The Sensex is expected to reach 23,000-24,000 levels in 2008. This appears to be a reasonable target given our expectations of a stable growth in the corporate earnings, peaking out of the interest rates and strong foreign investor interest in the emerging markets (EMs). Though the global economic growth is likely to moderate (the USA and parts of Europe are likely to experience a housing led economic slowdown), compared with the most other EMs India is relatively better insulated from a possible slowdown in the developed economies. Thus, India is expected to continue to grow at a robust rate and attract foreign investments. A populist budget could see a reduction in the direct tax rate, which would be a boost for the market. On the flip side, the implications of the Sixth Pay Commission, greater than expected moderation in the domestic economic growth and a hard landing of the US economy remain the key risks to the market in CY2008. In this issue of Market Outlook we have analysed the positive and negative factors that will affect our market in FY2009. We prefer sectors that are driven by domestic demand and capital spending, and hence are relatively better insulated from a US slowdown. We thus like banking, capital goods, telecom and oil exploration service sectors. However, we continue to believe that the bottoms-up approach can be used to identify promising opportunities in the mid-cap space as well.
In the December 2007 issue, we had recommended the best 12 of our Stock Ideas as Sharekhan Top Picks. As on December 31, 2007, the basket of stocks has given an absolute return of 2.8% as compared with a 4.7% appreciation in the S&P Nifty and 3.5% growth in the Sensex.
STOCK IDEA
Mold-Tek Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs215
Current market price: Rs155
Unlocking value
Key points
- KPO business growing exponentially: Mold-Tek Technologies (MTT) has gained the critical size and required expertise in the niche area of structural engineering KPO services. The size of the opportunity in this space is huge and the company has taken inorganic initiatives to move up the value chain and establish presence in the key overseas markets. Consequently, we expect its KPO business to grow at a CAGR of around 160% over the next three years.
- Expanding the plastic packaging service business: In the recent past, the company invested in modernisation and expansion of its manufacturing units in the plastic packaging business. It also bagged orders from large and reputed clients in the oil & lubricant business, further consolidating its leadership position in the segment. The plastic packaging business is likely to grow at a CAGR of over 20% in the three-year period FY2007-10.
- Unlocking value in KPO business: The company has filed an application for the de-merger of its two businesses into separate entities. We believe this would result in the re-rating of the KPO business that is not only growing at an exponential rate but also enjoys much higher margins. We value the KPO business alone at Rs189 per share.
- Attractive valuations: With its revenues and earnings expected to grow at CAGR of 31% and 66% respectively over FY2007-10, MTT is attractively valued at 7.6x FY2009 and 5.3x FY2010 estimated earnings (as the existing combined entity). Taking into account the de-merger ratio also (holders of 100 existing shares to get 72 shares of the plastic company and 28 shares of the KPO company), the KPO business alone is valued at Rs189 per share. We recommend a Buy call on MTT with a price target of Rs215.
Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,060
Current market price: Rs800
Moving in a unique Orbit
Key points
- Unique strategy to support long-term outlook: Orbit Corporation (Orbit) focuses on the redevelopment of old and dilapidated buildings in the central and southern parts of Mumbai. There are around 6,300 old and dilapidated buildings in these areas that can unleash approximately 56 million square feet (msf) of saleable area for the developers. With its unique and differentiated business model, Orbit would be one of the key beneficiaries of the huge redevelopment opportunities available in the city.
- Strong growth visibility: Orbit currently has 16 projects spanning 1.1msf under development. Moreover, the company has a project pipeline of 2.1msf. All these projects (the current as well as those in the pipeline) are located in the southern and central parts of Mumbai where there is a huge demand and supply mismatch for space. Consequently, we estimate Orbit's revenues would grow at a CAGR of 89.2% during the three-year period FY2007-10.
- Healthy cash flows and margins: Unlike most of its peers, Orbit would generate substantially large free cash flows over the next three years. This is largely due to its limited working capital requirements as the company is able to pre-sell a large part of its projects during the construction phase itself. Given the prime location of its projects, the margins are also quite healthy. The operating profit margins are expected to improve to 51% by FY2010, up from around 38.7% reported in FY2007. Consequently, the consolidated earnings are estimated to grow at a CAGR of 99.6% during FY2007-10.
- Attractive valuation: For Orbit's valuation, we believe the P/E multiple approach is better than the NAV approach. That's because the company has a unique business model focused on the redevelopment of projects where the size of the opportunity is huge. At the current market price of Rs800, the stock trades at P/E multiples of 14.8x and 10.4x based on the FY2008E and FY2009E EPS respectively. We recommend a Buy call on the stock with a price target of Rs1,060.
Patels Airtemp India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs135
Current market price: Rs88
Catch it young
Key points
- Booming user industries: Patels Airtemp India, which manufactures heat exchangers, pressure vessels, industrial fans and blowers and other heat-transfer-technology products, would benefit from the ongoing boom in its user industries such as oil and gas, refineries, power, cement, and fertilisers. The heating, ventilation and air conditioning (HVAC) business, where the company undertakes turnkey projects and manufactures HVAC equipment is also expected to benefit from the ongoing retail boom.
- Expect strong growth in new order booking: The company has a healthy order book of Rs45 crore, out of which Rs40 crore is executable over the next six months. We expect the orders to continue to grow at a strong rate of 45-50% annually for the next two years. We expect new order booking of ~Rs70 crore in FY2008, which should increase to ~Rs120 crore by FY2009, while the momentum is expected to continue considering the current buoyancy in its user industries. Exports too are expected to grow at a fast pace. Out of the current order book of Rs45 crore, about Rs15 crore pertains to export orders as against export orders of 0.98 crore in FY2007.
- Healthy return ratios: We expect a strong improvement in its return ratios going forward on the back of improved margins and no major capex requirement in the next two years. We estimate the topline to grow at a compounded annual growth rate (CAGR) of 49.1% and the bottomline to grow at a CAGR of 72.7% between FY2007-09.
- Attractive valuations: At the current market price, the stock discounts its FY2009E earnings by 5.9x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.5x. We believe the valuations are very attractive and recommend a Buy on the stock with a price target of Rs135.
Punj Lloyd
Cluster: Apple Green
Recommendation: Buy
Price target: Rs620
Current market price: Rs519
Stepping in the upper league
Key points
- Moving up the value chain: One of the significant achievements for Punj Llyod Ltd (PLL) over the years has been its increasing average order size. PLL started with an average order size of $30 million that has grown to $130-140 million, and the company intends to increase it to $250 million. We believe higher order size would improve the margins of the company and also make it a pre-qualified player for larger and more complex orders.
- SEC turnaround—a key positive: PLL acquired Sembawang Engineers & Constructors (SEC) in June 2006. SEC's acquisition has added to the expertise of PLL in the field of oil & gas, airports, jetties, MRT/LRT, and tunneling. SEC has traditionally operated at lower margins, however the new orders are booked at healthy margins. Further, the company expects to execute all the legacy orders of SEC over the next 18-24 months. We expect, this will improve SEC's operating profit margin (OPM) from 3.5% in FY2008E to 7% in FY2010E.
- Order book—more the merrier: PLL has had a spectacular flow of orders, with orders growing from Rs3,240 crore at FY2005 end to Rs15,944 crore (including Rs4,900 crore for SEC) by FY2007 end. In H1FY2008 the company bagged orders worth Rs2,070 crore. The company has a healthy order backlog of Rs14,852 crore, which is 2.9x its FY2007 revenues and this we believe imparts strong visibility to the earnings of the company.
- Acquisitions—help plugging and bridging gaps: PLL is the second largest engineering, procurement and construction (EPC) company in the country. Acquisition of SEC and Simon Carves has helped PLL plug gaps in its offerings and increase its addressable markets. Post acquisition, PLL has considerably bridged the gap making it more competitive against Larsen and Toubro (L&T), the largest EPC player in the country.
Tata Chemicals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs535
Current market price: Rs411
Riding on uptrend in soda ash cycle
Key points
- Soda ash prices up by 60%: Tata Chemicals Ltd (TCL), the third largest producer of soda ash in the world, is set to benefit from the upturn in the soda ash cycle. A worldwide shortage of soda ash has pushed its prices up by 60% to $260-300 per tonne in the last six months. Since the supply of soda ash is expected to remain tight, its prices would stay firm going forward.
- Soda ash capacity addition to lead to volume growth: TCL has recently added 365,000tpa of capacity at its Kenyan (Magadi) plant, which is the lowest cost producer of soda ash in the world. It is also planning to raise its Magadi capacity by another 365,000tpa to 1.1mmtpa by FY2011. It has also undertaken the debottlenecking of its Mithapur plant to raise the latter's capacity from 0.9mmtpa to 1.2mmtpa by FY2011.
- Windfall profits awaiting de-bottlenecking of urea capacity: After the de-bottlenecking of the urea capacity to 1.2mmtpa by September 2008, the normative capacity utilisation would reach 145%. This would generate windfall profits for the company till capacity re-rating takes place in FY2011.
- IMACID JV to benefit from higher prices of phosphoric acid: Higher phosphoric acid prices due to a shortage coupled with a better pricing policy would further improve the profit margins for the IMACID joint venture.
- Investment portfolio worth Rs187 per share: TCL's investment portfolio of Rs775 crore (book value) is worth Rs4,600 crore, which works out to Rs187 per share.
- Valuation: At the current market price of Rs411, the stock is trading at 13.5x its FY2009E diluted earnings and an EV/EBIDTA of 6.6x. We value TCL's core business at 14.4x its FY2009E diluted earnings and investments at Rs94.8 per share after discounting 50% of their fair value. We recommend Buy on the stock with a price target of Rs535.
STOCK UPDATE
Bajaj Auto
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,800
Current market price: Rs2,782
Downgraded to Hold
Key points
- The demand for two-wheelers is slow in December, as it is the last month of the year.
- Bajaj Auto Ltd (BAL) is expected to outperform the industry due to good demand from Platina and XCD. Sales of Pulsar and Discover continue to be slow in line with the industry trend.
- Discounts on Platina to continue in view of the strong order book and the waiting period. Production of XCD to be increased to 75,000 units from January 2008.
- The three-wheeler sales from the April-November period are down by 5.3%. The outlook for the passenger segment, where BAL is a leader, appears to be weak as the market for passenger vehicles is regulated.
- The stock has reached our price target of Rs2,800. Consequently, we downgrade the stock to a Hold. We still maintain our positive outlook on the company in view of the success of its new launches, the good volume growth expected in Q4FY2008, the High Court's approval of the de-merger that is expected soon and the value of its insurance subsidiaries. At the current market price of Rs2,782, the stock trades at 19.5x its FY2009E earnings and EV/EBIDTA of 12.4x.
Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs432
Current market price: Rs361
BoI to dilute 5% government stake
Key Points
- Bank of India's (BoI) board of directors have approved the proposed issuance of 3.8 crore shares through Qualified Institutional Placement (QIP) route. BoI will convene an Extraordinary General Meeting on January 23, 2008 for further proceedings. Meanwhile the Government of India, the largest shareholder in BoI, has approved the QIP placement with a stipulation that the placement should be made with public sector enterprises and mutual funds only.
- The 3.8 crore shares will be issued by diluting 5% government's stake in BOI. Following the QIP placement, the government holding in BOI will be reduced to 65.4% from 69.4% currently. The issuance of 3.8 crore shares, equivalent to 7.8% of the existing equity base of 48.8 crore shares, would help the bank raise around Rs1,325 crore.
- With this, BoI becomes the first public sector bank (PSB) to make a QIP placement. The placement through QIP route will help the bank fetch much better pricing in a shorter time span compared with a follow-on public offering (FPO) considering the relatively smaller size of the issue.
Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,100
Current market price: Rs985
Stake sale to unlock value
Bharti Airtel Ltd (BAL) has announced that a group of foreign investors has agreed to invest US $1 billion in its passive infrastructure subsidiary, Bharti Infratel Ltd (BIL). The international investors are Temasek Holdings, the Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup and India Equity Partners, with Temasek Holdings being the largest investor.
Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs646
Current market price: Rs400
Riding on power boom
Key points
- Crompton Greaves Ltd (CGL) is one of the major players in transmission and distribution (T&D) equipment space in India. With vast product portfolio and a roll out of massive expenditure in the T&D space, we reassert our confidence in the company to show strong growth in years to come.
- Industrial and consumer segments of the company also look well placed to grow robustly. HT motors will drive the growth of industrial segment while the booming real estate industry will drive the growth of consumer segment.
- With acquisition of Pauwels, Ganz, and Microsol, CGL is well placed to garner a pie not only in domestic market but also in international markets. We expect CGL's consolidated revenues to grow at a compounded annual growth rate (CAGR) of 22.7% over FY2007-09E.
- CGL has signed a distribution franchise agreement with Maharashtra State Electricity Distribution Company Ltd (MSEDCL) for power distribution in three divisions of Nagpur for 15 years. The net present value (NPV) of the agreement is put at Rs2,600 crore. However we have not factored in any value from this agreement and would wait for CGL to acquire assets from the utility by the end of the year.
- At the end of H1FY2008, CGL had a consolidated order book of Rs5,211 crore. The order flow remains strong for both domestic and international businesses, and we believe this to continue going forward on the back of increased spending on T&D world over.
- Continued growth stint of CGL and management's endeavors to integrate all its acquisitions (Pauwel, Ganz, and Microsol) have been impressive. Historically, CGL has traded at a discount to the likes of ABB, Siemens, and Areva due to its limited product range. By integrating its international acquisitions, CGL has emerged as a complete solution provider in T&D sub-station business, and we expect the discount vis-à-vis its peers to get reduced. A wider product range would differentiate it in the domestic market and would enable it to compete effectively with other MNCs.
- At the current market price the stock trades at 34.9x its FY2008E earnings per share (EPS) of Rs11.5 and 26.7x its FY2009E EPS of Rs15.We believe these valuations are attractive because of (a) Robust operating performance of stand-alone company; (b) Higher geographical width and product depth of the company due to subsidiaries and (c) Management's expertise in turning around operations of subsidiaries. We remain bullish on the stock and reiterate Buy recommendation with the price target of Rs464.
Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs180
Current market price: Rs150
On the right(s) track
Result highlights
- Indian Hotels Company Ltd's (IHCL) Q2FY2008 revenues grew by 15.7% year on year (yoy) to Rs341.4 crore. Room revenues continued to grow robustly and grew at 19% yoy for H1FY2008, as the average room rate (ARR) grew by 17.7% yoy to Rs8,581. The growth in room revenues appears strong considering the fact that a fair proportion of room inventory was under renovation in H1 (off season) and the fact that weak dollar adversely impacted the revenues.
- Stringent cost controls and operating leverage due to higher ARR's improved the operating profit margin (OPM) by 420 basis points yoy to 29%. The net interest charge was up by a hefty 64.4% yoy to Rs25.7 crore as proceeds from foreign currency convertible bond (FCCB) were fully deployed for recent international acquisitions. Incremental debt raised during the quarter also contributed to a rise in interest cost.
- Profit before tax (PBT) increased by 25.7% yoy to Rs77.7 crore, however a higher tax incidence at 31.5% in Q2FY2008 against 25.7% in Q2FY2007 led the net profit rise by 16% to Rs53.2 crore.
- IHCL acquired an 11.01% stake in Orient Express Hotels Ltd during the quarter and has further raised its stake to 11.5%. IHCL seeks a strategic alliance with the later, however Orient Express has rejected IHCL's offer for such a strategic alliance.
- We believe IHCL's strategy of expansion both in domestic and overseas markets and better profitability of its international operations would ensure that IHCL maintain the growth momentum. At the current market price of Rs150, IHCL trades at 20.9x its consolidated earnings per share (EPS) of Rs7.2 (post dilution on account of the rights issues) for FY2009E. We maintain Buy recommendation on the stock with a price target of Rs180.
ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs241
Current market price: Rs205
Price target revised to Rs241
ITC's non-cigarette fast moving consumer goods (FMCG) business has grown by leaps and bounds over the last few years. The segment grew at a compounded annual growth rate (CAGR) of 77.6% over FY2004-07E to register revenues of Rs1,701.5 crore. The branded packaged foods division constitutes a major chunk and the growth of the segment. With presence across product categories of biscuits, staples, confectionery and snack foods, ITC has created big brands such as Sunfeast, Aashirvaad, Kitchens of India and the most recent Bingo. ITC is leveraging its wide sales and distribution network that has an unparallel reach throughout the country, economy and quality in procurement of inputs from its agri-business and strong cash flows from its cigarettes business to grow the branded foods business.
Jindal Saw
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs1,018
Current market price: Rs898
Price target revised to Rs1,018
Key points
- Jindal Saw Ltd (JSL), the largest pipe manufacturer in the country, continues to benefit from the huge opportunity in the sector due a surge in E&P activities globally and a strong domestic and export demand.
- At the end of the last quarter, JSL's order book stood at $715 million, which is executable by May/June 2008. Of this, $565 million orders are for Submerged Arc Welded (SAW) pipes while the remaining orders were for ductile iron (DI) and seamless pipes.
- The performance of the company is set to improve further going forward. The US operations had been a drag on company's earnings in the past. With the US division being hived off along with a better product mix due to higher contribution from seamless and DI pipes, the overall profitability of the company is set to improve.
- JSL has a big investment book with investments in various group companies, particularly Jindal Steel & Power and JSW Steel. The total investment value works out to Rs403 per share for JSL. We believe JSL has strong potential for value unlocking and the same is likely to trigger a re-rating of its stock. We value the core business of the company at 11x CY2009E earnings and take the investment value at a 75% discount to its current value.
- The company has an aggressive capital expenditure (capex) plan, as it is expanding its Longitudinal Submerged Arc Welded (LSAW) capacity by another 200,000 tonne by September 2008 and is adding 350,000 tonne to its Horizontal Submerged Arc Welded (HSAW) capacity. The total capex for the same would be Rs250 crore by the end of CY2008. The capacity expansion of the seamless pipes to 250,000 tonnes is also on schedule.
- We maintain our positive outlook on the company considering its leadership position in the industry and the scope for margin expansion. With the sale of the US operations, the company would also be sitting on a huge cash pile, which would partly be used for debt repayments and capacity expansions. We believe the stock is trading at attractive valuations at 17.1x its CY2008E earnings and 10.8x its CY2009E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs1,018.
JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs330
Current market price: Rs246
Price target revised to Rs330
Key points
- JK Cement is expanding its capacity by 3.5 million metric tonne (MMT) through a greenfield plant at Karnataka, which will be accompanied by a 50-megawatt (MW) power plant at the site. The capital expenditure (capex) programme is in progress and the plant is expected to be commissioned by FY2009 end. This will augment the capacity of the company by 70% in FY2010 and will drive the volumes of the company going ahead.
- Refurbishment of Nihon facility is expected to be complete by the end of Q4FY2008 and would increase cement volumes by 350,000 tonne in FY2009.
- JK Cement's capex on captive power plants (CPPs) is progressing well. The company has already commissioned a 20MW pet coke based power plant and has replaced its 10MW turbine. It has partially implemented the 13MW waste heat recovery plant and expects the plant to get fully operational by FY2008 end.
- With all CPPs in place, the company will be able to save Rs150-200 per tonne on power consumption from FY2009.
- JK Cement's Q2 results were much above our expectations. The topline grew by a healthy 33% year on year (yoy) to Rs356 crore on the back of a blended volume growth of 12% yoy and a realisation growth of 17% yoy to Rs3,597 per tonne.
- Strict control on variable costs led the operating profit grow by 58% yoy and the operating profit margin (OPM) expand by 450 basis points to 28.2%. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne jumped by 40% yoy to Rs1,030 per tonne.
- Lower tax provision of 13% during the quarter made the profit after tax (PAT) grow by a whopping 142% yoy to Rs72.7 crore. The PAT growth was much ahead of our expectations.
- We have been bullish on the business prospects of JK Cement on account of its cost-cutting measures and capex programme. Savings in power costs from the CPPs coupled with higher volumes from its greenfield facility will be the major business drivers for the stock. The stock is trading at 10x its earnings and 6.6x its enterprise value (EV)/EBITDA on FY2009 earnings estimate. Even after a significant run-up in the last couple of months, it commands an EV per tonne of USD 84, which is lower than the benchmark asset valuation of USD 100-115 per tonne. Considering the cheap asset valuations, we maintain our Buy recommendation on the stock with an upgraded price target of Rs330, leaving an upside of 30%.
Madras Cements
Cluster: Cannonball
Recommendation: Buy
Price target: Rs4,800
Current market price: Rs4,474
Price target revised to Rs4,800
Key points
- Madras Cements' topline grew by 23% year on year (yoy) to Rs500.12 crore. The topline rose on the back of a healthy 29% year-on-year (y-o-y) growth in realisations, which compensated for 5% y-o-y decline in volumes.
- Variable costs per tonne jumped by 22.3% yoy on the back of a 27% y-o-y rise in power costs and 38% y-o-y rise in freight costs. Employee costs shot up by 38% yoy. Overall costs increased by 15% yoy translating into a per tonne rise of 21% yoy.
- Higher realisations led the operating profits grow by 36% yoy to Rs214.5 crore and the operating profit margin (OPM) expand by 400 basis points to 42.9%. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne zoomed to Rs1,548, the highest in the industry and the highest in the company's history as well.
- Interest cost and depreciation provision on a sequential basis remained more or less constant at Rs8.1 crore and Rs25.7 crore respectively.
- Other income doubled to Rs2.8 crore as the company deployed the surplus cash. Consequently, profit after tax (PAT) rose by 34% yoy to Rs120 crore.
- The company is expanding its capacity by 4 million metric tonne (MMT) to 10MMT by FY2009, as already mentioned in previous updates. The clinker unit at Jayanthipuram was commissioned in October 2007 as per schedule, whereas the 1MMT grinding unit at West Bengal has been delayed and will come up only in FY2009. The other 2MMT capacity expansion at Ariyalur is expected to come up at the end of Q2FY2009.
- Taking cognisance of the realisation growth in the current quarter, we are upgrading our FY2008 earnings per share (EPS) estimate by 5.8% to Rs390 and FY2009 EPS estimate by 12.1% to Rs497.
- 4MMT capacity expansion will drive the company's volume growth going ahead. Healthy realisations in the South coupled with the company's efforts on cost control will aid it in maintaining its EBITDA at an above-industry average, which in turn will drive the profitability. The company will also be able to avail tax benefits for setting up wind mills. The robust cash flow position of the company will make it well placed to withstand the downturn in the cement cycle. At the current market price, the company is trading at 9.1x its FY2009 EPS and 5.4x its enterprise value (EV)/EBITDA. With the rise in benchmark valuations, we are upgrading the price target to Rs4,800 per share.
Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs900
Current market price: Rs794
New launches to drive growth
Key points
- A diversified play in the auto sector Mahindra & Mahindra (M&M) aims to become a speciality player and continue its domination in the utility vehicle (UV) segment.
- In the current year, the automotive segment has grown by 22% year till date (ytd). The growth was driven by UVs other than Scorpio (such as Bolero and Maxx Maxi Truck) and revenues from exports.
- Farm equipment contributing 35% to sales has under performed in the current year. Year-till-date (y-t-d) volumes were down by 5% as compared with 6% decline witnessed by the auto industry as a whole. The focus of integration of recently acquired Punjab Tractors Ltd (PTL) is recovery of outstanding dues.
- The new UV platform code named Ingenio is slated for launch in August 2008. A new Sports UV is planned to be launched from its Chennai facility. The joint venture (JV) with International Truck for manufacturing medium and heavy commercial vehicles (M&HCV) is expected to start by CY2009.
- The management continues to unlock value in its various subsidiaries and group companies. We have estimated value of Rs40 per share from its subsidiary Mahindra Holiday Resorts which is to be listed in 2008. Any higher value on listing would further add to its holding.
- All new product launches would commence from FY2009 onwards, triggering good growth.
- At the current market price of Rs794, the stock quotes at 11.4x its FY2009E consolidated earnings. We continue to value M&M on the sum-of-the-parts basis and maintain Buy with a price target of Rs900.
Maruti Suzuki India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,230
Current market price: Rs990
To play a greater role in Suzuki's operations
Key Points
- Maruti Suzuki India Ltd (MSL) has outperformed the passenger vehicle segment in the current year due to the success of its new products. The new managing director (MD), Shinzo Nakanishi, aims to stay focused on the goal of achieving one million sales by 2010. This translates into a compounded annual growth of 14-14.5% in sales which is achievable.
- MSL is ready to play a greater role in Suzuki Motor Corporation's (SMC) global operations with increasing focus and investments in new product development.
- The new MD has reiterated that the current profit margins are not sustainable. We have already factored this guidance in our estimates.
Nicholas Piramal India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs377
Current market price: Rs360
Nicholas forms joint venture for diagnostics
Nicholas Piramal India Limited (Nicholas) and Kyoto, Japan based ARKRAY, Inc. (ARKRAY) have entered into a 10-year 49:51 Joint Venture to market diagnostic products, mainly self-monitoring blood glucose systems in the Indian market.
Saregama India
Cluster: Ugly Duckling
Recommendation: Book Profit
Current market price: Rs296
Book profit
Key points
- Saregama India Ltd (SIL) reported disappointing results for Q2FY2008. While the operating revenues fell by 2.7% year on year (yoy) to Rs33.8 crore, the operating profit declined by 57.9% to Rs2.7 crore. Consequently the net profit before extraordinary items decreased by 44.7% yoy to Rs2.6 crore.
- Operating profit margin (OPM) fell sharply to 7.9% in Q2FY2008 against 18.4% in Q2FY2007. The OPM declined primarily due to a sharp jump in royalty expenses that as a percent of sales increased by 860 basis points yoy to 28.6%. Royalty payments went up as royalty model has shifted from revenue sharing model to a fixed minimum guarantee model.
- SIL's audio sales declined sharply by 34% yoy in the last four quarters. Sale of cassettes and CDs is continually falling as consumers shift to non-physical formats of music such as radio and TV.
- SIL's share in acquiring new music rights declined to 9-10% from about 30% in the past. With competition setting in, the cost of acquiring these rights has gone up substantially. We believe that the current scenario wherein music rights are awarded on minimum guarantee as against revenue sharing in the past has increased the risk for music companies.
- Increasing competition, lack of aggression on the part of the management and sharper decline in physical sales raise concerns. We believe, the current market price of Rs295.5 fully factors the risks and rewards associated with SIL's business and thereby advice investors to book profit.
Shiv-Vani Oil & Gas Exploration Services
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs615
Current market price: Rs590
Bags contract worth Rs261 crore
Shiv-vani Oil & Gas Exploration (Shiv-vani) has bagged a contract worth Rs261 crore from Oil India to deploy four onshore rigs (1500HP/2000HP) for a period of two years at various locations across the country.
The contract would further boost the company's existing order backlog of over Rs3,000 crore, thereby improving its revenue growth visibility.
SHAREKHAN SPECIAL
AMCs to see a change in benchmark valuations
Asset Management Companies (AMCs) in India could see a change in their benchmark valuations after the recent deal involving Reliance Capital and Eton Park, a global investment fund. The benefit of such change in valuations is likely to impact listed players like Reliance Capital, HDFC, ICICI Bank and State Bank of India (SBI) who have AMC as subsidiaries. SBI, Punjab National Bank (PNB) and Bank of Baroda (BOB) also stand to gain as they hold 25% each in UTI AMC (likely to be listed soon).
Q3FY2008 IT earnings preview
The Q3 performance of frontline tech stocks is likely to be in line with street expectations with organic growth in revenues and earnings to be in the range of 5-7.5% on a sequential basis. Including the consolidation of results of Infocrossing (expected revenues of $60 million), Wipro Technologies' (Wipro) revenue growth is estimated to be around 12.3% sequentially. With no surprises in Q3 performance, the focus would be on the commentary related to the demand environment and the possible fallout of sub-prime issue. However, going by the recent comments of some of the global majors post their results, we expect the companies to maintain their neutral stand on the issue. Any sign of weakness in the commentary would severely impact the sentiments towards tech stocks.
MUTUAL GAINS
Sharekhan's top equity fund picks
We have identified the best equity-oriented schemes available in the market today based on the following 3 parameter : the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity).
The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.
FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.
SECTOR UPDATE
Information Technology
Recovery in tech stock
After drifting down continuously for past few months, tech stocks have recovered part of the lost ground on the back of renewed buying interest over the last couple of weeks. In addition to attractive valuations, the recovery has been driven by external factors such as stability of rupee against the dollar and indications of stable demand outlook by some of the global tech giants during their recent quarterly results.
Oil drilling
Adding fuel to fire
It couldn't have been better for oil drilling companies. The charter rates for drilling rigs are already at a record high level due to a favourable supply-demand scenario. In fact, the day rates have increased by as much as 200% to 300% (depending on the asset specification) over the past three years. For instance, an offshore rig (350-feet-jack-up rig) has been contracted at day rates of over $2,00,000, up from around $75,000-80,000 couple of years back.
Pharmaceuticals
Teva launches generic Protonix
Teva, the world's largest generic company, has launched the generic version of Wyeth/Altana's Protonix tablets in the USA on December 24, 2007 triggering off 180 days of exclusivity period for the product. Protonix is Altana's blockbuster drug for acidity and oesophageal reflux and is marketed in the USA by Wyeth. The product generated sales of close to $2.5 billion in 2006.
Telecommunications
Large players continue to dominate
GSM mobile service providers reported a net addition of 5.82 million subscribers during November, taking the total subscriber base to 165.8 million. The month-on-month (m-o-m) growth works out to 3.6%, which is bit lower than 3.7% reported in the previous month.
VIEWPOINT
Asian Electronics
New technology may fuel growth
Incorporated in 1964, AEL is involved in designing, manufacturing and marketing of energy efficient products and specialises in lighting solutions. AEL is also one of the few companies certified with Energy Saving Companies (ESCO) in India. Its manufacturing facilities are at Nashik, Silvassa, Chennai and Solan (Himachal Pradesh). Its largest domestic customers are local municipalities and utilities and include players like Maharashtra State Electricity Distribution Company and Central Power Distribution Company of Andhra Pradesh. AEL has a strong distribution network comprising over 450 distributors/ dealers and over 130 marketing consultants across the country.
Rolta India
Robust growth but fully priced
Rolta India (Rolta) has established itself as a leading offshore vendor in the geospatial information system (GIS) and engineering service space. It has three business divisions: GIS, engineering design and automation (EDA) and enterprise information & communication technology (ICT).
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