Saturday, March 24, 2007
Cluster: Emerging Star
Price target: Rs650
Current market price: Rs518
- KSB Pumps delivered good results for Q4CY2006. Its net sales grew by 24.9% to Rs108.3 crore during the quarter. There was a delay in the dispatch of certain orders in the previous quarter; the delayed sales got reflected in the fourth quarter, boosting the Q4CY2006 performance.
- On segmental basis, the revenues of the pump business went up by 16.2% to Rs78.9 crore while that of the valve business grew by a strong 57.7% to Rs28.7 crore. However, the margin in the pump business declined to 13.4% from 15.3% last year, while the profit before interest and tax (PBIT) margin in the valve business grew by 120 basis points to 25.4%.
- Overall, the operating profit grew by 24.2% to Rs20 crore, while the operating profit margin (OPM) was stable at 18.5%. This despite a steep hike in the raw material cost, which rose from 41% in the same quarter last year to 46.4%. However, substantial savings were made in the staff cost and other expenses.
- The profit after tax (PAT) for Q4CY2006 rose by 42.4% to Rs12.1 crore. For CY2006, the OPM grew to 20.4% from 18.1%, while the full years' PAT grew by 38.3% to Rs51.6 crore.
- Sales are traditionally better in the first and second quarters for pump makers because of seasonal factors. Hence, we should expect even better results from the company in the coming quarters, both in terms of revenues and margins.
- The pumps industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a 12% market share, would be one of the key beneficiaries of the same and hence we expect the growth momentum to sustain going forward. We are introducing our CY2008 earnings per share (EPS) estimate at Rs46 for KSB Pumps. At the current market price of Rs518, the stock quotes at CY2007E price/earnings ratio (PER) of 11.3x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs650.
Revised guidelines on CAR of banks
The revised guidelines on the capital adequacy requirements of banks are broadly in line with the previous guidelines issued in February 2005. However, certain changes have been made which include the introduction of a prudential floor for capital adequacy, increase in the Tier-I ratio and a change in the risk weights for corporate and non-banking finance company (NBFC) exposures. The major changes have been highlighted in a tabular form given below. The revised guidelines would impact some private banks like ICICI Bank, HDFC Bank and UTI Bank as the release of capital has been delayed. An increase in the risk weights for exposure to NBFCs would make the borrowing costs higher for companies like IDFC.
Garware Offshore Services
Fleet expansion to drive growth
Incorporated in 1976, Garware Offshore Services Ltd (GOSL) is part of the Garware group of companies and involved in providing supply and support vessels to oil exploration & production (E&P) companies operating in offshore blocks.
Currently, the company has a fleet of six vessels: four anchor handling tugs (AHTs; deployed with Oil & Natural Gas Corporation [ONGC] with day rates of $4,500) and two platform support vessels (PSVs; one deployed with Transocean [day rate of $15,500] and another with British Gas on long-term charter at day rate of $14,500).
In may 2006, some of the country's key economic indicators looked like this: The trade deficit, which is the difference between exports and imports (with the latter being higher than the former), stood at $3.8 billion or Rs 16,720 crore; the prime lending rate (PLR) of commercial banks stood at 10.8 per cent; 10-year government securities (G-Secs) were yielding 7.6 per cent; and inflation hovered around 6.1 per cent.
Cut to February 2007: The balance of trade is now negative to the tune of $5.8 billion or Rs 25,520 crore; borrowers of all hues (retail as well as medium-sized enterprises) are coughing up more what with the PLR climbing to 12.3 per cent; safe-haven assets like fixed deposits and bonds are back in fashion as 10-year government paper breaches the 8 per cent mark; and, last but not least, the monthly budget of households has shrunk with inflation peaking at 6.7 per cent.
If the scenario on the economic front was steadily deteriorating in the nine months between May and February, it wasn't quite reflected on Dalal Street. In fact, the euphoria persisted. After hitting a new high on May 10, 2006, of 12,612 points, the Bombay Stock Exchange's (BSE's) benchmark index did brutally correct over 26 trading days by 29.20 per cent to hit a low of 8,929 points thanks to fears of a global commodity bubble that looked set to implode. However, after duly riding out that crisis, the Sensex rebounded in style, and came within striking distance of the 15,000 mark in early February, hitting 14,697 by the 8th of that month. That the markets have since corrected is another story (attributable to global factors), but the 2,000-odd point spurt in just 180 trading days made you wonder whether punters had taken into account the dark clouds in the macroeconomic picture. It would appear, from the Sensex's spurt-and the pundits' consequent predictions that stretched from 20k to 50k over varying time-spans-that market men were blinded to these worries.
For a moment try and look beyond the much-hyped Sensex (and indeed other similar benchmark indices), and consider instead the 30 stocks that give it life. Therein hangs a bearish tale: Just six stocks with a collective weightage of 40 per cent have contributed to the rally. The rest didn't participate at all in the run up to 14,600 levels. In fact, 14 of the Sensex shares have been value destroyers in the May-February period, by as much as 30-54 per cent in a few cases. Look beyond the Sensex and the picture isn't brighter, with the BSE's 286-stock mid-cap and 463-stock small cap indices flat as a pancake. And sectors that were till recently the rage-auto, fast-moving consumer goods, public sector undertakings, metals and pharma-are in various states of neglect (see Does the Sensex Make Sense?). Last fortnight, as markets globally slipped into a free fall, unsurprisingly, back home, the stocks that fell the hardest were those that had fuelled the index's heady rise. For instance, HDFC, HDFC Bank, Reliance Communications, and ICICI Bank were responsible for pushing down the Sensex from the 14,600 levels to 12,500 by March 15.
Meanwhile, bearing the brunt of the apathy to India equity (or at least to most of it) are mutual fund schemes that tapped the markets in 2006 (see No Fun for Funds). Almost all of them have registered negative returns since inception. The net asset value-based returns of DSP Merrill Lynch Mid-cap and Small Cap Fund, for instance, are down by 14 per cent since launch in October, even as the Sensex has moved up by 5 per cent since then. UTI Contra Fund is down 13.14 per cent since being flagged off last March.
he big question being asked on Dalal Street these days is: Is the four-year structural/secular/broad-based rally over? Clearly, signs of fatigue have begun to show in the past nine months, and the multi-bagging machine that the Indian market till recently was, is beginning to sputter. "The focus has suddenly shifted back to large caps and even new investors are chasing the frontline stocks. That's the problem we are facing today," explains Hemendra Kothari, Chairman, DSP Merrill Lynch. Adds Asit Koticha, Managing Director, ask Raymond James: "The broader market's behaviour can be attributed to an underperformance in relation to expectations rather than any actual financial (under)performance." A worry is the decline in delivery-based trades, down to 32 per cent, which is the lowest level in years, and which clearly points to the lack of conviction in the long term. This is also reflected in the advance-decline ratio which has been below one for six out of nine months since May (which means there have more stocks falling than rising in these months) for the 1,000 most actively-traded stocks on the National Stock Exchange.
Some sections of the market can't understand why mid-caps are getting the cold shoulder. Earnings growth for this sector is robust (for the December ended quarter, mid-caps showed a 38 per cent growth in profits). And, as Nimesh Kampani, Chairman, JM Financial, puts it: "Mid-caps are tomorrow's large caps. I am not unduly worried.
The ubiquitous foreign institutional investor (FII), and the flows this tribe brings into the country, will have a major hand to play in creating tomorrow's mega caps. After all, it's been largely FII funds-all of $34 billion or Rs 1,49,600 crore in the past four years-that have been instrumental in pulling up the Indian markets from the undervalued stage to one of fair valuation (some would argue to a stage of overvaluation). However, the bad news is that FII inflows are showing distinct signs of flagging. In the last 10 months since May, net inflows have plunged by close to 60 per cent, to Rs 19,408 crore from Rs 46,445 crore in the previous corresponding period. In fact, the last 10 months' inflows are the lowest since 2003. Sushil Muhnot, Managing Director, IDBI Capital Markets, says: "There has been a slowdown in FII inflows, but that has, more or less, been made up by higher FDI (foreign direct investment)." That's cold comfort for investors who've bought shares hoping that foreign money will fuel those shares to dizzier heights. One reason for the subdued FII interest may be that the options for investment for global investors are simply narrowing down. For instance, in a sector like banking, FIIs have reached their respective permissible limits in stocks like ICICI Bank, State Bank of India, Bank of Baroda, Oriental Bank of Commerce, Punjab National Bank and half-a-dozen other state-owned banks. Amongst the Sensex stocks, ICICI Bank and Bharti Tele are two stocks with a total weightage of 17 per cent where the FII limit has been reached. But fewer options may not be the only reason for the dipping FII inflows. It could just be that the Indian markets have run out of steam in the past 10 months, and other emerging markets-particularly in the Asia-Pacific region- have begun to look more attractive. For instance, the Chinese markets had gained 90 per cent since May 10 till last fortnight; the Sensex on the other hand had inched up by only 3.10 per cent in this period. Yet, there are those who believe that few emerging markets can boast of a story like that of India over the longer term. Andrew Holland, Managing Director, DSP Merrill Lynch, says: "India's growth story is compelling. I don't think the Malaysian, Philippines and Vietnamese markets are big enough to force foreign investors to shift money from India." But the billion-dollar question is whether, barring the elite bellwether stocks, the FIIs have enough conviction in the rest of the pack that's listed on the Indian stock exchanges.
|Bid evaluation committee wants the combine's 'amicable extrication' from the project.|
|The promise of easy power from the Rs 16,000-crore Sasan ultra mega power project seems distant as the project’s bid evaluation committee has decided to ease out the Lanco-Jindal combine as developers of the project.|
|The committee, headed by HDFC’s Deepak Parekh, decided to “explore an amicable extrication of Lanco from the project,” said an official closely associated with the 4,000 MW project.|
|Lanco, with its overseas partner Globeleq, had offered to supply power at an eye-popping Rs 1.196 per unit from the pithead coal-based project in Madhya Pradesh.|
|This was the lowest of the nine bids received to develop the project, and brought the Hyderabad-based Lanco to the national stage. Its bid was better than those from industry veterans like NTPC (Rs 2.126 per unit), L&T (Rs 2.251 per unit) and Jindal (Rs 1.799 per unit).|
|There were also some questions raised about the financial strength of Globeleq-Singapore, which was the entity partnering Lanco.|
|“The next step is a meeting between Lanco and the Power Finance Corporation (the nodal agency for implementing the project),” officials said.|
|Lanco’s Managing Director Madhusudhan Rao said he was yet to hear from PFC though he reiterated that he was “confident of getting the project.”|
|The evaluation committee wanted to ensure that the project should not suffer. “We want the project to take off,” said an evaluation committee member, who requested anonymity.|
|However, members of the committee, which includes the chairman and managing director of both PFC and Punjab National Bank, and the chairman of Central Electricity Authority (CEA), want the power from Sasan to be made available at the amount bid by Lanco-Globeleq.|
|One of the options being explored is to ask the second-highest bidder — Reliance Energy — to match the Lanco-Globeleq bid. Reliance had bid to supply power at Rs 1.296 per unit.|
|“The committee could not take a decision on this,” sources said, adding that another meeting would be scheduled shortly.|
|The other option of inviting fresh bids did not find much favour at the meeting. “The entire bidding procedure followed the guidelines and there’s no question of any wrongdoing,” said a committee member.|
|However, all members are keen to avoid any litigation that could delay the project.|
|Sources said the shell company set up by PFC — Sasan Power Ltd — is working on full steam to get the requisite clearances and approvals. |
A subsidiary of United Phosphorus (UPL), Advanta India, held by Advanta Netherlands Holdings, ITC-Zeneca, Syngenta, AgroTech Foods, and private equity investors at various stages, has developed a global portfolio of wide range of hybrid seed varieties including sunflower, rice, corn, rapeseed, mustard, sorghum, canola and oats.
Advanta India has three international subsidiaries in Australia, Thailand and Argentina. The international division of the Australian subsidiary caters to Asia, the Middle East, Africa and Latin America.
The subsidiaries outside India were earlier subsidiaries of Bio-win Corporation, a group company of the promoter group, United Phosphorous. Advanta Holdings B.V., a wholly owned subsidiary of Advanta India, acquired these subsidiaries from Bio-win at euro 95 million, or around Rs 556.52 crore, on 30 March 2006. Of this, Rs 227.44 crore is still outstanding. Advanta India will be using the IPO funds to pay off this liability.
Uniphos Seeds and Bio-Genetics Pvt Ltd (USBPL), one of the promoter group companies, got merged with Advanta India on 1 April 2006. Advanta India issued 33.77 lakh equity shares at par to the shareholders of USBPL: Jai Shroff and Vikram Shroff. USBPL was focused on developing, marketing and selling bio-engineered seeds for cotton crops licensed from Nath Seeds, an Indian company delisted by the stock exchanges.
- Advanta India has well-developed brands and distribution network in the markets where it operates. The company owns and has access to a broad portfolio of proprietary germplasm, which is necessary for any seed company to gain competitive edge.
- The company has been developing since the last 12 years a hybrid non-genetically modified sunflower variety in Argentina, named Sunsat. It will have the capability of lower bad cholesterol. Commercial production is slated to start in 2009.
- Advanta India operates in a seasonal industry and is exposed to risks related to weather, disease and pests. Moreover, technology advances (like genetically modified seeds) are changing the dynamics of the industry. Besides, operations in many countries and crops make the performance highly unpredictable.
- In the present form, the consolidated company has been in existence since March 2006. So comparable financial track record is not available for the past, except for the latest seven-month performance. The different consolidated entities have been growing individually at unexciting rates in the past few years. Not surprisingly, they have also changed hands often.
Advanta India has set a price band of Rs. 600 to Rs 650 per equity share of Rs 10 each, translating into a PE of 30.1x on the lower price band and 32.6x on the higher side of the price band, according to annualised EPS for the seven-month period ended October 2006 on post-issue equity of Rs. 16.83 crore. However, the actual EPS may be significantly different from the annnualised one due to seasonality in business (the impact of which is not ascertainable).
Monsanto India and Syngenta India, the listed Indian subsidiaries of MNCs, derive part of their revenue by selling hybrid and genetically modified seeds to Indian farmers. These companies are presently trading at PE of 21.6 on a trailing 12-month basis.
Hybrid seeds is not a high growth business and also prone to unpredictable fluctuations. Hence, the asking PE is very steep.
Bears losing ground
The domestic indices have been trading firm for the last five sessions. Today the market closed a bearish gap on the Sensex and the Nifty also managed to go past 3900 on an intra-day basis...