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Tuesday, June 20, 2006
Monday, June 19, 2006
ET - Stocks you can pick up this week
Cummins India
Research: JM Morgan Stanley
Recommendation: Buy
CMP: Rs 164.25(Face Value Rs 2)
12-Month Price Target: Rs 228
JM Morgan Stanley has put a buy on Cummins India with a 12-month price target of Rs 228. Cummins posted a strong set of numbers with revenues, EBITDA and net earnings increasing by 22%, 26% and 17% respectively. Domestic business, which comprised nearly 65% of total revenues, posted yoy growth of 32% with export sales rising by 8% yoy.
Historically, this has been the strongest quarter for Cummins. CIL posted its highest-ever EBITDA margins in the past three years' last quarter, at 15.1%. This quarter, CIL managed to maintain its margins at 15%, a yoy growth of 40 bps. Margins improved due to aggressive cost reduction initiatives employed by the company, operating leverage, productivity improvement and better product mix.
This was despite CIL booking approximately Rs 9 crore as a one-time charge for a change in its pension scheme from a defined benefit plan to defined contribution plan, provident fund impact on leave encashment and excess inventory cost.
Therefore, while other expenses, as a percentage of sales, declined 90 bps yoy to 11.4%, raw materials and staff expenses increased marginally by 10 bps and 30 bps respectively. EBITDA grew 26% yoy to Rs 58.3 crore. For full-year F2006, EBITDA grew 46% yoy with margins rising by 230 bps to 14.3%.
The company hopes to sustain margins at these levels through cost-reduction initiatives that would enable the firm to offset cost volatility in commodities. At the current market price, Cummins trades at 15.7 times the estimate for F2007 EPS and 14.0 times the estimate for F2008 EPS. In terms of EV/EBIDTA, the multiples for F2007E and F2008E are 13.2 times and 11.2 times, respectively, and in terms of P/BV, the multiples are 4.1 times and 3.7 times.
Cipla
Research: CLSA
Recommendation : Buy
CMP: Rs 210.35 (Face Value Rs 2)
12-Month Price Target: Rs 280
CLSA has put a 'buy' on Cipla with a target price of Rs 280. With over 300 products across 65 therapies, product registrations in over 160 countries and a renewed thrust on growing exports, Cipla as strongly positioned to rapidly expand its share in the global generics market.
Cipla's exports rose at a 29% CAGR from $338m in FY06 to $720m in FY09 as its partnership-centric model enables low-risk high growth.
CLSA upgrading earnings by 19-22% driven by strong growth in formulation exports corroborated by aggressive investments in manufacturing facilities. The generic opportunity outside of the US, Europe and Japan is expected to reach $52bn by '09 (from $34bn in '04).
The opportunity is huge in 160-odd countries and growing. Cipla is one of the best proxies to the growth of generics in these countries. Cipla's model of developing partnerships with local companies enables it to leverage local market knowledge from its partners; and its own R&D, product development and manufacturing skills.
It's a win-win situation for both, and in particular, enables Cipla to grow its export markets with little investment in the front end, which substantially mitigates risk.
Having built relationships with more than 200 partners in 160 countries, Cipla now has 4,000 product registrations and 7,000 pending approval. These include tablets and capsules, respiratory products, oncology products and hormones. These products come from 31 manufacturing plants across six Indian locations.
This manufacturing strength, a rich product basket and partnerships have driven a 58% CAGR on formulation exports in the past three years. More importantly, US generics, which is the growth driver for most peer companies, contributes less than 6% of top line, making Cipla far less vulnerable to a pricing decline in that market.
With earnings set to double over FY06-09 (27% CAGR), valuations at 17.5 times FY08CL are reasonable. The target price of Rs 280 (22x FY08CL) implies a 26% upside.
AIA Engineering
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 528.30 (Face Value Rs 10)
12-Month Price Target: Rs 700
Enam has rated AIA Engineering's as an outperformer as its FY06 results are stronger-than-expectations. On a consolidated basis, AIAE reported revenues of Rs 400 crore (38%) and net profit of Rs 52.3 crore (up 91%). EBIDTA margin jumped 570 bps to 21.8% due to a 20% increase in realisation and favourable product mix.
AIAE's order backlog, at the end of FY06, stands at a healthy Rs 295 crore, and has grown by 84% from the level of Rs 160 crore at the end of H1FY06. Over 30% of the company's order backlog comprises project business where margins are higher. On a like-to-like basis, consolidated production volumes were up at 59,329MT in FY06. Of this, about 28,000MT were exported, while the balance was domestic sales.
AIAE's year-end capacity stood at 65,000MT. AIAE is augmenting its capacity from 65,000MT to 1,69,000MT by setting up a 100% export oriented unit (EOU) at Changodar. The capacity expansion would be in phases with the first phase of 52,000MT commencing production in December '06 and second phase of 52,000MT coming into production by December '07.
AIAE has an estimated 20% share in cement grinding market and seeks to increase its share to 35% once the new capacity is on stream. In addition to this, the company expects to enter the mining segment where the market potential is 10x larger than cement.
During FY06, AIAE has also made inroads into China — the largest market for grinding media in the world. Enam is raising the estimates for FY08 to factor in the increased capacity addition, and likely improvement in margins due to economies of scale and tax savings, once the EOU at Changodar becomes operational.
At the current market price, the stock trades at 12 times FY07E EPS of Rs 40.3 and seven times FY08E EPS of Rs 69.2
Tata Teleservices (M)
Research: IL&FS Investsmart
Recommendation: Buy
CMP: Rs 18.00 (Face Value Rs 10)
12-Month Price Target: Rs 55
IL&FS Investsmart has put a 'buy' on Tata Teleservices (M) with a price target of Rs 55. In past two months Tata Tele released its excellent Q4FY06 results when it turned cash positive and a lower stock price brought about by the recent fall in the stock market.
This anomaly gives investors an opportunity to buy into a turnaround story at prices driven down purely by extraneous events. In this report IL&FS has reiterated its arguments with renewed confidence, with additional focus on the above recent events, even though net profits may be over a year away and a currently negative net worth.
TTML turned cash positive as expected by us. At 64.8% qoq, EBITDA growth was stronger-than-expectations of 40%, driven by revenue growth and strict cost controls.
EBITDA margins expanded to 17.7% from 11.4% in Q3FY06, higher than the expectation of 14.4%. The net loss was lower at Rs 104.5 crore compared to Rs 129.8 crore in Q3FY06. IL&FS Investsmart expects this to continue.
Based on DCF analysis with projections until FY22, TTML is currently worth Rs 55 per share – even after assuming an expanded equity base of 2,279m shares after about Rs 1,100 crore of fresh capital infusion that they have assumed during FY07.
The merger of TTML with Tata Teleservices (TTSL) is inevitable as both work closely on the operational front and TTSL owns 47% of TTML. This will create a much larger all-India entity with huge economies of scale. TTML could be an entry to TTSL much as MTNL is touted for BSNL.
Sunday, June 18, 2006
Saturday, June 17, 2006
At Bursting Point
Despite last fortnight's correction in prices of commodities, specifically metals, a blow-out in prices could be on the cards after years of heady appreciation
"The world is now in the midst of another bubble - this one is commodities. It, too, will burst."
Stephen S. Roach, Chief Economist, Morgan Stanley
"Anyone who says commodities have been in a bubble has not done his homework and does not know about what he is talking"
Jim Rogers, Global commodities Guru
Last fortnight as commodities of all hues slipped into a downward spiral globally after years of a breathless uptrend, the billion dollar question on traders' lips worldwide was: Are we in for speculative blow-out? The tell-tale signs were all over the place (including in global equities): Base metals like copper, zinc, steel and aluminum were XX per cent off peak prices in a weak. To be sure, no commodity was spared, be it precious metals (gold, silver, platinum, palladium) or sugar, or cotton, or wool. Whilst most traders were caught on the wrong foot, there were those who saw it coming. "Base metal prices were moving up parabolically in April and early-May, with copper doubling in a little over a month. At the same time China was sending signals of its intent to reduce the energy and commodity content of its GDP over the next several years. There was a major macro disconnect that triggered my concerns about commodities as an asset class," Morgan Stanley's Roach told BT. Roach had turned bearish on commodities before last fortnight's plunge in prices began.
Then there are investors like Jim Rogers, a dyed-in-the-wool guru in commodities, with books like Hot Commodities to his credit. Try mentioning the word "bubble" to Rogers, and he's likely to rubbish you with disdain. He did exactly that to BT last fortnight, armed with an array of statistics. "Sugar is 80 per cent below its all time high; cotton 60 per cent; maize 50 per cent; soyabeans 60 per cent; silver 75 per cent; coffee 70 per cent; palladium 60 per cent; gold 30 per cent. If you adjust the hold highs for inflation, these and many others are 85-95 per cent below the all-time highs. What kind of 'bubble' is it when most things are 85-95 per cent below all-time highs," scoffs Rogers.
Rogers obviously knows what he's talking about. But at the heart of the bear theory is the question whether commodities deserve the highs they've been driven to in the first place? Should gold be at $700 per XX, copper at $4 per XX and oil at $70 per barrel? As Roach argues, there's nothing extraordinary about the global economic climate today to warrant such an uptrend in commodities, an uptrend that's pushed prices to their highest levels in the pat 35 years. There have been five periods of prolonged spikes in economic activity since the seventies. The current rebound, which began in 2002, averages 4.2 per cent in annualized world GDP growth terms. That's lower than the 4.4 per cent average annualized gains in the previous four global recoveries between 1970 and the 90s. Why then should commodities prices be at a 30-year all-time high? The Journal of Commerce composite gauge of industrial materials prices, which has four components (textiles, metals, petroleum products and a miscellaneous group), but which excludes agri-products and precious metals, has increased by 53 per cent over the past four years, the sharpest ever run-up since 1970.
The bull camp would feel such comparisons are odious, as there's one major piece in today's global economic picture that one didn't have to contend with prior in the 1970-2000 period: China. In 2005, China swallowed close to 9 per cent of the world's crude, 20 per cent of global aluminum, at least 30 per cent of steel and 45 per cent of the world's cement. And as the thrust continues to be on infrastructure and urbanization, a section of traders believes China will ensure that the rally in commodities doesn't peter out.
The bad news, going forward though, is that China is attempting to move away from investment-led growth to consumer-led growth (as is happening in India). And this will reduce its appetite for commodities sharply, thereby hitting global demand in a big way. Result? Prices will crash suddenly, and traders will be caught napping. Back home in India, where commodities markets have been racking up turnovers of Rs XXXX crore in daily trading, traders and analysts are treading with caution. Says Jignesh Shah, Chairman, Multi-Commodity Exchange (MCX): "Indian markets have shown a huge correlation with the world's commodity markets. As an exchange we have to manage the risks when such bouts of correction happen, and that's why we increased margins in various base metals." Adds Suresh Nair, Vice President (Commodities), Kotak Securities: "The commodity market was in overbought region for some time. After a rise of 100-120 per cent, a 15 per cent correction is healthy." Echoes Navin Mathur, Head (Commodities), Fortis Securities: "A market that makes a record almost every day is not sustainable for long." Trading in commodities from hereon isn't for the faint-hearted.
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