Weekly Wrap - June 6 2009
Sunday, June 07, 2009
Infosys moved in line with our expectation and rallied to the intra-week peak of Rs 1706. But the stock is pausing below this resistance. The near-term view will be ambivalent as long as the stock remains at these levels for a move above Rs 1706 can take it higher to Rs 1830 while failure to surpass this level will cause a decline to Rs 1500 again.
Our medium-term view for Infosys stays negative as long as it trades below Rs 1750. Failure to move above this level over the next two weeks can cause a decline to Rs 1486 or Rs 1400 over the medium term.
ONGC is currently in a short-term correction that is making the stock move in the range between Rs 1140 and Rs 1220. Short-term investors can buy on declines with a stop at Rs 1085. The stock can move higher to Rs 1257 or Rs 1340 in the near term
Maruti recorded yet another spurt last week that made it rally above our medium-term target of Rs 1100 to peak at Rs 1113. The stock is halting at the upper boundary of the trend-channel that is enclosing the stock’s movement since January 2009. Reversal from here can drag the stock lower to Rs 960. But the medium-term view will stay positive as long as this level holds. If it holds above Rs 960, Maruti can have another shy at its all-time high over the medium term.
RIL moved in line with our expectation, reversing below the resistance indicated last week thus highlighting the weak outlook for the short-term. The stock can decline to Rs 2094 or Rs 2066 in the near-term and a close above Rs 2343 is needed to reverse this view. The ceiling of the gap formed on May 18 at Rs 2102 will be the key short-term support for the stock.
We continue to advise caution from a medium-term perspective unless there is a weekly close above Rs 2384. A gradual decline to Rs 1900 or Rs 1700 can not be ruled out in the medium term.
Tata Steel led the market forward last week with a 14 per cent gain. The stock moved slightly above our second medium-term target of Rs 487 to peak at Rs 496. There could be a short-term correction to Rs 448 or Rs 416 in the near term. Short-term traders can buy on such declines with a stop at Rs 410. Resistances for the week would be at Rs 481 or Rs 496.
The stock is in a strong medium term up-trend and this move can continue to take Tata Steel towards the medium-term target of Rs 552. The positive medium-term view will be marred only on a close below Rs 330.
Investors with a medium-term standpoint can consider buying Tanla Solutions. The stock was on a structural down-trend from its lifetime high of Rs 410 recorded in January 2008. This move was arrested at Rs 21 in March. The prolonged positive divergence in the weekly indicators triggered its trend reversal. An emerging intermediate-term uptrend is visible since then.
Though the stock is undergoing sideway consolidation between Rs 74 and Rs 84, the medium-term prospect is bullish. Following this sideways movement, the stock has the potential to rally up to Rs 104 in the medium term. Medium-term investor can buy the stock while maintaining stop-loss at Rs 67. Short-term investor can buy with the target of Rs 89 and stop at Rs 71.
A small-sized company with a sizeable portfolio of sunflower, maize, cotton, and paddy hybrids, Kaveri Seed has sustained strong financial performance since its IPO in September 2007. The per share earning for the past year now stands at Rs 18.5 (excluding one-off items) against Rs 8 at the time of the IPO.
Yet, the market meltdown has whittled down the stock’s valuation; its PE shrinking from about 16 times to its current 11 times (market price of Rs.209). Given the bright growth prospects for the seeds and micronutrients business, the company’s growth history and established presence, the stock deserves a better valuation. Kaveri’s larger rivals — Monsanto India and Rallis India — the only other listed companies which have a presence in seeds, have already seen a sharp re-rating and now trade at 17 and 12 times earnings respectively.
High entry barriers
With a two-decade presence in the seeds business, Kaveri Seed has a portfolio of about 40 certified hybrids in corn (12 hybrids), sunflower (5), cotton (6) and paddy (13). Building a product portfolio of this size requires a fairly long gestation period, as development of each hybrid strain usually takes four-six years.
Production of hybrid seeds also calls for access to proprietary germplasm (genetic material) with the required traits making for high entry barriers to the business. The company also sells crop micronutrients under the brand name Microtek; another business with good potential.
Kaveri Seeds’ IPO in 2007 raised Rs 68 crore to fund acquisition of farmlands, upgradation of seed processing plants and working capital requirements. The bulk (Rs 62 crore) of the proceeds have already been utilised.
Potential in seeds
The bright demand prospects for domestic seed companies arise from the huge shortfall in availability of quality seeds and increasing adoption of hybrids, given the need to improve agricultural yields on food and feed crops (Indian yields are far below world standards).
The Indian market has been seeing a substantial deficit in the supply of certified seeds over the past few years. Data put out by the Agriculture Ministry for kharif 2009 suggests that crops such as paddy (shortfall of 28 lakh quintals for the season), maize (2.2 lakh quintals), sunflower (0.59 lakh quintals) and cotton (1.15 lakh quintals) saw persistent shortfalls over the past four years.
All of these crops feature in Kaveri Seed’s portfolio. The policy regime for the sector is likely to be friendly over the next few years, given the incumbent government’s stated intention of improving seed availability.
High on growth
In terms of financials, Kaveri Seed has managed to deliver impressive and yet consistent growth over the past four years, with a compounded annual growth of 22 per cent in sales and over 100 per cent growth in profits in this period, albeit on a low base.
Operating profit margins over this period have expanded from the low single-digits to well over 25 per cent for the past three years; the bulk of this improvement coming from a backward integration move into foundation seeds in 2006-07.
That performance was sustained over the past year. For the nine months ended December 2008, net profits rose 46 per cent while net sales grew 23 per cent, driven by a higher contribution from the seeds business and overall margin expansion. The micronutrients division despite more sedate growth than seeds, managed improved margins.
Going forward, the company appears well placed to sustain margins at healthy levels, mainly due to pricing power. Focussed on lucrative cash crops such as sunflower, maize and cotton, the company may be comfortably placed to pass on any cost increases to consumers, given the strong demand.
The upward bias in farm product prices and the sharp hikes in the minimum support prices of key crops last year are likely to have lifted the purchasing power of farmers and may lend support to both volumes and pricing power for Kaveri’s target crops.
Kaveri’s balance sheet remains quite strong, with near zero debt (thanks to the IPO proceeds of Rs.68 crore), healthy ROCE and RONW (22 per cent and 16 per cent respectively).
This apart, the recent upward spiral in crude oil (and in tandem, ethanol) prices, if sustained, may lift export prospects for Indian which have been lacklustre since last year’s ban (lifted in October). The sharp spiral in freight rates may also make Indian corn exports more cost competitive for shipping to the South-East Asian markets.
The key risks to the business arise from the weather-related risks enedemic to any agri-business and relatively high working capital requirements, due to a long debtor cycle.
For investors, the stock’s small cap status would peg up volatility and render the investment quite vulnerable to any broader market decline.
Investors may retain their shares of Jagran Prakashan, the top newspaper in the ‘Hindi-heartland’, considering its ability to monetise its leadership status in garnering greater advertisement revenues along with reasonable growth on subscription.
At Rs 83, the stock trades at 28 times its likely 2008-09 per share earnings. This is at a significant premium to the broader market and papers such as Deccan Chronicle, but at a discount to HT Media.
Given the expensive nature of the stock and average growth rates in advertising expected over the next one year, investors may have to hold on with a two-three-year perspective for capital appreciation.
But decline in newsprint prices, expectation of higher spends from the relatively insulated education and telecom sectors, and increase in cover price may expand revenues and realisations for the company.
Even in the turbulent December 2008 quarter, advertisements (which contribute 67 per cent to overall revenues) as well as subscription revenues have each grown by 4 per cent over the previous year.
Jagran runs 37 editions of its newspaper across 11 States under the ‘Dainik Jagran’ brand. It is the most read (with maximum circulation) regional language newspaper in the country, catering largely to the Hindi speaking States. There is very strong presence in towns and rural areas.
Rural demand is expected to be fairly robust as evidenced by sales figures of FMCG companies and the increasing presence of mobile operators in these areas. As with broadcasting, delivering increasingly regional (and localised) flavour has been a prov
Hindustan Times, for example, has looked to expand in the Hindi language genre under the Hindustan brand and is now the third largest read in this category according to recent IRS surveys (IRS 2008 R2).
Against this background, Jagran derives 60 per cent of its advertising revenues from regional advertisers and the balance from national ones. Regional advertising has grown by 14 per cent over the past one year for the company. With leadership in most of these 11 States, Jagran appears well placed to monetise its leadership status.
Near-term triggers for advertising revenues include the education sector, with admissions around the corner as well as the election-related ads (expected to show up in the 2009-10 numbers).
Over the long-term however, telecom, with more operators looking to expand and new operators coming in, automobiles, with the sector looking at a revival and others such as FMCG and financial services may be key advertisers.
A recent FICCI-KPMG report estimates advertising in print to grow at a compounded annual rate of 10 per cent to Rs 17,430 crore over the next four-five years led by education, services and banking sectors.
Jagran managed to increase its cover price late in December, which the company has indicated would help increase circulation revenues by about 10 per cent.
This apart, newsprint prices, which were hovering around $900 per tonne levels in mid 2008, have now declined to $600 levels, and this should help rein in raw material cost substantially.
Raw material cost accounts for over 40 per cent of revenues currently for Jagran. But given that companies maintain close to a three-month inventory of newsprint, the cost savings may trickle in only from the first quarter of FY10 onwards.
The rupee has also appreciated nearly 8 per cent from its peak to Rs 47 levels.
A cap on employee costs (through curtailed increments) is also in place. Taken together, all these factors point to strong cost-optimisation, which could help margins for Jagran.
For the nine months of FY09, the company’s revenues grew by 11 per cent to Rs 622.1 crore over the same period of FY08, while net profits declined by 15.5 per cent to Rs 69.8 crore. Raw material cost had shot up by 22 per cent during this period.
This, clubbed with a 21 per cent increase in staff cost, may have played a key role in bringing down margins.
The company also has an out-of-home (OOH) advertising division (Jagran Engage) that has started to contribute to revenues. I-Next, its bilingual daily, has also started to contribute to advertising revenues. Both these are at a nascent stage and may have to be watched closely for their contribution to overall revenues.
Competition from papers such as Hindustan and Amar Ujala requiring a rejig of the pricing strategy is a key risk to earnings.
Investors holding the Bajaj Auto stock can consider taking profits at the current price levels. The stock has run up quite sharply from its low of Rs 294 in December 2008. Trading at Rs 1133, the trailing price-earning ratio for the stock is 17 times.
Bajaj Auto is still at a discount to the BSE Auto basket (21 times PE) though it is almost on a par with the market leader, Hero Honda (trading at 17.8 times PE).
After a poor show until the December quarter of 2008, Bajaj Auto has seen an improvement in sales numbers, driven by easier credit availability, particularly for the high-end models. The company’s earnings over the next few quarters may also benefit from excise duty cuts and lower input costs.
However, across segments, be it motorcycles, three-wheelers or scooters, planned launches will hold the key to the company regaining lost market share. In this backdrop, the sharp improvement in the stock’s valuation limits the room for upside.
Bajaj Auto offers eight models in the two-wheeler space, catering primarily to the executive and premium segments. In 2008, it reduced its focus on economy bikes to concentrate on executive and premium bikes, taking the view that these segments offer better long-term potential.
But with the credit squeeze that affected higher value purchases, the strategy shift appears to have backfired as the bulk of growth in the two-wheeler sector over the past year came from sub-125 cc motorcycles, an area of strength for its rival - Hero Honda.
With sales volumes declining for the year, Bajaj Auto’s market share in motorcycles also dropped from 54 per cent in FY-08 to 42 per cent in FY-09.
An improvement is evident in the premium bike sales in recent months, with sales recovering by about 40 per cent from their low in December 2008. This has come from the XCD range, mainly the XCD — 135 launched in January 2008 apart from the continued interest in its flagship model — Pulsar, including the new variants launched in May.
On a year-on-year basis, growth still remains muted. When compared to last year’s numbers, the year-to-date sales are down by 18 per cent, while volumes sold in May 2009 were 8 per cent below its last year’s numbers.
Riding on launches
Plans to strengthen the premium segment include the launch of another Pulsar. Pulsar enjoyed a 60 per cent market share in the total bikes sold in the above 150 cc segment until FY-08. Its share-to-sales has now fallen to 56 per cent.
Given the intense competition from foreign players in terms of product offerings and pricing, it is crucial for the company to strengthen the Pulsar brand.
The same is the case with its three-wheelers segment as well, which accounts for 15 per cent of the total volumes.
The success of the launches will be vital to revive the market share that the company ceded to Piaggio and Mahindra & Mahindra last year. Bajaj Auto also plans to launch a scooter that is likely to rival Honda Motors’ Activa. Kristal (rolled out in 2007) is yet to capture significant share (its current market share even less than one per cent).
The ambitious compact car project has its share of uncertainties. With an investment of Rs 1,000 crore, the car is expected to be launched by end-FY-10.
However, the company has not yet signed MoU with its partners, Nissan and Renault, which will be providing technology apart from each of them holding 25 per cent stake in the JV. Competition in this segment is also intense, as Nano has already garnered sizeable bookings and Maruti Suzuki is aggressively adding to its line-up.
Bajaj Auto has increased its stake by another 25 per cent in KTM Sportmotorcycle, a significant player in high-end bikes. In early 2008, Bajaj Auto promised to roll out the KTM’s bikes in India. These plans were deferred to May 2009 due to adverse market conditions.
Kawasaki Ninja, another launch planned this year, is yet to materialise. The launch of Ninja and KTM’s bikes may be significant for Bajaj Auto to hold up its image in the high-end bikes market.
Notwithstanding a 20 per cent drop in sales volumes compared with last year and a 10 per cent decline in standalone net sales in the last quarter of FY-09, Bajaj Auto has managed to end the March quarter with an 8 per cent increase in net profits.
A 16 per cent decline in raw material costs, primarily on account of lower prices of steel, aluminium and rubber aided the company’s operating profits register a 9.2 per cent growth.
But for the forex loss on account of hedge contracts and expenses incurred under a voluntary retirement scheme, the net profits would have seen a 14 per cent increase compared to the previous year.
Exports have been the saving grace to Bajaj Auto’s sales numbers for 2008-09, expanding 25 per cent even as domestic sales shrank 10 per cent.
The company has recently commenced operations in its plant in China to cater to exports. This may add to its cost competitiveness.
Though the latest quarter of FY-09 ended on a slightly optimistic note, rough patches witnessed in the earlier quarter dented the annual performance.
Bajaj Auto has the headroom to benefit from softening raw material costs and exports from the Chinese plant, but its business prospects hinge mainly on how the market accepts its launches.
Investors with a long-term horizon may capitalise on attractive valuations to buy into the stock of construction contractor C&C Constructions. Currently trading at Rs 181.5, the stock is valued at 8 times its trailing four-quarter earnings.
C&C Constructions’ core competency is in road infrastructure, the segment accounting for 61 per cent of the order-book. This segment may see a pick-up in the coming years, with the focus on infrastructure development. Entry into BOT projects and other infrastructure spaces such as railways, water and sanitation, as well as commercial buildings provides a balance to the order-book and a platform for expansion into bigger projects and new segments.
Order-book growth has been healthy; at 75 per cent (to Rs 3,057 crore) since the start of the current financial year in June 2008. The order-book features a 14 per cent overseas exposure, constituting projects in challenging areas such as Afghanistan, which offer superior margins. It is executable over a period of 30 months, providing good earnings visibility for the coming quarters.
In tandem with the order-book, sales too clocked strong growth at 50 per cent-plus over the past four quarters, despite the general economic slowdown. Sales growth is suggestive of fast-paced execution, allowing it to secure more contracts while building on credibility. The company has traditionally banked on joint venture partners to qualify for bigger bids and enter new construction segments. That said, the company has also managed to bag projects on its own merits; share of joint venture projects in its order-book has dropped to 45 per cent in the March 2008 quarter over 55 per cent the quarter before. Another strategy is to own most of its equipment. While that may mean increased capex in the short-term, it ensures timely availability of critical equipment and easy mobility between projects.
A shift away from the Afghan projects, high employee costs and interest payouts due to debt-funded growth have cut down margins significantly over the past few quarters; this may continue. Debt is currently 1.5 times equity, and will be capped at 1.75 times. Increased project intake and execution has stretched the working capital cycle, but that should get addressed with easing credit availability.