Saturday, February 03, 2007
The market is likely to continue its rally as most results reported by India Inc were strong.
The next key event that the market will be closely watching is the Union-budget 2007. A pre-budget rally is expected.
But worries that inflation will lead to a further tightening of the monetary policy to follow this week's rate rise have been heightened by data showing annual inflation rate rising back above 6%, to just below a two-year high in mid-January.
Technically, the Nifty has breached the resistance of 4,168 and has moved above it. It is now likely to test another major resistance of 4,200. On crossing this point, the initial target is pegged in the range of 4,230 - 4,260 range. On the lower side, Nifty has strong support at 4,120 and 4,080 levels.
FAG Bearings India, Patni Computer Systems, ELGI Equipments and Rain Calcining will be declaring results in the coming week.
The RBI’s third quarter review of the Annual Monetary Policy was the highlight of the week. Anticipation of an interest rate hike and other credit policy measures influenced trading during the week on the stock exchanges.
The market corrected on the first two trading days of the week, and then bounced back remarkably on the following two. Both the Sensex and the Nifty closed at their all-time high levels on Friday, 2 February 2007.
The Sensex gained 121.05 points (0.84%), from the closing last week, to 14,403.77. The Nifty closed Friday at 4,183.50, up 35.8 points (0.86%) over the previous week’s closing.
The BSE Mid-Cap index gained a relatively lower 29.22 points than the Sensex’s gains. The BSE Mid-Cap index ended the week at 6,088.98.
The BSE Small-Cap index, however, ended in the red for the week. It ended at 7,576.13 on Friday, down marginally 15.41 points (0.20%).
On Monday, 29 January 2007, the Sensex lost 70.76 points on account of selling in banking counters. Interest rate sensitive banking shares weakened in the latter part of trading due to concerns of a rate hike. IT shares were subdued-to-weak throughout the day. Index heavyweight Reliance Industries did offer some support to the Sensex by holding strong. The bourses enjoyed a holiday on Tuesday, 30 January 2007, on account of Moharrum.
The market began Wednesday, 31 January 2007, in the correction mode. The fall was more severe on the day with a loss of 121.04 points on the Sensex. The hawkish stance taken by the Reserve Bank of India (RBI) at its monetary policy review meeting that day cast a shadow on trading. Tata Steel was a major loser on the day, crashing 10.65% after clinching the Corus deal, at a valuation deemed expensive by the market. Metal stocks across the board lost the same day.
The break through for the bulls came on Thursday, when the market soared on the back of RBI’s upgradation of 2006/07 GDP growth forecast to 8.5 - 9.0% from 8% on the previous day, and the US Federal Reserve’s stance of not raising interest rates in the absence of any serious pressure on the US economy.
The Sensex closed Thursday with a gain of 176.26 points. Market men opine that the gains in the derivatives segment were more so from short-covering than from a build-up of fresh long positions. So the day’s rally cannot be classified as the market’s strength, as not many fresh long positions were taken that day.
There was no respite to the bull-run on Friday with the telecom and IT stocks putting on good gains, and the overall market joining in the party. In the opinion of some market men, the pre-budget rally has now triggered off. The Sensex gained 136.59 points over the previous day. Both the Sensex and the Nifty closed at their all-time high levels.
Tata Steel finally managed to clinch the Corus deal this week, albeit at valuations which appear pretty much on the higher side of analyst estimations. The deal at 608 pence per share values the company at seven times its forecasted EBITDA earnings. The market reacted to the development by hammering the stock. Tata Steel's Q3 FY-2007 numbers, in line with market expectations, did not provide any buffer to the fall in the share price. It posted a 41.1% growth in net profit in the December 2006 quarter to Rs 1063.75 crore, on 21.4% growth in net sales to Rs 4469.98 crore. The stock fell for the week by 9.09%, to end at Rs 462.95 on Friday.
ITC, too, came out with its third quarter FY-2007 results. Net profits grew 33.6% at Rs 717.40 crore, while sales grew 23.8% at Rs 3165.57 crore. The stock was down 1.32% over the week and finished Friday at Rs 176.10.
Reliance Industries stayed flat over the previous week’s closing, or just gained marginally by 0.19%, to close Friday at Rs 1372.30.
ACC came out with an impressive set of December quarter results, its bottom line rising 106.7% to Rs 358.46 crore over the corresponding last year's quarter. Sales grew 27.4% at Rs 1619.90 crore. The stock ended the week, losing marginally by 0.04% and closing Friday at Rs 1040.50.
Reliance Communication ’s consolidated net profit jumped 198% in Q3 December 2006 quarter to Rs 924.42 crore, on 26% growth in consolidated revenue to Rs 3755.30 crore. It emerged a big gainer with a 12.22% gain over its previous week’s closing and settled at Rs 490.55.
Infosys Technologies stayed more or less flat over the week, gaining marginally 0.83%. The stock closed Friday, at Rs 2259.85.
State Bank of India (SBI) was in the news after the Union Cabinet agreed to transfer RBI’s 59.73% stake in SBI to the Central Government. India's top moneylender, SBI, and private sector ICICI Bank may soon qualify for a full-banking (QFB) status in Singapore, which will enable them to open up to 15 branches and ATM centres in the island country. This qualification falls under the comprehensive economic cooperation agreement (CECA) between India and Singapore, implemented in August 2005, which calls for grant of QFB status to three Indian banks in Singapore and vice-versa.
SBI, over the week, remained near flat, gaining a mere 0.47% to close at Rs 1181.35 on Friday. ICICI Bank, however, lost Rs 40.70 (4.13%), to close at Rs 944.55.
Ratings agency Standard & Poor’s including India in the investment grade category was another important development during the week. A lot of funds, for instance, pension funds in foreign countries, which were not allowed to invest in Indian equities hitherto, will now become eligible to purchase Indian equities. The development can be instrumental in the stock market’s further rally.
FIIs were net purchasers of Indian equities worth Rs 492.10 crore in January 2007.
On the contrary, mutual funds were net sellers of equities worth Rs 1342.14 crore in January 2007.
The market edged higher, last fortnight, on buying in pivotals following strong Q3 December 2006 results.
The rally accentuated after the US Federal Reserve, on 31 January 2007, kept interest rates unchanged at 5.25%, and abstained from voicing new concerns about inflation. Another sentiment booster came at the same time when the Reserve Bank of India (RBI) raised its FY 2007 GDP growth forecast at its monetary policy review on 31 January to 8.5% to 9% from earlier 8%.
The 30-share BSE Sensex gained 221.06 points or 1.55% to settle at 14,403.77 in the fortnight ended 2 February 2007. Sensex’s closing of 14,403.77 on 2 February 2007 was its lifetime closing high. The S&P CNX Nifty added 93.35 points or 2.2% to settle at 4,183.50 in the fortnight. Nifty also struck lifetime closing high on 2 February 2007.
Consolidation was seen in small-cap and mid-cap shares after a solid surge in their prices during mid-December 2006 and mid-January 2007. The BSE Small-Cap Index gained ended flat in the fortnight at 7,560.72. The BSE Mid-Cap Index gained 42.68 points or 0.7% to 6,118.20 in the fortnight.
A sell-off in cement shares pushed the Sensex down 168 points on 23 January 2007. Cement stocks plunged after the Centre lifted import duty on all varieties of cement except for white cement. Correction in banking sector stocks also added to the downward pressure on the Sensex and the Nifty. There was also some significant squaring up of long positions in the derivatives segment a day before the expiry of contracts.
A pronounced rally materialized on 25 January 2007 due to short-covering in derivatives ahead of expiry of January 2007 derivatives contracts. The Sensex surged 172.26 points on the day, to close at 14,282.72, a lifetime closing high. Nifty put up 57.80 points, to close at 4,147.70, an all-time closing high.
Sensex lost 70.76 points on 29 January 2007 as interest rate sensitive banking shares weakened in the latter part of trading due to concerns of a rate hike ahead of RBI’s monetary policy review of 31 January 2007. IT shares were subdued-to-weak throughout the day. Nevertheless, index heavyweight Reliance Industries did offer some support to the Sensex by holding strong.
RBI’s decision in its monetary policy review to increase provisioning requirement of banks for capital market loans to 2% from 1%, which is likely to result in an increase in credit rates for capital market loans led to a 121 point fall in the Sensex on 31 January 2007. The central bank raised a key short-term interest rate, the repo rate, by 25 basis points, which was in line with market expectations. It also raised its FY 2007 GDP growth forecast to 8.5% to 9% from earlier 8%. Tata Steel was a major loser on the day, crashing 10.65% after clinching the Corus deal, at a valuation deemed expensive by the market. Metal stocks across the board lost the same day.
Sensex spurted 176 points on 1 February 2007 tracking firm global markets, which were boosted by the US Federal Reserve’s decision to keep interest rates steady.
Telecom stocks led Sensex’s 137 points rally on 2 February after telecom regulator Telecom Regulatory Authority of India (TRAI) decided to lower port charges that allows cellular operators to connect to BSNL and MTNL lines by up to 29%, a move which is expected to result in tariff cuts. Firm Asian bourses once again support domestic bourses on that day.
Quarterly outcomes were strong. Reliance Industries (RIL), ONGC, Ranbaxy Labs, Dr Reddy’s Lab, Steel Authority of India, Tata Steel, ITC, Bharti Airtel, Bharat Heavy Electricals (Bhel), HDFC and ICICI Bank reported good results. However, Bajaj Auto, State Bank of India and Maruti Udyog disappointed.
FII inflow in January 2007 totaled Rs 492.10 crore. FIIs pressed heavy sales worth Rs 4550.70 crore in three trading sessions from 8 January 2007 to 10 January 2007. In a single trading session on 8 January, they pulled out a net Rs 3076 crore. The huge sales apparently included shares tended by FIIs in Oracle’s open offer for acquiring additional shares of i-flex. Oracle’s open offer for i-flex got over in late December 2006. After the huge three-day outflow, FIIs resumed buying later.
There was substantial selling by mutual funds from the middle of the month. Mutual funds’ withdrawal for January 2007 aggregated Rs 1342 crore
Global ratings agency Standard & Poors (S&P), on 30 January 2007, raised India's sovereign local currency credit ratings to investment grade BBB-/A-3, with a stable outlook, citing strong economic prospects and an improving fiscal situation. A lot of funds, for instance, pension funds in foreign countries, which were not allowed to invest in Indian equities hitherto, will now become eligible to purchase Indian equities. The development can be instrumental in the stock market’s further rally.
With the results season over, the near term trend on the bourses will be driven by expectations regarding the Union Budget 2007-08. Market men expect the budget to give big thrust to agriculture and infrastructure. There are also expectations that surcharge on corporate tax would be abolished.
Meanwhile, there has been a flurry of IPOs from the beginning of the New Year. A large amount of money will be raised from the primary market in the coming months. Real estate major DLF Universal has already filed a fresh draft red (DRHP) herring prospectus with Sebi in what would be the largest ever IPO by an Indian firm
BUY Sterling Tools
Current Price Rs 103
BSE Code 530759
Face ValueRs 10
NSE Symbol STERTOOLS
Sterling Tools is a leading high tensile cold forged fasteners manufacturer. Due to partial commissioning of expansion, its sales rose 27% and PAT was up 41% during the quarter ended December 2006. The sharp growth rates will be maintained in the March 2007 quarter also. Full utilisation of expanded capacities, low capex and benefits of export market penetration will sustain growth in FY 2008.
Actual EPS for March 2005 Rs 10.9
Projected EPS for March 2007 Rs 11.0
Actual EPS for March 2006 Rs 8.1
One per cent of the world's population owns 40 per cent of its wealth. That on a base of 6.5 billion refers to 65 million people. The actual proportion of national wealth owned by the top one per cent varies and is measured by the Gini Coefficient, reported in the CIA Factbook.
Here is data on the US: The top one per cent owns roughly 38 per cent of all wealth, while the top five per cent owns roughly 60 per cent. The top 20 per cent owns 80 per cent of the wealth, down from 83 per cent in 1998. Average income disparity i.e. the skewness of income distribution has fallen continuously from 1929 (the year of the Great Depression) till 1970, but this (skewness) has doubled since then. The bottom 20 per cent has zero net worth i.e. no savings. Median wealth is at $62,000 (at the 50th percentile), which looks very good by Indian standards ($1100 by rough estimates) but their top one per cent have an average wealth of $ 12.5 million.
US GDP per capita is around $40,000-42,000 compared to India's $650. With nearly 70 times Indian income, their wealth ownership is sharply lower, only about 55 times. My numbers are approximate, because data taken is for varying years, but the ratio I want to calculate is important. Total US wealth is about $55- 60 trillion, but a third of that, roughly $11 trillion, is in foreign hands. More important, the flow of savings is completely dominated by foreigners, with US savings at one per cent (i.e. $125 billion on a total economy of $12.5 trillion). Foreigners bring in about $1.2 trillion, if you add up the current account deficit ($800 billion) and the fiscal deficit ($400-500 billion).
If you factor in indebtedness, you get a very different picture. The bottom 20 per cent has no net assets, i.e. net of debt. Half of them are bankrupt, facing legal proceedings for debt default. The rest are on social security. Blacks and single women (including single women with children) have the lowest levels of wealth i.e net income. Blacks have 60 per cent of average income, but only 18 per cent of average wealth. Single women with children have the highest bankruptcy ratios, now running at nearly 15 per cent.
Another significant trend thrown up is that of a non-household wealth. If you strip out house ownership, the top one per cent now owns over 50 per cent of all non-house wealth. They are predominantly concentrated in equity ownership, both listed and private. Ten per cent of the US population owns 85 per cent of the listed equities, 85 per cent of all financial securities and 90 per cent of business assets in the country. Compare this with the concentration of all kinds of wealth (38 per cent) and you know where you need to be if you want to get seriously rich. With per capita GDP of $42,000, US median wealth is at $62,000, i.e. a net worth of roughly 1.5 years' income. Much poorer India does far better. On a per capita GDP of roughly $650, we have net wealth of $1100 per capita, 1.7 years. But we know that from elsewhere our household savings rate is around 30 per cent.
Actually, this key ratio of net worth:income is much better. You need to factor in US indebtedness, low savings, foreign ownership of US assets and their very highly-valued stock markets (1.8 times GDP). If one factors in all these factors, the US ratio will drop and the Indian ratio will rise much more.
So let me make my points.
The US is one of the most unequal among the developed countries, except the UK. The Gini Coefficient (an index of income inequality) is at 45, against India's 32.5. It has been noticed that very high levels of inequality tends to slow down economic growth, because it distorts the allocation of resources away from basic public goods to luxuries.
When a nation is dominated by excessively rich people, tax collection as a proportion of wealth drops because the rich are better tax planners. Millionaires in the US have taxable incomes of just seven per cent of net worth, compared to more than nearly two to three those levels for the rest of the populace. Further, the quality of education (and public services) suffers because the rich are able to send their children to private schools, while the poor make do with public schooling, which is always starved of funds. We see this spectacularly in India.
Another important point is the role of innovative industries in exacerbating income inequality. Industries like IT and biotech tend to concentrate wealth in the hands of the educated elite. This kind of income inequality may be better than the feudal kind seen in, say, a Bihar, but it also distorts the allocation of resources to public goods, outlined above.
And the most important point is that markets accelerate income inequality, as the data shows above. Similar macro-economic data for India is not available, but we can all see anecdotal evidence around us. Those who have large proportions of their wealth in equities tend to do better over time. I have argued this at the micro-economic level in previous articles, where I pointed out that real estate returns are random and more uncertain over long periods of time. Equities outperform both in quantum and in predictability.
Equity returns measure entrepreneurship, the returns available to risk-seeking capital. High equity valuations are available to those countries that are relatively entrepreneurial and growth-oriented. The fruits of such growth get disproportionately distributed to the small risk-taking class. These are usually the educated elite, leading to results very similar to the innovation- drivers outlined above.
Qualitatively, this kind of wealth inequality is much better than the kind seen in, say, North Korea or Zimbabwe, which is feudal, power-driven and goes to the hegemonist. But still, thanks to a disproportionate control over the fruits of education, the educated elite in these democratic countries also tends to contribute their mite to the problem.It has been argued, very reasonably, that income inequality is the biggest spur to entrepreneurship and innovation. Without the potential for relative outperformance, nobody would have any incentive to do anything useful. This was the biggest reason for the death of communism. That is acceptable. But this is not an unmitigated virtue. Capitalism still bears the responsibility of ensuring that income inequality does not end up in wrong hands. We need to look at Nigeria/ Zimbabwe and the tinpot nations of Africa and the Middle East to see what excessive concentration of wealth can do.
Capitalism also needs to monitor who gets the wealth, and why? If the income inequality is happening Bihar style, with wealth being captured through political or muscle power, then you will have the vicious cycle of political power capturing wealth, then that economic power consolidating itself into further political power, creating and endless morass which perpetuates itself. The dons of Dhanbad started with crime, captured wealth, then political power, which created even further wealth.
So are the IT tycoons any better? They too perpetuate private monopolies, which just look better because they are white collar in nature. But the distortion in resource allocation is the same. The physical slavery of Dhanbad is not much better than the slavery foisted by dollar on the sweatshops of Asia…we make a container-load of garments, just to get back a CD with a computer programme. There are ethical and humanitarian dimensions to this problem, besides the usual economic and political arguments. The pursuit of innovation and entrepreneurship is of course a virtue but you need to question whether you are doing too much, if your Gini curve starts to look the same as Zimbabwe's.
A couple of days ago, there was news that the Finance Ministry has said that the Employee's Provident Fund Organisation (EPFO) shall be able to invest up to five per cent of its new deposits in the stock markets. Most commentators assumed that this was it and the EPFO's stock investments would now actually happen. However, the EPFO's trustees' board rejected the idea as too risky. Also, the EPFO board asked the finance ministry for support to pay a higher interest rate. The current rate is 8.5 per cent. The board wants to maintain this rate but that will require the government subsidies. The EPFO's own finances suggest that only 8 per cent is feasible while the left trade unions reportedly want 9.5 per cent.
This has brought forth the now-periodic argument about whether the EPFO interest rate ought to be subsidised. Obviously, the unions and politicians of many colours want the government to subsidise the interest rates and 'finance ministry sources' that the pink newspapers often quote warn of how the subsidy will balloon up to an unaffordable size. Generally speaking, all involved knees have reacted by jerking in thoroughly predictable directions.
I think that this EPFO subsidy issue needs some dissection of exactly who is being subsidised and on what basis. It isn't anybody's case that there should be no subsidies at all in the country. Clearly, there are many things that ought to be subsidised. For example, school education and healthcare for the poorest Indians are surely good subsidies. However, a subsidy on the interest rate paid on savings is, in effect, a subsidy on the possession of money. As a result of an EPFO subsidy, the more money you have, the more money you will get from the government. The arithmetic is simple-if your provident fund balance is Rs 10 lakh, a one per cent subsidy means that the government will gift you ten thousand rupees a year. But if your balance is just Rs one lakh, then that same one per cent subsidy means that the government will gift you only a thousand rupees a year. And so on. The poorer you are, the less the government will subsidise you.
In my opinion, this bizarre and patently unjust reverse subsidy phenomenon is happening because of a failure to differentiate between different classes of EPFO beneficiaries. Everyone's mental image of an EPFO account holder is that of a peon or a manual labour. My hunch is that while such workers will form the greatest number, a relatively larger amount of EPFO assets will actually come from a smaller number of much better-paid employees. The poorer EPFO beneficiaries typically don't have the knowledge or the confidence to look for other investment avenues and in any case, often don't have any other savings except whatever is enforced by their EPF deductions. Often, their EPF savings are their entire savings. The cause of this class of EPF holder should not be mixed up with that of the better paid employee for whom the EPF is a small part of his personal asset base.
At BSE, Goldman Sachs Investments bought 2,880,000 shares at Rs.245.5 a share and Citigroup Global bought 352,518 shares at Rs. 238 a share of Gitanjali Gems.
Deutsche Securities bought 99,869 shares at Rs. 455 per share of Balmer Lawrie & Company, Mavi Investments sold 1000000 shares at Rs. 6.97 per share of G V Films.
ICICI Prudential bought 1,492,497 shares at Rs. 275 per share of Cummins India.
Crown Capital bought 1,920,000 shares at Rs. 161 a share & Shailaja Inv. sold 1,920,000 shares at Rs. 161 a share of Radico Khaitan.
UBS Securities Asia bought 1,238,000 shares at Rs. 89.05 a share & Sejal Shah sold 497,530 shares at Rs.89.48 a share of Swan Mills.
At NSE, Mirae Asset India Trust bought 1,092,292 shares at Rs. 135.84 a share & ABN AMRO Bank sold 372,880 shares at Rs. 138.29 a share of Escorts.
BSMA bought 507,339 shares at Rs. 47.95 a share & Khattar Holdings sold 500,000 shares at Rs. 47.95 a share of Bhagyanagar India.
Blackstone (Asia) bought 438,083 shares at Rs. 300 per share of GMR Industries and Deutsche Securities bought 163,000 shares at Rs. 342.15 a share of GVK Power & Infrastructure.
Saravana Stocks sold 3,200,000 shares at Rs. 25.59 per shares of IFCI.
Mandira Investment and Finance bought 1,539,500 shares at Rs. 61.53 a share & Sealand Investment sold 947,500 shares at Rs. 61.65 per share of Sona Koyo Steering Systems.
Munjal Showa Ltd.
Munjal Showa, largest manufacturer of shock absorbers in India has come out with good performance in Q3 FY2007.
Net Sales registered a growth of 12.4% to Rs.174.59 crore. OPM% has improved to 7.9% (6%) led by decline in raw material costs as well as other expenses. Sales increase coupled with improved margins and higher other income of Rs.2.4 crore (Rs.1.5 crore) led to 60.6% jump in PBT to Rs.12.85 crore. However a higher tax rate of 36.7% (34.3%) restricted growth in PAT to 54.8% at Rs.8.13 crore.
Munjal Showa is sole supplier of shock absorbers to its promoter, Hero Honda Motors. Around 80% of company’s sales are to Hero Honda. Company's business profile is enhanced by its collaboration with Showa Corporation, Japan, one of the world's leading shock absorber manufacturers that enables it to access world-class technology. In line with uptrend in automobile industry and its new product launches, Hero Honda is expected to sustain its growth trend. This in turn will benefit Munjal Showa which has developed products for Hero Honda’s new launches. In order to reduce its dependence on Hero Honda, company is expanding its client base and aims to increase sales to 4-wheeler significantly by inducting new customers. Munjal Showa continues to supply 100% export requirement of Maruti Udyog Ltd.
Auto component industry is on fast track on back of uptrend in automobile industry. Munjal Showa is well equipped to take advantage of upcoming growth opportunities through new product introductions, change in product mix and access to hi-end technology.
At CMP of Rs.69.1, the share (Rs. 2/- paid up) is trading at 10.2 times FY 2007 expected EPS of Rs.6.8 and 8.4 times FY2008 expected EPS of Rs.8.2. In view of good business prospects, we recommend to “BUY” the share at CMP.
Cluster: Apple Green
Price target: Rs230
Current market price: Rs209
Price target revised to Rs230
- Crompton Greaves' revenues grew by 25.5% year on year (yoy) in Q3FY2007 to Rs813.0 crore, slightly below our expectations. The top line of the power system division grew by 27.9% to Rs426.2 crore and of the consumer product division rose by 21.0% to Rs226.3 crore. The industrial system division saw a growth of 32.9% in its top line to Rs231.1 crore.
- The operating profit margin (OPM) reduced by only by 90 basis points yoy to 11.9%. Sequentially though the material pricing eased and this resulted in an expansion of 120 basis points in the margin.
- Crompton Greaves provided for full tax rate in Q3FY2007 as against the MAT rate in Q3FY2006. The increased tax provisioning led to a negative growth of 17.0% yoy in the PAT to Rs45.4 crore in spite of an 18.3% rise in the PBT. However the PAT after extraordinary items grew by 5.1%.
- Pauwels' top line grew by 86.4% yoy to Rs520.0 crore in Q3FY2007, way ahead of our estimates; its PBT stood at Rs21.3 crore.
- The stand-alone order book grew at 41% yoy and 17.5% sequentially to Rs2,115 crore. Pauwels' order book grew by an impressive 50.3% yoy and 12.5% sequentially to Rs1,939 crore.
- The Ganz acquisition, which has been concluded, will further accelerate the growth of the consolidated numbers. Though currently loss-making it is expected to contribute 70 million euros in FY2008 and turn profitable by then.
- We are revising our FY2007 and FY2008 estimates. The FY2007 earnings per share (EPS) estimate adjusted for bonus has been downgraded by 7.6% to Rs6. However considering the stabilisation of the margins in FY2008, the robust top line growth, the strong performance of Pauwels and the contribution from Ganz, we are revising upwards our FY2008 earnings estimate by 9.9% to Rs10.7.
- At the current market price of Rs209, Crompton Greaves is trading at 19.6x its FY2008E consolidated earnings and 11.8x its FY2008 EV/EBIDTA. We believe that these valuations are fair, given the robust operating performance of the stand-alone company; the higher geographical width and product depth of the subsidiaries; and the management's expertise in turning around operations. We are revising our price target to Rs230.
Orient Paper and Industries
Cluster: Vulture’s Pick
Price target: Rs800
Current market price: Rs573
A quarter of robust performance
- Orient Paper and Industries' net revenues grew by a robust 31.9% year on year (yoy) to Rs274 crore in Q3FY2007. This was driven by the cement division, whose revenues grew by 46.8% to Rs142 crore on the back of a 47.3% year-on-year (y-o-y) jump in the realisations to Rs2,591 per tonne.
- The fan business continued to grow at a healthy rate of 30% yoy and recorded a top line of Rs54.1 crore. After the previous quarter's lacklustre performance the paper business recovered with an 8.3% y-o-y growth in the top line to Rs73 crore.
- The earnings before interest and tax (EBIT) of the cement division grew by a whopping 343.9% yoy to Rs51.5 crore on account of the higher realisations and the company's strong leverage to cement prices. The other two divisions too contributed positively to the EBIT, thereby boosting the overall EBIT by 190.1% to Rs62.1 crore yoy.
- The interest cost continued to decline in the quarter. On a sequential basis the interest cost reduced by Rs3 crore to Rs5.67 crore. On the other hand, with the company not adding any assets in the quarter, the depreciation provision stood flat at Rs7 crore.
- These two factors coupled with the stellar performance at the operating level led to a 543% y-o-y growth in the net profit to Rs36.55 crore, which was higher than expectations.
- The company will be adding close to one million tonne of capacity in FY2009 through de-bottlenecking. Of this 0.27 million tonne of capacity will be set up by March 2007. To meet its power requirements, the company is also putting up a captive power plant of 30 megawatt (MW).
- To finance the capital expenditure (capex) as well as to reduce its long-term debt, the company has decided to raise Rs175 crore through a rights issue. We have factored the same in our estimates, assuming a price of Rs400 per share.
- Considering the better than expected performance for M9FY2007, we are upgrading our FY2007 profit after tax (PAT) estimate by 18.7% to Rs122.7 crore. We are also upgrading our FY2008 PAT estimate by 29% to Rs182.4 crore, taking cognisance of the higher than expected rise in cement prices in Andhra Pradesh and Maharashtra. After factoring in the equity dilution on account of the rights issue at a price of Rs400 per share, the diluted earnings per share (EPS) estimates stand at Rs63.9 and Rs94.9 for FY2007 and FY2008 respectively.
- At the current market price of Rs580 the stock is trading at 9.1x its FY2007E EPS and 6.1x FY2008E EPS. On an enterprise value (EV)/tonne basis, the stock is trading at $62 per tonne of cement (without considering the value of the investments in Century Textiles and Hyderabad Industries), which is less than the replacement cost of $80 per tonne. With cash and cash equivalent of Rs160 per share on its books, Orient Paper and Industries offers adequate margin for safety. We maintain our positive view on the stock with a price target of Rs800.
Ratnamani Metals and Tubes
Cluster: Ugly Duckling
Price target: Rs700
Current market price: Rs595
Price target revised to Rs700
- The Q3FY2007 results of Ratnamani Metals & Tubes Ltd (RMTL) are above our expectations.
- The company reported strong quarterly results; its revenues for the quarter grew by 63% to Rs193.6 crore and net profit grew by 119% to Rs21.7 crore.
- The operating profit for the quarter grew by 111% to Rs42.3 crore, as the operating profit margin (OPM) improved by 450 basis points to 22.5% from 18% in Q3FY2006. The improvement in the OPM was on account of controlled other expenses and lower power cost due to windmill operations. The other expenses as a percentage of sales declined by 915 basis points. However, the gains were partially offset by the pressure on the raw material cost, which increased by 418 basis points as a percentage of sales.
- The interest expense for the quarter increased by 29% to Rs3.5 crore, while the depreciation cost for the quarter increased by 38.9% to Rs3.3 crore.
- The order book at the end of the quarter stood at Rs451 crore, registering a strong growth of 125% on a year-on-year (y-o-y) basis.
- The strong order book and increasing demand for its products from its key user industries, which are in a capital expansion phase, impart strong visibility to the future earnings of RMTL. We maintain our Buy recommendation on the stock with a revised price target of Rs700.
Cluster: Ugly Duckling
Price target: Rs1,050
Current market price: Rs781
Price target revised to Rs1,050
- The Q3FY2007 results of Sanghvi Movers Ltd (SML) are slightly below our expectations, the company's revenues declined by 12.7% year on year (yoy) to Rs38.9 crore.
- In addition to the regular orders from Reliance Industries Ltd (RIL), SML had secured an additional order worth Rs20 crore from the company in Q3FY2006 due to a shutdown in the RIL refinery during that quarter. Adjusting for this one-time order, we believe the company has done easonably well.
- Also the business flow from windmill customers remains low during the third quarter as most of these customers install windmills by September to avail of tax benefits. SML had got a Rs9-crore order from Suzlon alone in Q2FY2007 but in the third quarter it received orders of only Rs1 crore from the same company.
- The operating profit for the quarter declined by 5.6% to Rs28.3 crore due to lower top line growth. However the operating profit margin (OPM) improved by 520 basis points to 72.2% from 67% in Q3FY2006.
- The interest expense for the quarter increased by 74% to Rs6.7 crore whereas the depreciation cost for the quarter increased by 13.7% to Rs8.8 crore.
- Consequently the net profit for the quarter declined by 30.7% to Rs11.7 crore.
Four-wheelers outpace two-wheelers
- Bajaj Auto: Bajaj's January sales are lower than expectations.
- Hero Honda: Hero Honda sales bounced back posting a 19.3% sales growth in January, with better sales of its new models like Glamour and CBZ X-treme increased.
TVS Motors: TVS Motors’ motorcycle sales were disappointing in January, remaining almost flat at 69634 units.
- Maruti Udyog: Maruti rendered a stellar sales performance in January, with a strong growth across all the segments.
- Tata Motors: Tata Motors' January sales were quite good with an overall growth of 19% with sales of 55440 units.
- Mahindra and Mahindra: M&M rendered a good performance for the month of January registering a 25.6% growth in the automotive segment and a 13.2% growth in the tractors segment