many retailers. Shoppers' Stop has plans to open ten stores by end-FY-11.
Given that a chunk of purchasing power rests outside the bigger cities where most of its stores are located, Shoppers' Stop has plans to move into Tier-II cities such as Coimbatore, Ahmedabad and so on.
Bankrolling expansion may not be hard to come by given relatively low debt equity of 0.72 and a further Rs 350 crore in the pipeline from warrant conversions and qualified institutional placements.
About Rs 125 crore of this may, however, go towards hiking its stake in HyperCity from 19 per cent to 51 per cent by June 2010.
Sales and margins pick up
With its marked concentration in the premium segment and bigger cities such as Mumbai and Bangalore, Shoppers' Stop fell prey to the spending slowdown that cramped most retailers, posting (adjusted) net losses of Rs 37 crore in 2008-09.
Recovery in lifestyle retail and cost controls helped the company record profits once again with the nine-month period ending December 09 posting Rs 23 crore in consolidated net profits against a Rs 39 crore loss in the same period a year earlier.
From a decrease in customer footfalls by 20 per cent in the December 2008 quarter, Shoppers' Stop saw footfalls increase by 1.5 per cent in the December 2009 quarter.
Similarly, sales growth of stores that were open for more than a year rose by 2 per cent in the December 09 quarter against a decline of 4 per cent in the same quarter in 2008. Still, for the nine-month period ending December 09, same-store sales growth is down 0.2 per cent.
On the costs front, manpower expenses were cut by 20 per cent and other expenses reduced by 3 per cent.
Interest costs dropped 21 per cent, but with a higher interest rate cycle in the offing, these costs may rise.
Salary cuts by top management accounted for a fair bit to reducing staff costs, and such cost controls are unlikely to continue in the coming quarters.
Consolidated operating margins improved to 7.3 per cent in the nine-month period ended December 2009 against the 0.5 per cent and 5.2 per cent in the same period in 2008 and 2007 respectively.
Consolidated net profit margins stood at 2 per cent for the nine months ending December 09, against the negligible levels of the earlier years.
Valuations for the P&G Hygiene and Healthcare stock (P&G Hygiene) have soared to a record high due to its recent price gains (currently at Rs 2,299), making it one of the most expensive FMCG stocks to own today. Investors should take this opportunity to book profits in the stock and exit their holdings.
Though rumours of the launch of P&G's global toothpaste brand, Crest, seem to have propelled the stock, there is no official confirmation of this (the Crest launch has made periodical news for many years now). And even if the Crest launch is finally on the cards, it appears unlikely that the launch will be routed through P&G Hygiene.
At the current price-earnings multiple of 36 times the trailing 12-month earnings, P&G Hygiene trades at a good premium to the much larger Hindustan Unilever (28 times) and on a par with Nestle India (36 times) and Dabur India (35 times).
The price discounts FY-11 estimates by a stiff 29 times. Such valuations appear unjustified for P&G Hygiene, given its relatively small size (the company's sales amount to just 4 per cent of HUL's and 15 per cent of Nestle India's annual sales) and its narrow product portfolio.
Premium valuations for companies such as HUL, Nestle or Dabur are backed by their presence across five-10 product categories with scores of brands.
The rationale for this is that a wide portfolio allows these players room to substantially scale up in size, economise on costs and weather a slowdown better than smaller rivals.
P&G Hygiene's is essentially a two-product portfolio comprising just of key brands — Vicks and Whisper (these have a number of extensions).
Expansion of P&G's portfolio beyond these brands, which would hold the key to better valuations, has not made much headway in the last several years.
Not a good fit
The US FMCG giant, Procter and Gamble US, operates through three separate arms in the Indian market (the 100 per cent owned P&G Home Products, the 70 per cent owned P&G Hygiene and Gillette India) and the areas of focus for the three companies have been clearly demarcated.
P&G Home Products holds and markets the entire portfolio of personal care and laundry brands (Ariel, Tide, Pantene, Head and Shoulders, Rejoice, Pampers, Olay) and Gillette India the entire range of male grooming and oral care brands (Gillette, Mach3, VectorPlus, Oral B).
The listed P&G Hygiene has been narrowly focussed only on feminine hygiene products under the umbrella of Whisper and healthcare under the Vicks franchise.
All product launches by the company in the past five years have been extensions and variants of these two key bread-and-butter brands. P&G Hygiene has, moreover, made several strategic moves over the past five years to obtain sharper focus just on these categories — businesses such as contract manufacturing of detergents have been hived off to the unlisted entity.
Given this backdrop, it appears quite unlikely that the Crest launch will be routed through P&G Hygiene, when both Gillette India (which already has a presence in oral care) and P&G Home Products (which houses personal products like shampoos) may offer a superior fit with the brand.
P&G Hygiene has, however, managed robust growth rates both in its sales and profits, merely by focussing on its existing product portfolio and regularly churning out new variants and brand extensions.
Recovering from the blip in revenues caused by the hiving off of the contract manufacturing business, the company's net sales have expanded at over a 20 per cent compounded annual rate and net profits at a 38 per cent rate over the past three years. Operating profit margins too have received a lift from 28 to 31 per cent over the same period.
With the underpenetrated feminine hygiene category consistently managing a near 25 per cent growth rate and bettering the healthcare segment (the Vicks franchise has seen growth rates of 5-14 per cent annually), the product mix has tilted towards hygiene products.
Given that P&G Hygiene occupies the premium end of this highly promising category, this has aided profit margins; the company's clear market leadership in its chosen segments too have helped.
From here on, while the Vicks portfolio may manage low double-digit growth, the Whisper franchise may sustain high growth rates, given the immense scope for improving the brand's penetration through distribution initiatives.
Making a serious dent in the mass market may, however, require the company to push its lower priced Whisper variants, which could entail a sacrifice on margins.
With the foreign promoter already holding 70.64 per cent in its equity, a possible delisting of this company at a later date cannot be ruled out; other FMCG multinationals have taken this route. Stagnant dividends (Rs.20-22 per share) and a fairly stiff royalty payment to its parent (5 per cent of net sales) are however, downsides to holding this stock.
Shareholders with a long-term perspective can retain their holdings in the stock of Fortis Healthcare, which is now the largest healthcare provider in India.
The company's well-established hospital network across the country, likely additions to the overall capacities in the next couple of years and the potential synergies from its string of acquisitions, with the latest being a 24 per cent stake purchase in Singapore-based Parkway Holdings, underscore our recommendation.
Domestic acquisitions have also lent it greater bargaining power, given the centralised sourcing of inventory for its hospitals.
The stock, however, appears to have factored in most of the benefits into its price.
At current market price of Rs 180, it trades at about 45 times its likely per share earnings and at about 20 times its likely EV/EBIDTA for FY11. This may leave little room for price appreciation in the near-term, especially since the current valuations are also at a significant premium to that of Apollo Hospitals.
Though the valuation gap to some extent can be justified, concerns regarding the expensive valuation of its recent purchase and the resultant overhang on earnings growth could keep the stock price pressured in near-term.
A long-term perspective, therefore, is a must for shareholders to best enjoy the benefits from the company's recent acquisitions.
Fortis has charted a high-growth trajectory for itself largely with the help of acquisitions; its revenues grew at a CAGR of about 28.5 per cent in the last three years.
While the buyout of 10 hospitals from the beleaguered Wockhardt Hospitals last year helped it gain a nationwide presence and inch closer to market leader Apollo Hospitals, its latest acquisition has helped it supersede Apollo and secure the top position in the domestic healthcare market.
It now has over 62 hospitals and roughly over 10,000 beds under its ambit, much higher than that of Apollo's.
For a company that has largely grown through acquisitions, it also has an impressive track record in integration — previous buys such as Escorts in Delhi and Malar Hospitals in Chennai, for instance.
In the just ended December quarter, all its hospitals (but for the one in Mohali) reported a healthy growth in revenues and operating margins.
Overall, the company also improved its occupancies to 74 per cent from 70 per cent seen in the corresponding quarter last year.
There was also notable improvement in the average revenue per occupied bed (at Rs 86 lakh) and average length of stay (3.7 days). With ten hospitals from the Wockhardt portfolio being added to its kitty this quarter, the overall numbers are set to improve further.
For one, these hospitals are located in metros and have fairly healthy occupancies and margins.
Second, Fortis would also benefit from the potential synergies in terms of shared talent pool, technologies, and common sourcing of inventories.
Third, the attractive deal valuations — pegged at about Rs 909 crore — which will make it easier for the investment to pay off sooner than later.
Fortis, however, appears to have bought the 23.9 per cent stake in Singapore-based Parkway Holdings at a high price. It bought the stake for about $685.3 million (about Rs 3,000 crore), valuing the company at about $2.8 billion (20 per cent premium to its market capitalisation then) and at about 17 times its CY09 EBITDA.
While to some extent, that Parkway is a well-established and profit making hospital chain in its region may justify the premiums, Fortis seems to have stretched a tad too much for the strategic stake and management control.
No doubt, Fortis will be able to extract benefits from the latter's network of 16 hospitals with over 3,400 beds spread across six countries; it is now also at a better vantage to benefit from the strengthening undercurrents of medical tourism.
There even are synergies in terms of multispecialty capabilities, innovative technologies in stem cell therapy and organ transplantation. But the potential benefits can be reaped only in the long run.
The foreign currency debt and warrants that Fortis is planning on taking to fund the deal may eclipse earning growth in the near-term.
Shareholders of Adani Enterprises (Adani), a business conglomerate with interest across industries, can consider subscribing to the rights issue made by the company. At Rs 475, the offer price is not at a significant discount to the market price of Rs 479. Besides, at a ratio of one share for every 16 held, the offer is unlikely to add significant exposure to investors' current holdings.
However, given the good long-term prospects that the company's assets provide, investors can consider subscribing to the rights. The stock can also be accumulated on dips in the open market.
Adani is set to hold a potent portfolio of 9,240 MW of power-generating assets (by 2013), a private port facility which can be expected to handle over 40 million tonnes of cargo annually, besides 70 million tonnes of coal mining operations.
In short, Adani Enterprises is in the process of undergoing a complete transformation of identity — from a low-margin trading house to a conglomerate that would hold a lucrative portfolio of annuity-yielding assets. Investors, though, may have to wait for at least two-to-three years, to reap benefits from the same. At the offer price, the stock trades at 15 times it per share earnings expected for FY-11. We have factored in an expansion of about 15 per cent in equity as a result of the proposed qualified institutional placement(QIP) of about Rs 4,000 crore, after the current rights offer. This valuation is based on current streams of revenue.
Once through with all its approvals, Adani would hold an 81 per cent stake in Mundra Port, a listed port player with a market capitalisation of over Rs 30,000 crore. It already holds a 70 per cent stake in Adani Power. The per share value derived from the listed entities on a post-QIP equity base would be Rs 204 per share from Adani Power and Rs 283 per share from Mundra Port.
The calculation assumes that the promoters would be issued that many equity shares (for the Mundra deal) which would result in keeping their stake in Adani Enterprises unchanged at 75 per cent.
From a business that generated over 90 per cent of its revenue from trading of coal, power, metals and minerals and agricultural products, Adani has moved to owning assets such as power utilities, operating coal mines, gas distribution, and refining and processing of agro products.
Of these, we view three segments as being key drivers of revenue for Adani — coal mining, power and port.
The subsidiary, Adani Power, has 330 MW in operation, with another 330 MW to go onstream anytime now. With the company already tying up funds for over 9,000 MW, execution would be the key event to watch out, for earnings accretion.
A 70:30 ratio of power purchase agreements and merchant power is expected to provide a healthy combination of steady revenues and some market-driven pricing. Fuel linkages at competitive rates from its parent and tax exemptions arising from being located in a SEZ are the key advantages for Adani Power.
Robust port operations
Mundra Port, the first port to be listed in the country, handled close to 36 million tonnes of cargo in FY-09; almost double that of FY-07. Mundra's unique combination of steady revenues from long-term contracts with auto makers, oil refineries and power companies in the region, coupled with volume growth from the diversified cargo mix it handles leave less room for volatility in earnings arising from slowdown in foreign trade.
Mundra's sales and net profits for the nine months ended December 2009, stood at Rs 9,257 crore and Rs 5,087 crore respectively.
Adani is stated to be the largest importer of coal to India with a 49 per cent market share in imports supplied to top players such as NTPC. While the company has its own coal mine in Indonesia, it has entered into joint ventures for coal mining in three locations in the country for mining and processing of coal for power stations.
Though coal mining now contributes less than 1 per cent to its revenues (Indian mining operations yet to commence), the segment could provide superior access to the supply-end of the coal trading business and also insulate the company from international coal prices.
The operating margins too would be superior to mere trading of coal, given the exploration mining and processing activities involved. The company's power trading business accounts for 8 per cent of its total revenues and is set to increase from Adani's power's merchant trading.
Overall, apart from the port business (which is also a crucial link for transport of coal), the power business of Adani is fully integrated from fuel to power trading.
Adani's subsidiaries, though, hold risks that could pose a threat to earnings. Changes in mining policies in Indonesia could increase coal costs; two, Adani Power is involved in litigation for one of its power purchase agreements in Gujarat; three, the company is yet to prove its strength in coal mining operations in India.
Adani is also highly geared with a debt-equity ratio in excess of 2.5:1. While much of the proceeds from this Rs 1500 crore offer would go towards repaying debt,a QIP placement could be the only way to ensure that leverage does not once again reach alarming proportions. However, such high leverage is not uncommon in nascent asset-intensive businesses.
For the nine months ending December, Adani's revenues stood at Rs 18,064 crore and net profit was Rs 580 crore.
Current net margins at about 3 per cent are set to increase as revenue from the power subsidiary expands and interest cost reduces. The offer closes on April 15.
Investors with a two-year perspective can consider adding the stock of Crompton Greaves to their portfolio. Strong positioning in the domestic transformer market, steady profit margins despite competitive pressures and continuing inorganic growth augur well for the company's earnings growth. At the current market price of Rs 274 the stock trades at 12 times its expected per share earnings for FY-12.
Crompton has, for a couple of years now, been a local market leader in the 765 kV transformer segment, traditionally dominated by four-five domestic players. However, active participation by Korean and Chinese players for orders placed by Power Grid Corporation (PGCIL) has not only dented market share but has resulted in severe pricing pressure. Despite this, Crompton has managed to bag about one-third of the orders from PGCIL in FY-10; expanding its share compared with a year ago.
Interestingly, Crompton has achieved this without compromising on profit margins. While most other peers have faced margin pressure, despite lower raw material cost, Crompton's operating profit margins increased by four percentage points to 14.2 per cent over a year ago numbers. Cost efficiencies in its overseas operations and lucrative margins from West Asian and African orders could have buttressed overall margins, even if domestic margins did stagnate.
The Chinese and Korean players benefitted from their respective currency depreciation against the rupee, apart from cost advantages. If this advantage wanes, the pricing pressure may be less intense.
After five acquisitions in the last five years, Crompton continued with its inorganic growth strategy with the recent acquisition of a UK-based electric engineering company. This move will help integrate Crompton's overseas operations.
Crompton's order backlog of Rs 6,080 crore is marginally lower than a year ago position mainly on account of a mild dip in overseas subsidiaries' order flows in FY-10. However, healthy order intake growth of 21 per cent in the December quarter suggests that the momentum has picked up. Even while it could take a couple of quarters before the overseas markets revives, PGCIL's planned spending of Rs 28,000 crore in the next two years is likely to provide ample opportunity. Crompton Greaves' growth in its industrial systems (19 per cent) and consumer products (27 per cent) is also likely to drive earnings. Planned listing of Avantha Power, in which Crompton holds 32 per cent, could also provide some unlocking of value (investment valued at Rs 6-8 a share, assuming a price to book value of 2). Increasing competition from overseas players could erode market share and margins for Crompton and remain key risks.