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Sunday, May 23, 2010
Numeric Power Systems
Those looking for an off-beat small-cap exposure can consider investing in the stock of Numeric Power Systems, a manufacturer of uninterruptible power systems (UPS).
After a year of poor performance in FY-09, the company has been steadily increasing its sales over the last three quarters; its entry into green energy businesses such as solar panel installations, light emitting diode (LED) and a planned micro wind turbines would, besides supplementing income, help the company augment its business in the power back-up/alternative power solutions space.
At the current market price of Rs 331, the stock trades at about eight times its expected per share earnings for FY-11. While the company may close FY-10 (results awaited) on a flat note, new initiatives, besides a pick-up in corporate spending, may boost earnings from 2011.
Investors may, therefore, require a two-three-year perspective to benefit in terms of improved earnings growth from the above businesses.
However, being a small-cap stock with a market capitalisation of Rs 342 crore, it would be subject to the vagaries of the market, especially in volatile phases. The stock, for instance, lost 15 per cent since the beginning of this month. Investors may, therefore, have to adopt a strategy of buying on declines linked to broad markets. Similarly, any sharp rallies of 15-20 per cent in the stock can be used as opportunity to book profits.
New initiatives
Numeric Power has traditionally been in the business of selling UPS, inverters and other power-conditioning solutions. This segment is reported to be witnessing a double-digit growth over the last few years, as a result of increasing data centre capacity (with IT and ITES driving the same) and worsening power situation. Numeric Power's sales have grown by 19 per cent annually in the last three years.
The company, claiming to have a market-share of about 20 per cent, has been combining its pure power back-up solutions with alternative energy solutions such as solar power.
For instance, the company's photovoltaic systems allows to bank solar power in a battery for future use. Its solar inverters and hybrid solar UPS systems all come with these options.
Solar panels that can be installed in the roof-top and can provide investment/tax incentives may well prove to be a high-volume business in India and abroad. Besides operating solar power projects for captive consumption in three of its units, the company has made over 200 installations to clients in India and abroad in sectors such as banks and telecom.
That the segment is quickly being ramped up is evident from the fact that it already contributes about 10 per cent to the top line.
UPS segment
Numeric Power has had a steady market in the UPS segment, thanks to the increasing power deficit in the country. Even as 2008-09 may have seen a cut in spending by corporates as a result of slowdown, Numeric Power's volume of UPS sold was 7 per cent higher than the previous year.
Aside of UPS traded, its own manufactured UPS volumes saw increased off-take of 14 per cent. Clearly, a peak power deficit (such as 12.7 per cent in March 2010) leaves very little choice for corporates but to spend on power back-ups and inverters.
However, the improved volumes came on the back of a marginal dip in realisations. That Numeric claims to have set up 80 per cent of the UPS in bank ATM networks in the country also indicates the demand for the product.
Numeric is also in talks for a tie-up with a US-based micro wind turbine company. Given the current incentives for alternative energy in the country, low-cost small-scale solutions may appeal to corporates. That banks such as SBI have resort to wind power indicates how corporates are looking at viable and efficient alternative power solutions.
While the green energy segment is unlikely to become a chunk of its overall business in the medium-term, it holds potential to drive profit margins.
Numeric Power's operating profit margins were 12 per cent for the December 2009 quarter as against 8.5 per cent a year ago. Revenue for the nine months ended December was Rs 322 crore while net profits stood at Rs 26 crore. The company has traditionally maintained low gearing and a return of net worth of about 20 per cent.
Business risk for Numeric Power arises from a large unorganised market for low-capacity UPS. The company along with players such as APC, Microtek, and Emerson reportedly account for a little over 50 per cent of the low-capacity UPS market.
It may, therefore, be inevitable for the company to upgrade itself to offering more high-end solutions catering to corporates.
via BL
Whirlpool of India
Investors with a medium-term horizon can consider buying the Whirlpool of India stock. Though the stock trades at 23 times its trailing earnings, which appears expensive, the potential for improvement in earnings is significant on account of the company's product launches, expanding dealer network and better pricing power.
The company's sales for FY-10, at Rs 2,137 crore, recorded a 30 per cent growth against 9 per cent in FY-09. Whirlpool's efforts to expand distribution reach through road shows and dealer-contact programmes in the Tier-II and Tier-III cities have evoked good response (added around 2,000 dealers in the network last year); in a year's time, this geographical expansion too may buoy-up sales.
With strong demand translating into good pricing power, the company has passed on part of the increase in raw material cost to buyers by way of price increases (of around 4 per cent in two rounds between December and now).
If commodity prices rise further, Whirlpool plans to pass it on to the consumers again, shielding its margins from erosion.
Whirlpool's net profit margins too are set to improve in FY-11, as it has repaid its entire debt recently.
The stock is up 115 per cent from our initial buy in November 2009. At the current market price of Rs 258, the stock still promises upside.
Sales strength
Whirlpool reports a five-year compounded growth of 19 per cent in sales.
This average is skewed by the muted 7 per cent growth in 2008-09 when Whirlpool saw a blip in demand following the sudden withdrawal of consumer credit for durable-goods purchases by finance institutions. With revival in the economy many NBFCs however kick started financing consumer goods purchases during diwali last year.
Whirlpool's already strong market position in refrigerators has been fortified through product innovations over the years.
In 2007 summer, the company launched Delight (frost-free) and Fusion (direct cool) range of refrigerators and in 2008 the ‘Mastermind' series (fully automated refrigerator).
In 2009, features such as e-light, stabiliser-free option, and l-shaped handles were added.
In 2010, the company unveiled the ‘Protton' model with freshness booster system .
For the current year, the company is working on the plan of launching UPS systems for home and office applications. The product has been tested in UP and Bihar and will be launched across markets soon.
The product upgrades clubbed with its marketing initiatives and a good after-sale service have helped Whirlpool grow sales.
Washing machines sales (in volume terms) have grown at a CAGR of 15 per cent in the years between 2005 and 2009; growth in FY10 picked up to 39 per cent. Refrigerator volumes have risen by close to 10 per cent annually between 2005 and 2009; in 2009-10, the volumes rose by 28 per cent.
The company is now set to venture into the non-metro cities and has conducted road shows in West Bengal (Asansol and Durgapur), Bihar, Uttar Pradesh, Maharashtra and all the four States in the South.
Over the long term, these new markets will help the company expand sales and gain a larger share of the market.
The company's marketing budget will be funded without much trouble as the company has cut down its debt burden, freeing up operating cash flows for promotional and distribution spends.
Healthy cash flows
At the end of FY10, after repaying almost Rs 110 crore of debt, the company had Rs 62 crore of cash balance (cash generated from operations was Rs 258 crore against Rs 184 crore in the previous year).
Cash generation was helped by a doubling of profits (to Rs 145 crore). Whirlpool turned profitable at the net level only in 2007-08. And in the last three years the company's earnings (net) have grown at over 100 per cent annually.
The company looks quite comfortable to handle future cash requirements internally. With all borrowed funds paid back now, net margins too will improve.
Margins expand
Conscious efforts to cut cost (raw material expense as a percentage of sales was down to 50 per cent in FY-10 from 52 per cent in the previous year), a profitable product mix and better realisations saw margins expand both at the operating and net levels in the March quarter and in full year FY-10.
For FY-10, the OPM was up three percentage points (to about 10 per cent) and net profit margin stood two percentage points higher at six per cent.
via BL
Standard Chartered Plc IDR
Conservative investors looking for defensive options can subscribe to the Indian Depository Receipt (IDR) offer of Standard Chartered (StanChart) PLC. The IDR is an opportunity for investors to invest in a globally diversified (both in terms of geography and segments) banking and financial services conglomerate at a reasonable price. Investors, however, need to bear in mind the higher capital gains and dividend tax incidence on returns from IDRs compared with domestic shares. Investors in the IDR would also lose out if the Rupee appreciates vis a vis the Pound.
StanChart's global access to low cost funds, the possibility of better growth driven by improving credit offtake as well as margins in the emerging markets and likely improvement in fee income as capital markets stabilise, argue for the investment.
Valuation
Each IDR represents one-tenth of Standard Chartered PLC's UK listed stock. The actual price at which the IDRs are offered for subscription by investors will be known only on Monday May 24th. The Friday closing price of Stanchart's shares at the London Stock Exchange offers a clue as to the likely level around which the eventual price would be determined. At Rs 103.6 (computed based on a 5 per cent discount on the current price of £16.1) ), the stock would discount the bank's calendar 2009 earnings by 13.4 times. The offer would be at a price-book value of 2.1 times, excluding goodwill. The pre-tax dividend yield would be 3.5 per cent.
This price would place the stock at a discount to most of the Indian private sector banks (1.8 to 4.4 times). While StanChart may not match the pace of Indian private sector banks on growth in its asset book, its large size, well-diversified presence across emerging markets, along with a clean balance sheet and strong risk management systems, make the stock a good investment.
The profit before tax (PBT) of StanChart for the year ended December 31, 2009 was Rs 24,044 crore .
Standard Chartered PLC intends to raise $500 million from this offer of IDRs. The primary objective appears to be an India listing as the offer will only add 1.18 per cent to the equity base and shore up the core capital ratio marginally from 8.92 per cent to 9.16 per cent. As of December 2009, the capital adequacy ratio of Standard Chartered PLC stood at a comfortable 16.5 per cent.
Business
Standard Chartered PLC is a holding company that offers a host of financial services through its subsidiaries in almost 70 countries with predominant presence in the high growth markets of Hong Kong, Korea, India, China, Africa and other Asian countries.
The company segments its business into Wholesale segment and Consumer segment.
The Wholesale segment comprises transaction banking , capital market services, corporate finance and principal finance mainly targeted to corporates. The bank's consumer banking encompasses credit cards, personal loans, wealth management, mortgages and auto loans.
StanChart has an international credit rating of A, as against BBB- sovereign credit rating for India, an indicator of the edge it enjoys over Indian banks in accessing global funds for its operations at a low cost. The bank's high low-cost deposit proportion of 53 per cent as of December 2009, also helps reduce the overall cost of funds.
Financials
StanChart's net profit attributable to shareholders grew by 14 per cent annually during 2006-09. The PBT during the same period grew at an annualised 17.4 per cent. During the period 2006-09, the profit contribution from under-banked and high-margin geographies such as India, Asian economies such as China and Indonesia and Africa rose at a much faster pace than that from the developed regions, thereby increasing the overall profitability. StanChart also made acquisitions such as Union Bank of Pakistan (in 2006), American Express Bank (2008) and Korea First Bank Hsinchu International Bank which strengthened its presence in the emerging markets. StanChart adopts advanced Basel II norms on par with global banks with respect to its operational structure, which lends higher transparency and increases its readiness to tackle risks.
India, despite being a smaller business in terms of lending, has been a significant profit contributor to StanChart owing to higher fee based income from the growing wholesale banking business. India contributed 20 per cent to PBT, though it only made up 6.5 per cent of the asset book in 2009.
Despite it being a troubled year, StanChart weathered 2009 reasonably well. While its total income grew by 9 per cent, the costs only grew at 4 per cent thereby improving the group operating profits. This helped cost-income ratio fall from 56 per cent in 2008 to 51 per cent in 2009. A huge jump in the provisioning for bad-assets (51 per cent increase in 2009) partly limited profit growth but improved the overall provision coverage.
StanChart also has significant fee income (50 per cent of total income) coming in from services such as cash management, wealth management, principal investments and corporate finance. For 2009, the 22 per cent fall in operating profits for consumer banking was made up by the 36 per cent expansion in wholesale banking profits.
In the year ahead, the strong traction in consumer credit offtake in StanChart's key markets — India, Hong Kong, Korea and Singapore — may aid improvement in consumer banking offtake.
StanChart's Net Interest Margin, which was maintained at 2.5 per cent for 2006-08, fell to 2.3 per cent in 2009. While this was a function of the pressure on interest rates last year, margins may improve significantly from now on the back of the bank's low funding costs, rising rates and demand for credit.
Consumer banking which was a laggard in 2009 too may drive profit growth as the wealth management business revives as the global economy revives. StanChart indicated in its Interim Management Statement for the first quarter of 2010, that the group witnessed improvement in volumes, as the consumer segment increased its contribution to the overall income and profits. There was also increase in lending volumes. StanChart's overall asset quality is reasonable in the global context, especially given its emereging markets focus. The Gross NPA ratio stood at 2 per cent with an overall provision coverage of 70 per cent by end of 2009. The average loan to value is low in both mortgages (50 per cent) and wholesale banking , substantially limiting credit risk.
Credit growth is usually correlated to overall economic activity and on this score investors in StanChart may not have much to worry about. IMF forecasts regions such as Developing Asia, Africa and West Asia may have GDP growth rates of 8.4 per cent, 4.3 per cent, 4.5 per cent for 2010 and 8.4 per cent, 5.3 per cent and 4.8 per cent in 2011. This may have a two-fold impact on business as consumer demand revives and corporates revive borrowing plans. The prospect of a shift from a very easy monetary policy to a slightly tighter one does exist in India, China and Korea. However, StanChart's large low-cost deposit base and its access to low cost funds may help it weather such a phase better than peers.
Offer details: The issue opens on 25 May and closes on 28 May 2010. .
via BL
MindTree
Investors with a two-year horizon can consider buying the shares of MindTree, a software and R&D services provider, given the overall improvement in IT spending from clients and a revival in the US.
The company has showed a robust improvement in key operating metrics, most importantly through the increase in per-hour realisations over the past two to three quarters.
A ramp-up in its top clients, revival in the number of large-deals and a heavy thrust on fixed-price contracts allow for revenue and margin visibility.
At Rs 539, the stock trades at a modest valuation of 10 times its likely FY11 earnings. This valuation is at a slight discount to comparable mid-tier IT companies. MindTree's share price was knocked down (15.6 per cent) over the last three weeks, largely due to the fact that the company would invest $10-11 million towards developing ready-to-brand 3G smartphones to be launched in the US and India.
Considering that any further investment by the company would only be made based on the performance of this product, the price correction may be unreasonable and present an attractive point for investors to enter.
In FY10, MindTree's revenue increased 4.7 per cent to Rs 1,296 crore, while the net profit trebled to Rs 214.8 crore. This is much better than several mid-tiers that had to contend with revenue declines last fiscal.
The company has seen an increase in realisations of close to 7.7 per cent onsite and 2.3 per cent offshore over the course of the last few quarters, thus aiding its margins. MindTree's top five clients have increased contribution to revenues, suggesting that ramp-up in volumes is well under way, a fact reinforced by a repeat business proportion of 99.1 per cent. The company has also seen an addition of large clients ($10 million) over the course of the last fiscal.
There has also been a steep increase in fixed-price contracts — that ensure better realisations, to 31.2 per cent of MindTree's revenues.
The company also has an enviable revenue-mix with 71.9 per cent revenues from services delivered from offshore locations (largely India) and ensures cost-optimisation. This proportion is among the best in the industry. MindTree hopes to better the Nasscom projected growth rate of 13-15 per cent in IT exports for 2010-11.
With its key segments of operation such as the US geography and verticals such as BFSI (Banking, Financial Services and Insurance) and travel and transportation stabilising, the company appears well-paced to achieve this growth on the revenue front.
A wage hike of 13-15 per cent may affect margins in the near-term, while a spurt in attrition (14 per cent) is a key execution risk.
Muted debut for SJVNL; Jaypee Infra falls below issue price
State-run hydro power generation company SJVNL lost about 4% on its debut and closed at Rs25 on the BSE after kicking off its maiden trading journey at Rs28. The stock hit a high of Rs28 on May 20 and a low of Rs24.10 on May 21. The company had priced its IPO at the top end of the Rs23-26 price band following strong response to the issue. A discount of Rs1.30 per share was given to retail investors and employees. The SJVNL IPO was subscribed 6.64 times, kick starting the government's divestment programme for FY11 on a positive note. The QIB portion was bid 9.02 times, while the HNI segment was bid 3.38 times and retail investors segment was subscribed 3.11 times. The central government offered 41.50 crore of SJVNL, formerly Satluj Jal Vidyut Nigam Ltd., for sale through the IPO. With the successful completion of the IPO, the Centre's stake has declined to 64.47% from 74.5%. The Himachal Pradesh (HP) state government holds 25.5% stake in SJVN. the company reported a net profit of Rs7.75bn on net sales of Rs14.23bn for nine months ended December 2009.
Shares of Jaypee Infratech Ltd. fell on listing amid a weak market and closed well below the issue price of Rs102 per share on the BSE. The stock opened at Rs93, touched a high of Rs98.50 and a low of Rs90 before shutting shop at Rs91. Set up as a special purpose vehicle for the Yamuna Expressway, Jaypee Infratech had raised Rs22.5bn from the initial public offering (IPO) between April 29 and May 4. The 165 km, six-lane Yamuna Expressway will connect Noida and Agra, in Uttar Pradesh. The company currently has debt of Rs40.44bn. Jaypee Infra had priced its IPO in the band of Rs102-117 per share following lukewarm response, with retail investors getting a discount 5% on allotment. The issue was subscribed 1.24 times, with 27.39 crore shares bid against 22.17 crore shares on offer. The IPO comprised fresh issue of equity shares and an offer for sale of 6 crore shares by parent Jaiprakash Associates.
Abbott to acquire Piramal's healthcare solutions business
Abbott announced a definitive agreement with Piramal Healthcare Ltd. to acquire full ownership of Piramal's Healthcare Solutions business (Domestic Formulations), for an up-front payment of US$2.12bn, plus US$400mn annually for the next four years, giving Abbott the No. 1 position in the Indian pharmaceutical market. The total consideration works out to US$3.7bn. This further accelerates Abbott's emerging markets growth following the recent acquisition of Solvay Pharmaceuticals and announcements last week of Abbott's collaboration with Zydus Cadila as well as the creation of a new stand-alone Established Products Division to focus on expanding the global markets for its leading branded generics portfolio.
Abbott plans to fund the deal with internal accruals and said that the transaction would not change its earnings outlook for 2010. Piramal's pharma solutions business makes and sells cheaper versions of patented drugs and the unit accounts for more than half of its revenue. Piramal's other interests include contract manufacturing (CRAMS) and pathology laboratories. Abbott said that the combined sales force would be the largest in the industry in India, and forecast that sales in India of more than US$2.5bn by 2020. In September 2009, Abbott bought the drugs unit of Belgium's Solvay for €4.5bn. This month, Abbott entered into a licensing agreement to commercialize products of India's Zydus Cadila in 15 emerging markets, in a bid to accelerate Abbott's growth in emerging markets.
Piramal Healthcare will remain in the industry and invest in remaining businesses, Chairman Ajay Piramal said. The stock was highly volatile this week, rising sharply on speculation of a possible stake sale by the promoters, but the rumours were later denied by the Piramal family. Reports had suggested that Sanofi-Aventis, Pfizer and GlaxoSmithKline could be possible buyers of the founders' stake in Piramal Healthcare. Shares of Piramal Healthcare ended at Rs502 on the BSE on Friday after touching a day's high of Rs599.90 and a day's low of Rs488. On the other hand, Abbott India shares closed at Rs1,096, up 3.7% over the previous day's close. It also cooled down from the day's peak of Rs1,210.
ICICI Bank-BoR merger swap ratio fixed at 25:118
ICICI Bank entered into an agreement with the Tayal family to merge Bank of Rajasthan (BoR) with it. A decision to this effect was taken on May 18 by both the banks. According to ICICI Bank, the share swap ratio has been fixed at 25 shares for 118 shares of BoR. This is based on an internal analysis of the strategic value of the proposed amalgamation, average market capitalization per branch of old private sector banks and relevant precedent transactions, ICICI Bank said in a statement. "The proposed amalgamation would substantially enhance branch network and presence in northern and western India," ICICI Bank said. At the proposed share swap ratio, the indicative price for BoR works out to about Rs188.42 per share, which reflects a premium of 89% to the latter's closing stock price on May 18. The deal values BoR at about 2.9 times its book value, compared with the industry average of 1.84. BoR's board has approved the deal, which will be subject to regulatory clearances. It's board will meet again on May 23 to discuss the ICICI Bank offer. ICICI Bank has started a due diligence exercise on BoR.
"An in-principle approval has been taken to amalgamate the bank with ICICI Bank. The majority shareholder is looking at swapping his official shareholding of 28.60% with ICICI Bank shares. Other details on valuation and share swap will be decided on May 24," said BoR MD & CEO G. Padmanabhan. He was appointed by RBI, after the central bank slapped Rs2.5mn fine on BoR for alleged violation of various norms. These included irregularities in transactions and misrepresentation of documents, norms pertaining to anti-money laundering, Know Your Customer and irregularities in the conduct of accounts of a corporate group. The RBI also appointed Deloitte Haskins & Sells to conduct a special audit of the bank, which recently submitted its interim report to the central bank. In March, SEBI banned 100 entities, including Tayal Group firms from all stock market-related activities for fraudulently hiking the promoter holding in Bank of Rajasthan, while conveying the impression they were reducing their shareholding. Though BoR promoters say they hold a 28.60% stake in the bank, SEBI has put the promoter shareholding at 55.01%.
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