MNCs with less than 25% public shareholding

MNCs with less than 25% public shareholding

Stock Ideas

Stock Ideas

Network 18 Fincap: Sharekhan Stock Idea dated June 20, 2007

Network 18 Fincap
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs651
Current market price: Rs476

Striking the right(s) note

Key points

News businesses to flourish: Network 18 Fincap (Network 18) controls the front-line business channels CNBC-TV18 and Awaaz, and the fast growing general news channels CNN-IBN and IBN 7. With the digitalisation of cable and advent of DTH platform, the subscription revenues would substantially boost the profitability of the group. Also, Awaaz, CNN-IBN and IBN 7 have shown good viewership gains and should drive the growth as they mature over the coming years.

Web properties to add tremendous value: Network 18 through its associate companies Television Eighteen India (TV18) and Global Broadcast News (GBN; together the two hold 100% in Web18) owns several web properties like moneycontrol.com, poweryourtrade.com and yatra.com among others, covering the news, e-transaction, travel, recruitment, shopping and e-ticketing genres. It has added many new web properties over the last year and started spending heavily on enhancing these sites and popularising them.

Taking big steps in entertainment: Through GBN it has entered into an alliance with Viacom Inc to launch a Hindi general entertainment channel. The alliance also gives it part ownership of MTV India, VH1 and Nickelodeon. The group’s movie business would derive synergies from Viacom Inc’s world-famous studios.

Group builds war chest for growth: Sensing the opportunities provided by the booming Indian media & entertainment industry and allied sectors, the TV18 group is building a war chest for exponential growth. While TV18 has raised Rs200 crore through a QIP, Network 18 proposes to raise a similar amount through a rights issue of partly convertible preferential shares. GBN aims to raise $200 million through an overseas offering while its board members have approved a plan to raise a debt of Rs1,500 crore. We believe with all these funds the TV18 group aims to become one of the big wigs of the Indian media and entertainment business.

Rights issue adds Rs133.6 per share to value: The company proposes to raise Rs200 crore via a rights issue of 5% partly convertible cumulative preference shares (PCCPS). It will offer one PCCPS for every five equity shares held. Our calculations suggest that the rights add Rs133.6 to the value of each existing equity share and make the Network 18 stock even more attractive.

Valuations suggest a 37% upside: Our valuation of the Network 18 scrip based on its holdings gives us a value of Rs517.8 per share before the rights issue. The rights issue adds Rs133.6 to the price of the existing float, giving us a fair value of Rs651 for the scrip and indicating a good 37% upside from the current market price of Rs475.5. We initiate a Buy recommendation on the stock with price target of Rs651.

Network 18 Fincap: Sharekhan Stock Idea dated June 20, 2007

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Federal-Mogul Goetze (India): Sharekhan Stock Idea dated January 18, 2007

Federal-Mogul Goetze (India)
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs559
Current market price: Rs385

The Mogul of the rings

Key points

• Leader in critical auto components: Federal-Mogul Goetze India (FMGI) is a leading supplier of piston and piston rings to OEMs across vehicle segments. It owns a 65% share of the OEM market and enjoys 70-80% penetration in the CV and tractor segments. The CV industry continues to grow at above 30% in FY2007 and the strong double-digit growth rate is expected to sustain in FY2008. FMGI is also set to ride the wave of dieselisation of Indian cars. It will be the 100% supplier for Maruti Udyog’s soon-to-be-launched diesel Swift.
• Revamp over, Federal-Mogul gains control: FMGI turned profitable in Q2CY2006, as it restructured and cleaned up its balance sheet over the first and second quarters of 2006. As its operations stabilised under parent Federal-Mogul's new systems, it reported a 14.2% EBITDA margin in Q3CY2006 against 9.1% in Q2CY2006.
• Huge potential for outsourcing: Federal-Mogul has identified India as a low-cost manufacturing location and is shifting ten manufacturing lines to FMGI's Patiala plant. The resulting outsourcing opportunity is expected to boost FMGI's exports. The export benefits are expected to begin accruing as early as from Q1CY2007, with the company building scale from that point onward.
• Attractive valuations as compared with its peers: FMGI looks attractively valued as compared to the Tier-I auto-component companies. We think the lower valuations are not justified, considering the strong growth prospects on the back of the buoyancy in its domestic business, rising dieselisation of cars and the huge outsourcing opportunity. At the current market price of Rs385, the stock discounts its CY2008E earnings by 12.4x and trades at 7.5x CY2008 EV/EBIDTA. We recommend a Buy on the stock with a price target of Rs559.

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Tata Elxsi: Sharekhan Stock Idea dated December 14, 2006

Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs320
Current market price: Rs232

Designed to grow

Key points

• Niche player with distinct competitive strengths: Tata Elxsi Ltd (TEL) has built the required scale of operations and established strong client relationships with leading global companies to effectively tap the huge opportunity emerging in the niche segment of product design and engineering space. In this space, the size of the opportunity for the domestic companies is estimated to more than double to $6.6 billion by 2010. TEL also has the advantage of having developed reusable components (intellectual property to provide faster and more valuable proposition to the customers) and is investing to boost its delivery capabilities in the high-end services like VLSI and chip design.
• Aggressive expansion plans: TEL has aggressive expansion plans in terms of the capital expenditure on physical infrastructure and employee addition. This clearly reflects the management's growing confidence in the revenue growth visibility over the next few years.
• Improving margins: The shift in the revenue mix in favour of the high-margin software development service business has significantly improved the company's operating margins in the past two years (up by 490 basis points to 19.8% in FY2006). The trend is expected to continue and further boost margins by 250 basis points during FY2006-08, in spite of the aggressive expansion plans and rising wage inflation.
• Attractive valuations and decent dividend yield: Revenues and earnings are estimated to grow at a robust rate of 26.8% and 34.5% respectively, during the period FY2006-08. Moreover, the company offers a decent dividend yield of 2.8% (based on the 65% dividend given in FY2006), which is likely to limit the downside risk. We recommend Buy call on TEL with a one-year target price of Rs320

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Fem Care Pharma: Sharekhan Stock Idea dated December 13, 2006

Fem Care Pharma
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs500
Current market price: Rs358

A name FEM(mes) trust

Key points

• Leadership position in a niche category: Fem Care Pharma Ltd (FCPL) has a dominant market share (around 65%) in the niche segment of bleach cream. It is also among the leading players in the liquid soap and hair-removing categories. To boost its overall growth, the company has introduced several product variants at various price points to effectively tap the expected growth in the FMCG industry, especially the fast growing beauty treatment and skin care segments.
• Incremental growth from exports: In FY2006, FCPL acquired a US-registered premium bleaching cream brand, Jaquline, which has an established presence in the UAE and Middle-East markets. The company plans to utilise it as an umbrella brand to introduce skin care and beauty products, and boost the overall growth of its export business.
• Margins to firm up: The introduction of high-margin premium products has positively affected its operating margins. The company has also commissioned a new manufacturing facility in the tax-blessed region of Baddi, Himachal Pradesh. The fiscal incentives in the form of income tax and excise duty exemptions are further boosting its overall profitability.
• Consolidation of its marketing arm: The distribution of FCPL's products is done exclusively by its 60% subsidiary, Mirasu Marketing. FCPL is expected to acquire the remaining 40% stake (held directly by the promoters) in Mirasu Marketing over the next one year. The consolidation is likely to result in marginal dilution in its equity base (about 1-1.5% on the higher side) but would be earnings accretive.
• Attractive valuation: The consolidated revenues and earnings are estimated to grow at a CAGR of 17.5% and 48.3% respectively during FY2006-08. Currently the stock trades at 9.9x FY2007E and 8x FY2008E earnings. We recommend a Buy on FCPL with a price target of Rs500

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Nucleus Software Exports: Sharekhan Stock Idea dated December 12, 2006

Nucleus Software Exports
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs680
Current market price: Rs497

Product play

Key points

• Niche player with established presence: Nucleus Software Exports Ltd (NSEL) is a niche player offering software products and services to companies in the banking and financial service space. It has established itself globally with product installation base of over 250 application modules in more than 30 countries.
• Product business drives growth: The product business grew exponentially in FY2006, on the back of some impressive order wins like the $12-million multi-year deal with GMAC. Apart from this, it added 21 new clients and bagged orders for 38 new installations in FY2006. In the first half of FY2007 also, the company added 14 new clients and continued to grow its pending order book that stood at Rs135 crore as on September 2006. Consequently, we expect the product revenues to grow at a CAGR of 67% over FY2006-08.
• Margins are sustainable: In spite of the cost pressures and the aggressive employee addition targets for this year, the company is likely to sustain its overall profitability. The growing contribution from the high-margin product business is expected to mitigate the adverse impact of the rising wage bill and the expansion-related pressures in the intermediate term.
• Alliance could throw positive surprises: The initiatives to forge joint marketing alliances with global technology giants and develop a network of channel partners could result in higher-than-expected order bookings. The partnership model has already started yielding results.
• Valuation: Revenues and earnings are estimated to grow at CAGR of 38% and 40% respectively over FY2006-08E. At the current price the stock trades at 11x its FY2008 earnings, which is relatively cheaper compared with the peer companies. We recommend a Buy on NSEL with a one-year price target of Rs680.

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Alphageo India: Sharekhan Stock Idea dated November 29, 2006

Alphageo India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs214
Current market price: Rs150

Back on the shopping list

Key points

• Order wins improve growth visibility: Alphageo India (Alphageo) has recently bagged orders worth Rs32 crore and has built a healthy pipeline of orders that is likely to bring in additional orders of around Rs30-35 crore. The company also has an option to accept a Rs20-crore low-margin order from Oil India. Consequently, the revenue growth visibility for the next fiscal (FY2008) has improved considerably. Moreover, one of the orders is from Rajasthan (as against the current concentration of order backlog from the North-East region), which should help in mitigating the seasonality pattern resulting from the closure of operations during the monsoon season in the North-East region.
• Growth to be funded through equity dilution: The huge capital investment required to support the estimated exponential growth in revenues is likely to be partially funded by dilution of equity. The company is expected to raise around Rs15 crore through a preferential issue of shares/warrants to promoters and/or institutional investors. The issue is estimated to result in 22% dilution of its equity base.
• Re-initiating coverage: We are re-initiating coverage on Alphageo as the visibility of its revenue growth has improved considerably on the back of the recent order wins and the healthy order pipeline. Consequently, we recommend a Buy call on the stock with a price target of Rs214 (10x its FY2008 estimated earnings per share on a diluted equity base).

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Stocks Idea - Deccan Cement

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Stocks Idea - Reliance Energy

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Indo Tech Transformers: Sharekhan Stock Idea dated November 28, 2006

Indo Tech Transformers
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs280
Current market price: Rs199

Powered by power reforms

Key points

• The fortunes of Indo Tech Transformers are all set get transformed, thanks to India’s mission to achieve power for all by 2012. As part of this programme the government plans to almost double the country’s installed power generation capacity from 115,000MW to 200,000MW by the end of the 11th Five-Year Plan.
• This initiative is expected result in an additional demand of around 570,000MVA of transformer capacity over FY2005-12 or of 80,000MVA per year. Another 15,000MVA of demand is expected from the replacement market every year, leading to a total annual demand of 95,000MVA. That is a huge opportunity for the transformer industry whose annual capacity stands at a mere 75,000MVA.
• Indo Tech already stands to gain from this opportunity, as it has built a strong relationship with the SEBs in the south over the years. Now to make the most of this demand explosion, it is tripling its capacity from 2,450MVA to 7,450MVA.
• Indo Tech has signed an MoU with DuPont (USA) to set up a 100MVA plant to manufacture dry-type transformers for industrial and corporate customers. These transformers are higher in realisation and installed in the basement of hotels, IT parks, malls etc. We believe this will further boost the top line of the company.
• As a result of these initiatives we expect its revenues and net profit to grow at CAGR of 52% and 49% respectively over FY2006-08E.
• At the current market price of Rs199, the stock is quoting at 8.6x its FY2008E EPS and 4.8x its FY2008E EV/EBIDTA. Considering the future growth potential of the company and the stock’s attractive valuations, we recommend a Buy on the stock with a price target of Rs280.

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Sharekhan Stock Idea - Sundaram Clayton

Company details

• Price target: Rs1,550
• Market cap: Rs 2,280 cr
• 52 week high/low: Rs1,373/770
• NSE volume: 2,415
  (No of shares)
• BSE code: 520056
• NSE code: SUNDRMCLAY
• Sharekhan code: SUNCLA
• Free float: 0.38 cr
  (No of shares)

Result highlights

• The Q2FY2007 results of Sundaram Clayton Ltd (SCL) are slightly below our expectations due to a marginal fall in the company’s operating profit margin (OPM) owing to high raw material prices.
• The net sales for the quarter rose by 34.1% to Rs203.4 crore. The revenue growth of both the air-brake and the die-casting divisions remained strong during the quarter.
• The OPM declined by 100 basis points to 14.6% primarily due to a rise in the price of the raw materials, particularly non-ferrous metals. Consequently, the operating profit grew by 25.6% to Rs29.6 crore for the quarter.
• The other income, as expected, was higher at Rs13.8 crore due to the dividend income received from the subsidiaries. Stable depreciation charge and taxes led to a 58.3% growth in the net profit to Rs23 crore.
• The value of SCL''s total investment in the group companies works out to Rs950 per share. While computing SCL''s value, we have assumed a 75% discount to the company''s total investment. After adjusting for the same, the SCL stock is currently trading at around 12.6x its stand-alone FY2008E earnings and at 10.2x its stand-alone FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,550.

Strong top line growth
The net sales for the quarter exceeded our expectations, growing at 34.1% to Rs203.4 crore. The growth in both the air-brake and die-casting divisions remained strong for the quarter. The revenues from the air-brake division stood at Rs114.8 crore as against Rs99.7 crore in Q2FY2006, marking a growth of 15.1% year on year (yoy). The die-casting division continued to perform brilliantly as its revenues increased by 70.3% from Rs52.0 crore to Rs88.6 crore this quarter.

The company continued its strong growth in exports with the export revenues reaching Rs38.4 crore (rising by 75.2% yoy). During this year, the company had won an export contract from the global automobile major Volvo for the supply of engine and transmission castings for trucks. The revenues from this order are expected to touch Rs60 crore in the next two years.

SCL continues to be on the look-out for newer clients. Last quarter it added a new customer, Asia Motor Works, to its air-brake division. At the moment, it has a strong client list with orders from automobile majors like Tata Motors, Ashok Leyland, Honda Siel Cars, Sona Koyo Steering, Tata Holset, Ford India and Visteon.

Higher input costs affect margins
The OPM declined by 100 basis points yoy to 14.6% and was stable on a sequential basis. The margins were affected as a result of a rise in the raw material cost, which rose from 48.6% to 54.4% as a percentage of sales. However, the sharp rise in the input cost was offset by the savings on the employee cost and other operational efficiencies.

The other income at Rs13.8 crore was higher for the quarter compared with Rs7.2 crore last year, as the dividend income was accounted for during the quarter. Stable interest and depreciation charges helped the company to register a growth of 58.3% in its net profit to Rs23 crore.

Looking at the first-half numbers, the margins have remained stable at 14.6% in comparison with last year. However, we expect the margins to improve further in the subsequent quarters because of (a) price hike due from its original equipment manufacturer customers, particularly Tata Motors; and (b) higher exports contribution.

Capacity expansion plans for the year
For FY2007, SCL has lined up a capital expenditure (capex) plan under which Rs48.63 crore has been earmarked for the air-brake division and Rs75 crore for the die-casting division. The capex would be used for capacity expansion and new product development. SCL plans to increase its casting capacity to 50,000 tonne from the current 24,000 tonne. The company has increased its capex in both the divisions, which has increased its interest cost.

ABS—a huge opportunity
The regulations regarding the usage of anti-lock braking system (ABS) in commercial vehicles (CVs) are expected to be implemented soon. We are of the view that this should trigger a huge replacement demand in case the usage of ABS is made mandatory in CVs. SCL has already given samples of the product to CV majors, Ashok Leyland and Tata Motors. The cost differential between an ABS and an air brake is in the range of Rs30,000-35,000 per vehicle since the margins in the ABS are higher than those in the conventional braking systems. This should further help the company to post better margins going forward.

Outlook and valuations
We believe that SCL would benefit from the buoyancy in the country''s CV industry. The shift from hydraulic brakes to air brakes that is expected to take place in the CV industry augurs well for SCL. Also, there is a huge outsourcing potential considering that WABCO is looking for a low-cost producer of brakes. Considering all these factors we maintain our positive outlook on the company.

We are marginally increasing our sales estimates for FY2007 due to higher-than-expected revenue growth from the domestic air brakes sales and strong sales registered by the die casting division. However, the gains from the same would be offset by slightly lower margins and higher interest costs as a result of increased capex during the year.

SCL has a huge investment portfolio with an investment value of Rs950 per share. It holds 56.8% in TVS Motors (8.8% directly and 48% indirectly through its 100% subsidiary Anusha Investments. In valuing the company we have assumed a 75% discount to the total investment value per share. After adjusting for the investments, the stock is currently trading at around 12.6x its stand-alone FY2008E earnings. We maintain our Buy recommendation on the stock with a price target of Rs1,550.

Ahmednagar Forgings

Ahmednagar Forgings
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs380
Current market price: Rs250

Forging ahead

Key points

• The business of Ahmednagar Forgings Ltd (AFL) is growing at a spectacular pace on the back of a buoyant domestic climate and bulging export orders. At present, the company has an order book of Rs850 crore, executable over the next twelve months. Of these, orders worth Rs650 crore are from the domestic market and the balance are export orders.
• To cater to this demand, AFL is more than trebling its forging capacity from 46,000 tonne per annum (tpa) in FY2006 to 165,000tpa by FY2008. The machining capacity is also being expanded from 10,000tpa to 25,000tpa.
• After the acquisition of Amforge's Chakan unit by Mahindra Automotive Steels, some of its original equipment manufacturer (OEM) customers have shifted to AFL. This is expected to generate additional revenues of Rs100 crore.
• AFL's export revenues should get a boost with the acquisition of the two forging lines from Anvil International. At peak levels these lines should generate revenues of Rs300 crore. AFL would also be meeting the outsourcing needs of GWK, UK, the Amtek group's global business.
• With increased contribution of the machined products and higher revenues from the non-automotive segment, we expect the margins to expand by 120 basis points over the next two years.
• At the current market price of Rs250, the stock discounts its FY2008E earnings by 6.5x. Considering the company's future growth potential and the stupendous increase in its size, we believe that such a discount to its peers is unjustified and recommend a Buy on the stock with a price target of Rs380.

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