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Sunday, August 01, 2010
Infotech Enterprises
Investors can book profits in shares of Infotech Enterprises (Infotech), an engineering and geospatial services provider, given the margin concerns that the company is likely to witness and challenges in the form of declining contribution from key verticals.
Bajaj Auto
Investors with a one-to-two-year perspective can consider an investment in the Bajaj Auto stock. The company had a dream run in 2009-2010, aided by a demand revival after the slowdown of 2008. This performance has extended to the first quarter as well. For the quarter ended June 2011, net sales grew 65 per cent year on year to Rs 3,737 crore. Profits almost doubled to Rs 590 crore. This year, the industry growth is expected to moderate to about 15 per cent. Nevertheless, robust volume growth aided by its ‘twin brand' strategy, higher operating margins from a superior product mix, and expanding exports lend visibility to the company's earnings in the near to medium term. At the current market price of Rs 2,688, the stock trades at a reasonable 17 times its estimated 2010-11 earnings, providing room for appreciation.
Birla Corporation
Investors with a two- year perspective can consider investing in the stock of Birla Corporation, a cement manufacturer whose target markets are the northern, central and eastern regions.
Presence in high-demand markets, aggressive capacity expansion with sufficient cash in the kitty and improving operating efficiency on added captive power sources are key positives.
Lanco Infratech
Investors with high risk appetite can consider fresh exposure to the stock of Lanco Infratech with a two-year investment horizon. The company plans to add 1888 MW of additional capacity, trebling its capacity in FY11 which will significantly boost its earnings. It has already commissioned 733 MW of power projects in the June quarter of this fiscal, taking the current operating capacity to 2082 MW.
Interestingly, the company had only a 511 MW project as of March 31 2009.
While the scaling up of capacity led to re-rating, the stock may give better returns as it enters the big league of power utilities. The potential upside to the stock from here would be determined by its on-time execution capabilities for bigger projects, short-term power tariffs and financial closure of residual projects under construction.
At current market price of Rs 66, the stock is discounting its FY12 earnings by 14 times and 2.7 times its estimated FY12 book value. In terms of book value multiple, only public sector peers with regulated margins are at a discount to Lanco making it one of the cheaper stocks in the power sector.
Lanco will immensely benefit from the current short-term tariffs as against the future projects when the merchant rates are expected to soften. Despite the earnings moderation in other revenue segments such as EPC (engineering, procurement and construction), real estate and accounting change done in depreciation, the stock will continue to have strong profit growth.
Business
Lanco Infratech is an integrated infrastructure player with presence in power, other infra segments, power trading and real estate. A significant proportion of its revenues comes from EPC/construction and power generation followed by power trading.
In-house EPC tends to reduce execution risk and sustainable revenue stream for the company when the capital is still locked up during the construction stages. Earnings from EPC (inclusive of internal accruals from power) can be used for funding the equity portion of other projects.
The capacity of power projects is set to jump from 2082 MW (which include the recently commissioned Lanco Kondapalli unit of 133 MW and the Udipi unit of 600 MW) to 3970 MW over the next one year and capacity will go up to 9300 MW by end-2014. It has another 2500 MW in planning stages.
In terms of fuel mix the company has moved from gas projects to coal projects which have better fuel availability. The company is also executing relatively bigger hydro projects. The fuel mix by 2014 would be 74 per cent coal, 8 per cent hydro and 18 per cent gas.
Lanco has around 666 MW (Amarkantak-1 and Kondapalli Ph II) of merchant capacities currently. This proportion is set to go up as the company structured its off-take with part power purchase agreements (PPAs) for most of the projects.
This judicious mix of purchase agreements enable it to earn higher returns (around 25 per cent) while reducing the off-take risk to some extent. The company has signed most of the PPAs with fuel as a pass-through component, to reduce fuel price volatility. Only the Udupi project is running on imported coal while the other coal-based projects either have coal linkages or captive coal blocks.
Funding
Of the 7229 MW under construction, 2700 MW of projects are in advanced stages of completion. Around 2600 MW of project have attained financial closure with the management expecting financial closure of bigger projects in the first half of this fiscal. While more than Rs 35,000 crore capex in pipeline, equity funding of more than Rs 8,000 crore seems very high.
The company last year raised Rs 723 crore through a QIP for funding the near-term projects. Internal accruals over the next four years would take care of most of the equity funding for the company. The debt-equity ratio of the company stood at 2.5 as of March 31 2010, down from 4 the preceding year.
Financials
The consolidated net profits have grown at 28 per cent annual rate over the last four years with higher contribution from the EPC segment. Currently, EPC and construction contribute 55 per cent of the sales and 61 per cent of EBIDTA. However, power generation, which contributes 38 per cent to EBIDTA, is all set to grow manifold. As of March 31, 2010, the EPC and construction segments have an order book of around Rs 25,700 crore.
However, barring the projects nearing completion, the rest are in the initial stages of construction which may mean volatile revenue flow from this segment.
Lanco Infratech's trading arm continues to contribute to short-term trading volumes allowing an additional income stream for the company. In addition, carbon credits for some of its gas-based and alternative-energy projects contribute marginally to the earnings. As of March 31, 2010, the EBIDTA margin of the EPC segment was 14.7 per cent which may moderate to industry levels of 10-11 per cent as more projects outside of the power sector are taken up.
Risks
Additional cess on coal and hike in MAT rate are key negatives for Lanco which are already priced-in. The company is using Chinese equipments which are not tested for Indian coal.
Given the high leverage of the company, any adverse movements in interest rate would increase the interest costs for the company.
Bajaj Corp IPO Review
The Initial Public Offer (IPO) from Bajaj Corp may not be suitable for investors with a conservative risk profile. Though the company occupies a lucrative niche in the hair oil market, it relies heavily just on this one segment to drive growth and profitability. Bajaj Corp plans to diversify by foraying into new products, backed by heavy spending on advertising and promotion with money raised from this IPO.
Aster Silicates slumps after strong debut
Shares of Aster Silicates Ltd. doubled on debut before tumbling by 20% on the last trading day of the week. The stock closed the week at Rs196.30. It had been as high as Rs258 during the week and as low as Rs123. The issue price was fixed at the higher end of the price band of Rs112-118 a share. The IPO of sodium silicate maker was open between June 24 and June 28. The issue was subscribed 4.47 times. Sodium silicate includes food grade sodium silicate, special drilling grade silicate and detergent grade silicate. Aster produces sodium silicate both in glass and liquid form. Food grade sodium silicate is used in the manufacturing of Silica precipitate and Gel, which finds its applications in toothpaste, salt, cosmetics, glucose powder, tyre, rubber and pesticides etc. Sodium silicate, (special drilling grade silicate) is also used in off-shore drilling and for reactivation of old oil and gas fields. Aster intends to use issue proceeds for expansion of manufacturing facilities and additional working capital requirements.
Tulip Telecom to buy 13% in Qualcomm's India arm
Tulip Telecom Ltd. (Tulip), one of India’s largest Enterprise Data Service providers, today announced a strategic partnership with Qualcomm Inc. for a Broadband Wireless Access (BWA) venture. Subject to Government approvals, Qualcomm will have a 74% stake in the venture, while Global Holding Corporation (GHC) and Tulip will hold 13% each, in compliance with applicable Indian Foreign Direct Investment regulations. Tulip’s investment in this venture for the 13% stake will be approximately Rs. 1,400 million.
HCC announces Rs20bn Lavasa IPO, bonus
Hindustan Construction Company Ltd. (HCC) said that the Board of Directors of Lavasa Corporation Ltd. has approved the proposal to undertake, subject to market conditions, obtaining necessary shareholder and regulatory approvals, an initial public offering (IPO) of its Equity Shares for an amount up to Rs20bn. Lavasa Corp.'s Q1 net sales were at Rs1.81bn and net profit at Rs490mn during the quarter ended June 30. Separately, HCC's Board of Directors also approved the issue of Bonus Shares in the ratio of one equity share of Re. 1 each for every existing one equity share of Re1 each held by the Shareholders.
Noel Tata steps down as Trent MD
N. N. Tata, on stepping down as the Managing Director of Trent, has been appointed as the Managing Director of Tata International Ltd. Tata will continue his association with Trent as its non executive Vice Chairman. N. N. Tata has overseen the profitable growth of Trent from a single store company in 1998 to over 90 stores across its retail formats - Westside, Star Bazaar, Landmark, Fashion Yatra, Sisley and Zara. During this period, Trent has entered into a strategic franchise and sourcing agreement with the well-known international retailer Tesco of UK for the Star Bazaar business. Under N. N. Tata’s leadership, the consolidated turnover of Trent has increased from Rs80mn in FY99 to Rs11.37bn in FY10.
Nifty may trade in London
India’s National Stock Exchange (NSE) and The London Stock Exchange Group (LSEG) signed a Letter of Intent to evaluate joint strategic business opportunities, and to co-operate together more closely in the future. As part of the agreement, both exchanges declared their intent to explore the feasibility of an agreement whereby FTSE Group may licence the FTSE 100 Index to the NSE, and whereby the NSE may licence the S&P CNX Nifty (Nifty 50) to LSEG for the purpose of issuing and trading options and other index contracts. Additionally, the two signatories will explore the possibility of holding joint training and education courses besides holding seminars with a particular focus on Small and Medium sized Enterprises (SMEs). The LoI was signed in Mumbai by Xavier Rolet, Chief Executive of LSEG and Chitra Ramkrishna, Joint Managing Director of the NSE, in the presence of the George Osborne MP, the Chancellor of the Exchequer of the United Kingdom, who is leading a high profile British business delegation to Mumbai.
Food inflation slides...falls below 10%
India's food inflation declined in the week ended July 17, falling to single digit levels for the first time in many months while inflation in the fuel group remained elevated. Inflation in the Primary Articles group also fell, the Government said. According to the data released by the Commerce & Industry Ministry, inflation in the Food Articles group stood at 9.67% in the week ended July 17 versus 12.47% in the previous week. Inflation in the Primary Articles group was at 14.5% as against 16.48% in the week ended July 10 while inflation in the Fuel & Power group rose to 14.29% from 14.27% in the preceding week.
Mobile device sales in India are forecast to reach 138.6 mn in 2010: Gartner
Mobile device sales in India are forecast to reach 138.6 mn in 2010, an increase of 18.5% over 2009 sales of 117 million units, according to Gartner, Inc. The mobile handset market is expected to show steady growth through 2014 when end user sales surpass 206 million units.
Weekly Stock Picks - Aug 1 2010
Buy IVRCL Infra
Buy Exide Inds
Buy LIC Housing Finance
Buy Bank of India
Buy Sun TV
Weekly Newsletter - Aug 1 2010
Indian market seems to have hit a soft patch after a really good June, with the key indices struggling to break above the current range. Disappointing earnings from a few bellwethers have not been of any help even as uncertainty prevails over the state of the global economy. Even the fact that food inflation has dipped below 10% and that monsoon deficit has shrunk failed to offset jitters linked to corporate results. Bulls are hoping that August turns out to be better than July.
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