Market Outlook - March 31 2008
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Monday, March 31, 2008
Readers Soundoff - What was your biggest gain in FY08 ?
What was your biggest gain in FY08 ?
Did you actually book profits or were greedy and lost that gain ?
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Trading Calls - March 31 2008
Nifty (4942) Sup 4850 Res 5000
Buy Voltas (174) SL 170
Target 182, 185
Buy Suzlon (270) SL 265
Target 280, 283
Buy ITC (207) SL 203
Target 213, 216
Sell Hero Honda (701) SL 707 Target 688, 686
Sell Ranbaxy (439) SL 444
Target 430, 427
Enduring bulls hope to stay afloat!
Endure the present, and watch for better things.
It has been an enduring task to stay afloat in the markets, especially for the last two months. Better things remain a hope. In fact, on Friday, bulls may have powered ahead. That does not hide the fact that inflation is reaching alarming levels. The Government has already announced measures to contain price pressures. More steps are likely to be announced over the next few days. The moot point is whether these measures will be enough to check inflation amid a global rally across various commodities.
The RBI too may take steps to rein in inflationary expectations. Most experts see the central bank keeping rates unchanged and resorting to a CRR hike. It may also allow the rupee to appreciate further to make imports cheaper. One has to see whether the RBI waits till next month's annual policy meeting or makes the anticipated announcements well ahead of it. A tighter monetary policy at a time when the economy is slowing down spells bad news for India Inc. and therefore the stock market. Not long ago, many were betting on a rate cut.
Aside from inflation, the market will also have to brace for the change in the STT regime from Tuesday. The withdrawal of STT benefit will hit traders, jobbers and arbitrageurs hard. This may have an adverse effect on traded volume and push up transaction costs, though past experience shows that the market has adjusted well to such events over time. Then there are the lingering concerns over the state of the US economy and global credit markets. There is no dearth of bad news on this front. This will remain a stumbling block for the bulls.
Today, we expect the market to open on a cautious note after Friday's surprising rally and on mixed global cues. Though indicators from the technical and derivative side are encouraging, weak fundamentals (both locally as well as globally) and erratic behaviour of the FIIs will keep the market on tenterhooks. The upcoming quarterly results will be keenly followed for ascertaining the impact on future earnings growth. Given the year end considerations, mutual funds may do their best to prevent a slide in their counters today.
Asian markets are trading mixed this morning. The Nikkei in Tokyo was down 192 points or 1.5% at 12,627 while the Hang Seng in Hong Kong dropped 290 points or 1.25% at 22,995. The Kospi in Seoul was flat at 1702 and the Straits Times in Singapore added 6 points or 0.2% at 3037.
The Shanghai Composite in China slid 82 points or 2.3% to 3497 and the Taiex in Taiwan shed 95 points or 1.1% to 8528.
US stocks closed lower for a third successive day on Friday, with two of the three major indexes recording weekly losses. A grim outlook from retail major JC Penny and disappointing economic data weighed on the sentiment.
Stocks rose through the early afternoon as investors welcomed a report showing a rise in personal income and tame inflation - as well as falling oil and gold prices. But the advance was short-lived as most of the gains evaporated by the close of trade.
The Dow Jones Industrial Average declined 86.06 points to 12,216.40, off 1.2% from the previous week's close.
Of the blue chip's 30 components, 22 posted losses, with financials including JP Morgan Chase erasing the bulk of earlier gains to close down nearly 0.4%. Other financials on the Dow also fell, with Citigroup easing 4.4% and American Express down 3.8%.
The S&P 500 shed 10.54 points to 1,315.22, down 1.2% from the previous week ago, while the technology-laden Nasdaq Composite index dropped 19.65 points to 2,261.18, rising by just 0.1% from the previous week.
The Dow is down just under 8% in the January-March quarter, the S&P 500 down 10.4% and the Nasdaq down 14.7%. Next week brings a heavy spate of economic news, including readings on manufacturing and construction spending, factory orders and employment.
Personal income in the US rose 0.5% in February, beating economists' forecasts. But spending rose just 0.1%, the smallest rise since September 2006.
On the upside, core PCE, the spending report's inflation component, rose 0.1%, in line with expectations. That left PCE at 2% over the last 12 months, within the 1-2% range at which the Fed is said to be comfortable.
Separately, the Fed announced that it would make an additional $100bn available to cash-deficient banks during the month of April, as part of its ongoing plan to help unfreeze the credit markets.
Another report showed that consumer sentiment fell to 69.5 in March from a previous reading of 70.5 and down from 70.8 in February.
Meanwhile, retailer JC Penney issued a profit warning. The department store operator said first-quarter earnings won't meet forecasts, due to sagging consumer demand amid the economic slowdown. Its shares slumped 7.5%.
Citi Investment Research upgraded Lehman Brothers to "buy" from "hold", saying that the company is attractively valued after the recent selloff and is in good shape in a tough environment. Lehman shares fell around 2.2%.
US light, crude oil for May delivery fell $1.96 to settle at $105.62 a barrel in New York. Oil prices hit a record $111.80 in electronic trading last week.
COMEX gold for April delivery fell $18.20 to settle at $930.60 an ounce. Gold hit an all-time trading high of $1,033.90 an ounce one week ago. The dollar fell versus the euro and the yen.
Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.44% from 3.53% late on Thursday.
In Europe, the pan-European Dow Jones Stoxx 600 index fell 0.6% to 306.68 on Friday but was still more than 3% higher on the week. The UK's FTSE 100 closed down 0.4% at 5,692.90, while the German DAX 30 slipped 0.3% to 6,559.90 and the French CAC-40 dipped 0.5% to 4,695.92.
In the emerging markets, the Bovespa in Brazil gained 0.5% at 60,452 while the IPC index in Mexico gained 0.3% at 30,089. The RTS index in Russia was up by nearly 1% at 2049 and the ISE National 30 index in Turkey was down almost 3% at 49,191.
Bulls may extend gains
Markets posted a smart start to the April series with benchmark Sensex shutting shop gaining over 350 points and Nifty index adding over 100 points. Markets snapped two day losing streak on back of positive cues from the Asian and the European markets
Despite accelerating inflation figures markets surged pass the 16,400 mark in intra-day. Finally, the BSE benchmark Sensex surged 386 points to 16,401 and the Nifty index ended at 4,942 adding over 111 points.
Overall about 2,328 stocks advanced; 374 stocks declined while 38 stocks remained unchanged. Among the 50 Nifty 40 stocks ended in positive territory. On the other hand, 10 stock ended in red.
Era Infra gained by 1% to Rs596 as the company’s venture with KMB Ukrain secured order worth Rs1.48bn. The scrip touched an intra-day high of Rs614 and a low of Rs591 and recorded volumes of over 68,000 shares on BSE.
Ranbaxy Labs was up by half a percent to Rs435. The company said that it would pay final dividend of Rs6 per share. The scrip touched an intra-day high of Rs446 and a low of Rs434 and recorded volumes of over 3,00,000 shares on BSE.
Tata Power gained 3.5% to Rs1211 after media reports stated that it would increase capacity to 12,861MW against 2,474MW by 2013. The scrip touched an intra-day high of Rs1225 and a low of Rs1153 and recorded volumes of over 93,000 shares on BSE.
Aegis Logistics surged by over 7% to Rs204 after the company said that it plans to set up subsidiary in Singapore. The scrip touched an intra-day high of Rs225 and a low of Rs196 and recorded volumes of over 21,000 shares on BSE.
Varun Shipping rallied over 7% to Rs72 after the company acquired India’s largest AHTS vessel. Fitch also rated the company’s bank loan facilities at A+/F1. The scrip touched an intra-day high of Rs77 and a low of Rs69 and recorded volumes of over 1,00,000 shares on BSE.
Jupiter Bioscience surged by over 9% to Rs148 after the company announced that it is acquiring a Manufacturing facility of Merck Life Sciences, Switzerland. Also the Company has concluded a long term business contract with Merck Life Sciences. The scrip touched an intra-day high of Rs150 and a low of Rs138 and recorded volumes of over 1,00,000 shares on BSE.
Reliance Power gained by 1.7% to Rs333 after reports stated that the company would place Rs100bn equipment order for its power plants. The scrip touched an intra-day high of Rs337 and a low of Rs327 and recorded volumes of over 16,00,000 shares on BSE.
MIC Electronic advanced by 4% to Rs700 after the company said that it secured orders from Delhi Metro Rail. The scrip touched an intra-day high of Rs744 and a low of Rs651 and recorded volumes of over 3,000 shares on BSE.
Suryachakra Power was locked at 5% upper circuit to Rs21.75 after the company announced that Lahari Power & Steels Ltd being the wholly owned subsidiary Company of Suryachakra Power, having its 9.8 MW Biomass Power Plant located at Madwa Village, Champa-Janjgir District, Chattisgarh State, started its operations from March 28. The scrip touched an intra-day high of Rs21.75 and a low of Rs21.75 and recorded volumes of over 34,000 shares on BSE.
J.B Chemicals, after being locked at 20% upper circuit in the previous trading session, the scrip further rallied by over 13% to Rs50 after the company announced its plan to buy back shares. The company would consider buyback plan on April 8. The scrip touched an intra-day high of Rs52 and a low of Rs47 and recorded volumes of over 6,00,000 shares on BSE.
Corporate Front Page
Reliance Energy has bagged two contracts worth about Rs12bn for execution of transmission system in the Western region.(Mint)
Tata Power plans to sell stakes in holding companies and assets to help fund its US$6bn capacity expansion plans.(Mint)
Tata Power is evaluating opportunities to make another overseas acquisition of a coal mine.(BS)
Bharat Oman Refineries' IPO is likely to hit the market in the second quarter of the coming fiscal.(BL)
BPCL says it can no longer absorb the losses it suffers on account of having to sell petroleum products at a government-mandated price.(Mint)
IDBI has deferred its earlier decision to cut benchmark PLR by 50 basis points.(BS)
Nagarjuna Fertilisers has completely exited from the inter-state mega power project under construction in Udupi, Karnataka, selling its 26% stake to the Lanco group.(BL)
Marks & Spencer is likely to hold majority stake in Reliance
Retail joint venture. (ET)
Power Grid Corp has signed agreements with World Bank and Asian Development Bank for two loans of US$600mn each for funding projects.(ET)
Ispat Industries to increase its steel capacity to 10 mtpa by 2014.(BS)
Shareholders of Ispat Industries approved the issue of convertible warrants to the tune of Rs5.1bn to the promoters of the company.(BL)
The Netherlands-based Pearle Europe is entering into a 50:50 JV partnership with Reliance Retail to sell optical products.(ET)
The Supreme Court has asked Posco to approach the Orissa government for allotting demarcated mining area for its proposed Rs510bn steel plant.(FE)
Tata Motors’ credit rating has been downgraded following its acquisition of Jaguar and Land Rover by Crisil.(ET)
The DoT has approved the Tata Teleservices–Virgin alliance.(ET)
GSPC has sought about one-tenth of the gas produced from Panna/Mukta and Tapti fields (PMT) for sale to customers in Gujarat.(BS)
Oil marketing companies (IOC, HPCL and BPCL) debt may swell to
Rs700bn in the current fiscal. (ET)
HDFC Bank to move its BPO activity to the semi-urban area by hiring about 2,000 people in next two months.(FE)
Gujarat NRE Coke is planning to invest US$425mn in the next three years to develop its mines.(DNA)
DLF Assets plans to raise more than US$2bn in a private stock sale to buy office properties.(DNA)
DLF will spend US$5bn in the next seven years to build about 125 hotels in the world’s fastest-growing tourist destination.(FE)
Four Soft and Take Solutions, providers of IT products and solutions in the supply chain management (SCM) space to merge.(BS)
Diamond Cables has raised Rs1bn as debt to meet its working capital requirement.(DNA)
Welspun Gujarat secured an order for supply of spiral pipes worth Rs10.8bn in Northern Africa.(BS)
IndianOil is mulling transportation of crude through pipeline from the upcoming SPM at Paradip in Orissa.(BL)
Bata India recorded a PAT of Rs0.5bn, up from the Rs0.4bn last year, on a turnover of Rs8.9bn for the year ended December,2007.(BL)
GSPC defers IPO due to market uncertainties, to come out with the IPO of Rs40-60bn before Diwali.(BL)
Electrotherm to raise Rs3bn via QIP route.(BL)
Morgan Stanley has increased its stake in S Kumars to over 7% for Rs1bn.(DNA)
KMB-ERA JV, of which Era Infra Engineering Ltd is a partner, has secured a contract from Delhi Metro valued at Rs1.5bn.(BL)
Lok Capital LLC has raised US$22mn from institutional investors to fund micro-finance institutions in India.(Mint)
Finance Ministry examining Essar Power’s $2 billion FDI proposal.(Mint)
Hinduja Group in talks with Europe’s third-largest auto component manufacturer Valeo SA to buy a controlling stake in the companyat around US$1.5bn.(BS)
Bhushan Steel to give free land to land-losers as a part of its rehabilitation and resettlement (R&R) package.(BS)
Havells will invest Rs4bn for increasing its capacities in India. (TOI)
HUL has shelved plans to sell its 28acre land in Brookefields,
Bangalore. (ET)
JetLite will soon start air services between Delhi and Islamabad. (ET)
Ispat Industries is all set to acquire in a cluster of coal and iron ore mines in Colombia, Mozambique and
Dena Bank will write-off Rs2bn under the loan waiver packaged announced in the Union budget. (TOI)
Today's Pick - Aptech
We recommend a buy in Aptech from a short-term perspective. The charts of Aptech show that it was on a medium-term downtrend from its December 2007 high of Rs 448 till its March 2008 low of Rs 155. However, recently, the stock took support at Rs 155 that also coincides with the long-term moving average line and bounced from there, penetrating the medium-term down trendline. Later on, the stock moved up crossing over the 21- and 50-day moving averages.
We note that there is an increase in volume for the past four trading sessions. The daily momentum indicator is on the verge of entering the bullish zone and the weekly momentum indicator has entered the neutral region from the bearish zone. We also see that the daily moving average convergence divergence is steadily rising towards the positive region. We are bullish on the stock for the short-term. We expect the stock’s up move to continue to our target level of Rs 270 in the short-term. Investors with a short-term perspective can buy the stock with stop-loss at Rs 206.
Precious metals end lower
Gold and silver prices end lower on the last day of the week though gains on a weekly basis
Bullion metals ended lower on Friday, 28 March, 2008 as other commodities too declined across the board. Dollar rebounded on Friday and thus precious metals ended lower. A lower dollar pushes up precious metal prices as their demand lessens as it becomes cheaper for traders holding other currencies and vice versa. Silver prices fell for the day.
Comex Gold for June delivery fell $17.20 (1.8%) to close at $936.8 ounce on the New York Mercantile Exchange. On Monday, 17 March, prices skyrocketed to a high of $1,034/ounce. For the week, gold prices gained 1.1%.
This year, gold prices have gained 14.1% till date. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But in March, prices have succumbed and fell by 3%.
Comex Silver futures for May delivery fell 60 cents (3.2%) to $17.955 an ounce. Silver has gained 28% in 2008. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years. In January this year itself, prices climbed 14%. In February, it gained another 15%. For March, it ended lower by 1%. For the week, silver gained 6%.
In the energy market on Friday, oil fell for the first time in three sessions, touching $105.22 a barrel after supply concerns continued after a pipeline explosion in southern Iraq cut supplies to the country's main export terminal earlier in the week.
At the MCX, gold prices for April delivery closed lower by Rs 347 (2.8%) at Rs 11,987 per 10 grams. Prices rose to a high of Rs 12,340 per 10 grams and fell to a low of Rs 11,907 per 10 grams during the day’s trading.
At the MCX, silver prices for May delivery closed Rs 1,009 (4.2%) lower at Rs 22,939/Kg. Prices opened at Rs 23,841/kg and fell to a low of Rs 22,680/Kg during the day’s trading.
Crude falls below $106
Prices close below $106 as consumer spending remains flat in February and dollar rebounds
Crude prices fell substantially lower on Friday, 28 March, 2008 as fresh concerns about the health of the US economy cropped up. Ongoing supply tensions from Iraq and rebounding dollar also weighed on the crude prices for the day. In the previous three sessions prior to Friday, crude had gained more than $7.
Crude-oil futures for light sweet crude for May delivery closed at $105.62/barrel (lower by $1.96/barrel or 1.8%) on the New York Mercantile Exchange. Crude prices are 65% higher on a yearly basis.
The crude ended the week lower by more 3%. Also helping to push oil higher this week was the weak dollar. The dollar index, which tracks the value of the greenback against a basket of other currencies, has dropped 1.4% this week.
The Commerce Department reported on Friday that U.S. consumer spending was flat in February after adjusting for inflation, the third consecutive month of weak consumer demand.
Earlier in the week, it was reported that a pipeline explosion took place in southern Iraq cutting supplies to the country's main export terminal. Also, clashes between Iraqi forces and militants were raging.
Natural gas advanced as speculators who had sold contracts in bad bets on falling prices bought the positions back to protect gains or limit losses. Natural gas for May delivery rose 11.3 cents (1.2%) to settle at $9.80 per million British thermal units.
Against this backdrop, May reformulated gasoline fell slightly to $2.7135 a gallon, while May heating oil dropped 4.99 cents to $2.9876 a gallon.
Crude had ended FY 2007 substantially higher by $35 or 57%. It was crude’s biggest yearly gain in five years.
At the MCX, crude oil for May delivery closed at Rs 4,171/barrel, lower by Rs 133 (3.1%) against previous day’s close. Natural gas for April delivery closed at Rs 387.4/mmtbu, lower by Rs 1.9/mmtbu (0.5%)
Sunday, March 30, 2008
Moving towards 200 day DMA
The markets staged a relief rally as expected and now look on course to test the 200-DMA (Daily Moving Average).
The Nifty surged by 8 per cent or 368 points to 4,942. It touched a low of 4,540 and a high of 4,971 during the week.
The Nifty closed above its short-term 20-DMA, which was 4,845. The 50-DMA and 200-DMA are 5,090 and 5,099 respectively.
If the index closes above the 200-DMA for three consecutive sessions, one may a see further upmove.
The Nifty may face resistance around 5,105-5,155-5,210 this week, while it has a support around 4,775-4,725-4,675.
The Sensex moved in a range of 1,396 points. From a low of 15,056, the index rallied to a high of 16,452 and finally ended with gains of 9.2 per cent or 1,376 points at 16,371.
The index is now close to the upside target zone of 16,650-17,200 mentioned last week. It may face resistance around 16,900-17,070-17,235 and support around 15,835-15,675-15,505 this week.
A move beyond 17,200 would be crucial for the Sensex to sustain the upmove.
Via Business Standard
Pyramid Saimira ties up with Spize TV
Pyramid Saimira Entertainment, a subsidiary of Pyramid Saimira Theatre, has tied up with the UK-based Spize TV, a direct-to-home (DTH) platform to offer the complete suite of the ARY Network channels (ARY Digital, ARY One World, QTV, and The Musik) and also the two B4U Network channels (B4U Movies & B4U Music) in the UK.
Pyramid Saimira Entertainment will provide content on Spize TV, a pan-European direct-to-home (DTH) TV platform offering Asian and niche content to viewers in Europe.
While Spize TV’s North bouquet has have channels in Urdu, Hindi, Punjabi, Bangla and Gujarati. The South bouquet has channels in Tamil, Telugu, Malayalam, Kannada, and Sinhalese. Since the soft launch of the bouquet, the channels are available, and the formal commercial launch for viewers will be in April 2008.
SpizeTV is a pan-European direct-to-home TV platform offering Asian and niche content to viewers in Europe. Spize TV is available on the EuroBird-9 (EB9) satellite, which allows viewers to benefit from the 500+ free-to-air channels on the HotBird satellite. Ajoy Khandheria, CEO of SpizeTV (Managing Director, ORG Informatics Ltd.) says “SpizeTV is a very exciting project for our Group to offer niche content on a pan-European basis and are proud to work with Eutelsat to create the EB-9 as a new hot location for the region, and with Pyramid Saimira to capitalize on their extensive content expertise.”
Salman Iqbal, MD of ARY Group says “we are proud to be the anchor tenant on the SpizeTV platform to progress the European distribution of ARY.”
Via ET
Coromandel Fertilisers
The strong uptrend in farm product prices, mounting pressure to expand farm output and yield and expanding government outlays on agriculture, are all likely to stoke demand for agri-inputs such as fertilisers and crop protection products over the next few years.
The policy environment for domestic fertiliser makers is also likely to turn more conducive in this backdrop. However, the stock may deliver only over a 2-3 year time frame, as the company’s cost and sourcing advantages may pay off only over the medium term. Near-term financials, especially for the March quarter, may be muted as one of the units had temporarily suspended production during this period.
Coromandel Fertilisers, one of India’s leading makers of phosphatic and complex fertilisers, has the scale and distribution reach to capitalise on this trend. The company has managed an annualised growth of 15 per cent in its sales and 32 per cent in net profit over the past five years helped by capex and acquisitions, despite limited pricing power and an unfriendly policy environment. The stock, trading at about eight times its estimated earnings for the current year, at its market price of Rs 117, appears to be a value ‘buy’ in this context.
Starting out as a South-based producer of phosphatic and complex fertilisers and pesticides, Coromandel Fertilisers has acquired significant scale and a pan-India presence through a series of acquisitions. The company’s acquisition of EID Parry’s farm inputs division, phosphate producer — Godavari Fertilisers — and pesticide maker — Ficom Organics — have added manufacturing facilities that are well spread-out to reduce logistics costs and an extensive distribution network for agri-inputs. These have been leveraged to market a wide range of farm inputs spanning fertilisers, crop protection products and micro-nutrients across India.
Scale and diversity
In the fertiliser business, the company is India’s second largest phosphate producers, controlling capacities of close to 2.5 million tonnes; this is proposed to be enhanced to 3.3 million tonnes by 2009. Economies of scale allow considerable flexibility and diversity in CFL’s product mix between DAP and various grades of NPK complex fertilisers (12:32:16, 20:20, 10:26:26 and 28:28). CFL’s earnings growth in fertilisers is determined mainly by volumes and product mix changes. Current selling prices are well below production costs, with producers reimbursed for the shortfall through a “concession” (subsidy) determined on the basis of “normative” conversion costs and prices of imported inputs.
Strategic sourcing
Though this subsidy regime allows eventual pass-through of major input costs (significant when international prices of sulphur and phosphoric acid have risen 9 and 3 times respectively in a year), late recoveries and under recoveries do tend to exert pressure on the liquidity of domestic manufacturers. CFL, on its part, has made several strategic moves over the past five years to optimise its cost structure. It has secured sourcing of key raw materials such as rock phosphate by acquiring stakes in large global suppliers such as Foskor.
A JV to produce Phosphoric acid has also been flagged off with Groupe Chimique Tunisien. CFL has also acquired, turned around and expanded capacities at Godavari Fertilisers to attain considerable scale; it has also worked with a flexible product mix to take best advantage of the subsidy regime. The company’s cost structure is now among the lowest in the phosphatic/complexes space, which makes it well-placed to compete with imported fertilisers.
Favourable twist to policy
Domestic demand for complex fertilisers has been strong over the past three years, on the back of stable prices (fixed by the government) and expanding irrigated area, with the Southern market registering the strongest demand growth. Supplies in the domestic market have been extremely tight as investments in new capacity have not kept pace with demand. Bridging the deficit through imports has become an expensive proposition with global fertiliser prices soaring more than two-fold in the past year.
In this backdrop, the policy on the subsidy and pricing of phosphatic and complex fertilisers is likely to turn more favourable in the years ahead. Implementation of the Abhijit Sen committee recommendations (which proposes pricing and subsidy based on landed cost of imported DAP ) could translate into better margins for low cost, integrated producers such as CFL; it will also make the policy regime more stable and transparent. CFL will also benefit from any transition to nutrient-based subsidies, as this will ensure better offtake of phosphatic fertilisers, relative to urea.
The recent spiral in global fertiliser prices has ensured that landed costs of imported products are well above production costs for efficient domestic producers such as CFL, allowing them a substantial margin of comfort. CFL’s other products offerings within agri-inputs — crop protection and micro nutrients — also offer growth potential. Low-cost manufacture makes CFL a supplier of choice for generic agrochemicals, while micro-nutrients offer significant scope for scaling up given the nascent Indian market.
Indo Tech Transformers
Indo Tech Transformers is one of the small-cap stocks that witnessed steep declines during the recent sell-off by foreign institutional investors. With strong fundamentals in place, the correction has provided an attractive entry point into the stock.
However, given the volatility seen in the broad markets, investors can consider buying in small lots and use price dips, if any, to accumulate the stock.
Invest with a perspective of two-three years. At the current market price of Rs 515, the stock trades at 9.7 times its expected per share earnings for FY-2009 and 12.5 times its present trailing 12 months earnings. Capacity additions that have gone on stream in February 2008 can be expected to reflect fully in revenues from FY-2009.
While the company has enjoyed price-earnings multiple of over 20 in the past, we believe such valuations were driven more by market momentum than fundamentals.
While the company’s business potential is likely to drive healthy growth, investors may have to temper their expectations on the returns front.
Steady demand
Indo Tech Transformers makes a range of power and distribution transformers. The company has fully utilised the proceeds of the IPO (March 2006) towards its plans and has rapidly added capacities. For companies such as Indo Tech, timely expansion moves may be key to capturing orders in a demand-driven market such as the present one. Indo Tech has been doing well on this front with the recent capacity augmentation from 3450 MVA to 7450 MVA.
While the company has not made any significant foray into overseas markets because of capacity constraints, recent capacity additions have opened up opportunities to diversify.
The company has already received orders from the African markets. As these are at present booked in the euro, the risks arising from currency fluctuations may not be as high as with dealing in dollars. Enhanced spending in transmission and distribution segment in these countries has led to higher demand. As a result, Indo Tech’s orders from these countries now carry relatively high profit margins.
While Indo Tech may not significantly ramp up contribution from the export market, the 15 per cent contribution that it hopes to achieve by FY-2009 may be sufficient to strengthen overall profit margins.
SEB dependent
Indo Tech’s order-book of Rs 180 crore is likely to convert into revenues in the next 6-7 months. While state electricity boards (SEBs) of Tamil Nadu and Andhra Pradesh account for about 70 per cent of this, Indo Tech has been expanding its list of corporate clients as a de-risking strategy. Interestingly, the company has managed to recover its receivables more quickly than even bigger players such as Emco, despite having SEBs as its biggest clients.
The company has also managed to enter into price escalation clauses with these SEBs. While it has had a smooth sail dealing with SEBs, the risk of delayed payments arising from the cash-strapped and loss-making SEBs does remains a risk factor.
However, on the positive side, the spending warranted by SEBs would ensure that Indo Tech (being a regular supplier) would secure new as well as replacement orders, thus providing a steady stream of projects.
While the order-book has remained healthy for Indo Tech, inflows in the current quarter (ended March) may see some slowdown associated with the delays in tendering process normally seen towards the financial year-end.
Superior margins
Indo Tech has always enjoyed higher operating profit margins compared to peers. The company’s raw material as a percentage of sales has been lower than peers, indicating better management of sourcing cost.
For the quarter ended December 2007, OPMs surged to 34 per cent from the 25-28 per cent range. While a better client mix could have contributed to this improvement, the company may also have enjoyed the benefits of lower prices of copper in that quarter.
However, even if copper prices remain sluggish (as suggested by forward contracts now, the company may not always be able to retain the cost benefits. Hence, sustainable OPMs of 28-30 per cent appear more realistic.
Tech Mahindra
The steep correction in the price of Tech Mahindra’s shares over the last several months can be traced more to adverse sentiment towards mid-sized IT companies, than to any material change in fundamentals. This offers an opportunity for investors to consider investments in the stock with a two-year perspective.
At Rs 723, the stock trades at 12 times its current earnings and 10 times its FY-09 earnings. This puts valuations on a par with Tier-2 IT players, though the company’s much larger revenue base and net profit margin (20 per cent) is comparable to Tier-1 IT players. Strong business prospects driven by an established relationship with British Telecom offer scope for capital appreciation.
Tech Mahindra broadly caters to three sets of clientele — telecom service providers, telecom equipment manufacturers and independent software vendors. The company is also working with clients on latest Internet technologies to cover newer delivery standards such as WiMAX.
These three segments, along with associated IT and BPO services, cover the entire gamut of IT/network operations for any telecom company. This makes Tech Mahindra a fully integrated player, a model not easily replicable even by Tier-1 software players, providing it with a significant competitive advantage. The other critical aspect is Tech Mahindra’s focus on the European markets, a critical geography for telecom spending. The client base of Tech Mahindra comprises, among others, AT&T, Motorola, Alcatel-Lucent, Convergys, Vodafone, and O2. Tech Mahindra derives 70 per cent of its revenues from European clientele.
Europe is also the biggest telecom market, home to top service providers and equipment makers (such as Ericsson, Alcatel, Nokia-Siemens) and the largest market for value-added services.
Tech Mahindra already works with some of these players. In the Business Support Systems and Operations Support Systems segment (areas where a lion’s share of telecom-software outsourcing happens), Tech Mahindra is among the top ten players in the world.
Business Drivers
Deal wins and strong pipeline: Tech Mahindra has recently won a $350-million, five-year deal with British Telecom Group (BT). This deal is largely for provision of application support and maintenance services and is structured for payment evenly spread over five years, giving sustained revenue visibility in an environment of global uncertainty over IT spends. This being a volume service deal, BT has indicated that a good part of the work is to be carried out offshore, suggesting scope for higher margins. This deal is over and above the $1-billion deal that the company had won from BT in December 2006.
The deal also envisages higher compensation to Tech Mahindra if it betters BT’s standards on certain project metrics. BT has also indicated that there may be more such “multi-hundred million” dollar deals in the offing, which may buoy Tech Mahindra’s prospects.
This apart, AT&T, Tech Mahindra’s second-largest client, has won a chunk of spectrum in the recent auction by the American telecom regulators. This will enable it to enhance its voice and data services delivery and tap new customers.
Other recent deal wins are from mobile virtual network operator (MVNOs), WiMAX providers and select media and entertainment companies. These are spread across West Asia and Europe. These services and geographies are high growth, portending more business for Tech Mahindra.
Operational Metrics
The geographic spread is now expanding with US also contributing 20 per cent of Tech Mahindra’s revenues. Revenue concentration (BT being the top client) has been reducing, with BT’s contribution down from 75 per cent levels earlier to 61 per cent now.
Utilisation levels as of December 2007 stood at 69 per cent, much lower than Tier-1 peers. Tech Mahindra may need to hike this level substantially to generate higher volume-driven growth, especially during turbulent quarters.
Risks
Attrition at 21 per cent, higher than Tier-1 players, is a key execution risk. Vendor rationalisation process of top clients may mean that large deals could be sliced into smaller ones, affecting deal size and revenues. In this light, Infosys and TCS, in particular, may offer stiff competition to the company.
Saturday, March 29, 2008
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