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Monday, September 10, 2007
Intraday Stock Ideas
Nifty (4510) Supp 4440 Res 4535
Buy R Com (544) SL 539 Target 552, 555
Buy Crompton Greaves (323) SL 318 Target 332, 335
Sell CESC (458) SL 463 Target 449, 446
Sell Unitech (248) SL 253 Target 240, 238
Another jolt to deal with…
A new truth marries old opinion to new fact so as ever to show a minimum of jolt, a maximum of continuity.
Bulls will hope that the jolt is less and their winning ways continue. Just when the Indian bulls thought they could manage hoisting the indices at a new peak, comes another jolt from the global markets, especially from the US. Wall Street was stunned on Friday by an unexpectedly weak jobs report, sending the main indices into a tailspin amid concerns about the health of the world's largest economy. Markets around the world slumped following the grim payroll data and the subsequent declines on Wall Street.
There are serious concerns that the mess in the US housing sector is hurting the broader economy there. This could lead to another round of selloff across world markets, at least in the next couple of days (sometimes its just for a day) amid fears of a slowdown in global economic growth. Expectations are the Federal Reserve will come to the rescue and cut rates. The speculation now is by how much it will cut rates at its Sept. 18 meeting (or perhaps before that) and at its following meetings. Alas.
The trend in the local market will largely hinge on the global sentiment and the fund flows (inward or outward). Avoid any leverage and continue picking up your favorite counters expecting to sell them after a couple of years. Buy less but buy quality. No clear trend is expected for months to come. Open your ears to all and your purse to a few select stocks.
Vakrangee Software could gain as it has increased the investment limit for FIIs, from 24% to 49%. Also, Goldman Sachs Investments and Merrill Lynch have crossed the significant 5% holding mark in the company. Taneja Aerospace might rise amid market grapevine that it has struck a deal with GMR for its property in Bangalore.
Kesoram and Century Enka could advance amid reports that the promoters are hiking stake in the two BK Birla group companies. Oil PSUs may gain amid reports that the Government will go for a marginal fuel price hike shortly. Bajaj Auto and other two-wheelers will be in focus as the former is all set to launch its much-hyped 125cc bike, Exceed to take on rivals Hero Honda and TVS.
US stocks tumbled on Friday as a surprise drop in August payrolls raised worries that the contagion in the housing and financial markets were spreading to the rest of the economy. Treasury prices jumped as investors sought safety, while the dollar plunged. Gold prices jumped as well. Oil prices rose.
The Dow Jones Industrial Average was down 249.97 points or 1.9% to 13,113.38 while the broader S&P 500 index shed 25 points or 1.7% to 1,453.55. The tech-fueled Nasdaq Composite index was down 48.62 points or 1.9% to 2,565.70.
For the week, the Dow lost around 1.8%, the S&P 500 eased around 1.4% and the Nasdaq gave up 1.2%.
And, there could be more trouble ahead. After the close of trade, Countrywide Financial, the biggest US mortgage company, said it will cut between 10,000 and 12,000 jobs, or 20% of its work force, over the next three months.
The surprisingly weak jobs report added to optimism that the Fed will cut its benchmark fed funds rate, a key short-term interest rate, when it meets on Sept. 18.
Meanwhile, former Fed Chairman Alan Greenspan, speaking at an economics conference, said that the current market turmoil is similar to what happened in 1998, 1987 and other times in history when there were economic bubbles.
Treasury prices surged in a classic "flight to quality" move. The rally lowered the yield on the 10-year note to 4.37% from 4.5% late on Thursday. Gold prices also jumped in response to the report. COMEX gold for December delivery rose $5.10 to settle at $709.70 an ounce.
In currency trading, the dollar slumped versus the euro and the yen.
US light crude oil for October delivery rose 58 cents to $76.88 a barrel on the New York Mercantile Exchange.
OPEC will probably maintain its oil production targets at its Tuesday meeting, resisting calls for more supply because of concerns demand may falter as US economic growth slows.
European shares fell sharply on Friday. The pan-European Stoxx 600 index declined 2.2% to 365.58. The French CAC-40 closed down 2.6% at 5,430.10, while the German DAX 30 gave up 2.4% to end at 7,436.63 and the UK's FTSE 100 slipped 1.9% to 6,191.20.
In emerging markets, the Bovespa in Brazil was up 0.3% at 54,569 while the IPC index in Mexico was down 1.8% at 30,252. The RTS index in Russia shed 1.2% at 1898 and the ISE National-30 index in Turkey fell 1% to 61,690.
Asian stocks were down sharply this morning after the number of jobs in the US unexpectedly fell for the first time in four years and Japan's economy shrank at almost twice the pace forecast in the second quarter.
Mitsubishi UFJ Financial Group paced declines in Tokyo while Toyota dropped as the yen gained against the dollar.
South Korea's Samsung Electronics slid on concern that demand will cool in the world's two biggest economies. BHP Billiton slipped along with the price of metals.
The Morgan Stanley Capital International Asia-Pacific Index fell 1.8% to 149.71 at 10:35 a.m. in Tokyo, set for its biggest loss since Aug. 17. Japan's Nikkei 225 Stock Average dropped 2.3% while the Hang Seng in Hong Kong was down. All markets open for trading declined.
Japan's economy contracted for the first time in more than two years after companies cut spending last quarter.
The world's second-largest economy shrank at a 1.2% annual pace in the three months ended June 30, compared with the government's initial estimate for 0.5% growth. The average forecast was pegged at a deceleration of 0.7%.
Bulls slipped on to back foot as a volatile trading session ended in red. After carrying on the momentum in early trades key indices witnessed seesaw trades as alternate bouts of buying and selling pushed the key indices from positive to negative terrain. FMCG and Small-Cap stocks were in demand on the other hand shares of Auto, Realty and Oil & Gas stocks were offloaded. Finally, the BSE 30-share Sensex closed at 15,590 losing 25 points. NSE Nifty slipped 10 points to close at 4509.
Karuturi Networks surged by over 4.5% to Rs238 after investors approved $100mn fund raising plan. The scrip touched an intra-day high of Rs240 and a low of R227 and recorded volumes of over 8,00,000 shares on NSE.
ICRA advanced by 1.6% to Rs989 after reports stated that the company has signed MoU with SBI. The scrip touched an intra-day high of Rs1013 and a low of Rs968 and recorded volumes of over 1,00,000 shares on NSE.
ICICI Bank ended flat at Rs920. Reports stated that they are setting up a $2bn fund to invest in roads, ports, utilities, bridges and telecommunications. The scrip touched an intra-day high of Rs930 and a low of Rs915 and recorded volumes of over 28,00,000 shares on NSE.
Sadbhav Engineering slipped by 2.4% to Rs690. The company announced that they have secured Rs1.9bn orders. The scrip touched an intra-day high of Rs720 and a low of Rs685 and recorded volumes of over 10,000 shares on NSE.
Mastek surged by 3% to Rs289 after the company announced that they would raise Rs1.5bn selling securities overseas. The scrip touched an intra-day high of Rs291 and a low of Rs281 and recorded volumes of over 37,000 shares on NSE.
Ashok Leyland slipped 2.6% to Rs38 after the company yesterday announced its August dropped 6.6% to 6055 units. The scrip touched an intra-day high of Rs40 and a low of Rs38 and recorded volumes of over 37,00,000 shares on NSE.
Realty stocks were under selling pressure. DLF slipped by 2% to Rs622, Akruti was down by 1.7% to Rs594 and Ansal Infrastructure declined by 2.6% to Rs251.
FMCG stocks ended higher led by gains in McDowell surged by over 1.5% to Rs1540, Marico was up by 2.4% to Rs60, ITC gained by 1.6% to Rs177 and Tata Tea added 0.8% to Rs761
Auto stocks were on the receiving end. Tata Motors slipped by 2.3% to Rs695, Bajaj Auto slipped by 0.6% to Rs2324 and TVS Motor dropped 1.7% to Rs64.
Stocks In News
Petrol and diesel prices are likely to be increased by Rs2 and Re1 per litre respectively after monsoon session of parliament ends this week.
Domestic air travel to cost more as Jet Airways and Indian plans to increase fares shortly.
Ranbaxy Laboratories, India’s largest drug maker, may hive off its R&D activity into a separate company and raise resources by selling equity in the new entity.
TCS plans setting up third development centre in China by the end of current fiscal, to hire 4,000 more.
NTPC and BHEL may float a new JV company for executing power sector projects in India and abroad.
BPL Mobile Communications, which offers GSM services in Mumbai and run by the Essar group, has applied for licenses in the remaining 21 circles in the country.
Axis Bank sets up $500mn private equity fund to invest in domestic infrastructure sector.
AV Birla group to plans to invest $600mn in increasing carbon black capacities in India and abroad in the next four years.
Moser Baer plans Rs10bn investment in manufacturing facilities in a SEZ near Chennai .
Mahindra Gesco plans strong thrust in solid waste management and water treatment business.
Gammon India considering foraying into logistics sector in a move to expand its presence in infrastructure sector.
JSW Steel’s coal block plan suffers as its JV partner walks out.
Fund Activity:
FIIs were net buyers of Rs3.85bn (provisional) in the cash segment on Friday and the local institutions pulled out Rs994.3mn. In the F&O segment, foreign funds were net buyers of Rs4.15bn.
On Thursday, FIIs were net buyers to the tune of Rs6.23bn in the cash segment. Mutual Funds were net buyers of Rs452mn on the same day.
Major Bulk Deals:
Merrill Lynch has bought Amtek Auto; ILFS Investsmart has purchased Goldstone Tech; Crown Capital has sold IVRCL Infrastructures; Merrill Lynch has picked up; HDFC Core has sold Rico Auto; Merrill Lynch has bought Shree Precoated Steels; Bear Stearns has picked up Unity Infra Projects; A slew of deals on both sides took place in Proto Infosys.
Insider Trades:
Ambuja Cements Ltd: P.B. Kulkarni, Director of the company has sold 3000 equity shares of Ambuja Cements Ltd on 30th August 2007.
Lower Circuit:
Raj Tele
Upper Circuit:
Lotus Global has sold Gremac Infrastructure and Kashyap Tec; Macquarie Bank has sold Hexaware; Pricipal PNB Long Term MF has bought Madhucon Projects while Bear Stearns has sold the scrip; Morgan Stanley MF has picked up Welspun Gujarat.
Delivery Delight (Rising Price & Rising Delivery):
Bharti Airtel, Crompton Greaves, Mangalam Cement and Praj Industries.
Abnormal Delivery:
Bombay Rayon Fashions, Bank of Baroda, Sadbhav Engineering and Lupin.
Major News & Announcements:
Inflation for the week ended 25th August was 3.79% against expectation of 3.89%
Fortis Healthcare to buy Chennai-based Malar
Karuturi Networks shareholders approve $100mn fund raising plan
Gitanjali Gems enters into software, telecom business
NDTV, Astro launch news channel in Malaysia
Aurobindo gets UK-MHRA clearance for Unit VIII
Maruti receives 12,000 units export order from Indonesia.Power Grid Corporation - Apply !
| Power Grid Corporation is a great proxy to India’s power sector. Long-term investors can subscribe to its IPO. One of the best depictions of India’s power shortage was in the movie Swades. The residents of a village, who didn’t know what electricity was, assist actor Shah Rukh Khan to create a small power generation unit. The expression of curiosity on the old lady’s face before the bulb is lit and the 100-watt gleam on her face after the illumination is something that still needs to reach many parts of the country. |
| This is better understood with statistics–we have one of the lowest per capita consumption of power. Besides domestic electrification, there is a huge demand for power from the industrial sector. And that is why the government is investing directly or encouraging private sector investments in power generation capacities. |
| Power transmission is the next step after generation, as the power needs to reach consumers. If new generation capacity is being set up, there is a need to transmit and distribute that capacity. Thus, companies operating in the generation sector will benefit. |
| The IPO |
| Power Grid Corporation of India, the largest player in the power transmission sector, is coming out with an initial public offer of Rs 2,525-2,984 crore at a price band of Rs 44-52 per share. Like NTPC, Power Grid is a great proxy to India’s growing power sector. Its strong business model, operational efficiency and tariff based on assured returns on equity provide stable revenues and low risk. Besides, its huge future investment in the transmission sector will ensure long-term earnings growth. |
| “We think it is a good play on the growing power sector. The company is building about 31,000 km of transmission lines over the next five years. Compare this to the 68,000 km built over the last 60 years, and the number appears huge,” says Jigar Shah, director, KR Choksey. |
| Power generated at a plant is transmitted to a sub-station near a populated area. Due to the large amount of power involved, transmission normally takes place at high voltage (132 kV or above). Over a long distance, electricity is usually transmitted through overhead power transmission lines. |
| The company was incorporated in 1989 as a result of a government decision to form a national power grid. It managed the transmission assets of NTPC, National Hydro Electric, North-Eastern Electric and Neyveli Lignite till 1993, when these assets were transferred to Power Grid. Today, it owns and operates most of India’s inter-state and inter-regional electric power transmission networks—i.e from power plants to substations. |
| Power Grid generates about 90 per cent of its total income from transmission business. The company owns and operates 61,875 circuit km (ckm) of electrical transmission lines and 106 sub-stations. During FY07, the company transmitted about 298 billion units of electricity, representing about 45 per cent of all the power generated in India. |
| Sound business model |
| Power Grid has a strong business model with its transmission business providing stable returns with low risks. Central Electricity Regulatory Commission (CERC), which determines the tariff for the company, has stipulated an assured cost-plus-14 per cent return on equity. Besides, on the operational front, Power Grid has maintained an average system availability of above 99 per cent since FY02, leading to higher income under the incentive-based tariff structure. |
| Around 80 per cent of its revenue comes from the public sector state utilities, many of which have defaulted in the past. The company says about 105 per cent of the receivables are backed by letters of credit, and says that it manages to collect 100 per cent of receivables on a timely basis at present. Despite these measures, if state electricity boards default in future, the company could lose some money. Also, state electricity boards are in better financial health than in the past, so this risk is not too different today than in any other business. |
| Power-packed growth |
| With a large share in the transmission industry coupled with the expertise and operational efficiency, Power Grid has an important role to play in India’s growing power sector. Considering the growing economy this gap is further widening. India’s power generation capacity increased from 105,046 MW in FY02 to 132,329 MW during FY07 and is expected to reach 219,992 MW by FY12. This will also require large investments in power transmission for laying transmission lines across the country and inter-regional lines to facilitate distribution and ultimately providing power to consumers. |
| The Eleventh Five Year Plan emphasises the enhancement of the national grid in a phased manner to increase the inter-regional power transmission capacity from 14,100 MW to 37,150 MW by FY12. This envisages an investment of Rs 1.4 lakh crore in the transmission sector in the Eleventh Plan. Power Grid targets an investment of Rs 55,000 crore as part of this plan till FY12. |
| Mega expansion |
| Over the past four years, Power Grid has made a capital expenditure of Rs 18,248 crore. As on June 2007, the company had 45 transmission projects at various stages of development totaling to an investment of Rs 27,291 crore. These projects involve 30,536 ckm of transmission lines, which is 50 per cent higher than its existing capacity, as well as new substation capacities. The ongoing projects are scheduled to be completed by June 2009. |
| The successful implementation of these projects on schedule will translate into a total transformation capacity of 90,727 MVA (mega volt-ampere) by June 2009. Considering the FY07 realisation of about Rs 5.46 lakh per transmission MVA, the increased capacity has the potential of providing revenues of Rs 4,959 crore on completion, or 43.5 per cent higher than FY07 transmission revenues. |
| Consulting gain |
| Besides, the company is also leveraging its capability and understanding of the transmission industry to diversify into the consultancy business. This accounted for 6 per cent of its FY07 total income and grew 46 per cent over previous year. Since 1995, this division has provided transmission-related consultancy services to over 90 clients involving about 200 domestic and international projects. |
| The company also facilitates the implementation of various government-funded projects for the distribution of electricity to end-users, such as the Accelerated Power Development and Reform Programme (APDRP) in urban and semi-urban areas and the Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY) in rural areas. |
| Telecom |
| With its own overhead transmission infrastructure in place, the next logical step for Power Grid was to create a fibre optic cable network on this backbone. The company owns and operates a fibre optic cable network of over 19,000 km and connects over 60 Indian cities. The company leases bandwidth on this network to more than 60 customers, including major telecom operators such as BSNL, VSNL, Tata Teleservices, Reliance Communications and Bharti Airtel. This is the fastest growing business; it grew 106 per cent in FY07 y-o-y to Rs 77 crore. Since this business is new, it made losses till FY07 but has good potential. “We expect the trend to change from FY08 as the initial investment stage is over,” says, Misal Singh, analyst, Edelweiss Securities. |
| Valuations |
| At the lower end of the price band of Rs 44, Power Grid is priced at 1.3 times estimated FY08 book value and 1.2 times FY09 book value. At the upper end of Rs 52, the issue will be priced at 1.55 times estimated FY08 book value and 1.5 times FY09 book value. |
| Compared with the price-book value ratios of NTPC, Tata Power and Reliance Energy, which are trading at well above two times FY08E book value, Power Grid is cheaper. While valuing the company, some analysts also use the discounted cash flow approach. “We have a DCF value of Rs 62, which is 20 per cent higher then the price at the upper band” adds Edelweiss Securities’ Singh. Based on the price-earnings multiple, the issue is priced at 13-15 times FY08 and 9-11 times FY09 fully diluted estimated earnings. Power Grid provides a good opportunity for investors to capitalise on the infrastructure growth story. |
| Issue opens: September 10 Issue closes: September 13 |
Nicholas Piramal
| The demerger of Nicholas Piramal's R&D arm will improve cash flows and help the company focus on core business. First it was Dr Reddy’s followed by Sun Pharma to hive off their R&D units into separate entities. Now, Nicholas Piramal India too has joined this group of pharma companies trying to balance increasing R&D costs with rapid expansion of the core business. This idea is gaining further currency–Ranbaxy too is weighing its options on splitting R&D from its core manufacturing activity. |
| The Mumbai-based company decided to demerge its R&D unit into a separate company called Nicholas Piramal Research Company (NPRC). With this demerger, the company will be left with two businesses – a domestic formulations business generating revenues of Rs 1,200 crore and custom manufacturing business with a turnover of Rs 1,100 crore. While Nicholas can now focus on improving its core businesses, why did it opt for separating its R&D arm and how do shareholders benefit? |
| The need for demerger |
| With all its five compounds in the research pipeline at the pre-clinical stage few years ago, Nicholas could fund its R&D costs from internal sources. Now, it has 13 compounds, four of which are in clinical stages. With R&D accounting for 5 to 6 per cent of sales (Rs 126 crore) and clinical stages accounting for two-thirds of the R&D costs, funding was becoming an issue. Says N Santhanam, CFO, Nicholas, “NPRC is expected to have a revenue expenditure of Rs 73 crore for FY08 which may move up to Rs 140 crore in the next fiscal depending on the number of compounds in the clinical phase.” After the demerger, NPRC can raise capital either by accessing the markets by way of listing or a rights issue; or by bringing in financial or strategic investors. |
| Another reason for the demerger is that even though the company has a choice of out-licensing its compounds at an early stage, Nicolas has chosen to continue its development and bring the compound to market. Out-licensing is transferring costly clinical trials to another research company but retaining the patent, and sharing future revenues on the development. Nicholas believes that rewards would be optimal if it outlicensed after proof-of-concept stage which is the end of phase II clinical trials. For compounds such as cancer drug P-276, its best bet, the company may develop and market the product on its own as the patient size for clinical trials is a few hundreds and the drug needs a smaller team to market it. |
| NPRC prospects |
| While shareholders will get one share of NPRC for every 10 shares held in Nicholas, a bank of 13 compounds at various levels of development and a few facilities, are there any growth prospects for the demerged research entity? The two sources of revenues for NPRC are from out-licensing its compounds or sales after the compound is launched. |
| In the best case scenario, the company expects to complete clinical trials for P-276 and launch it in FY11. Till then, it will have only expenses to show for its efforts, unless it outlicenses some of the compounds. Thus, shareholders aren’t going to get revenue growth in this high risk, high returns business of developing new chemical entities over the short term. |
| So how does the market value a pure research company? An indicator is the sole listed R&D unit, Sun Pharmaceuticals Advanced Research Company, the demerged R&D arm of Sun Pharma. This company got listed in July at Rs 87.20 and is currently trading at Rs 80 with a market capitalisation of nearly Rs 1,600 crore. It has one NCE lead, an antihistamine molecule, which is in phase II trials in the US and is few years away from being commercialised. |
| The market for the 13 compounds that NPRC is working on has a size of $48 billion, but it will be some time before benefits flow to the NPRC shareholders. But shareholders have the Nicholas Piramal stock to look forward to—it should clock 25 per cent growth over the next two years. |
| CMO and international operations |
| Thanks to the Morpeth acquisition in the UK last year, Nicholas’s custom manufacturing operations (CMO) business grew 41 per cent y-o-y in the first quarter. From a single customer — Pfizer – with which it has a supply arrangement till 2011, the company has added three more customers. This will help the Morpeth business to grow at 20 per cent and achieve operating margins of 15 per cent for FY08. The Morpeth facilities contribute 10 per cent to the total turnover. |
| The company has also been able to improve revenues at Avecia, its other UK operation acquired nearly two years ago. Says Santhanam, “A 20 per cent growth in revenues was achieved in the last fiscal by getting new clients and sourcing raw material from India.” This has resulted in cost savings and the business has turned around from a 13 per cent loss at the operating level to an estimated 5 per cent positive contribution in FY08. |
| Morpeth and Avecia’s Scottish operations are likely to be the growth drivers as far as Nicholas’ international operations are concerned with growth rates of 15-20 per cent. Going forward, the company expects the principal manufacturing centre of Avecia at Huddersfield in the UK to act as a feeder site for Indian operations. The share of Nicholas’s international operations would be around 25 per cent in FY08 revenues of around Rs 3,000 crore |
| Valuations |
| The June 2007 quarter results have not been good for Nicholas Piramal. Due to government action on supply of codeine, sales of Phensedyl cough syrup slumped. This best-selling brand caused a top line erosion of Rs 25 crore and a Rs 15 crore drop at the operating level. But going forward, the management does not see any problems in sourcing codeine. After the demerger announcement of NPRC, Nicholas has raised its guidance from Rs 13 to Rs 17 for FY08 largely due to the reduction in R&D costs. At the current price of Rs 293, India’s largest Crams stock trades at 17 times its FY08 earnings, while peers in this category Divi’s (Rs 1210), Jubilant (Rs 291) and Dishman (Rs 310) trade at 31, 17 and 20 times their estimated current fiscal earnings. |
Cinemax
| A dominant position in Mumbai and on-track expansion across the country gives Cinemax an edge over others. Over the past few weeks, the stock markets are reverting to the great Indian growth saga and those companies and sectors which are driven by the growth in domestic consumption are back in the limelight. |
| As disposable incomes rise in the deep pockets of the country, the resulting spending spree is envisaged to be an unparalleled opportunity for sectors such as consumer goods, apparels, leisure and lifestyle. Among others, the multiplex players too are investing big bucks across the country to reap the resulting riches. |
| Players like Adlabs, Cinemax India, Inox Leisure and PVR Cinemas – all are racing to gain presence town and country. Cinemax India, which raised around Rs 138 crore via an initial public offering in order to expand its footprint out of Mumbai, appears to be well on track. A part of the Kanakia real estate group, the company is among the large multiplex operators with 39 screens and over 11,000 seats at 13 locations across Mumbai, Thane, Nashik, Himmatnagar (Gujarat) and Guwahati. |
| Mumbai magic |
| Mumbai is the largest contributing market to box-office revenues of movies in India, accounting for over 15 per cent box-office collections of all the Bollywood movies released. Cinemax is the largest operator in this regional market, as it has a majority of its operations concentrated in and around Mumbai and hence, stands to gain the most from its continuing demand. Of the total 39 screens, 31 are housed at 10 locations in Mumbai, Thane and Mira Road. Twenty-eight of the 31 screens are multiplex properties, spread across an area of over 155,000 square feet. |
| Beyond Mumbai, the company has plans to expand its reach in the northern and eastern parts of the nation. |
| Realty blues? |
| Over the past 12-18 months, real estate prices across the country have zoomed out of the roof. The rise in real estate prices caused concerns of cost overruns of the rapid expansion plans of multiplex companies. “We have already signed up our properties for expansion well in advance,” claims Rasesh Kanakia, chairman, Cinemax. “Even though the overall property rates have gone up by about 10-25 per cent across different locations, we gain from a lag effect in the rates, from the time we sign up a property until the time a multiplex is launched. In addition, being an anchor tenant in a property, we can benefit from preferential rentals offered in the form of prime mover discounts, which ranges between 50-60 per cent,” adds Jitendra Mehta, chief financial officer, Cinemax. “So far, we have already signed up properties for 425 screens, which are expected to be up and running by FY11,” he adds. |
| Numerically strong |
| Over the past year, Cinemax has witnessed average ticket prices (ATPs) rising by nearly 19 per cent from Rs 105 in FY06 to Rs 125 over FY07. The average spend on food and beverages increased from Rs 21 to Rs 26 over the two fiscals. As a result, the average spending per head rose almost 20 per cent in a year. “We expect the ATPs to rise by about 15 per cent over the next year,” says Mehta. Further, footfalls too, are on a rise. For Q1 FY08, the footfalls increased by 7.1 per cent to 1.5 million over previous corresponding period. However, the average occupancy levels dipped during the quarter from 35 per cent over the same period last fiscal to 30-31 per cent. In defence, Mehta says: “During the first quarter this year, there were hardly any blockbuster releases. Further, with a greater number of Hollywood releases, the number of shows per day has gone up to five. If we calculate the occupancy rates in the traditional manner, considering the average number of shows to be four a day, the occupancy has actually risen.” |
| Cinemax has come up with the innovative Red Lounge, which is a theatre with reclining seats and massage chairs, clocking an ATP of almost Rs 450. At present, there are two operational Red Lounges in Versova and Bandra in Mumbai. Now, the company plans to install one or two rows of reclining seats in each of its multiplexes, across all properties in order to boost its top line growth as well as profitability. |
| Valuation |
| At present, the Cinemax stock trades at Rs 136 which is nearly 19 times estimated FY08 earnings, and around 14 times estimated FY09 earnings (See table: Running full house). With the demand going strong for all the multiplex players, and Cinemax’s execution of expansion well exceeding its plans, the company is on a good footing. The dominant position of the company in the Mumbai region gives it an edge over its peers such as PVR Cinemas and Inox Leisure, which trade almost at similar or slightly higher price-earnings multiples. While the global markets are in turmoil, Cinemax appears to be a good bet considering that the sector is entirely dependent on domestic demand and the widening middle class of the country |
Psychology of a loss
Humans are loss averse. And the individual, corporate and society, which understand it thrive despite odds.
“How did this stuff ever get published?" was what traditional economists asked when behavioural economists observed that human beings were loss averse. This aversion is at the heart of human psychology and asset pricing. And if professors are fighting over academic leadership over the subject you can understand why the only “loss” Google search can handle today is that of “weight”.
More here
US Market sells off
Investors waiting with bated breath for Federal Reserve’s rate cut meeting on 18 September
A weak job report on the last day of the week pulled down the US market considerably lower for the holiday-shortened week ended on Friday, 7 September, 2007. The indices had alternate bouts of journey during the four trading days of the week, rising on Tuesday, 4 September and Thursday, 6 September and skidding on the other two days.
The Labor Department's report on Friday showed that payrolls fell by 4,000 in August, the first decline since August 2003. It was well below analysts' expectations of a gain of 110,000. Unemployment rate held steady at 4.6% as expected.
The downward revision to both the June and July numbers totaling 81K further led to the negative sentiment among investors. July job growth was revised down to 68,000 from a previously reported gain of 92,000. June job growth was also revised down, to 69,000 from 126,000.
With the weak report, the major averages plummeted on Friday, 7 September, 2007 with the Dow Jones industrials falling nearly 250 points. The broader S&P 500 index fell 25 points and the Nasdaq composite index declined 49 points.
Twenty-nine out of thirty Dow stocks ended in red on Friday. Johnson & Johnson was the only stock to close marginally higher on that day.
The Dow Jones Industrial Average lost 245 points for the week. Tech - heavy Nasdaq lost 31 points and S&P 500 shed 20.45 points.
The month of September had kicked off on a strong note after Energy and Technology sectors helped the US market pushed stocks higher on Tuesday, 4 September, 2007. Stocks rallied inspite of the Institute for Supply Management reporting that its manufacturing index registered 52.9% in August, just shy of the consensus and down from 53.8% in July.
On Wednesday, 5 September, stocks fell once Federal Reserve’s Beige Book was released. The Beige Book suggested that the weakness in the economy is limited to two areas: residential real estate and motor vehicle sales. Renewed worries about credit markets and weak data on housing sector also took a toll on the stocks.
But on Thursday, 6 September, stocks got a good boost after Wal-Mart reported better than expected August same-store sales growth of 3.1%. Target too said same-store sales rose 6.1% during the month. The figures were of major importance as Costco had reported disappointing same store sales results for August just a day earlier reflecting increasing pressure on U.S. consumers.
Among other major stories during the week, Apple shares fell by almost 5% during the week. The company came under major firing from customers after the company dropped the prices of its new iPhone by $200 within two months of its launch.
On Friday, Apple CEO Steve Jobs asked for apology to original iPhone customers. He also added that Apple will give each of the early iPhone customers a $100 credit at the Apple store.
Executive Summary
For the week, the indices closed down. DJIx was down by 1.9% and S&P 500 was down by 1.4%. Nasdaq was down by 1.2%. Market started off the week on a strong note but ended finally on a much weaker note.
The weak job report on Friday mainly pulled stocks down for the week. For the year, Dow is up by 5.2%, Nasdaq is up by 6.2% and S&P 500 is up by 2.5%.
It seems that investors are now in a dilemma about how to react to latest market news. On, one side, weak job report paints a weak picture for the economy. On the other, it might act as the main fuel to instigate Federal Reserve for a 25-50 bps rate cut in its forthcoming 18 September meeting. That will surely cheer investors.
Cairn India
Morgan Stanley research is bullish on Cairn India and has maintained overweight rating on stock with target price of Rs 191.
Morgan Stanley research report on Cairn India
Conclusion:
We are increasing long-term earnings by 20% and upgrading Cairn India to Overweight and raising our price target to Rs191. Our global team has raised normalized long-term crude oil (WTI) price forecasts to USD65/billion from USD55/billion. Cairn is India’s most levered company to crude oil prices. At a 2008E EV/boe of 14.1x, Cairn trades in line with its global peers, though its major production is two years away.
However, on C2010 earnings it trades at 6x P/E compared to an average of 12-13x for its global peers, yielding attractive valuations. Cairn has underperformed the market by 20% since its listing, making entry look attractive at current levels. Mid-Cycle oil prices revised to USD65/billion – Our global team has raised normalized long-term crude oil (WTI) price forecasts to USD65/billion from USD55/billion, prompting us to also raise our 2007/08 assumptions from USD60/billion to USD65/billion.
We also factor in a weaker dollar and higher costs. We are also incorporating a weaker dollar and higher costs into our new estimates to reflect further tightening in the service industry. Every USD per billion change in crude oil prices changes Cairn’s earnings estimates by 3%.
Key risks:
As the Rajasthan crude is viscous in nature, handling is more difficult than for other crudes. Also, as it operates in an inland basin, the company has to create logistics handling systems to get the oil to its consumers. Finally, the amount of cess Cairn has to pay is unclear.
Investment Thesis
Cairn has an excellent track record, with three of the country’s seven landmark discoveries since 2000. It has made 30 hydro-carbon discoveries in India.
Overall, the company has working interests of 498 million boe of proved and probable oil reserves, and has the potential for 740 mmboe via enhanced oil recovery and resource optimization.
Valuation
Our valuation methodology primarily assesses cash flow of individual fields owned by Cairn India based on its 2P reserves. For our base case, we used a 10.9% cost of capital in the initial seven years of the field.
Key Catalysts
Leverage on crude oil prices. If crude were to remain at USD70/billion in the long term, our price target would move to Rs210/share. Resolution of pipeline logistics.
Key Risks
Execution: Cairn faces the challenge of executing its projects in a timely manner. Crude volatility: Global crude prices are cyclical and volatile, so Cairn’s earnings, too, may correlate with sector cyclicality. • Crude oil sales agreement and pipeline logistics still not set.
Weekly Technical Analysis
Resistance Around 4534
Nifty — The index traded positive on the opening session of the week. It consolidated toward the opening sessions of the week and saw a rise toward 4548 toward the later part of the week. It ended the week up 45 points.
Momentum Oscillators — On the daily chart, MACD is in buy mode and has moved into positive territory. RSI (14) – Relative Strength Index is exhibiting a reading of 60.62 (reading above 70 signifies overbought). Stochastic (5,3) is in the overbought zone and in sell mode. Momentum oscillators suggest the index can consolidate at current levels.
Moving Averages — The 50 dma = 4397, 20 dma = 4321, 10 dma = 4432. Index has closed above the averages; intra-week declines should find support around the 50 dma levels around 4397. The key support for the week’s trading will be around the 50 dma; only a close below 4397 could see the index decline toward 4300 levels.
Resistance — The index faces resistance around 4534 (high of 31 July 2007). A close above the 4534 level with rise in volumes can see the index test the recent high around 4648. Until the index maintains below 4534 on a closing basis, consolidation can be expected.
Support — The index has support around the 10 dma and 50 dma in the 4432- 4397 band. Decline during the week's trading should find support around these levels.
Conclusion — Expect consolidation with support around 4397; close above 4534 will see the index exhibit strength during the week’s trading
Stocks you can pick up this week
Sterlite Industries
Research: Merrill Lynch
Rating: Buy
CMP: Rs 612
Merrill Lynch has reiterated its ‘buy’ rating on Sterlite Industries. The company’s sustainable low-cost advantage implies that at Merrill Lynch’s long-term price forecasts, it will offer a high EBITDA margin of 57% in zinc and 29% in aluminium. Since Merrill Lynch has raised its estimates of metal prices as part of its global commodity price review, it has upgraded the company’s FY08E earnings per share (EPS) by 3% and FY09E EPS by 11%. In the near term, it offers a healthy compounded annual growth rate (CAGR) in volumes — 14% in zinc, 10% in aluminium and 11% in copper smelting. In addition, the management has a credible track record of project delivery and proven skills in identifying new growth businesses. It plans to increase its stake in its zinc subsidiary from 65% to 94% by the end of the year. Despite the company’s continuing hurdles in hiking stake in its other aluminium subsidiary, the probability of success is much higher in the case of zinc. This is due to precedence of a stake hike in ’03 and also because valuation may be more in sync with current market prices.
Bank of India
Research: IDBI Capital
Rating: Buy
CMP: Rs 249
Bank of India’s (BoI) Q1 FY08 results were impressive, with a 51% YoY jump in net profit. The loan loss provisions were lower, but were 18% higher YoY. Strong growth in net interest income (NII) and other income, and lower operating expenses boosted the bank’s operating income by 45% YoY.
The bank is likely to maintain its performance with strong business growth, robust margins and good growth in fee income. Operating expenses in FY08 may show a modest growth as a major part of core banking solutions (CBS) expenses were booked by BoI in FY07. The bank maintains a large workforce; it has a substantial branch network and overseas operations and has more than 1,100 branches out of a total 2,845 (including extension counters) under CBS.
The bank has good asset quality with gross non-performing assets (GNPAs) at 2.3%, while net NPAs are at 0.69%. BoI has tried to maintain most of its retail portfolio collateralised. This gives comfort on the asset quality front, going forward. Given the bank’s profit growth, its average book value (ABV) is likely to increase to Rs 130-135 in FY08. Hence, BoI’s fair value lies in the Rs 270-280 range.
GMR Infrastructure
Research: HSBC Global
Rating: Underweight
CMP: Rs 780
HSBC Global has initiated coverage on GMR Infrastructure with ‘underweight’ rating. The company has a risk-mitigation strategy with a good mix of assets under operation and under-development across different sectors and a diverse list of clients.
The airport business has also benefited from real estate appreciation as GMR has 1,250 acres of land on a 60-year government lease, ready to be developed commercially as the Delhi and Hyderabad airport projects. HSBC Global estimates that this real estate contributes 41% to the company’s overall valuation. GMR has expanded outside India and has 40% equity stake in a consortium that has won a contract to operate Sabiha Gokcen International Airport (SGA) in Istanbul.
The company is trying to turn around its power portfolio, changing its strategy to focus on assured fuel supply. In the roads sector, GMR has unlocked value through financial engineering and securitising receivables. The company’s business fundamentals remain strong, but its valuation has run ahead of its one-year earnings prospects. HSBC Global has valued all of GMR’s projects as most of them are for fixed duration. Based on this, the company is valued at Rs 19,710 crore, or a per-share value of Rs 595 — 20.5% below its current share price.
Cipla
Research: Goldman Sachs
Rating: Sell
CMP: Rs 181
Goldman Sachs has revised Cipla’s rating with a ‘sell’ recommendation based on the company’s guidance of lower profit for FY08. Even after Cipla’s recent underperformance (down 23% in the past three months), it is one of the most expensive stocks. It trades at a 31% premium to its peers on FY08E EV/EBITDA and has a P/E growth of 1.9x versus a sector average of 1.3x.
The stock has an implied growth rate of 18% versus the forecast of 13% sales growth over FY07-FY10E. Cipla’s premium rating reflects a de-risked business model (the management has been adverse to high-risk patent challenges) and a track record of delivering consistent growth in sales and earnings. The ‘sell’ recommendation for Cipla is based on the view that its track record is under pressure from higher overheads and a deteriorating business mix. Goldman Sachs believes Cipla will underperform its peers as the market narrows its premium in the face of slower growth and lacklustre margins.
Punj Llyod
Research: Citibank
Rating: Buy
CMP: Rs 305
Citigroup has revised Punj Llyod’s rating with a ‘buy’ recommendation. It has revised earnings by 14-16% over FY08E-10E on the back of: (1) 73% YoY sales and 101% YoY PAT growth in Q1 FY08; (2) 22% higher sales growth on faster execution of orders and 50 bps higher margins in Punj; (3) Dilution because of the recent equity placement and promoter warrants. L&T’s order backlog is 2.7x that of Punj Lloyd + Sembawang Engineers & Constructors, but its market capitalisation (m-cap) is 7.5x and is 32% more expensive than Punj Lloyd.
Citigroup expects this valuation and m-cap gap to narrow as it forecasts that Punj Lloyd will start delivering earnings growth at a pace superior to that of L&T over the next three years. Punj Lloyd is perhaps the only mid-cap engineering & construction company that can leapfrog into the next level, which is occupied by L&T with its diversified skill sets. The first sign that Punj Lloyd can actually deliver on its potential came when the company reported Q4 FY07 PAT of Rs 88.9 crore. In FY07, Punj Lloyd acquired Sembawang Engineers & Constructors, which scaled up its expertise to upstream oil & gas, airports, jetties and tunnelling.
Transport Corp of India
Research: SSKI
Rating: Outperformer
CMP: Rs 115
SSKI has initiated coverage on Transport Corporation of India (TCI) with an ‘outperformer’ rating. TCI, one of the largest cargo transportation (trucking) companies in India, occupies a 15% market share in the organised sector. It has built strong infrastructure in terms of a wide network (over 1,000 destinations), warehousing space (6.5 million sq ft) and tracking technology. This has enabled the company to grow at a strong pace in the transportation division and enter the fast-growing express distribution business.
TCI has also diversified into coast-to-coast shipping, rail and over dimensional cargo (ODC) to capture growth in these segments. In order to emerge as one of the largest supply chain solutions (SCS) providers, TCI is investing heavily into warehouses and trucks, which will enable its SCS revenues to witness 55% CAGR over FY07-09E.
TCI is trading at 12.8x earnings and 7.4x EV/EBITDA for FY09E (adjusted for Rs 15/share real estate value). The valuations are attractive, considering robust 28% earnings CAGR over FY07-09, TCI’s strong position in the express distribution (XPS) business, its ability to ramp up its SCS business at a fast pace and the fact that it trades at a 10-15% discount to its peers.
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