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Showing posts from 2009

Merger of Samruddhi with Ultratech Cement

UltraTech Cement - Merger of Samruddhi with Ultratech—sequel to restructuring plan. The Boards of Ultratech (UTCEM) and Samruddhi have approved the merger of the two entities that will result in the creation of the largest pure-play cement company in the country. The merger ratio is earnings accretive, as UTCEM will benefit from the pan-India presence of the combined entity.

Swap ratio earnings accretive, implies equity value of Rs108 bn for Samruddhi. The proposed merger ratio of four shares in UTCEM for every seven shares held in Samruddhi is earnings accretive for UTCEM shareholders (EPS of Rs84/share compared to Rs74 currently in FY2011E) and implies an equity valuation of Rs108 bn and an enterprise value of Rs130 bn for Samruddhi.

The combined entity will have a market capitalization of Rs200 bn (US$4.3 bn). Combined entity to have pan-India presence, help combat regional disparities. The merger of Samruddhi with UTCEM will create India’s largest cement company with an aggregate ca…

Monetary Rolicy Review

Key Highlights:
Repo rate and Reverse Repo rate under the LAF window have been left unchanged at 4.75% and 3.25%, respectively.
Cash Reserve Ratio (CRR) left unchanged at 5.0% of net demand and time liabilities (NDTL).
Bank rate has been kept unchanged at 6.0%.
SLR (statutory liquidity ratio) has been restored to 25% of NDTL (from earlier 24%).
RBI has advised the banks to augment their provisioning coverage to 70% by September 2010.
The growth projection FY10 GDP has been retained at 6.0% with an upward bias.

The inflation (WPI) target for FY10 has been raised to 6.5% from 5% earlier.

RBI has left the key policy rates unchanged; however it has restored the SLR (statutory liquidity ratio) to 25% of NDTL, which was reduced earlier to 24%. The hike in SLR is not likely to impact the liquidity position of the banking system and credit to the private sector.

RBI has also taken some measures which constitute the first phase of its exit strategy.It has reduced the limit for export credit refinance f…

ZEE Entertainment

Zee Entertainment FY2009 annual report analysis—positives and negatives.
Positives. ZEEL’s FY2009 debtors day have reduced considerably to 106 days from about 116 days in FY2008/ 2HFY09 was an extremely challenging period for the broadcasting sector with advertisers searching for discounts and extended credit periods. Large one-offs (gains and losses) in FY2009 cloud the core profitability of the franchise, which remains robust.
Negatives. ZEEL’s operating cash flow position weakened considerably in FY2009 over FY2008 despite (1) robust book profits and (2) control over receivables. The large increase in investments (Rs2.1 bn) in film production, film library rights and sports rights in FY2009 as representative of competitive cost pressures on ZEEL.
DCF-based target price works out to Rs170 - largely due to DCF roll forward and improvement in ZEEL’s receivables position. ZEEL stock seems fully valued at 21.6X FY2010E and 17.7X FY2011E .EPS estimates and risk-reward balance seems to be in…

Reliance Industries Update

Reliance Industries - RIL is not the best Indian play on global economic recovery theme.
RIL stock offers low leverage to the global economic recovery theme compared to other commodity plays given (1) the ‘converter’ nature of its business as opposed to pure resource plays in India and (2) large incremental supply in the case of both chemicals and refining that will well- exceed even higher demand arising from stronger-than-expected global GDP growth. Also, the current stock price is already discounting new discoveries of ~55 tcf of additional gas reserves over the next six years (see Exhibits 2 and 3). This is hard to justify despite the reported high prospectivity of several RIL blocks in various stages of exploration.
Limited scope for upward revision to margin assumptions given generous assumptions.
FY2010E and FY2011E earnings assumptions are based on (1) refining margins of US$7.8/bbl and US$9.8/bbl, (2) strong chemical margins of US$550-600/ton and US$450-500/ton and (3) gas produ…

Indian IT Stocks Update

Indian IT stocks have moved from strong value plays three months back to momentum stocks, banking on consistent upgrades in earnings estimates to sustain prices. One can expect revenue upgrades will consistently accrue over the next 12-months; 1QFY10 results were a good starting point. The Tier 1 plays for the IT recovery story and it is better to stay away from Tier 2 names as revenue recovery is unlikely to materialize; cost rationalization is already played out and reflected in results.
1QFY10 performance—a good starting point. The Indian IT companies, with only a few exceptions, beat the Street’s (low) expectations on revenues as well as margins quite comfortably. More importantly, volume/pricing stability seen across companies also provided comfort on the worst being over. Expectations of sequential growth from the next quarter appear firmly set in, despite the companies’ commentary tending on the cautious side. In addition, sharp margin expansion seen across companies also cheere…

Tata Consultancy Services TCS Results update

TCS Results update.TCS’ 1QFY10 performance exceeded consensus expectations on all counts. Revenues at US$1480 mn grew 3.3% qoq and were 3.6% higher than we expected. Volumes grew 3.5% qoq while pricing dipped 0.25%. Revenue growth was led by strong gains in the BFSI vertical, which grew 5.1% qoq. TCS management has cited BFSI, retail, utilities and life sciences verticals as the potential growth drivers.

Some number crunching:

EBIT margin increased 113 bps qoq to 24.8% led by 1) strong shift in revenues offshore contributing 95 bps to margins; (2) SG&A expenses declined 93 bps qoq. Benefit of the above factors was somewhat offset by weaker pricing (34 bps) and currency (41 bps).

Receivables collection cycle reduced further to 93 days versus 95 in 4QFY09 and 105 in 1QFY09. TCS had placed special emphasis in reducing credit cycle to weaker clients. TCS’ receivables days are still higher than peers like Infosys, Wipro and Cognizant.

FY2010E EPS is expected to inrcrease by 13% to Rs30.5 a…

Infosys Technologies - Stock Update

Infosys Technologies - Results update.
Infosys reported strong performance for the June 2009 quarter, exceeding market expectations and that of consensus in terms of revenue, EBITDA and net income.

Infosys'FY2010E EPS guidance reduced to Rs96 from Rs101.2 earlier (Re/US$ now 47.9
Infosys has reduced FY2010E EPS guidance to Rs94.6-96, versus Rs96.7-101.2 earlier. This decline is lead by (1) revision in Re/US$ rate to Rs47.9 versus Rs50.72 earlier and (2) increase in tax rate assumption to 19-20% versus 16.5-17% earlier— the company is attributing this to slower-than-expected ramp up from SEZs.

The FY2010E guidance given by the company is excessively conservative and leaves room for significant outperformance. Improvement in decision making, lower project cancellations, and new deal wins will drive growth and positive surprises over the next 12-month. Long term investors can buy Infosys on declines with a price target of Rs.1750.

Sterlite Industries - ASARCO sale

ASARCO sale entering the last lap: The ASARCO bidding process is entering the final round of hearning which is scheduled for on August 10, 2009. As per the latest filings by ASARCO, creditors have to approve one of the following 3 plans i.e. (1) the parent (Grupo Mexico) (2) the debtors (Sterlite) and (3) Harbinger Capital.

The Parent (Grupo Mexico) plan.
According to the re-organizaiton plan proposed by the Parent (Grupo Mexico) it would contribute US$1.46 bn to the claimants and would also use the US$1.4 bn cash in the books of ASARCO. However, it differs from other plans in its assessment of claims against Sterlite for breach of its initial agreement to acquire ASARCO for US$2.6 bn and has assessed the claim to be worth atleast US$400 mn to US$ 1bn compared to the Debtors’ Plan assessment of claim value at US$100 mn.

The Debtors’ (ASARCO with Sterlite) plan.
The debtors’ plan calls for initial payment of US$1.1 bn by Sterlite and deferred payment of US$770 mn for which the present valu…

Voltamp Transformers

Voltamp Transforms - Results update.

Unlike most other transformer makers, Voltamp is mainly focused on the industrial transformers including power and distribution and dry-type transformers. It was expected that the company's dependence on industrial customers would severely impact company's volumes in FY09 given that industrial capex was badly hit in FY09 due to high interest rates and liquidity crunch. Despite this, VTL managed to report 29% rise in transformer sales in volume terms.

VTL's margins have been on an uptrend in the past few years from 13.6% in FY06 to 23.3% in FY09. Consistent uptrend in operating margins was on account of favourable product mix and attractive pricing of product. VTL's cash and equivalent has increased from Rs 628 mn in FY08 to Rs 1.4 bn in FY09. The company is debt-free.

Free cash flow per share is forecast at Rs 43 per share. Considering better than expected working capital cycle resulting in robust cash generation earnings…

Reliance Capital - Diversified Financial Services

Reliance Capital is focused on businesses across the spectrum of financial servces, including life insurance, asset management, retail broking and distribution.Its strong parentage and large capital base will help it achieve a substantial market share over time.

Reliance Life insurance (Rs453) and asset management businesses (Rs199) account for 74% of target price of Rs.875,though once can expect the fair value of other businesses to appreciate over time. Focus on wide reach, superior pricing strategy across businesses Reliance Capital's market position in asset management and life insurance has remained strong despite the slowdown in the industry during FY2009. After setting up a large network for broking and distribution, RCAP has begun to focus on asset reconstruction, private equity and institutional equities.

Despite its late entry into most segments, it can become a sizeable player over time given its (1) focus on expanding beyond metros, (2)technology support and (3) superior…

Hindalco - Stock Update

Novelis reports steady earnings.

Novelis reported EBITDA of US$252 mn and an adjusted EBITDA of US$54 mn despite a sharp 20% yoy drop in volumes. The drop in qoq EBITDA is just from US$100 mn to US$72 mn qoq if further adjusted for non-cash exhange variations. Management has guided for strong earnings in the coming quarters due to restructing initiatives, increase in volumes in Asia etc.

Steady earnings in a weak market.
Volumes in 4QFY2009 were sharply lower by 20% compared to last year due to sharp demand contraction in the auto, construction and other markets. However, can volumes were stable and have largely contributed to the profitability during the quarter.

Strong EBITDA improvement guidance for 1QFY2010.

Outlook for 1QFY2010 expected to improve significantly due to the following:
1) benefits from restructuring initiatives undertaken in 3QFY2009 and 4QFY2009 to start flowing through 2) non metal commodity price deflation 3) strong recovery in Asian shipments driven by China.


Accenture results

Accenture results—implications for the Indian IT industry.
Recently Accenture reported inline results for 3QFY09. The positive aspect of the result was robust growth and bookings in the outsourcing business; this highlights relatively buoyant market for ‘run the business’ services, a stronghold of Indian IT names.

Implications for Indian IT services companies.

Despite Accenture’s weak albeit in-line revenue performance and another downgrade in FY2009 revenue guidance, one can see incremental positives on the outsourcing business. Outsourcing remains a strong play for Indian IT services companies, a segment which has been relatively buoyant. Infosys and Wipro remain top stocks in the sector.

Budget 2009 Expectations

India's new Finance Minister will present a full-fledged budget after a gap of 16 months and under a different set of circumstances. In February 2008, India was entering a phase of lower growth trajectory. On the other hand, current data is suggesting that, the economy is likely past the worst and improving. However, we expect the agenda of the budget to be identical, subject to a few differences. We note that, the previous FM had a far more fractious and demanding set of coalition partners to contend with.

We opine that, the focus of the FM will continue to be on sustaining and improving the rate of GDP growth and that too, equitable (inclusive) growth. Investments in infrastructure, social initiatives and agriculture are expected to continue. While fiscal prudence will be attempted, we expect little change to the Center's fiscal deficit of more than 6% of the GDP. Alternate sources of raising finances like dis-investment, relaxation of FDI norms, auctioning of telecom license…

Inflation Data

Inflation: Falls to 3.92%
• India's wholesale price index (WPI) came down to 3.92% for the week ended February 07, 2009 from 4.39% for the week ended January 31, 2009, lowest in last 13 months.
• The index number of 'primary articles' and 'manufactured goods' declined week-on-week for the week ended February 07, 2009. However, 'Fuel segment' saw some moderate up move during the same period.
• 'Fuel segment' continues to witness deflation for last nine consecutive weeks. Similarly, manufacturing segment is largely on the downward trajectory for last three months, thus, reducing the inflation risk emanating from it.
• We expect headline Inflation (read WPI) to continue to fall at an accelerated pace before coming down to sub-2.0% levels by the end of FY09.
• The speedy fall in inflation is likely to provide additional headroom to RBI for further monetary accommodation. The deteriorating real economy is also strengthening the case for further cut in policy …


DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

Automobile Sector - an update

Automobile Sector.

Free-riding on high price elasticity coming to an end. A 24% reduction in vehicle prices, in the form of lower excise duties has played a significant role in the 15% volume CAGR since 2003. Nonetheless the gravy train may come to a stop, putting the onus on higher income levels to drive affordability and thereby volumes from here on. Separately on competition, we believe the size of the Indian auto market would need to be bigger before it becomes more cutthroat. Devoid of further price reductions, could growth rate slow down.

Statistical analysis attributes the bulk of the auto sales growth in India to excise duty reductions and not as much to GDP growth, implying strong price elasticity of demand. In other words, till now the bulk of the increase in affordability seems to have come from lower taxes and less from higher income levels. Going forward however,there’s not much room to cut excise duty, putting the onus on income growth to improve affordability. Growth rate…

Thermax - stock update

Result Update: Thermax
• Third quarter numbers are in line with our as well as street expectations. The company had started the year with lower order backlog which is resulting in moderate growth.
• EBITDA margins have been maintained.
• Order book declines sequentially reflecting challenging macro environment for capitl goods companies. Sharp drop in sequential order inflows.
• Company admits that large players are on a wait and watch so far as committing major investments is concerned.
• Stock trading at cheap valuations of 7.0x and 6.4x FY09 and FY10 earnings respectively. Dividend yield is attractive at 5%.
• The stock has seen very sharp correction over the previous quarter on fears of significant scaleback of capex plans by Indian Industry.
• At the current price, the stock is to a large extent building in the likely downtrend in order inflows over the coming quarters, in our opinion.
• Even assuming a fairly pessimistic growth scenario over the next couple of years, our DCF based targe…

ENIL - stock update

Result Update: ENIL
• ENIL: De-growth in revenues reflects the challenges of a deteriorated macro for advertising revenues; high fixed cost base in OoH does not help. Maintain REDUCE.
• Q3FY09 results reflect the impact of a slowing macro environment on advertising spends; radio revenues are down 12% YoY while consolidated revenues drop 19% YoY. OoH subsidiary pares profit from radio business translating into losses at the consolidated level.
• Quarterly revenue growth trends validate our cautious outlook towards advertising spend trends. A visible slowdown in advertising spends towards alternate media platforms like radio, outdoor (part of ENIL’s bouquet) likely to hurt over the challenging medium term.
• OoH to remain a drag as the cost base rises with new investments while revenues are yet to gain traction; a weak macro does not help. Incremental margin gains will be difficult given the challenging macro and the high fixed costs that will likely push back new business break-evens.
• Adj…

Nagarjuna Construction

Nagarjuna constructions - Results update.

Revenues of the company for the current quarter were ahead of expectations, registering 27% growth in Q1FY09.Operating margins for Q1FY09 stood at 9.4%,slightly lower than estimates. This was impacted by higher raw material prices.Net profit for the current quarter registered a marginal increase of 3% due to steep increase in the interest charges as well as lower operating margins.

At current price of Rs 130, NCC is trading at 16.9x and 13.8x on P/E multiples and 7.4x and 6.4x on EV/EBITDA multiples on FY09 and FY10 estimates respectively. Adjusted with BOT valuations, it is trading at 10.5x and 8.6x on P/E multiples on FY09 and FY10 estimates.

To factor in the increasing interest rate scenario and lower than expected growth in profitability going forward, we lower our target valuation multiples for the company going forward. Investors can buy on declines with a price target of Rs 190, the targed based on sum-of-the-parts methodology based on FY1…