Bank of Rajasthan

Bank of Rajasthan

Motilal maintains 'buy' on HDFC Bank

Motilal Oswal is bullish on HDFC Bank and has maintained a ‘buy’ rating on the stock after the bank posted 34% rise in net profit for the first quarter of 2007-08 (Apr-Mar).

The bank's net profit stood at Rs 321.23 crore in the quarter ended June 30, 2007 compared with Rs 239.3 crore in the same period previous year. Total income during the quarter rose to Rs 2,641.7 crore from Rs 1,855.08 crore a year ago.

"HDFC Bank's earnings grew by 34% on year-on-year basis in line with estimates. However, net interest income growth was merely 28% YoY in the first quarter of 2007-08 compared with an estimated 44% growth," the brokerage said.

The bank's margin was 4.2% in the June quarter versus 4.1% in the same period last year. HDFC Bank aggressively built up its term deposits during the June quarter, recording quarter growth of 37%.

According to Motilal Oswal, this faster deposit growth (putting pressure on margins) is a 'catch up' as the bank had not grown its term deposits for the past three quarters. Loan growth was 33% on year-on-year basis, above the industry growth of 25%. Asset quality has been maintained with gross non-performing assets at 1.3% and net at 0.4% of customer assets.

The bank had slowed down its bulk deposit intake during the second half of 2006-07 as rates were unattractive. This resulted in slower deposit growth of 22% for the full year 2006-07. The bank's total term deposits also remained almost flat. But in the first quarter of 2007-08, the bank has reversed the trend of slower growth and has built a strong retail term deposit base.

Term deposits grew by 37% on quarter-on-quarter basis. As a result, CASA reduced from 58% in the fourth quarter of 2006-07 to 52% in the April-June quarter. On a quarter-on-quarter basis, the bank has grown its deposits by 19% versus industry growth of 3%.

The bank has been able to sustain its credit growth during the June quarter while credit growth in the system has reduced to 25% from 28% year ago. Quarter on quarter, loans have grown by 15% versus industry de-growth of 1.5%, the brokerage observed.

According to the brokerage, retail has been the key growth driver for the bank, although the pace of growth continues to be slowing down. Corporate loan growth has been picking up for HDFC Bank, primarily from small and medium enterprises and working capital financing.

On year-on-year basis, other income grew 77% in the first quarter driven by robust fee income growth of 28% and strong foreign exchange and derivative income as well as higher treasury income. Forex and derivatives income grew by 263% year-on-year. The growth in derivatives and forex was on account of executing some big-ticket transactions for corporate clients in the quarter.

The bank has opened 69 new branches and 111 ATMs in the June quarter and now has 753 branches and 1,716 ATMs. Over the last nine months, the bank has added 218 branches. Motilal Oswal expects an additional 100 branches to be opened during the next three quarters.

The bank's capital adequacy currently is at 13.1%, with Tier-I at 9.2%. During the June quarter, it raised Rs 13.9 billion of equity by way of preferential allotment of 13.6 million shares at a price of Rs 1,013.50 to the parent HDFC Ltd.

The bank would be raising an additional Rs 28 billion in equity, probably in the second quarter of 2007-08 by way of an international issue as part of its announced equity raising of $1 billion. This capital build-up, apart from being significantly book accretive, would take care of above industry credit growth for the bank in next 3-4 years, said the brokerage.

Motilal Oswal expects the bank's balance sheet growth to be faster with margins in the range of 4.2-4.3%. Rapid branch expansion would ensure core deposit growth as well as sustainability of its relatively higher CASA ratio.

On a post diluted basis, the brokerage expects the bank to report earnings per share of Rs 42.8 in 2007-08 and Rs 58.6 in 2008-09. The return on equity in these two financial years is likely to be 17%. At current market price of Rs 1,210, the stock currently trades at 19.6 times EPS and 3 times book value of 2008-09 estimates.

Derivatives, Eagle Eye

Derivatives, Eagle Eye

India Textiles, UTI Bank

India Textiles, UTI Bank

India Macro View

India Macro

Short-term bias bullish

The markets rallied smartly last week led by frenzied buying in metal stocks. The BSE Metal index gained a whopping 11.4% (1,226 points) with the heavyweights SAIL, Tata Steel and Hindalco — the three stocks amount for almost 59% weightage in the index of 15 stocks — making sharp gains.

The Banks, FMCG and realty stocks also witnessed considerable buying activity. While Infosys’ lowering its guidance for the full-year had limited impact on the technology stocks, pharma stocks continued to sag.

The Nifty is close to its short-term target of 4520. The index has reached here rather sooner than expected. The index touched a lifetime high of 4514, and ended the week 120 points higher at 4505

With momentum on its side, and the index in unchartered territory, it will be difficult to set an upside target for the Nifty. The bulls are unlikely to give up initiative. However, one may see some profit-taking around the 4600-4690 level.

The short-term bias remains extremely bullish as long as the index trades above the 4420-mark.

The Sensex, from an intra-week low of 14,830, soared to a new high of 15,331 — a swing of 501 points during the week. The index finally ended with a gain of 309 points at 15,273. The Sensex may rally to 15,500-15,780. On the downside, the index is likely to find considerable support in the range of 14,930-15,100 for remaining part of the month.

The CNX 100 index, which ended with a gain of 126 points at 4433, is likely to touch the 4530 level this week, with an eye on 4700 in the short-term. On the downside, the index is likely to find support in the range of 4340-4370.

Wild Picks - Nicco Corp

One of the operators is positive on Nico Corp, can be traded.

Disclaimer: Your capital may be lost if you invest in these stocks

Omaxe IPO: Invest at cut-off

An investment can be considered in the Initial Public Offer (IPO) of Omaxe, a real-estate company with its current revenues comparable to players such as Sobha Developers and Parsvnath Developers.

The company’s previous avatar as a contractor has not only enabled it to graduate into a real-estate developer but has provided it with a reasonable track record of execution.

The above process has also accelerated the bottomline growth and profit margins.

However, the key to success for this company with substantial business in North India, may lie in establishing its brand presence amidst bigger and better-known players such DLF, Unitech and Ansal Properties.

Competition apart, the company’s ability to bring professionalism in terms of disclosure and transparency could be a vital indicator of the company’s performance.

At the offer price of Rs 265-310, the price-earnings multiple is 18-20 times the company’s consolidated earnings for 2006-07 on the expanded equity base. The offer is at a discount to peers of a similar size.

Further, based on the company’s planned projects and current projects under development, the PE (at the offer price) stands at 10-12 times its likely consolidated earnings two years from now.

The company nevertheless carries a higher risk profile than some of its peers, given the relatively concentrated geographic presence and lesser experience in the commercial/retailing space.

Background

Omaxe is a construction and real-estate development company, with predominant business in the residential segment. The company started out as a contractor and executed 120 projects in such capacity, before moving on to becoming a developer in 2001. This background is comparable to Sobha Developers, which was also in the contracting business earlier.

In its new capacity, Omaxe has developed 5.13 million sq ft, comprising group housing projects, integrated townships and commercial projects. The company plans to raise Rs 470-550 crore through this offer. The proceeds are to be utilised towards land acquisition for current and future projects, for part-repayment of loans and to meet some of the construction cost of existing projects. Post-issue, the market cap (based on the offer price band) would be Rs 4,500-5,300 crore.

Comfort from land reserve

Omaxe has declared land reserves of 3,255 acres, representing 150 million sq ft of developable area, mainly in North India, but spread across nine states. This holding can be broadly classified into four divisions.

One, land owned by itself or through subsidiaries, which is 34 per cent of the total developable area. Two, 15 per cent of the area is under joint development agreement. We view this as the next best strategy to owning land directly, since the landowner evinces interest in the completion of the project.

Three, the company has sole development rights for 42 per cent of the developable area. The company has clearly stated that such land is owned by group companies and associates, providing comfort that the strategy is unlikely to generate any risk of disruption to the development process.

Finally, a minimal 9 per cent of area is under agreement to acquire, part of which is lease-hold land given by various state authorities for a period ranging from 90-99 years. This agreement is also likely to benefit the company, as it would get to fully enjoy revenue generated from such lease-hold land.

The above mix lends a positive view on the land-holding and appears to mitigate typical risks related to owning and developing land.

Late starter

Omaxe has seen an improvement in its operating profit margins (OPMs) from 18 per cent in 2005-06 to 24 per cent in 2006-07. This is as a result of substantially scaling down operations in contracting business (with no new projects under this segment, post-March 2006) and concentrating on realty development.

The OPMs are, nevertheless, lower than other realty majors in the National Capital Region. That land cost plays a major role in determining the OPMs of realty players is a given.

Looking back, players such as DLF and Unitech enjoy superior margins as a result of sitting on a land bank accumulated perhaps over a period of 10-20 years.

However, players such as Sobha Developers and Omaxe may have been accumulating land, over the past four-five years, as they have recently slipped into the developer’s role.

The cost of brand-building may also have taken its toll on the margins. Therefore, a comparison with recent entrants reveals that the margins appear reasonable.

Further, Omaxe has so far earned a majority of its revenue from group housing. The current project mix reveals that integrated townships have taken precedence over group housing; commercial projects are also gaining a place in the business mix.

The last two mentioned segments are more lucrative; the historical price realisation of the company in these segments also reveals this.

We expect the company’s operating and net margins to improve over the next two-three years, with this changing business mix. While the term ‘group housing’ is typically associated to mass low-cost housing, Omaxe has an interesting mix of apartments and condominiums. This mix may also provide a healthy average price realisation for these projects.

Fewer the better

The company has stated that it has received an in-principle approval for a multi-product SEZ which is, however, subject to the government relaxing the 5,000 hectare (12,355 acres)-ceiling. While we have not factored in any revenue from this segment, that the company has not gone in for too many plans in this segment is a positive.

With lack of clarity on the Government’s stand in this space, the fewer the plans (that a realty player has in this segment) the better, from an earnings visibility perspective.

Risks

Omaxe operates in a region that has already cultivated larger, established players. While the company will see serious competition in the NCR, the present developable area is skewed in favour of other states, which constitute close to 63 per cent of the total acreage.

This spread, across nine States and 30 cities may still provide enough room for the company to expand in its area of expertise.

The company has declared additional income for earlier years after it was subject to a search and seizure operation by the Income-Tax Department. Any proceedings that are underway may result in the company paying interest and penalties.

While this may dent net profits in the short-term, we are more concerned about the governance issues that these proceedings raise. Lack of transparency in transactions and poor governance have for long been impediments to higher valuations for realty stocks, and these have begun to be addressed only in recent times with better practices.

The company’s debt-equity ratio is likely to remain at about two even after the repayment of loans, post-issue. However, its ability to service its finance charges lends confidence. Its working-capital requirements may also be partly met with occasional cash flow from plotted developments, which from part of integrated township projects.

The offer is open from July 17-20. JM Financial is the book-running lead manager.

Trader's Corner

We continue to mull over the ways in which the Fibonacci series and ratios are useful in real-time trading this week too. The regularity with which these ratios keep popping up while using technical analysis is astounding.

We discussed the Fibonacci retracements last week. There are two more (less popular) tools with which the supports and resistances can be gleaned with the aid of these ratios. They are the Fibonacci fan and the Fibonacci arc. Though these are not as effective as the retracements, knowledge of these tools will come in handy to fortify your analysis.

The Fibonacci fan is a three-line tool that uses the ratios .382, .50 and .618. To draw the Fibonacci fan a trend line is drawn from the nearest peak to trough or vice versa. Next, the vertical distance between a peak and trough is divided by the ratios 38.2, 50 and 61.8. Then three lines are drawn from the leftmost point in the trend line to intercept the vertical line at the three levels derived by the ratios.

A more picturesque way of utilising the ratios to derive supports and resistances is by drawing the Fibonacci arcs. The initial steps for drawing the arc are similar to that for drawing the Fibonacci fan. The ratios are divided from the vertical distance between a peak and a trough. Then arcs are drawn through these levels of 38.2, 50 and 61.8 per cent.

As the security moves up after a down-move, the Fibonacci fan lines and arcs provide the levels where the price would encounter resistance. Similarly, in a correction, these lines and arcs provide the support levels. The Fibonacci fans and arcs can be used in conjunction with other tools. The convergence of many tools at a specific support or resistance would make that level an important reversal point.

The major drawback with these tools is that they tend to lose their relevance in a prolonged sideways move. Secondly, since they are less used, they do not enjoy the psychological advantage that the Fibonacci retracement does.

Index Outlook

Market mood is swinging back to a state of utopia where all the negatives are banished from the realm of thought and only the positives are allowed to blossom. Strong global markets and the liquidity suffusing our markets could be partly responsible for this upbeat feeling in the street.

Having conquered the peak at 15K, Sensex did a brilliant job of staying above the mark and closing the week with a 2 per cent gain. The deluge of inflows from FIIs in the cash segment gave a fillip to the already exuberant markets. However, the domestic mutual funds were more wary, preferring to book profits. The derivative segment is going from being overheated to turning red-hot.

We had glanced briefly at the long-term counts in the July 1 column. The Sensex movement last week suggests the continuation of the long-term up-move that commenced four years ago. The most obvious count is that the fifth wave of the move from the 8800 trough of the Sensex has been unfolding since 12316. This wave has the targets of 15091 and then 16345. Termination of the wave at any point between these two targets is also possible.

The first hurdle for next week would be at 15388. Move beyond 15388 would set-off another vertical move to 15533 or 15743. Conversely, a reversal below 15400 can set off a short-term reaction that can pull the index to 14750 and then 14619. Short-term investors can buy in dips until the Sensex stays above 14619. Fresh purchases should be avoided on a fall below 14600.

Though technical indicators are reaching overbought levels, the market can continue in this ebullient state for some more time. It is important to keep a balanced head on the shoulder and not to go chasing after ‘hot stocks’ in such a market.

Nifty (4504.5)

Nifty moved well past our outer target of 4480 last week. The long-term target for the Nifty while assuming the continuation of the move since 2595-low would fall at 4390 and then 4731. The Nifty is currently poised between these two targets. In the week ahead, the resistance at 4520 needs to be firmly surpassed in order to take the index to 4581 and then 4629. The supports will be at 4443 and then 4405. Traders can buy in dips until the Nifty stays above 4400.

Global Cues

A closer scrutiny of DJIA is required now as it is this average that is ensuring the continued rally in all the other indices. This index is in a strong up trend since last July. The third leg of the move that translates in to a broad target of 14000. The minor counts of the move since 11939 throw up the targets for DJIA at 13928 and then 14223. A fall below 13300 would be needed to reverse the medium-term outlook. Nasdaq composite too is gung-ho, having broken out beyond the long-term resistance at 2650. Comex gold has reversed from the 200 DMA and is trying to stage a come-back. The $675 mark needs to be keenly watched now. A move above this level will take gold beyond $700 again. Nymex crude paused for a breather, moving between $71.5 and $73 last week. The long-term e-wave counts for crude since the 1998 low of $10.35 throw up the targets of $127 and $175.

Key drivers in the dash to 15000

At 15000 points, the BSE Sensex is now at a level that many investors would not have believed possible just two years ago. Agreed, stock prices have repeatedly broken previous highs and crossed new milestones in recent years. But what distinguishes the recent rally to 15000 from the others before it? And what were the key sector- and stock-specific drivers this time?

The universe of listed stocks was categorised into different market capitalisation ranges to unearth trends in large-, mid- and small-cap stocks in the recent rally. The following trends distinguished the current rally from that of September 2006 (when the index regained its May peak):

The present rally enjoyed broader participation from the large-cap and emerging large-cap stocks. The rally was also marked by the resurgence of mid-cap stocks, driven by strong earnings; these occupy big chunks of most individual inve stors’ portfolios.

Apart from infrastructure, capital goods and the others in the limelight, low-profile sectors such as steel and banking were the key drivers. This rally actually saw a greater divergence between sectors, in contrast to the investor beh aviour in 2006, when most sectors underwent a re-rating.

The returns show considerable divergence in returns between individual stocks within a sector, some notching up gains while others suffered losses. This suggests that this time round, investors paid more attention to individual busines ses and their prospects, rather than going by a broad sectoral “theme.”

The recent gains in stock prices were in the backdrop of firm global cues, steady inflows from foreign institutional investors and mutual funds, and with improving liquidity playing its part in leading the Sensex to the magical 15k point. The conclusions are based on an analysis of stock price returns between February 8, 2007 (the previous market peak), just before the interim sell-off began, and July 6, when the Sensex breached the 15k level. A universe of 2,476 stocks was considered.

More large-caps

The latest market rally was marked by a broad-based participation, even within the universe of 121 large-cap stocks (defined as those with a market capitalisation of over Rs 5000 crore). Interestingly, six out of ten stocks in this space now trade at values higher than their February levels; every third stock in the category gained more than 20 per cent.

The gainers list featured unexpected stocks — GMR Infrastructure (72 per cent), Reliance Petroleum (67 per cent), Aban Offshore (66 per cent), Reliance Capital (59 per cent) and ABB (48 per cent) being some of the prominent gainers.

The rally was also marked by the absence of the usual performers such as Infosys, TCS and auto majors Tata Motors, M&M and Bajaj Auto. While Bajaj Auto (30 per cent decline) led the losers list, stocks such as Essar Steel, Bharat Forge, Hindalco and ITC lost about 10-20 per cent in value.

Emerging large-cap stocks, however, remained in the neutral zone, with only about 56 per cent of them gaining in value. Given the investor fancy for stocks in the capital goods, engineering, realty and construction sectors, it was not a shock to see them top the gainers’ list in their segments.

One out of six stocks that gained belonged to these sectors. However, some stocks from these sectors also figured in the losers’ list, pointing to a possible shift in stock preferences within these sectors.

While stocks such as Alstom Projects, Praj Industries, AIA Engineering and Voltas notched up gains, Atlanta, Ansal Properties, Mahindra Gesco and Akruti Nirman were lower by 16-75 per cent.

Pharma stocks, bucking their previous trend, gained in value. With the exception of Divi’s Lab (77 per cent gains), the gains were modest, with half the stocks appreciating 6-15 per cent.

Emerging large-caps have been defined as those with a market capitalisation of Rs 2,000-5,000 crore, which is a sample of 118 stocks.

Mid-caps join in

The most important trend evident from the recent rally is the revival in mid-cap stocks, after a prolonged sluggish phase. In stark contrast to the September 2006 rally, the current upsurge could, to a great extent, be attributed to the participation of mid-cap stocks. While the re-rating of mid-cap stocks could well be a function of the good earnings numbers, a good chunk of the gains can also be attributed to the perceived stiff valuations for large-cap stocks, which forced investors to look elsewhere for opportunities.

In the year ended March 2007, mid-cap stocks constituting the CNX Midcap Index recorded about 56 per cent growth in earnings on the back of a 45 per cent increase in revenues.

Another notable feature was investors’ greater selectivity in stocks and sectors. While capital goods, construction and engineering retained their attention; individual stocks within the sectors recorded divergent trends.

Sugar stocks, backed by institutional and fund buying, made a comeback, appreciating 9-100 per cent. Other prominent gainers were India Infoline (97 per cent), NIIT (91 per cent), IFCI (90 per cent), Asian Electronics (72 per cent) and UTV Software (67 per cent).

Manugraph India, GHCL, Welspun India, Allsec Technologies and Ansal Housing, however, topped the losers’ list, shedding 27-37 per cent.

While the overall picture remained bland with one stock appreciating for every one that declined, it was worth noting that mid-cap stocks recorded the highest price appreciation during this period relative to other market cap categories. Mid-caps are defined as stocks with a market capitalisation of Rs 500-2,000 crore — a sample of 314 stocks in the analysis.

Small-caps, however, remained the only category to be left out of the party. Seven out of ten stocks failed to touch their February highs. Some of the well-known small-caps that suffered erosion were House of Pearl, KRBL, Lok Housing, Marg Constructions and R-Systems.

However, driven by news, select stocks did see a build-up in buying interest. Stocks such as Usher Agro (259 per cent), Autolite Industries (221 per cent), Oil Country (153 per cent), Bank of Rajasthan (66 per cent) and TRF (54 per cent) appreciated in value.

Small-caps are stocks with market capitalisation less than Rs 2,000 crore, which were 1,923 stocks in the total sample.

Sectoral trends

Though the popularity of sectors such as construction, engineering and capital goods was apparent in the current rally, a study of stock prices on a sectoral basis did throw up a few surprise performances.

Steel stocks, unlike the September rally, topped the gainers list with an average price increase of 18 per cent. Among the prominent performers in this sector were Bhushan Steel, Jindal Steel and JSW Steel. Tata Steel also made a strong rebound, gaining about 35 per cent.

Banks, media, retail and telecom service providers followed next in the list. Bank of Rajasthan, Prime Focus and Bharti Airtel were among the prominent gainers in these sectors, respectively.

Concerns on interest rate hikes and an impending slowdown of the heavy commercial vehicles segment took its toll on auto companies, which slumped about 20 per cent.

Cement stocks, too, fell on policy intervention in cement pricing. Notably, Budget blues extended to other sectors as well. The withdrawal of the 80IA tax benefit for construction companies with retrospective effect led to underperformance of stocks in the sector.

However, IT stocks, conspicuous by their absence in the recent rally, had good reason for their underperformance.

The introduction of the minimum alternate tax and proposal to bring employee stock options under the fringe benefit tax scanner added to the sector’s woes, as did the sudden spurt in the rupee vis-À-vis the dollar.

Textile stocks too suffered on the bourses; another backlash of the rupee appreciation. Eight out of ten stocks in the sector quoted at prices lower than February levels. Birla VXL, Raj Rayon and Celebrity Fashions were some of the stocks that shed value.

Pointers to investors

Overall market capitalisation between the two highs registered a 13 per cent growth while the Sensex value appreciated only 2 per cent, suggesting that the Sensex gains have dampened wealth creation for investors.

Total turnover in both cash market and derivative segment have grown by about 50 per cent over this period, suggesting greater investor participation. In the same period, foreign institutional investors pumped in about Rs 18,500 crore.

Despite concerns on this score, liquidity remained comfortable with companies raising about Rs 25,000 crore through initial public offers and other offers during this period.

Despite rising stock prices, institutions and the owners of businesses remained confident about their companies. Promoter holdings increased in about 17 per cent of the stocks, while 15 per cent of the stocks saw an increase in foreign institutional holdings.

The importance of a quarter

If you are an avid watcher of the business channels on television, you could not have missed the frenetic activity that accompanies the quarterly “earnings season” — the period when listed companies unveil their results for the latest quarter. In fact, the actual earnings announcement is often drowned by a veritable flood of analyst comments, Q&A sessions with the management and sound bytes from market players. All this is usually accompanied by sharp gyrations in the stock price of the company being discussed. Indeed, to find a stock battered by 5-10 per cent in a single day after ‘disappointing’ results is not an unusual occurrence.

Quarters as milestones

But if stock prices really capture a company’s earnings prospects over the next two-three years, why do results for a single quarter cause so much mayhem? Well, this exuberance is not entirely irrational. Here is why quarterly results influence stock prices.

Though the stock market typically values a company based on its estimated earnings over the next few years, the quarterly earnings announcements are milestones that help investors evaluate if a company is really on track to meet those expectations.

Failure to meet the market’s expectations for a particular quarter naturally means higher targets for the rest of the year. Numbers that are better than what the majority of players in the market expected drive the stock prices up, as that may warrant an upward revision in the earnings expectations.

In fact, stock price gains for the Sensex companies over the past three years have been driven, to a large extent, by them repeatedly delivering earnings that are higher than analyst expectations.

Cues to future

Another reason why the earnings season is such an action-packed one for the stock markets is that they often provide cues to future earnings, from the company’s management.

With disclosures improving, several companies use the earnings season to touch base with analysts and investors and update them on business developments.

Conference calls with analysts and the public appearances made by the company management, often give investors new insights about unfolding trends in the business as well as the outlook for it, over the next few quarters. The new information helps the stock market “reset” earnings expectations, triggering stock price moves.

Finally, the quarterly earnings season also helps to turn the spotlight on the earnings potential of the less-known mid-size and smaller companies. Remember; there is still a large cross-section of small and mid-cap stocks that are not yet tracked by an army of analysts. Stock prices for such under-researched stocks are often not shaped by formal “earnings estimates” or “consensus expectations” as in the case of the high profile companies.

Under the circumstances, the quarterly earnings announcement often serves as the only reference point for investors looking to evaluate such stocks. This is why the quarterly earnings season is often marked by frenetic activity in the mid-cap and small-cap space, with sharp jumps in stock prices shortly after a company’s results announcement. For some of the low-profile members of India Inc, the earnings season is the time to bask in a few moments of glory, fleeting though the stock markets’ attentions may be.

Corporation Bank: Buy

Among listed public sector banks, the Corporation Bank stock, at its current price of around Rs 350, provides a good medium-term investment opportunity.

The stock trades at around 1.3 times its March 2007 book value and about 9.3 times its March 2007 earnings.

Investors with an investment horizon of at least one year can take exposure at current levels.

An investment horizon of less than a year may generate decent returns provided some weakness is seen in the stock. Short-term investors can pick up the stock for quick gains at lower levels than currently.

The stock has a notable correlation or relationship (though not very strong) with the Junior Nifty as well as the sectoral bank index (Bank Nifty). Based on price changes in the stock and the broader market in the past year, the stock moves by around 1.25 times the broader market change, suggesting that any overall market correction could provide good opportunities for picking the stock at lower levels.

Solid profile

Overall, the bank shows steady and solid fundamentals that can generate decent, positive, real returns (inflation-adjusted) over the medium term.

The inherent constraints in being a public sector bank, however, show up in many areas of business.

Such constraints have meant that the bank has not been able to capitalise on business opportunities to the fullest measure.

For instance, the bank has been able to double its balance-sheet in the last five years — which indicates an average rate of business growth of about 15 per cent.

There are banks in the private sector, though, that have done this in half the time — particularly in the last two years as the economy expanded and provided high growth opportunities for financial intermediaries.

A growth rate of 40 or 50 per cent in key parameters such as deposits/advances has become almost normal for some private sector banks in recent times.

Though having an ideal platform in terms of a clean balance-sheet at the turn of the decade, a reputation for nimble-footedness, initiative, relationship building and networking, good systems — both IT and non-IT — Corporation Bank’s growth the last five years is somewhat disappointing.

The Government of India holds a 57 per cent stake in the bank and as per current law, its holding cannot go below 51 per cent.

This puts constraints on business growth in public sector banks as fresh capital infusion has to be structured without diluting government holding.

The regulatory ceiling on the amount of Tier 1 perpetual and Tier 2 hybrid debt capital that can be raised also acts as a restraint.

Frequent public issues of capital, of course, will not be favourable from a valuation perspective; it would be ideal if business growth can be supported only by growth in retained earnings/debt.

The point, though, is that the enabling environment is not exactly complete for public sector banks.

For instance, it may not be possible for them to replicate the marketing strategies of private sector banks in the retail space to register growth in retail loan portfolios.

While the above argument applies broadly to public sector banks, it has to be suitably modified for banks such as Corporation Bank that have a good cushion at the existing level of capital itself.

Corporation Bank’s capital adequacy, as of March 2007, is 12.75 per cent against the regulatory norm of 9 per cent. This means the bank has a good cushion to expand the level of risk assets without the need for fresh capital infusion.

Well-placed among peers

Though not comparable in size, Corporation Bank stands out on some key efficiency parameters such as overall profitability of the underlying business, the structural make-up of its balance-sheet in terms of the proportion of low-cost liabilities and the cushion provided to the earnings stream by non-interest income.

The bank also has a well-distributed network of around 900 branches, which will be the key in sourcing new business — particularly from the retail segment.

Retail credit currently forms around 25 per cent of the total and this could be an area for aggressive growth in the ensuing period.

Stability to earnings

Not only will margins in certain segments of the retail business be higher — for example, in credit cards and personal loans — but the overall retail business would also provide more stability to the earnings stream and could offset income variability from other business segments such as corporate/commercial banking.

The level of impaired assets on the balance-sheet is very low at around 0.50 per cent.

This could provide the flexibility for the bank to ramp up asset growth.

Tata Chemicals: Buy

The stock of Tata Chemicals may be a good investment option for conservative investors with a two-year horizon. The prospect of continuing volume gains in the fertiliser business, strong growth in the chemicals business as recent global acquisitions begin to contribute and ongoing capex plans, suggest that the company may sustain strong earnings growth over the next two-three years.

At the current market price of Rs 244, the earnings expectations factored into the stock price are also modest, with the stock trading at just 12 times its 2006-07 earnings. A dividend yield of 3.3 per cent also provides cushion against significant downside.

The company’s soda ash business has delivered strong profit growth in 2006-07 on the back of firmer global prices and higher offtake from domestic glass manufacturers. The global soda ash cycle appears to be on a recovery phase currently, helped by strong offtake in the Asian region, tighter supplies and a rationalisation of capex in and exports from China. Tata Chemicals’ acquisition of the UK-based Brunner Mond group in 2006 has made it the third largest global producer of soda ash and enabled access to large sources of natural soda ash.

These will significantly reduce the company’s cost structure and strengthen its competitive edge in supplying to the domestic markets and the Asian region. With the company making ongoing investments in its acquired facilities, earnings contributions from the overseas business may scale up significantly over the next two years. Funding for the capex plans may raise debt levels, but strong cash coffers and a comfortable interest cover suggest room in the balance sheet for such plans.

Meanwhile, prospects for the domestic fertiliser business are also looking up, to some degree, with a higher share of the domestic sales going to the more efficient players. The new pricing policy for urea has helped the company embark on a 40 per cent expansion in urea capacity to be commissioned over the next 18-24 months.

Tata Chemicals’ business forays into establishing a supply chain for agricultural produce and its food additives business also have good potential. The company’s consolidated operations registered a 44 per cent growth in sales to Rs 5,810 crore and a 19 per cent increase in net profit in 2006-07, translating into earnings per share of Rs 23.6 (Rs 20.9, on a fully diluted basis).

MindTree Consulting: Hold

The MindTree Consulting stock has delivered strong returns to its IPO (initial public offer) investors, with a 78 per cent jump from its offer price. For 2006-07, the company met earnings forecast made at the time of the IPO. The stock remains a preferred exposure among mid-size IT companies, considering that the bright growth prospects and the increasing revenue contribution from high-value services could be engines for higher realisations. Over the past year, the stock valuation has risen about 30 times the trailing earnings, which is a significant premium to other mid-cap IT companies. Shareholders can retain the stock, while fresh exposure can be timed to price weaknesses.

MindTree Consulting delivers broadly IT and Research and Development services. While the former consists of application development and maintenance, business intelligence solutions, ERP (enterprise resource planning) and supply chain management, testing, and mainframe, the latter is focussed on product-realisation services in product and semiconductor design, operating systems, protocol engineering, embedded applications, product testing and licensing of intellectual property.

This segregation gives the company a blend of volume-driven services on the one hand, and high-value services (in terms of execution complexity and revenues), on the other.

Business Outlook

A closer look at some of the key metrics and the rising trend in the contribution of some of its services indicate that the company has reasonable prospects in the medium/long-term.

Better spread: In terms of geographical spread, the company derives a chunk of its revenues from the US though it has significant presence in Europe, Asia-Pacific and India (all contributing about 36.7 per cent to last year’s r evenues). This augurs well on two counts. One, it gives greater visibility across locations and broad-bases its clientele. Two, there is better protection against currency risk, thus helping revenue realisation.

Service mix: Services such as consulting contributing 4.7 per cent of revenues, independent testing (3.4 per cent), and IP (Intellectual Property) licensing (0.8 per cent) have shown a rising trend on a sequential basis, which is healt hy.

One, all these services are high-revenue-earners and an increasing trend could mean smooth realisation; and, two, it indicates that the company may be climbing the services value-chain.

Trends relating to verticals of operation, client adds and repeat business are also worth noting. In the March 2007 quarter, the Banking and Financial Services (BFS) vertical contributed 24.6 per cent of the company’s revenues replacing the manufacturing vertical as the biggest contributor, which is a positive for MindTree. IT spend by overseas clientele is normally higher in the BFS vertical compared to other sectors.

The company added 17 clients this quarter; two are million-dollar clients. Sustaining this will help the company scale up its level of operations and realise better margins on its projects. MindTree generates 92 per cent of its revenues from repeat business. This compares favourably even with Tier-1 companies.

Risks: The utilisation level, at 62.7 per cent, has declined 7.7 percentage points on a sequential basis (March quarter); this along with a slight increase in attrition are execution risks.

Of the 155 active clients, the top 10 contribute 50.7 per cent of its revenues, indicating a high top-clients concentration. This also indicates that nearly half the company’s revenues comes from a large number of low-value projects, which could pose challenges in terms of optimal resource allocation. The company may also face execution risks on account of this.

The company’s recent foray into IMS services, which is a niche area for Indian players, needs to be watched, considering the competition from some of the Tier-1 players. Lastly, there is the risk of rupee appreciation vis-À -vis the dollar (only $13 million of revenues was hedged last quarter).

Valuation: The stock trades at a significant valuation premium to players such as Hexaware Technologies and I-Gate Global. Considering that MindTree has been able to scale up its operations above its peers in a relatively short perio d, a premium valuation for MindTree appears justified.