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Rakesh Jhunjhunwala - Insights, Recommendations

Even super bull Rakesh Jhunjhunwala says he believes that the next few months will be tough for Indian markets.

In a recent presentation to the students of IIT Mumbai, he approvingly quotes former US Federal Reserve chairman Alan Greenspan saying that “history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.” He says the impact of the current credit crisis in the US will lead to a slowdown in the US economy, and that is bound to affect world equity markets. But the pain in India is likely to last for only a short time. “India may benefit,” argues Jhunjhunwala, “but only after an intermittent transition period.”

What’s the basis for this upbeat view?

The presentation lists all the usual reasons: a large pool of skilled people, favourable demographics, domestic consumption-led growth, increased productivity, and so on. But it does give a couple of other reasons that aren’t often cited, such as the fact that the corporate sector will grow faster than the unorganized sector. That implies there is plenty of space for companies to grow, as they muscle into space vacated by the unorganized sector. The withdrawal of reservations for small scale industry is a case in point—it may result in the closing down of small firms, but it will also benefit the larger companies.

But the crux of Jhunjhunwala’s argument lies in the “significant potential” of “rising savings, yet low equity ownership” of the typical Indian household. The percentage of savings to GDP is forecast to rise from 30% in 2007 to 33% by 2011. The proportion of financial savings within overall savings will also rise—from 17.3% of GDP in 2007 to 20% by 2011. Moreover, investment in equities, debentures and mutual funds will rise from 3.8% of financial savings to 15% by 2011. This trend, coupled with increased FII inflows, will lead to a quantum jump in the amount of funds entering the market, from $13.9 billion (Rs56,573 crore) in 2007 to $64.9 billion by 2011.

Is all this the stuff of which bulls’ dreams are made?
Well, the Central Statistical Organization data show that the percentage of gross savings to GDP is already well above the estimates given in the presentation and it is expected to rise to 35% in fiscal year 2008. But forget the detailed numbers—the point that savings are rising, and that the proportion of savings invested in equities is also likely to rise is well taken. In 1994, the proportion of household savings flowing into equities/debentures/mutual funds amounted to a high 13.5% of total financial savings.

The question is, what will it take for those glory days to return?

The most critical factor is the continuation of the bull run. The surge in equities in the last four years has led to some investors returning to the market and the proportion of household money invested in equities is probably understated, given the popularity of the ULIP (unit linked insurance plans) schemes of the insurance companies, which are not included in the official figures of household savings flowing to equities.
In the long run, a rising allocation of household savings to equities does hold the potential to expand price-earnings multiples in the Indian markets, just as it has done in the Chinese.

Mutual fund inflows

After two lacklustre months, inflows into growth funds picked up in the months of June and July. The last two months have seen net inflows of over Rs3,200 crore, on the back of new fund offerings worth Rs7,600 crore. In these months, net inflows into growth funds are almost back at the level they were during February and March. That’s a contrast to the situation in April and May, when equity funds had net outflows of Rs145 crore, thanks to the correction in the markets in February-March. Mutual fund investors now appear to have laid those fears aside. But fund managers still seem to be exercising caution with the deployment of the newly acquired funds.

According to data released by the Securities and Exchange Board of India (Sebi), mutual funds have been net buyers worth only Rs200 crore since June. They made net sales worth Rs900 crore in July, when the markets reached new peaks. This month has been much better, with net purchases of Rs400 crore in the first two weeks.

What’s important to note is that new fund offerings continue to spur net inflows into equity funds. The irony is that much of the flows into new schemes have been because of sales of existing schemes. Existing schemes saw net outflows of Rs7,300 crore since April. While much has been written about this practice by mutual fund agents to earn higher fees, it’s high time Sebi did something to put an end to it.

NOTE: You can find this presentation on this site

Research recommendations from Geojit

RESEARCH DESK says:
Buy SEA Marine Indian Card Clothing ICI India CMC Ennore Foundaries ITD
Cementation Bombaynews
15.02.2007 : 9:29:18 AM

Thanks Kiran

Brokers bullish on NIIT Tech, Everest Kanto, Tata Steel

Motilal Oswal has kept buy rating on NIIT Tech; with a target of Rs 432.

Citigroup has kept buy rating on Everest Kanto Cylinder; with a target of Rs 950.

Karvy has kept buy rating on Tata Steel; with a target of Rs 671.

ICICI Securities has maintained buy rating on Bajaj Auto and Maruti.

ICICI Securities has maintained buy rating on Hero Honda and Bharat Forge.

ICICI Securities has kept sell rating on BPCL and HPCL.

ICICI Securities has kept buy rating on Indraprastha Gas.

Deutsche Bank has maintained buy rating on PNB and BOB.

Deutsche Bank has kept buy rating on OBC and HDFC Bank.

Deutsche Bank has kept sell rating on Canara Bank.

Deutsche Bank has kept hold rating on Union Bank.

Brokers bullish on Int Combustion, RIL, Reliance Comm

JM Morgan Stanley has kept underweight rating on SBI; with a target of Rs 800

Sushil Finance has kept buy rating on International Combustion; with a target of Rs 435

Enam has kept outperformer rating on Essel Propack

Karvy has kept market performer rating on Bajaj Hindustan; with a target of Rs 235

Karvy has kept market performer rating on Anant Raj Ind

DSP Merrill Lynch has kept buy rating on RIL; with a target of Rs 1320

Citigroup has kept buy rating on Reliance Communications; with a target of Rs 570

Citigroup has kept buy rating on Tata Teleservices; with a target of Rs 24

Brokers bullish on UltraTech Cement, Aventel Softech

Anandrathi has kept outperformer rating on Jindal Saw; with a target of Rs 440.

Edelweiss has maintained reduce rating on Bajaj Hindustan.

Emkay PCR has kept buy rating on Ultratech Cement; with a target of Rs 1122.

Emkay PCR has kept hold rating on Praj Ind; with a target of Rs 222.

Karvy has kept buy rating on Aventel Softech ; with a target of Rs 85.

Kotak PCR has kept buy rating on Allcargo Global Logistics; with a target of Rs 1224.

Kotak PCR has maintained buy rating on Gateway Distriparks; with a target of Rs 259.

Brokers bullish on Guj Mineral, Cadila Health, SREI Infra

Angel Broking has maintained buy rating on Gujarat Mineral; with a target of Rs 480

Angel Broking has maintained buy rating on Cadila Healthcare; with a target of Rs 430

Emkay Research has kept buy ratingy on SREI Infra; with a target of Rs 70

Emkay Research has kept buy rating on Global Vectra; with a target of Rs 334

Prabhudas Lilladher has maintained outperformer rating on Marico

Prabhudas Lilladher has maintained market performer rating on Tata Motors

Sharekhan has kept buy rating on Alphageo; with a target of Rs 214

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Stocks you can pick up this week

KPIT Cummins
Research: Prabhudas Lilladher
Recommendation: Outperformer
CMP: Rs 587 (Face Value Rs 5)
12-Month Price Target: Rs 650

The company is set to achieve its targeted revenue of $100 million by FY07. From less than 10 customers a few years ago, to over 80 now, the company has done well in bagging some of the well-known names in the manufacturing and banking & financial services (BFS) verticals. It has also widened its scope in terms of service offerings — apart from IT solutions, it offers a variety of services such as consulting, engineering and business process outsourcing (BPO). The company’s revenue (at Rs 320 crore) and PAT (at Rs 32 crore) recorded a CAGR of 58.3% and 50.2%, respectively, between ’04 and ’06.

According to the company’s FY07 guidance, it is set to post a 34-40% growth in revenue and 51-61% growth in profit. Revenue for FY07 will be in the range of Rs 9.8-10.2 crore, while PAT will be in the range of Rs 1.1-1.2 crore.

Over the past eight quarters, the company has seen a 9% CQGR in revenue, primarily due to robust growth in volumes. Overall, the company’s future scenario appears to be fairly strong. At the current market price, the stock trades at 17.1 times and 11.6 times the expectations of its FY07 and FY08 earnings.

Provogue
Research: Karvy Stock Broking
Recommendation: Outperformer
CMP: Rs 380 (Face Value Rs 10)
12-Month Price Target: Rs 466

Established as a strong fashion brand, Provogue is now engaged in aggressively expanding its retail reach. Along with increasing its retail space, the company is increasing the number of store formats and product lines under the brand name ‘Provogue’.

It has also entered into multi-brand large format retailing under the brand name ‘Promart’. Leveraging on its retail expertise, the company’s wholly-owned subsidiary, Prozone, has adopted a business model to develop and actively manage malls.

The company has signed up six malls in tier-II cities, which are likely to be operational over the next three years. Prozone intends to bridge the gap between traditional property developers and modern retailers.

Liberty International, one of UK’s largest real estate companies with property investments of over £7.5bn, has entered into an agreement to take 25% stake in Prozone with an equity contribution of Rs 200 crore, thereby valuing Prozone at Rs 800 crore.

The DCF value for Prozone is estimated at Rs 130 per share. Valuing Prozone at Rs 130 per share, the core business of the company is available to Karvy at Rs 250, which is 14.8x FY08E. Karvy expect 51% EPS growth over FY07 and FY08. Based on 20x FY08E, the value of the core business stands at Rs 336 and DCF value of Prozone stands at Rs 130.

Thermax
Research: Edelweiss
Recommendation: Buy
CMP: Rs 367 (Face Value Rs 2)
12-Month Price Target: NA

Thermax’s Q2 FY07 results were in line with expectations in terms of revenues and above expectations in terms of profitability. On a consolidated basis, the company’s revenue grew by 21.2% y-o-y to Rs 520 crore. Sales from the energy segment grew by ~81% y-o-y, contributing 84% to the sales of the standalone entity in Q2 FY07.

EBITDA grew by ~140% y-o-y to Rs 72.1 crore, while net profit grew by ~147% y-o-y to Rs 53.7 crore on a consolidated basis for the quarter. The energy segment contributed ~90% and the environment segment contributed ~10% to the order book in the quarter.

On a standalone basis, the order book backlog was ~Rs 2,700 crore for Q2 FY07, with a similar breakup between the energy and environment segments as in the consolidated entity.

The consolidated order intake for the energy division was ~Rs 1,600 crore for the quarter, showing a growth of ~38% for Q2 FY07 and a strong growth ~179% for H1 FY07 y-o-y. With significant presence across various industry verticals, coupled with better operational efficiency than industry standards, Thermax remains one of Edelweiss’ top picks in the industrial machinery space.

3i Infotech
Research: Emkay
Recommendation: Buy
CMP: Rs 180 (Face Value Rs 10)
12-Month Price Target: Rs 232

3i Infotech has acquired 51% stake in US-based Professional Access for $12 million and will acquire the balance stake over two years. Professional Access specialises in the area of e-commerce for BFSI and retail segments. It has close to 500 employees with an offshore development centre in India.

It is a profitable company with PAT margin of 10% and annual revenue of $24 million. This acquisition will benefit 3i Infotech in the following ways: (a) Enter and penetrate the US market; (b) Tap large base of marquee clients such as Citibank, JP Morgan, Goldman Sachs and Duke Energy; (c) Access to global delivery centres and (d) Increase deal ticket size in the range of $5 million.

Rhyme’s acquisition will be EPS accretive for 3i Infotech from Q3 FY07 and Professional Access’ acquisition will be EPS accretive from Q4 FY07. With the continuation in growth, Emkay expects the company to post a CAGR of 60% in revenues and 60% in profit over FY06-08E.

Emkay expects forward EPS of Rs 14.3 and Rs 21 for FY07E and FY08E respectively. At current market price, the stock is trading at 13.1x and 8.9x FY07E and FY08E EPS respectively.

Usha Martin
Research: India Infoline
Recommendation: Buy
CMP: Rs 174 (Face Value Rs 5)
12-Month Price Target: Rs 228

Usha Martin posted strong results for Q2 FY07 with its performance improving on a sequential basis, while registering robust growth on a y-o-y basis. The sequential earnings growth was led by margin improvement, while the y-o-y earnings growth was driven by flattish interest, depreciation and lower taxes.

For H2 FY07, the company expects further improvement in operational performance with strong volumes and higher benefits from iron ore integration. The current FY07 valuations are similar to commodity steel makers like Tata Steel and SAIL, despite the company’s character of an alloy/special steel-maker, producing high value-added products like wires and wire ropes.

India Infoline feels the key reason for this is the company’s relatively lower margins, with lesser backward integration.

However, with increasing mineral integration over the next two years and relatively superior pricing power for its product portfolio, India Infoline expects significant upgrade in valuations. India Infoline believe the stock will trade at 7 times (factoring 0.5x multiple re-rating) FY08E EPS. i.e. Rs 228 one-year forward, representing 34% appreciation from current levels.

Dalaal Street Flash News Recommendations

Jai Prakash Associates - Face Value - Rs 10 Buy Rs658

Suprajit Engineering - Face Value - Rs 5 Buy Rs 200

Pokarna - Face Value - Rs 10 Buy Rs 235.25

Thanks Vishesh