Technical Pick #1: Kingfisher Airlines Ltd (KINAIR) - BUY CMP: Rs. 71.9
Rationale for call: On the weekly chart stock had formed an “Inside Bar” pattern as well broke the resistance of 21DEMA with good volumes. On the hourly chart stock broke the neckline of Inverse Head and Shoulder pattern further indicating positive momentum in the stock. Oscillator on daily chart depicts bullishness with RSI continuing their upside trend.
Buying is recommended at CMP of Rs. 71.9 with target of Rs.79.60 and stop loss of Rs. 67.5.
Target: Rs. 79.60
Stop Loss: Rs. 67.5
Technical Pick #2: Cipla Ltd (CIPLTD) - BUY CMP: Rs. 370.0
Rationale for call: On the weekly chart stock broke the resistance of 362.80 with good volumes and finally closed above the mentioned resistance. Stock is continuously making Higher Top and Higher Bottom on the daily and weekly charts further indicating strength in the stock. Oscillator still continued their upside move.
Buying is recommended at CMP of Rs. 370 with target of Rs. 400 and stop loss of Rs. 351.30.
Target Price: Rs. 400
Stop loss: Rs. 351
Technical Pick #3: Dr Reddys Laboratories Ltd (DRREDD) - BUY CMP: Rs. 1825.0
Rationale for call: Last few trading session stock was consolidating in the range of 1813-1765. On Friday stock broke the resistance of 1813 with good volumes. Beside this on the weekly and daily chart continuously making “Higher Top and Higher Bottom”, further indicating strength in the stock.
We reiterate a Buy on Dr Reddy at CMP of Rs. 1825 with target of Rs. 1955 and stop loss of Rs. 1735.
Target: Rs. 1955
Stop Loss: Rs. 1735
Showing posts with label Reports of the day. Show all posts
Showing posts with label Reports of the day. Show all posts
Monday, December 6, 2010
Tuesday, March 31, 2009
15 stocks you can buy - Kotak
In last few days stock trades & volumes have picked up substantially in the market, institutional investors are buying stocks has started, foreign institutional investors (FIIs) have bought 1,600 crore in the last five days.
Kotak Institutional Equities team has put out a list of top 15 stocks to buy now for 2009 - 2010, which are not penny stocks but are reasonably large cap names and stock buying in these counters can give returns of 50-100% over the next 18 months.
Most analysts believe that domestic participation has picked up quite significantly and so people may trade back into the market as there are lots of values and accumulate stocks.
Following are Sanjeev Prasad, ED, Kotak Institutional Equities' fabulous 15 picks
Punjab National Bank (PNB): Valuations are attractive and gross non-performing loans (NPLs) are seen at 5% for FY11
HDFC Bank: It is a large cap stock with attractive valuations
Axis Bank: Valuations are cheaper than that of HDFC Bank and see high return on equity (ROE)
United Phosphorous: See fair value of the company and in a year�s time it would be Rs140-150 per share
Crompton Greaves: See seven times prcie to earnings (PE) on 2010 numbers. It is a pretty good buy, despite whatever has happened on the investment in the power
India Infoline: The brokerage stock will see upside in market volumes
Tata Steel: See FY10 earnings per share (EPS) at Rs 55
Indiabulls Real Estate: The occupancy levels in the properties are going higher and there will be a re-rating of the stock to some extent.
Reliance Infrastructure: See clarity in Q4 on the usage of cash available with the company
JP Associates: The company will benefit from higher cash flows from its cement business
Biocon: Although valuations are cheap and the stock has fallen a bit, but by 2010 things will start improving.
Kotak Institutional Equities team has put out a list of top 15 stocks to buy now for 2009 - 2010, which are not penny stocks but are reasonably large cap names and stock buying in these counters can give returns of 50-100% over the next 18 months.
Most analysts believe that domestic participation has picked up quite significantly and so people may trade back into the market as there are lots of values and accumulate stocks.
Following are Sanjeev Prasad, ED, Kotak Institutional Equities' fabulous 15 picks
Punjab National Bank (PNB): Valuations are attractive and gross non-performing loans (NPLs) are seen at 5% for FY11
HDFC Bank: It is a large cap stock with attractive valuations
Axis Bank: Valuations are cheaper than that of HDFC Bank and see high return on equity (ROE)
United Phosphorous: See fair value of the company and in a year�s time it would be Rs140-150 per share
Crompton Greaves: See seven times prcie to earnings (PE) on 2010 numbers. It is a pretty good buy, despite whatever has happened on the investment in the power
India Infoline: The brokerage stock will see upside in market volumes
Tata Steel: See FY10 earnings per share (EPS) at Rs 55
Indiabulls Real Estate: The occupancy levels in the properties are going higher and there will be a re-rating of the stock to some extent.
Reliance Infrastructure: See clarity in Q4 on the usage of cash available with the company
JP Associates: The company will benefit from higher cash flows from its cement business
Biocon: Although valuations are cheap and the stock has fallen a bit, but by 2010 things will start improving.
Thursday, March 12, 2009
Buy - Nestle India Ltd - Good Long Term Story
Nestle India Ltd - Buy
CMP - 1,444
52 week H/L - 1880 / 1220
Summary -
Nestle India Limited engages in the manufacture and sale of nutritious food products in India. The company’s products primarily comprise milk products, such as sweetened condensed milk, baby milk foods, milk powders, acidified infant food, and other milk products. It also offers beverages, prepared dishes and cooking aids, and chocolates and confectionery under various brand names, such as KitKat, Friskies, NESCAFE, Maggi, Nestle, Dreyer’s, DogChow, and NESTEA. The company is headquartered in Gurgaon, India. Nestlé India Limited operates as a subsidiary of Nestle S.A.
Result analysis -
Nestlay India has decalred its fourth quarter results. The company's Q4 net profit was up 29.1% at Rs 534 crore.
Its net sales were up 23.4% at Rs 432.4 crore.(A good result during recession time)Growth -
Nestle India is best placed to ride on the expected growth in processed food market due to the strong technology of the parent company. Dominant market share and strong brands will prevent margin erosion of the company. Going ahead, high penetration and innovative prod-uct launches would further fuel its growth.
Positive Factors -
Good financials/results.
A divident paying stock (paid 25.50 Rs per share last yr)
Good market demand & growth potential.
Monday, February 9, 2009
Blue Star Ltd
Cooling Business; Feeling The Heat
Air conditioners and electro-mechanical services providers Blue Star and Voltas are not comparable to each other in true sense. While Voltas makes revenue from hawking engineering products and services for textile and mining industries, Blue Star’s business includes marketing and maintenance of hi-tech professional electronic and industrial products. Devangi Joshi takes a look into the companies’ performance
BLUE STARPREMIER AIR-CONDITIONING and commercial refrigeration provider Blue star works under three business segments and earns 7% of its total revenues through exports. The electro mechanic project and packaged air-conditioning system business contributes the most to its top line. The segment comprises central air-conditioning, packaged air-conditioning and electrical contracting businesses, besides after- sale services and customised original equipment manufacturing business. Under the segment, the company provides HVA (heating, ventilation and air-conditioning), M&E (mechanical and engineering) and VRF (variable refrigerant flow) products and services. Blue Star is the country’s first and only manufacturer of VRF systems and owns nearly 20% market share.
Blue Star offers a range of contemporary window and split air-conditioners under cooling products segment. It also manufactures and markets a range of commercial refrigeration products and services catering to the industrial, commercial and hospitality sectors.
The electronics segment exclusively distributes hi-tech professional electronic equipment and industrial products . The company has moved up in the value chain by offering system integration, apart from distributing products like analytical instruments, medical electronics, data communication products, material testing, and measuring instruments from global manufacturers.
The company exports to middle-east countries like the UAE, Qatar, Bahrain, Oman and Kuwait.
FINANCIALS
Falling demand has affected the top line and profitability in the electro mechanic (EM) and cooling segments . Both the segments, which contribute nearly 80% to the bottom line, showed a negative growth in profitability in the December quarter. On the other hand,
electronics segment posted a 31% growth in revenues and 19% growth in profits during the quarter. On the export side, though the product export business witnessed profitability, it was contributable to a 10% dollar appreciation against the rupee in the quarter. However tight control over total expenses has helped profit margins post stability in the last three quarters.
GROWTH POTENTIALS
Contracting global and domestic demands are expected to have a significant effect on the electro mechanic and cooling business, especially pertaining to the retail and building sectors. However, the company is expecting to see good prospects from the hospitality, healthcare and education sectors. The company is aggressively pursuing business from infrastructure sector, especially government projects as it has received several orders from government for air conditioning various stadiums for the Commonwealth Games in 2010.
The company also undertakes water management and LEED ( leadership in energy and environment design certification) consultancy for green buildings as a part of its after sales services. It has submitted bids for a number of such projects, that can be implemented in the coming months.
In the December quarter, the order inflow has seen a rise of 12%, while carry forward order book as of December 2008 has grown by a 52% compared to the same period last year.
RISKS
The company’s gross block has seen a compounded annual growth rate (CAGR) of 19% in the last four years, while the interest payment rose by 86% during the period. The interest cover ratio has, on the other hand, has declined in the last three quarters, from 33.2 in March 2008 to 10 in December 2008. This, in turn, has affected the company’s net profit in September and December quarters of FY09. Company exports to the west Asian region, where the construction activity has been slowing down. Moreover, growth in the exports would be dependent on the dollar’s strength against the local currency.
The liquidity crunch and economic downturn could affect the company’s project execution and top line.
TO SUM IT UP
Blue Star has a healthy carry-forward order book, slowing demand from the construction and retail sectors may impact the company’s top line. Moreover, the liquidity crunch can lead to delays in project executions. However, the company focuses to reap the benefits from the growth in infrastructure, health care and hospitality sectors. A healthy 60% CAGR of net cash from operations in the last four years and sustained dividend payouts during the period makes the company a value buy. Lower beta and high debt-to-equity ratio makes it a safer bet for risk-averse investors.
Beta: 0.52 Institutional Holding: 8.12%* Current dividend Yield: 5.22% Current P/E 7.57 Current m-cap: Rs 1205 cr Current Market Price: Rs 134
* Dec’08
VOLTAS
VOLTAS IS a major engineering service provider whose operations is organised into four independent strategic business units. Under the engineering products and services segment, the company designs and manufacturers, machine
tools, mining & construction equipment and sells textile machinery. About 80% of the revenues from this segment comes from manufacturing of forklift, trucks, cranes, warehousing equipment and construction equipment and sale of accessories, spare parts and maintenance services, while the rest 20% comes from commission income.
The company provides electrical, mechanical, HVAC and refrigeration solutions under the EM projects and services division.
Water treatment and management is also a part of this business, which contribute the most to the total revenues and profits.
Cooling appliances and commercial refrigeration products are manufactured and marketed under unitary cooling products division. The company is also in chemicals trading business, but it contributes less than 1% to the top line. Voltas earns 5% of its revenues from its foreign operations, which mainly include execution of projects in Middle East, Far East and South East Asia.
FINANCIALS
The company posted a 29% growth in revenue during December 2008. In comparison, total operating expenditure during the quarter was up by 33% YoY. This resulted in contraction in its operating margin which hit its bottomline. On expense side, the employee cost rose over 40% in year ended December 2008.
GROWTH STRATEGY
In last few years, it has changed its business strategy to emerge as a onestop solution provider rather than a
manufacturer. The strategy has paidit handsomely. At the end of September ‘08, its domestic order book in EM projects and services segment stood at Rs 1,000 crore, while international order book stood at Rs 4,500 crore with an average completion cycle of 24-30 months. For the domestic market, the company has formed industrial verticals in order to focus on areas like airports, power and steel, which are likely to have sustained growth.
RISKS
Historically, Voltas tends to sit on higher inventories, which depressed its cash flows. In last few years, it has cleaned up its act but, its cash flows from operations continues to be erratic. The company is a big importer of equipment and cooling products. The recent depreciation in the rupee raised the cost imported goods which hurt its profitability. Bulk of Voltas’ overseas business is in West Asia especially UAE and Qatar. The global credit crisis and falling crude oil prices has hit these economies hard leading to a slowdown in construction activities. This will have an adverse impact on Voltas’s earnings in next few quarters.
TO SUM IT UP
Voltas is expected to take a hit on its earnings and profitability thanks to its high exposure to the gulf countries as well as slowing construction and engineering activities in domestic market. The company earns substantial non-operating other income from recurring rental income and investment of surplus funds. However, this segment is likely to hit due to a gloomy realty sector and fall in yields across asset classes. It doesn’t have a track record of higher dividend pay. However, with a higher beta, the company could turn out a well fit for risk-loving investors.
Beta: 0.94 Institutional Holding: 26.54%* Current dividend Yield: 3.34% Current P/E 5.45 Current m-cap: Rs1337 cr Current Market Price: Rs 40.4
* Dec’08
Max India
Longing For Cover
Though Max India’s insurance business is yet to mature, it is an attractive pick for the long term considering its earnings potential
THE fairly recession-proof insurance sector is not well represented in the Indian financial markets, but for a few listed companies. Among these, Max India seems to be a promising bet. The company has diverse business interests in insurance, healthcare, packaging and clinical research. Considering the growth clocked by its insurance business and its expected capital infusion, Max India is seen to be an attractive pick for the long term.
BUSINESS:The Rs-3,250 crore group is diversified into insurance, healthcare, specialty packaging business and clinical research. Earlier, Max India group had a presence in telecom, pharmaceuticals and medical transcription businesses. At present, insurance business accounts for more than 80% of the company’s revenue, while each of specialty and hospitals business contributes 8%. The remaining revenue is contributed by the company’s clinical research business.
Max India is operating in the life insurance segment through its subsidiary, Max New York Life, which has New York Life as its foreign partner. The company is among the top three private insurance players in the northern and western India. It has a conservation ratio of 80% that represents a high policy renewal rate. Nearly 60% of its revenue is contributed through agency channels and the rest through alternate channels. The company has outperformed the industry since the beginning of the current fiscal. For instance, during the quarter ended December 2008, the company posted a growth of 9% in its business, while the industry registered a 13% drop.
With assets under management of Rs 4,800 crore, the insurance arm of the company is still under losses that rose on account of significant expansion undertaken by the company in the life insurance business. Max India expects to achieve a break-even by FY12.
The company, through its subsidiary Max Healthcare, operates a network of eight hospitals in the NCR region with an average of 714 beds. The average revenue per occupied-bed stands at around Rs 19,464 and its average occupancy rate stood 63%. While the business generates cash profits, a net profit breakeven is expected by FY11.
The company’s specialty packaging business is growing at an average EBITDA rate of 15% per annum and returns 18-20% on capital. The company is into a niche segment of manufacturing BOPP films and also provides packaging service to FMCG companies.
The company, in July 2008, made its foray into the health insurance sector through a joint venture with UK-based international health insurer Bupa group. The venture has potential synergies with its existing life insurance, healthcare and clinical research businesses.
GROWTH STRATEGY: Max India is quite aggressive on its insurance business with an intention of turning it into a profitable one by FY12. However, the company has revised its plans due to the financial slowdown and lowered its growth targets. The company now intends to open 100 sales offices every year with the total number of offices exceeding 1,000 by FY12. Agency strength is also slated to grow from current 72,000 to 2,00,000 agents during that period. The company aims to maintain a 15-20% lead over the market’s performance.
In order to strengthen its distribution channels further, the company has entered into a tie-up with Barclays Finance, one of the leading NBFCs with 119 branches. The company has tie-ups with various domestic and international distributing companies.
Max India is also in the process of setting up five new hospitals, one in Dehradun and the rest in NCR. This will help double its bed capacity to 1,500 beds in the next 2-3 years. The company’s health insurance business is likely to gain traction in revenues soon. However, it will start contributing to the group’s income in another 4-5 years.
FINANCIALS: Max India’s consolidated net sales have increased at a compound average growth rate (CAGR) of 55% to Rs 3,241.4 crore over the last five years. On a consolidated basis, the company has been reporting losses as it has warranted a significant investment in its insurance business.
The company’s performance has been affected during the quarter ended December 2008 as it posted a 32% drop in case rate per agent and a 23% drop in the average case size. Besides, the drop in crude oil prices has adversely impacted the earnings and revenues of the company’s packaging business in the short term due to downgrading of inventory costs. The company’s healthcare business has logged profits, albeit on a marginal y-oy increase in revenues. The life insurance business has been capitalised at Rs 1,782 crore, and the company intends to raise a Rs 1,000 crore through its proposed rights issue.
VALUATIONS: The company is valued at nearly half of its investments or assets under management in line with its peers. While its insurance business is making losses, the company has the potential of being a profitable company. The company is currently in its growth phase – with most of its businesses still achieving the traction required for reporting profits. Investor can look at investing in this stock with a horizon of at least three years.
One-year beta: 0.56 Institutional holding: 39.4%* Current dividend yield: 0 Current P/E : NA Current m-cap: Rs 2409.3 cr Current market price: Rs 108.65
*as of Dec’08
Monday, December 22, 2008
Stock You can buy for decent gains - LIC Housing Finance Ltd
LIC Housing Finance Ltd has strong fundamentals. Long-term investors can accumulate the stock at its current level.
The company is one of the best-managed non-banking finance companies (NBFCs) in the country and longterm investors can accumulate the stock at its current level.
BUSINESS:
LIC Housing Finance provides housing loans mainly to individuals. It is the second-largest housing finance company in the country after Housing Development Finance Corp (HDFC). Its balance sheet size has nearly trebled in the five years from FY03-08. During this period, it has been one of the fastest growing NBFCs. This is due to the strong economic growth seen in India and the rising level of disposable incomes, which has fuelled the demand for housing loans.
Also, since last year, LIC Housing Finance has stepped up its promotional activities, which has improved its share in housing loans from 5% to 7%. This is commendable as much larger players like HDFC and commercial banks, which have a significant presence in housing loans, dominate this market. Since the beginning of the current financial year, the financial sector has been facing the brunt of rising interest rates and slow disbursements. LIC Housing Finance has been able to weather the storm, which is visible from its growth in interest income. The company’s interest income grew by more than 30% year-on-year for the six months ended September ’08. In fact, even its disbursements were up 30% during this period, which is in line with its performance last year.
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NBFCs typically face delinquency risks, which surface during times of a slowdown, when borrowers are not able to make the interest payments (EMIs) on their loans. LIC Housing Finance’s net non-performing assets (NPAs) stood at less than 1% of its net advances as of end-September ’08, compared to 1.65% a year ago. This shows that the company’s quality of loan book has improved tremendously in the past one year and it has been efficient in managing delinquency risks.
The company is also efficient in managing liquidity risks. This is evident as the proportion of assets maturing in one year is similar to the proportion of liabilities maturing within one year. This aspect is extremely vital as NBFCs which have financed long-term assets through short-term sources of finance face tremendous pressure in a scenario of tightening liquidity. Hence, it is clear that LIC Housing Finance has been able to efficiently manage all kinds of risks during testing times.
VALUATIONS:
The stock is trading at a price-to-earnings (P/E) multiple of 3.9 times. Hence, the stock appears to be cheap considering its high earnings growth, as its net profit in the past 12 months has grown by more than 40%. Though it is a known fact that in the case of finance companies, the stock trades at a lesser multiple than earnings growth, we feel this is overdone in the case of LIC Housing Finance, as the P/E multiple is just a fraction of its earnings growth.
The market has already factored in a worst-case scenario for all NBFCs, including LIC Housing Finance. The company’s current low valuations appear to be attractive for long term investors, as LIC Housing Finance’s stock price has fallen as much as that of other NBFCs, even though its fundamentals are much better than theirs.
Source: Economic times
Monday, December 1, 2008
Stock Pick - Dabur India Ltd.
Dabur India, with popular brands such as Vatika, Real, Hajmola and Dabur Chyawanprash, is a prominent player in the fast moving consumer goods (FMCG) space. The company has a well-diversified portfolio of over 350 products spread over segments such as consumer products, health products and foods. With very little presence in the luxury or premium segments (which are the first to bear the brunt of any slowdown in consumer spending), Dabur is fairly insulated from slowdown pressures. Further to this, new launches and brand extensions, growth in key categories such as hair oils, shampoos and baby and skin care and strong growth in the international market make Dabur a good, long-term investment.
Business performance. During the September 2008 quarter, Dabur’s consumer care division (CCD), which forms almost 77 per cent of the revenues, grew by 18.86 per cent. Its renewed focus on ayurvedic over-the-counter (OTC) products saw consumer healthcare division grow by over 21 per cent in the same quarter.
Within CCD, hair oils grew by 20 per cent in the quarter while baby and skin care business saw 18 per cent growth. Shampoos grew by over 36 per cent in the quarter. A recent report by AC Nielsen ORG Marg says Vatika shampoo’s sales (volumes) grew by 38 per cent during the April-September 2008 period compared to the industry average of 10 per cent. In terms of value, it grew by 33 per cent while the industry average was 15 per cent.
Financial performance. Dabur registered a compounded annual growth rate (CAGR) of 14 per cent in revenues and 25 per cent in net profit, over the last five years. Sustained growth rate in its key categories has helped it register 18.32 per cent growth in sales in the September 2008 quarter as against the previous year’s quarter. Its international business (19 per cent of the total revenue) saw a good growth of 40.5 per cent led by robust performance in GCC (Gulf Cooperation Council), Egypt, Nigeria, Yemen and North African markets.
Its operating margin, however, slipped by 179 basis points on higher commodity prices, advertising cost and loss
Growth plans. Dabur plans to strengthen its presence in the shampoo (revamped Vatika packaging and introduced Vatika black shine shampoo) and skin care categories. It is also strengthening its OTC portfolio (plans to launch ayurvedic skincare range) and is expanding its homecare portfolio (launched hard surface cleaner Dazzl). It is planning to launch fruit juices at different price points and is making packaging changes to the entire chyawanprash range. The new launches will be growth drivers over the next few years. The ayurvedic and herbal association is a plus.
Valuation. Going forward, if the current softening seen in the commodity prices continues, then the pressure on operating margins will ease. The price hikes seen during the previous quarter is also likely to improve the margins. At the current market price, the stock is trading 20.91 times its earnings, low when compared to players like Hindustan Unilever (25.9 times) and Nestle (27 times). Invest for steady returns and low downside risk.
Market Factsheet - A Squeeze On Margins
With economies worldwide shrouded in gloom, a slowdown in India Inc.’s Sep-tember quarter (Q2FY09) earnings was expected. Despite this recalibration, the sharp year-on-year (y-o-y) fall of 26 per cent in net profit for the universe of the BSE 500 companies as against a growth of 28 per cent in the corresponding quarter last year (Q2FY08) appears disturbing. No wonder the Sensex slipped below the psychological barrier of 10,000 in November, dropping by over 20 per cent since September. Markets have evidently factored in this performance in the share price.
However, during tough times every bit of information has to be looked at with a magnifying glass and positives cannot be overlooked. That the oil marketing companies (BPCL, HPCL and Indian Oil Corporation), which suffered a combined loss of Rs 12,000 crore due to huge subsidy burden, have contributed to this significant drop in earnings cannot be ignored. The fate of these oil companies is mired in politics and is beyond economics. So, if we remove these culprits from the list, there is a marginal y-o-y growth of 3.5 per cent in the net profit as against the 30 per cent growth in Q2FY08. Another positive point is that almost half the companies from this list have outperformed the index companies with respect to earnings.
Sales performance for this universe (475 declared results as on 7 November 2008) indicates that the volume of business was strong, resulting in a 37.89 per cent y-o-y growth as against 16 per cent in Q2FY08. However, this BSE 500 Index set of companies (which represents almost 93 per cent of the total market capitalisation on BSE and covers all 20 major industries) reeled under input cost pressure. Rising raw material cost, up by 58 per cent, was a major drag and the ratio of raw material cost to sales shot up to 60 per cent in Q2FY09 (53 per cent in the corresponding period last year). No wonder the operating profit margin (OPM) dipped by 775 basis points (bps) to 17 per cent on a y-o-y basis. The impact of the softening commodity price is yet to be reflected in the performance. Interest cost, however, grew at a much slower pace—37 per cent for Q2FY09 against 49 per cent in Q2FY08.
To get a much clearer picture of how Q2FY09 turned out to be, we analysed the performance of five key sectors that constitute 29 per cent in market capitalisation of the BSE 500 companies—fast-moving consumer goods (FMCG), healthcare, banking, automobile and information technology. Their respective BSE sectoral indices have been used for this analysis.
Fast-moving consumer
Goods (FMCG)
Performance of the BSE FMCG index set of 12 companies shows that spending in consumer goods has not slowed down despite the inflationary trend and the uncertain economic environment. Sales for Q2FY09 has grown 21 per cent y-o-y compared to 16 per cent a year ago. Marico (an OLM stock pick) has outperformed the index with a sales growth of 30 per cent. Close on its heels is Ruchi Soya and Britannia Industries (both OLM stock picks) with sales growth of 28 per cent. United Breweries and Godrej Consumer Products also saw good topline growth, but their net profit slipped significantly.
OPM declined for all companies largely due to pressure on the raw material front. Raw material cost to sales increased to 58 per cent in the latest quarter as against 54 per cent in the corresponding period last year. The impact of the declining commodity price is not reflected in the latest quarter results possibly due to inventories held at higher price levels. But, FMCG companies have been able to restrict the OPM fall to the extent of 161 bps due to cost control measures and price increases. The full impact of the price increases seen over the last few months may have a positive effect on the operating margin in the next quarter. And the impact of lower commodity prices will be felt October (when international commodity index Reuters-CRB dropped the most) onwards.
The adjusted net profit (excluding exceptional income) has grown 6.73 per cent against 1 per cent in Q2FY08. Colgate Palmolive, Dabur India and Marico (part of OLM’s FMCG stock picks) have posted double-digit growth rates, outperforming the BSE FMCG index profit growth. The BSE FMCG index itself was the most stable in terms of holding share price (BSE FMCG index went down 3 per cent y-o-y, while BSE 500 slipped 51.50 per cent y-o-y).
Going forward, one cannot rule out a slowdown in purchasing power and consumer spending, given the uncertain economic environment. However, companies have adopted various methods to tackle this—new product launches, packaging style and strong brand positioning. Companies with a mixed approach—focusing both on rural and urban sectors—are likely to maintain their growth rates. FMCG intake from the rural sector is still around 35 per cent, indicating potential for growth. It would be prudent to watch out for companies with a diverse portfolio basket, especially in those segments that lack substitutes and do not have significant exposure in the premium space.
Healthcare
The BSE Healthcare index witnessed a 28 per cent growth in sales in Q2FY09 as against 13 per cent a year ago. This uptrend can be attributed to steady growth in the domestic market, new product launches in the regulated markets and growth in the contract research and manufacturing services (CRAMS) business.
Rising input cost (up by 14 per cent as against a fall of 5 per cent in Q2FY08) due to a supply crunch of active pharmaceutical ingredients and intermediates in China has affected the sector’s OPM. It slipped 68 bps in the latest quarter, a less severe drop when compared to other sectors.
Many companies from this sector had to suffer due to the losses on account of depreciation of the Indian rupee against the dollar. These companies have high foreign exchange (forex) liabilities in the form of foreign currency convertible bonds (FCCBs). For instance, Ranbaxy Labora-tories suffered a forex loss of Rs 309 crore due to exchange differences on foreign currency borrowings. Aurobindo Pharma incurred a loss of Rs 105.10 crore for similar reasons. Adjusting such forex impact, this index has registered a net profit growth of 12 per cent y-o-y against a 1 per cent growth in Q2FY08. Divi’s Laboratories, Glenmark Pharmaceuticals, Lupin, Opto Circuits, and Sun Pharma-ceuticals have outperformed the BSE Healthcare index in both topline and bottomline growth significantly.
The sector’s long-term growth potential is intact. While pressure on margins may continue, it may see volume-based growth, especially as drugs worth $60 billion will go off patent in the next few years.
Banking
This sector grew at a faster rate than many others in Q2 FY09. The total income for BSE Bankex set of companies was
Even during the high interest rate regime in Q2FY09, the net interest margin (NIM—a profitability measure of banks’ investment decisions) for most banks remained flat compared to Q2FY08. OPM was stable at 16 per cent. Bank of India remained the most profitable (as measured by OPM) bank with a significant growth in its NIM. The asset quality of Indian banks improved significantly. Of 18 companies in the Bankex index, the net non-performing asset of 12 banks improved over the previous quarter.
The recent cuts in cash reserve ratio (CRR), repo rate and statutory liquidity ratio (SLR) will free funds for banks to lend at a higher rate than the one they were receiving by investing in government securities (in case of SLR) or keeping cash idle with RBI (in case of CRR). Also, these rate cuts could lead to declining interest rates amid moderating growth and inflation. All this means more business and higher margins for banks in the coming quarter. The only major concern for the banks in the near term will be commercial loans turning bad in case of slow economic growth.
Automobile
Higher interest rates and raw material costs took their toll on the auto industry. High repo rates and CRR limited the ability of finance companies and banks to finance auto sales, which was the main driver for its volume growth. Sales impact was mixed. Sales volume for cars and commercial vehicles (CVs) was the most affected while two-wheelers escaped the impact (largely due to Hero Honda). Overall, the net sales for the industry grew at 13 per y-o-y in Q2 FY09.
However, the industry’s quarterly expenses grew faster—at 17 per cent compared to 10 per cent during the same period last year. Higher raw material costs ate into the margins of these companies resulting in a 498 bps drop in OPM from Q2 FY08 level. Q2FY09 y-o-y growth in operating profit and net profit was negative at -27 per cent and -18.47 per cent, respectively.
Major players saw a drop in their profit growth over the previous quarter, barring Hero Honda Motors (OLM stock pick) and Bosch. Dismal sales in October and slowdown in production by many major players indicate that their is more pain ahead. CV makers Tata Motors and Ashok Leyland have decided to cut back production. Ashok Leyland is opting for a 3-day week till December, while Tata Motors plans to stop production of CVs in Pune and Lucknow for six days this month. Although the recent CRR and repo rate cuts is a positive step, it will take some time for demand to resume. Meltdown in commodity prices will be a relief to contracting margins.
Information Technology (IT)
The September quarter had mixed news flow for the Indian IT companies. Leading US financial institutions collapsed and many of them were clients of Indian IT companies (Lehman Brothers, for instance, was a client of TCS, Wipro and Satyam). The scenario could have been worse had the rupee not depreciated against dollar leading to higher revenue in rupee terms.
Companies in the BSE IT index registered a cumulative net sales y-o-y growth of 30 per cent in Q2FY09, faster than 22.67 per cent in Q2FY08. Most of the companies reported net sales growth of around 25 per cent, while Satyam Computer Services (OLM stock pick) and MphasiS grew higher than their peers. However, the operating profit growth for the index declined over the same period last year. OPM dipped by 268 bps. Rupee depreciation could have improved the margins for these companies had they not hedged against currency fluctuations at a higher rate. As a result, net profit growth halved to 13 per cent compared to Q2FY08. The crisis in the West will certainly affect the revenues for Indian IT companies. Pressure on the margins will continue as the pricing ability of the companies may get hit.
Earning Report I
Earning Report II
Monday, November 24, 2008
Stock Picks for the week
ACC
RESEARCH: ABN AMRO
RATING: SELL
CMP: RS 399
ABN Amro has cut ACC’s earnings and downgraded it to ‘sell’. ACC seems financially well-placed with moderate expansion plans, but its earnings outlook has weakened, since the industry may see excess supply for at least two years, which will lower cement prices. FY09 cement demand growth YTD, at 6.6%, is below expectations, due to the stress in credit markets and delays in capex. So demand estimates for FY10 and FY11 fell by 200 bps each to 8%, which exposes the industr much longer to surplus supply. Restructuring over the past five years has seen ACC exiting non-cor businesses. The company, which had high gearing in the last business cycle (1997-03), now seems in a stronger financial position. ABN estimates it will have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs 3,700 crore over the next three years. This will raise its capacity by 9.6%, slightly ahead of the expected demand growth. ACC looks cheap, trading at a cement enterprise value/mmt of $61 (vs replacement cost of $110), but ABN sees more downside to its earnings, given the overhang of excess supply.
HINDUSTAN CONSTRUCTION
RESEARCH: HSBC
RATING: UNDERWEIGHT
CMP: RS 40
HSBC Global has reiterated its ‘underweight’ rating on Hindustan Construction Company (HCC). It has factored in a dividend payment of Re 1 per share, implying a dividend yield of 2.2%. Thus, the total potential return on investment in shares over the next year is -1.8%. HSBC considers the share price to be volatile. For Indian stocks, HSBC considers the average cost of equity to be 11%. A volatile Indian stock with a potential total one-year return of 10 percentage points on either side of 11%, i.e. 1-21%, merits a ‘neutral’ rating. As the potential total one-year return on HCC is less than 1%, HSBC reiterates its ‘underweight’ rating on the stock. A key upside catalyst for the stock is sharp increase in order inflows and reduction in leverage, resulting in lower interest costs. A sharp drop in execution volumes along with demand slowdown remain key downside risks to HSBC’s valuation.
POWER GRID CORPORATION
RESEARCH: CITIGROUP
RATING: SELL
CMP: RS 74
CITIGROUP has maintained its ‘sell’ rating on Power Grid Corp (PGCIL) with a target price of Rs 69. PGCIL’s shares have outperformed the Sensex, post its IPO. Despite correcting more than 55% from its peak, it is not in the value zone yet. They are trading on par with NTPC, which appears unjustified. The key upside risks are: 1) Favourable CERC regulations for FY10-14E; 2) Faster-than-expected project execution; and 3) Higher non-core business profits. PGCIL has the potential to generate 14-17% returns on its regulatory equity base, compared with NTPC’s 14-22%. NTPC under-reports its profit/net worth. PGCIL matches depreciation under the tariff with reported depreciation, whereas NTPC’s depreciation under the Company Law is higher than under the tariff. PGCIL’s target price of Rs 69 is set at 1.8x FY10E P/BV from 2.2x earlier — a 10% discount to the target P/BV multiple for NTPC. PGCIL’s H1 FY09 reported PAT, at Rs 700 crore, was down 15% y-o-y. But this is largely due to forex fluctuations and a pass-through in tariffs.
BANK OF BARODA
RESEARCH: INDIABULLS SECURITIES
RATING: HOLD
CMP: RS 268
INDIABULLS Securities has reiterated its ‘hold’ rating on BoB. The bank reported an average performance in Q209, even as its asset quality improved. It expects interest income to grow by 16% in FY09, against 31% in FY08, as the growth rate of advances is likely to fall to 23% in FY09 vis-à-vis 28% in FY08. In addition, the expected fall in yield on investments will affect interest income. Advances may be under pressure due to the global financial crisis and slowdown in the domestic economy. Over 20% of the loan book is accounted for by real estate and SMEs, which are prone to default in the current domestic scenario. BoB’s net interest margin (NIM) increased by a mere 4 bps sequentially to 2.8%. NIM is likely to be under pressure in the coming quarters due to increased cost of deposits, though RBI has lowered its key policy rates. With increased risk-aversion, BoB may shift the mix of interestearning assets from high-yield, risky advances to safer, low-return investments. This is likely to reduce the average yield, further pressurising NIM.
RELIANCE INDUSTRIES
RESEARCH: MERRILL LYNCH
RATING: BUY
CMP: RS 1,127
MERRILL Lynch has retained it ‘buy’ rating on Reliance Industries (RIL). Its refining margin has consistently been higher than the benchmark Singapore complex refining margin. Analyses suggests RIL’s superior refining margin is due to its ability to refine heavier crude than Dubai. Compared to the last refining downturn, RIL is set to benefit more in FY10-FY11E from its ability to refine heavier crude. Reliance Petroleum’s (RPL) refinery, which is expected to start operations soon, can process even heavier crude than RIL and has a superior product slate. The average discount of Arab heavy to Dubai since FY01 is $2.4/bbl. The discount has sustained at over $5/bbl even in the past six weeks, despite the slump in oil prices. Merrill Lynch estimates RPL’s refining margin at $12.9/bbl if it were to operate in Q3 FY09, vis-à-vis Singapore margin of $7.3/bbl. It will produce more gasoline than RIL. Gasoline cracks have always been at a premium to naphtha and LPG cracks. Merrill Lynch feels that a weakening in diesel and gasoline cracks is the main risk to RPL attaining such high margins when it begins operations.
STEEL AUTHORITY OF INDIA
RESEARCH: EDELWEISS
RATING: REDUCE
CMP: RS 63
SAIL has a saleable steel capacity of 13 mt. But with no major capacity expansion over the next two years and moderate demand scenario, incremental volume growth is seen at 0.6 mtpa in FY09E and may decline by 0.4 mtpa in FY10E on production cuts. SAIL’s average volume-based growth till FY10 will be more muted than that of Tata Steel and JSW Steel. The company is targeting completion of modernisation-cum-expansion by end-FY11, which is set to hike its saleable steel capacity to 23.1 mtpa, up 78% from FY08 levels. It will also improve the company’s productivity and refine its product mix. While the project will put SAIL in the global league, its timely completion looks daunting. Due to its scale and operational vastness, SAIL is best-positioned among its peers to gain from Indian steel consumption growth in the next two years. But in the absence of tangible volume growth, slow demand growth for steel, exposure to tight coking coal market, highest susceptibility to government norms on prices, and potential delay in expansion plan, Edelweiss expects SAIL’s margins to be under pressure in the next two years.
RESEARCH: ABN AMRO
RATING: SELL
CMP: RS 399
ABN Amro has cut ACC’s earnings and downgraded it to ‘sell’. ACC seems financially well-placed with moderate expansion plans, but its earnings outlook has weakened, since the industry may see excess supply for at least two years, which will lower cement prices. FY09 cement demand growth YTD, at 6.6%, is below expectations, due to the stress in credit markets and delays in capex. So demand estimates for FY10 and FY11 fell by 200 bps each to 8%, which exposes the industr much longer to surplus supply. Restructuring over the past five years has seen ACC exiting non-cor businesses. The company, which had high gearing in the last business cycle (1997-03), now seems in a stronger financial position. ABN estimates it will have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs 3,700 crore over the next three years. This will raise its capacity by 9.6%, slightly ahead of the expected demand growth. ACC looks cheap, trading at a cement enterprise value/mmt of $61 (vs replacement cost of $110), but ABN sees more downside to its earnings, given the overhang of excess supply.
HINDUSTAN CONSTRUCTION
RESEARCH: HSBC
RATING: UNDERWEIGHT
CMP: RS 40
HSBC Global has reiterated its ‘underweight’ rating on Hindustan Construction Company (HCC). It has factored in a dividend payment of Re 1 per share, implying a dividend yield of 2.2%. Thus, the total potential return on investment in shares over the next year is -1.8%. HSBC considers the share price to be volatile. For Indian stocks, HSBC considers the average cost of equity to be 11%. A volatile Indian stock with a potential total one-year return of 10 percentage points on either side of 11%, i.e. 1-21%, merits a ‘neutral’ rating. As the potential total one-year return on HCC is less than 1%, HSBC reiterates its ‘underweight’ rating on the stock. A key upside catalyst for the stock is sharp increase in order inflows and reduction in leverage, resulting in lower interest costs. A sharp drop in execution volumes along with demand slowdown remain key downside risks to HSBC’s valuation.
POWER GRID CORPORATION
RESEARCH: CITIGROUP
RATING: SELL
CMP: RS 74
CITIGROUP has maintained its ‘sell’ rating on Power Grid Corp (PGCIL) with a target price of Rs 69. PGCIL’s shares have outperformed the Sensex, post its IPO. Despite correcting more than 55% from its peak, it is not in the value zone yet. They are trading on par with NTPC, which appears unjustified. The key upside risks are: 1) Favourable CERC regulations for FY10-14E; 2) Faster-than-expected project execution; and 3) Higher non-core business profits. PGCIL has the potential to generate 14-17% returns on its regulatory equity base, compared with NTPC’s 14-22%. NTPC under-reports its profit/net worth. PGCIL matches depreciation under the tariff with reported depreciation, whereas NTPC’s depreciation under the Company Law is higher than under the tariff. PGCIL’s target price of Rs 69 is set at 1.8x FY10E P/BV from 2.2x earlier — a 10% discount to the target P/BV multiple for NTPC. PGCIL’s H1 FY09 reported PAT, at Rs 700 crore, was down 15% y-o-y. But this is largely due to forex fluctuations and a pass-through in tariffs.
BANK OF BARODA
RESEARCH: INDIABULLS SECURITIES
RATING: HOLD
CMP: RS 268
INDIABULLS Securities has reiterated its ‘hold’ rating on BoB. The bank reported an average performance in Q209, even as its asset quality improved. It expects interest income to grow by 16% in FY09, against 31% in FY08, as the growth rate of advances is likely to fall to 23% in FY09 vis-à-vis 28% in FY08. In addition, the expected fall in yield on investments will affect interest income. Advances may be under pressure due to the global financial crisis and slowdown in the domestic economy. Over 20% of the loan book is accounted for by real estate and SMEs, which are prone to default in the current domestic scenario. BoB’s net interest margin (NIM) increased by a mere 4 bps sequentially to 2.8%. NIM is likely to be under pressure in the coming quarters due to increased cost of deposits, though RBI has lowered its key policy rates. With increased risk-aversion, BoB may shift the mix of interestearning assets from high-yield, risky advances to safer, low-return investments. This is likely to reduce the average yield, further pressurising NIM.
RELIANCE INDUSTRIES
RESEARCH: MERRILL LYNCH
RATING: BUY
CMP: RS 1,127
MERRILL Lynch has retained it ‘buy’ rating on Reliance Industries (RIL). Its refining margin has consistently been higher than the benchmark Singapore complex refining margin. Analyses suggests RIL’s superior refining margin is due to its ability to refine heavier crude than Dubai. Compared to the last refining downturn, RIL is set to benefit more in FY10-FY11E from its ability to refine heavier crude. Reliance Petroleum’s (RPL) refinery, which is expected to start operations soon, can process even heavier crude than RIL and has a superior product slate. The average discount of Arab heavy to Dubai since FY01 is $2.4/bbl. The discount has sustained at over $5/bbl even in the past six weeks, despite the slump in oil prices. Merrill Lynch estimates RPL’s refining margin at $12.9/bbl if it were to operate in Q3 FY09, vis-à-vis Singapore margin of $7.3/bbl. It will produce more gasoline than RIL. Gasoline cracks have always been at a premium to naphtha and LPG cracks. Merrill Lynch feels that a weakening in diesel and gasoline cracks is the main risk to RPL attaining such high margins when it begins operations.
STEEL AUTHORITY OF INDIA
RESEARCH: EDELWEISS
RATING: REDUCE
CMP: RS 63
SAIL has a saleable steel capacity of 13 mt. But with no major capacity expansion over the next two years and moderate demand scenario, incremental volume growth is seen at 0.6 mtpa in FY09E and may decline by 0.4 mtpa in FY10E on production cuts. SAIL’s average volume-based growth till FY10 will be more muted than that of Tata Steel and JSW Steel. The company is targeting completion of modernisation-cum-expansion by end-FY11, which is set to hike its saleable steel capacity to 23.1 mtpa, up 78% from FY08 levels. It will also improve the company’s productivity and refine its product mix. While the project will put SAIL in the global league, its timely completion looks daunting. Due to its scale and operational vastness, SAIL is best-positioned among its peers to gain from Indian steel consumption growth in the next two years. But in the absence of tangible volume growth, slow demand growth for steel, exposure to tight coking coal market, highest susceptibility to government norms on prices, and potential delay in expansion plan, Edelweiss expects SAIL’s margins to be under pressure in the next two years.
Wednesday, November 12, 2008
Stock Pick - Hero Honda Ltd
Double-digit inflation and high interest rates are not new for the 25-year-old two-wheeler manufacturer, Hero Honda Motors. The company has been able to wade through such tough times in the past and become a leading player in the domestic two-wheeler market (current market share: over 55 per cent). When the domestic motorcycle industry declined by 12 per cent in 2007-08, Hero Honda posted positive numbers (4 per cent growth in sales). For the latest quarter of the current fiscal, its topline grew by 35.60 per cent compared to the corresponding period last year—impressive given the credit crunch in the industry.
Its strengths include strong distribution network, new models, and focus on all segments of the market, including the rural vertical. Besides, the company enjoys a debt-free balance sheet.
Business performance. Hero Honda is strong in both urban and rural markets. Its key brands continue to drive volumes across segments. The company is increasing its presence in the premium segment with brands such as Hunk and CBZ X-treme that target urban youth. For the festive season, it has already launched four new models and more launches will be seen over the next few months.
While the overall rural penetration of two-wheelers is still low (10 per cent), the company has made inroads into the growing rural and semi-urban markets to increase sales. It is formulating region-specific modules.
To address financing issues, Hero Honda has tie-ups with regional retail financiers like Shriram Transport Finance and Fullerton India Credit. It also has agreements with Grameen Bank, co-operative banks and microfinance companies that are present in smaller towns and villages and have small loan portfolios.
The company has also expanded its distribution network by over 50 per cent over the last two years to 3,000 outlets (touching 3,500 this year).
Financial performance. Where other auto players posted moderate sales growth, Hero Honda did more. Its quarter-on-quarter (q-o-q) sales for the latest quarter increased by 12 per cent while Bajaj Auto’s grew by 6 per cent. Despite the overall credit squeeze, volume grew 28.50 per cent during the September 2008 quarter against previous year’s quarter. Its net profit grew by 50 per cent to Rs 306.30 crore. Hero Honda’s operating margin increased to 13.24 per cent in the same period from 12.39 per cent last year.
Hero Honda has been a debt free company for a few years now. The unsecured loan of Rs 132 crore from the Haryana government is interest free on account of sales tax deferment.
Valuation. Hero Honda has a strong brand name, sound fundamentals and impressive figures over the last few quarters. The recent cut in cash-reserve ratio and repo rate, which could lead to lowering of lending rates, may support volume growth. Softening in commodity prices will help maintain operating margin growth. Its net profit margin is likely to improve as the benefits from lower excise liabilities and tax savings from its capacity in Uttarakhand (started production in April 2008) have started trickling in. Excise duty as percentage of gross sales is lower at 10.24 per cent for the last quarter as against 14.43 per cent in September 07 quarter.
Hero Honda’s increasing dividend and high dividend yield (2.3 per cent) is good news. The stock has also outperformed the BSE Sensex since January this year. At the current market price, it is trading 13.03 times its trailing 12 months’ earnings. Park here with a long term-ticket.
Stocks you can buy now and add on declines
The two most respected names of corporate India, Tata and Birla, failed to raise money from the stockmarket through their respective rights issues (a rights issue is when a listed company offers shares to existing shareholders at a price, which is usually less than the market price of the listed stock). Eventually, underwriters had to buy the majority of shares. Hindalco Industries, an Aditya Birla Group company, saw just half its Rs 5,000-crore rights issue subscribed to. Tata Motors of Tata Group, too, had the same fate. The reason? Market prices of these stocks fell much below their offer price in the rights issue, removing the investor incentive of buying. Tata Motors and Hindalco are not the only companies to have seen such a battering.
As we go to press, about 380 out of 600 companies with a market cap of over Rs 250 crore, have lost more than 50 per cent of their value since January. The Sensex and the Nifty have also lost close to 60 per cent. It is carnage on markets. But, in the rubble, you will find some gleaming diamonds, available at a quarter of what they were worth until a few months ago.
The Indian market has become a victim of a global meltdown. What started as credit crisis in the US has spilled over to the global financial market. Bears are out in full force, with their usual weapon of panic and fear, and have virtually captured every market—from Wall Street to Dalal Street. If all you saw over the last four years was unbridled enthusiasm, now all you can hear is negativity. The Indian market started witnessing selling pressure from January this year. As the credit crisis started deepening in the West and liquidity became scarce, foreign institutional investors (FIIs) started selling stocks in all the markets, including India. Anticipation of heavy selling from the FIIs prompted domestic investors to get out. FIIs continue to dump Indian stocks—they have sold stocks worth Rs 52,000 crore, or $12.90 billion, in our markets since January. Apart from the FII play, expectation of slower growth of the economy and corporate earnings, due to deteriorating global outlook and high domestic interest rates, contributed to the market’s downfall.
What next. International Monetary Fund (IMF), in its October 2008 report, World Economic Outlook, said that the world economy is entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. It has marked down global growth to 3 per cent for 2009, the slowest since 2002. The Indian economy is also expected to slow down. The Reserve Bank of India (RBI), in its mid-term review of marcoeconomic and monetary developments, published a professional forecasters’ survey, which suggests that the Indian economy will grow at 7.7 per cent in FY09, compared to 9 per cent in FY08. Earnings growth has also started to show a declining trend.
Earnings guidances are being revised downwards, liquidity has become scarce, markets have fallen above 60 per cent, and FIIs continue to sell. In short, the overall condition has turned against equities. So, should you be out of equities? Outlook Money advised caution when the market was on a dizzying ride—the Sensex was up at around 21,000. Now, as the Sensex crashes to 9044.51, we are breaking out of the pessimistic babble to tell you that this is a good time to start buying stocks. The current crisis is being termed as once-in-a-lifetime by the Western press. If the crisis is once in lifetime, so are the challenges and opportunities. And as an investor, you should grab the opportunities.
The question you may ask is whether the market will fall further? It surely can. But you need to remember that it’s always difficult to catch the bottom. The market may fall further before stabilising, but start buying now. Investors entering at this stage need to hold on to their stocks for the long term. If you are a short-term investor, stay out of the market at this stage. Buying long-term assets with short-term capital is never a good idea.
Valuations have come down significantly, even for fundamentally sound companies. We are giving you eight such options—take your pick and invest for at least three years. Invest systematically to take advantage of any further price fall.
Methodology. The companies that have been considered for selection are the ones with a market capitalisation of at least Rs 250 crore. Among them, companies with year-on-year (y-o-y) net sales and net profit growth of more than 10 per cent for the last three years and the last two quarters were retained. From this list, only companies that were able to maintain or increase their operating profit margin (OPM) and operating cash flow in the last three years were kept. The remaining stocks were examined individually based on qualitative and quantitative measures.
Bank of India (BOI)
BOI is perhaps the fastest growing public sector bank in India. Its operating profit and net profit in FY08 grew 53.81 per cent and 78.90 per cent y-o-y, respectively. For the last nine quarters, including the quarter ended September 2008 (Q2 FY09), its net profit grew at 50 per cent plus y-o-y, which indicates its sustained growth. Because of its strong presence in the industrialised states of Maharashtra and Gujarat, BOI has given advances to more productive sectors than its public sector peers. It has reduced its dependency on low-yielding treasury income and has focused on interest income and income from fees. Its gross non-performing assets have gone down from 3.72 per cent in FY06 to 1.68 per cent in FY08. Overseas operations contribute around 20 per cent of its business. The overseas branches help BOI raise deposits at rates lower than the domestic rates. It has some exposure to derivatives instruments overseas, but all of them have highly-rated Indian companies as underlying.
Bharti Airtel
Bharti Airtel is riding high on the overall growth of the telecommunication sector in India. Mobile penetration in India is still around 26 per cent, which leaves an enormous opportunity for growth. In this growing and competitive market, Bharti has been on top, in terms of subscriber base since May 2006. It has maintained both y-o-y net sales and net profit growth at around 40 per cent in the last nine quarters. The margins have declined due to stiff competition, but the volume growth from the untapped rural market compensates that. It has outsourced its non-core operations to focus on brand building and increasing subscriber base. In January 2008, it hived off its infrastructure business into a new subsidiary, Bharti Infratel, which will share the capital expenditure burden with other telecom players.
Emami
Emami has created a niche in the market by bringing products for its consumers that combine modern production techniques and ayurvedic principles. Its brands such as Boro Plus, Navratna Oil and Fast Relief are leaders in their respective categories. Its recently launched brand, Fair & Handsome, created an altogether new market. In the last eight years, its net sales and net profit registered 19 per cent and 23 per cent CAGR, respectively. Its OPM also improved over this period due to better pricing of products and cost management. The return on equity, which increased from 10.36 per cent in FY2000 to 35.78 per cent in FY08, also reflects its rising profitability. Emami is reaching deep inside rural India, which will lead to volume growth. Modern lifestyle has increased the risk of chronic ailments and consumers will demand natural products backed by research.
HDFC Bank
HDFC Bank has seen a y-o-y net profit growth of over 30 per cent for the last 34 quarters and has maintained a high OPM of around 60 per cent during the same period. Maintaining the same momentum, it has reported a net profit growth of 43.29 per cent and OPM of 62.61 per cent in Q2 FY09. The bank’s merger with Centurion Bank of Punjab has not shown any significant impact till now, but it is expected to yield robust growth for the company in the future. Banks will start showing mark-to-market gain on their bond portfolio with interest rates expected to go down in the coming quarters.
Also, funds have dried up in the global markets—this will increase demand for credit from domestic banks. This means stable business in the future.
The government’s thrust on environment is putting more compressed natural gas (CNG) buses on road and rising fuel prices are prompting people to fit CNG kits to their cars. This is boosting IGL’s CNG distribution business. Households and commercial establishments now prefer piped gas supply to conventional LPG cylinders as it is convenient and safe. This means a huge revenue jump for IGL’s piped natural gas (PNG) distribution business.
IGL has been enjoying consistently high OPM—over 40 per cent—for the last 21 quarters. As a result, its return on equity has remained higher than 30 per cent in all the financial years, starting 2003. Even if it is not able to sustain such high margins in the long term, the volume growth will more than compensate for any dip. It is unlikely to face any gas supply constraint as it gets it on a priority basis as directed by the government. The IGL stock has limited its fall to 21 per cent as against Nifty’s 54 per cent in the last 12 months. It is currently trading at seven times its earnings.
KS Oils Ltd
It leads the edible oil market in the north and north-eastern part of India through brands in mustard oil, refined oil and vanaspati. Its share in the Indian mustard oil market is 7 per cent, when 75 per cent of mustard oil is sold loose. Among brands, it has captured 25 per cent of the market. The company has also entered north and central India with an aggressive branding effort and greater retail push. Its net sales in FY08 was Rs 2,044 crore, implying 91.08 per cent growth over the previous year, backed by volume and high edible oil prices. Its y-o-y net sales growth in the first quarter of FY09 remained high—at 91 per cent over the previous quarter, though the margins were flat. KS Oils has secured its raw material supply by acquiring 50,000 acres of palm plantations in Indonesia, which will protect it from any price fluctuation in oil seeds. Also, this kind of backward integration will help improve the margins over sales.
Mphasis Ltd
MphasiS derives its revenues from application services, infrastructure technology outsourcing (ITO) and business process outsourcing that span industry verticals, such as banking and financial services, healthcare, transport and manufacturing. In Q2 FY09, Mphasis reported an impressive y-o-y sales growth of 54.59 per cent. It significantly improved the OPM by 273 basis points over the last quarter and, therefore, registered higher PAT growth of 128.74 per cent during the same period.
All its three business segments are registering healthy growth with its ITO business growing at 113 per cent. MphasiS is trying to reduce its dependence on the US, which contributed 67 per cent to its revenue in FY08. The current crisis in the financial sector may impact its revenue, but it will also throw up new opportunities as ailing banks will go for greater outsourcing in order to cut costs.
Titan Industries LTd
Titan watches have built a strong brand and its diverse product range caters to masses as well as the premium segment, which is its success formula. Titan Industries’ jewellery business, under the brand Tanishq, too, commands leadership position in the organised retail segment. It is going to smaller towns and rural areas under the brand Gold Plus.
In Q2 FY09, Titan Industries’ net sales and net profit rose 53 per cent and 88 per cent y-o-y, respectively. In the last six years, Titan and Tanishq recorded a compounded annual growth rate (CAGR) of around 13 per cent and 40 per cent, respectively. Risks to business growth are low. Watch penetration in India is well below 30 per cent. Growth will continue and margins should improve as it sells more watches through its exclusive Titan showrooms, which is more profitable than the dealership model. Rise in gold prices could slow down jewellery sales. But, at higher prices, consumers will become more quality and value conscious and should go to organised stores, such as Tanishq, that guarantee quality, diverse range and standard pricing.
As we go to press, about 380 out of 600 companies with a market cap of over Rs 250 crore, have lost more than 50 per cent of their value since January. The Sensex and the Nifty have also lost close to 60 per cent. It is carnage on markets. But, in the rubble, you will find some gleaming diamonds, available at a quarter of what they were worth until a few months ago.
The Indian market has become a victim of a global meltdown. What started as credit crisis in the US has spilled over to the global financial market. Bears are out in full force, with their usual weapon of panic and fear, and have virtually captured every market—from Wall Street to Dalal Street. If all you saw over the last four years was unbridled enthusiasm, now all you can hear is negativity. The Indian market started witnessing selling pressure from January this year. As the credit crisis started deepening in the West and liquidity became scarce, foreign institutional investors (FIIs) started selling stocks in all the markets, including India. Anticipation of heavy selling from the FIIs prompted domestic investors to get out. FIIs continue to dump Indian stocks—they have sold stocks worth Rs 52,000 crore, or $12.90 billion, in our markets since January. Apart from the FII play, expectation of slower growth of the economy and corporate earnings, due to deteriorating global outlook and high domestic interest rates, contributed to the market’s downfall.
What next. International Monetary Fund (IMF), in its October 2008 report, World Economic Outlook, said that the world economy is entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. It has marked down global growth to 3 per cent for 2009, the slowest since 2002. The Indian economy is also expected to slow down. The Reserve Bank of India (RBI), in its mid-term review of marcoeconomic and monetary developments, published a professional forecasters’ survey, which suggests that the Indian economy will grow at 7.7 per cent in FY09, compared to 9 per cent in FY08. Earnings growth has also started to show a declining trend.
Earnings guidances are being revised downwards, liquidity has become scarce, markets have fallen above 60 per cent, and FIIs continue to sell. In short, the overall condition has turned against equities. So, should you be out of equities? Outlook Money advised caution when the market was on a dizzying ride—the Sensex was up at around 21,000. Now, as the Sensex crashes to 9044.51, we are breaking out of the pessimistic babble to tell you that this is a good time to start buying stocks. The current crisis is being termed as once-in-a-lifetime by the Western press. If the crisis is once in lifetime, so are the challenges and opportunities. And as an investor, you should grab the opportunities.
The question you may ask is whether the market will fall further? It surely can. But you need to remember that it’s always difficult to catch the bottom. The market may fall further before stabilising, but start buying now. Investors entering at this stage need to hold on to their stocks for the long term. If you are a short-term investor, stay out of the market at this stage. Buying long-term assets with short-term capital is never a good idea.
Valuations have come down significantly, even for fundamentally sound companies. We are giving you eight such options—take your pick and invest for at least three years. Invest systematically to take advantage of any further price fall.
Methodology. The companies that have been considered for selection are the ones with a market capitalisation of at least Rs 250 crore. Among them, companies with year-on-year (y-o-y) net sales and net profit growth of more than 10 per cent for the last three years and the last two quarters were retained. From this list, only companies that were able to maintain or increase their operating profit margin (OPM) and operating cash flow in the last three years were kept. The remaining stocks were examined individually based on qualitative and quantitative measures.
Bank of India (BOI)
BOI is perhaps the fastest growing public sector bank in India. Its operating profit and net profit in FY08 grew 53.81 per cent and 78.90 per cent y-o-y, respectively. For the last nine quarters, including the quarter ended September 2008 (Q2 FY09), its net profit grew at 50 per cent plus y-o-y, which indicates its sustained growth. Because of its strong presence in the industrialised states of Maharashtra and Gujarat, BOI has given advances to more productive sectors than its public sector peers. It has reduced its dependency on low-yielding treasury income and has focused on interest income and income from fees. Its gross non-performing assets have gone down from 3.72 per cent in FY06 to 1.68 per cent in FY08. Overseas operations contribute around 20 per cent of its business. The overseas branches help BOI raise deposits at rates lower than the domestic rates. It has some exposure to derivatives instruments overseas, but all of them have highly-rated Indian companies as underlying.
| Current market price (Rs): 222.65 PE: 4.51 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 16.53 | 27.14 | 38.26 |
| Net profit y-o-y growth (%) | 106.28 | 60.12 | 78.9 |
| Return on equity (%) | 14.84 | 20.35 | 24.38 |
| EPS (Rs) | 14.39 | 23.04 | 38.26 |
WHY BUY
FASTEST growing public sector bank
FOCUS on efficient fund use and cost cuts
Bharti Airtel
Bharti Airtel is riding high on the overall growth of the telecommunication sector in India. Mobile penetration in India is still around 26 per cent, which leaves an enormous opportunity for growth. In this growing and competitive market, Bharti has been on top, in terms of subscriber base since May 2006. It has maintained both y-o-y net sales and net profit growth at around 40 per cent in the last nine quarters. The margins have declined due to stiff competition, but the volume growth from the untapped rural market compensates that. It has outsourced its non-core operations to focus on brand building and increasing subscriber base. In January 2008, it hived off its infrastructure business into a new subsidiary, Bharti Infratel, which will share the capital expenditure burden with other telecom players.
| Current market price (Rs): 615.05 PE: 16.97 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 42.08 | 58.47 | 44.45 |
| Net profit y-o-y growth (%) | 66.19 | 100.5 | 54.82 |
| Return on equity (%) | 33.42 | 42.54 | 39.67 |
| EPS (Rs) | 10.62 | 21.27 | 32.9 |
WHY BUY
growth in telecom industry will translate into company growth
Emami
Emami has created a niche in the market by bringing products for its consumers that combine modern production techniques and ayurvedic principles. Its brands such as Boro Plus, Navratna Oil and Fast Relief are leaders in their respective categories. Its recently launched brand, Fair & Handsome, created an altogether new market. In the last eight years, its net sales and net profit registered 19 per cent and 23 per cent CAGR, respectively. Its OPM also improved over this period due to better pricing of products and cost management. The return on equity, which increased from 10.36 per cent in FY2000 to 35.78 per cent in FY08, also reflects its rising profitability. Emami is reaching deep inside rural India, which will lead to volume growth. Modern lifestyle has increased the risk of chronic ailments and consumers will demand natural products backed by research.
| Current market price (Rs): 244.25 PE: 15.89 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 37.48 | 71.43 | 13.17 |
| Net profit y-o-y growth (%) | 67.66 | 33.55 | 40.7 |
| Return on equity (%) | 14.99 | 23.47 | 35.51 |
| EPS (Rs) | 8.07 | 10.78 | 14.92 |
WHY BUY
leader in most of its product categories
HDFC Bank
HDFC Bank has seen a y-o-y net profit growth of over 30 per cent for the last 34 quarters and has maintained a high OPM of around 60 per cent during the same period. Maintaining the same momentum, it has reported a net profit growth of 43.29 per cent and OPM of 62.61 per cent in Q2 FY09. The bank’s merger with Centurion Bank of Punjab has not shown any significant impact till now, but it is expected to yield robust growth for the company in the future. Banks will start showing mark-to-market gain on their bond portfolio with interest rates expected to go down in the coming quarters.
Also, funds have dried up in the global markets—this will increase demand for credit from domestic banks. This means stable business in the future.
Current market price (Rs): 945.60 PE: 21.24 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 44.67 | 48.55 | 52.15 |
| Net profit y-o-y growth (%) | 30.83 | 31.08 | 39.31 |
| Return on equity (%) | 17.65 | 19.43 | 17.73 |
| EPS (Rs) | 27.81 | 35.74 | 44.87 |
WHY BUY
consistent performance over long term
business more stable compared to peers
attractive valuation against growth
Indraprastha Gas Ltd (IGL)The government’s thrust on environment is putting more compressed natural gas (CNG) buses on road and rising fuel prices are prompting people to fit CNG kits to their cars. This is boosting IGL’s CNG distribution business. Households and commercial establishments now prefer piped gas supply to conventional LPG cylinders as it is convenient and safe. This means a huge revenue jump for IGL’s piped natural gas (PNG) distribution business.
IGL has been enjoying consistently high OPM—over 40 per cent—for the last 21 quarters. As a result, its return on equity has remained higher than 30 per cent in all the financial years, starting 2003. Even if it is not able to sustain such high margins in the long term, the volume growth will more than compensate for any dip. It is unlikely to face any gas supply constraint as it gets it on a priority basis as directed by the government. The IGL stock has limited its fall to 21 per cent as against Nifty’s 54 per cent in the last 12 months. It is currently trading at seven times its earnings.
Current market price (Rs): 99.90 PE: 7.48 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 15.74 | 17.9 | 16.1 |
| Net profit y-o-y growth (%) | 14.51 | 29.98 | 26.46 |
| Return on equity (%) | 30.5 | 32.33 | 33.1 |
| EPS (Rs) | 7.6 | 9.85 | 12.46 |
WHY BUY
Long-term earnings visibility due to increasing demand
KS Oils Ltd
It leads the edible oil market in the north and north-eastern part of India through brands in mustard oil, refined oil and vanaspati. Its share in the Indian mustard oil market is 7 per cent, when 75 per cent of mustard oil is sold loose. Among brands, it has captured 25 per cent of the market. The company has also entered north and central India with an aggressive branding effort and greater retail push. Its net sales in FY08 was Rs 2,044 crore, implying 91.08 per cent growth over the previous year, backed by volume and high edible oil prices. Its y-o-y net sales growth in the first quarter of FY09 remained high—at 91 per cent over the previous quarter, though the margins were flat. KS Oils has secured its raw material supply by acquiring 50,000 acres of palm plantations in Indonesia, which will protect it from any price fluctuation in oil seeds. Also, this kind of backward integration will help improve the margins over sales.
Current market price (Rs): 40.75 PE: 9.49 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 34.42 | 76.02 | 91.08 |
| Net profit y-o-y growth (%) | 351.49 | 277.9 | 110.6 |
| Return on equity (%) | 42.85 | 54.01 | 29.85 |
| EPS (Rs) | 18.07 | 25.95 | 3.63 |
WHY BUY
high growth in business maintained
Mphasis Ltd
MphasiS derives its revenues from application services, infrastructure technology outsourcing (ITO) and business process outsourcing that span industry verticals, such as banking and financial services, healthcare, transport and manufacturing. In Q2 FY09, Mphasis reported an impressive y-o-y sales growth of 54.59 per cent. It significantly improved the OPM by 273 basis points over the last quarter and, therefore, registered higher PAT growth of 128.74 per cent during the same period.
All its three business segments are registering healthy growth with its ITO business growing at 113 per cent. MphasiS is trying to reduce its dependence on the US, which contributed 67 per cent to its revenue in FY08. The current crisis in the financial sector may impact its revenue, but it will also throw up new opportunities as ailing banks will go for greater outsourcing in order to cut costs.
Current market price (Rs): 40.75 PE: 9.49 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 34.42 | 76.02 | 91.08 |
| Net profit y-o-y growth (%) | 351.49 | 277.9 | 110.6 |
| Return on equity (%) | 42.85 | 54.01 | 29.85 |
| EPS (Rs) | 18.07 | 25.95 | 3.63 |
WHY BUY
high growth in business maintained
Titan Industries LTd
Titan watches have built a strong brand and its diverse product range caters to masses as well as the premium segment, which is its success formula. Titan Industries’ jewellery business, under the brand Tanishq, too, commands leadership position in the organised retail segment. It is going to smaller towns and rural areas under the brand Gold Plus.
In Q2 FY09, Titan Industries’ net sales and net profit rose 53 per cent and 88 per cent y-o-y, respectively. In the last six years, Titan and Tanishq recorded a compounded annual growth rate (CAGR) of around 13 per cent and 40 per cent, respectively. Risks to business growth are low. Watch penetration in India is well below 30 per cent. Growth will continue and margins should improve as it sells more watches through its exclusive Titan showrooms, which is more profitable than the dealership model. Rise in gold prices could slow down jewellery sales. But, at higher prices, consumers will become more quality and value conscious and should go to organised stores, such as Tanishq, that guarantee quality, diverse range and standard pricing.
Current market price (Rs): 1,004.35 PE: 21.26 | |||
| | fy06 | fy07 | fy08 |
| Net sales y-o-y growth (%) | 31.32 | 45.14 | 43.25 |
| Net profit y-o-y growth (%) | 195.07 | 27.86 | 59.64 |
| Return on equity (%) | 37.09 | 34.15 | 21.14 |
| EPS (Rs) | 17.63 | 21.25 | 35.66 |
WHY BUY
high growth business with low risk
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