Sunday, June 14, 2009
Investors with a medium-term perspective can consider buying Jyothy Laboratories stock.
The long-term down-trend in this stock was arrested by the formation of ascending triangle price pattern spanning between mid October 2008 and early June.
This pattern paved the way for a strong uptrend since mid May. The medium-term outlook is positive for the stock as the weekly indicators are projecting bullishness. The weekly traded volume is increasing over the past three weeks.
The stock has the potential to trend up to Rs 155 in the medium-term.
Though the stock can erase some of the recent gain, medium-term investors can utilise dips to accumulate the stock while maintaining stop at Rs 84.
Investors with a long-term perspective may use attractive valuations and buy the stock of Amara Raja Batteries (ARB). At Rs 91.6, the stock trades at 8.9 times the trailing four quarter earnings, at a discount to competitor, Exide Industries, that trades at a trailing earnings price-multiple of 19.2 times. We had given a buy recommendation at Rs 101 in October 2008.
Since then, even with the automotive component sector facing a severe downturn on the back of reduced demand from automakers, ARB has made up through its industrial division and the battery replacement market. Capacity expansion plans, its entry into new segments and research efforts strengthen the potential of this stock.
Replacement demand makes for the bulk of ARB’s automotive revenues for ARB, constituting 62 per cent of sales with a 28 per cent market share in the automotive aftermarket sales. Ignoring the tame sales last year, vehicle sales have been robust in the years prior — year-on-year growth in passenger cars between 2006-07 and 2007-08 was 20.7 and 12.3 per cent respectively. Commercial vehicle sales grew 33.3 and 4.9 per cent in the same period. ARB supplies to both these segments, and replacement demand will, therefore, be a key factor boosting sales, since most batteries have maximum a four-year life span, and will necessarily have to be replaced.
Serving this demand is further helped by ARB’s extensive retail network — the company has over 18,000 retail outlets besides franchised distributors and Amaron Pitstops — its exclusive brand stores in urban areas. Rural markets have been tapped through PowerZone, which number more than 400 stores. The retail reach, coupled with brand building efforts will help stimulate sales.
Within the industrial segment, ARB supplies batteries for telecom infrastructure, UPS systems, railways, and has started supplying to the IT and banking segments. About 60 per cent of revenues in the industrial division stem from the telecom sector, and infrastructure investment in this sector will boost demand.
The company is bringing in new technology to further its reach in this segment; it introduced Front Access Terminal batteries for the telecom sector, and is designing solar powered batteries for its UPS segment. Efforts are also on to design solutions for line interactive inverters, which have voltage regulators, and then move on to online inverters.
ARB addresses the OEM requirements of a vast number of automakers such as Honda, Ford, Fiat, Ashok Leyland, General Motors and others, catering to the passenger and commercial vehicles. This sector constitutes 26 per cent of revenues, and the company has attempted to combat the slowdown by reaching a wider section of automakers, entering the two-wheeler segment with its Amaron Pro-Bike, and launching batteries with extended warranties and new ranges of batteries.
In a new initiative, the company tied up with Maruti Suzuki to launch a co-branded car battery — Amaron MGB — which will be available across all Maruti dealerships, besides being the battery endorsed by Maruti. With alternative fuels in the limelight now, ARB is designing batteries for hybrid cars. Its partnership with Johnson Controls will help its research and development efforts.
Exports account for 10 per cent of the automotive segment and the company, therefore is sheltered to an extent from the global auto slowdown though foreign exchange losses are still a concern.
An investment of Rs 95 crore will be made in manufacturing capacity expansion, ramping up production capacity from 1.2 million units to 1.8 for its VRLA battery and from 1.8 million units to 2.4 million units for its motorcycle batteries.
Sales have grown at a CAGR of 54 per cent, while profits posted a 50 per cent CAGR for the years between 2006 and 2009. Global lead prices were on the downswing between September and March 2009 hitting a low of $844 per tonne in December. Per tonne price of lead averaged $1,859 in September, dropping to $1,245 by end-March. The effect of this showed up in margins, with an improvement of 50 basis points to 17.3 per cent at the operating level in the March 2009 quarter over the March 08 quarter.
However, higher depreciation brought net margins down to 8.5 per cent, a slight drop from 8.6 per cent in the same quarter in 2008. Leverage is on the low side at 0.8 times equity, and interest payouts have remained steady at 1 per cent of sales turnover.
Foreign exchange exposure remains a concern, and the company operates on a negative operating cash flow. Lead prices have risen for the past two months, and such fluctuations may dampen margins.
Fresh investments can be considered in Credit Rating Information Services of India (CRISIL) stock. CRISIL is the largest credit rating agency in India also engaged in research and advisory services.
The credit rating business offers huge growth potential in India as the corporate debt and fixed income market in India is still in a nascent stage. While demand for rating services (especially bank loan ratings) provides high earnings visibility, CRISIL’s significant market share, zero debt, diversified revenue mix and superior margins (net profit margin of 27 per cent) are the key investment arguments.
At the current market price of Rs 3,265, the stock is trading at a trailing one year price to consolidated earnings multiple of 16.4.
That is at a discount to its lone listed competitor ICRA (20.2 times). CRISIL is essentially a defensive stock despite its mid-cap status. A low beta (0.47) led to its under-performance in the bull market, but the stock fared better than the market in the 2008 meltdown.
CRISIL claims a more than 50 per cent market share in bank loan ratings and a 70 per cent market penetration in debt ratings. The company’s net profit grew at 59 per cent compounded annual rate over the three years to 2008, while revenues grew at 42 per cent during the same period.
For the year 2008, 44 per cent of CRISIL’s revenues came from the research business, 37 per cent from ratings and the advisory business contributed to 19 per cent of the revenues.
In recent years, the contribution from the research business has steadily risen, from 13 per cent in March, 2005 to 44 per cent in December, 2008. However, ratings contributed 48 per cent in the latest March quarter.
After net profit growth of 67 per cent, on consolidated operations in the calendar year 2008, growth moderated to a modest 12 per cent for the quarter ended March 2009.
Lower revenue growth (3.6 per cent year-on-year), operating loss in its advisory business (Rs 1.4 crore loss against 1.36 crore profit last year) and discontinuation of revenues from the Gas Strategies group which CRISIL divested in December 2008, were triggers.
Operating margins moderated from 37 per cent to 36 per cent, even as the ratings business continued to grow at a strong pace (32 per cent for the quarter ended March) during the quarter.
Going forward, the ratings business may contribute more to the revenues, with potential to lift the overall margin profile.
Over the next few quarters, growth in bank loan ratings (BLR) (all bank loans above Rs 10 crore should be rated by the end of FY10) and SME ratings may contribute to earnings.
Any incremental loans originating from this year may also have to be rated, which may support BLR growth.
Rating income from securitisation may start flowing as the demand for structured finance products increases post-revival.
A Rs 2.02 lakh crore Infrastructure investment is estimated to be required in the current Five Year Plan (2007-12). Even if this is funded through a debt-equity of 75:25; it offers immense scope for debt fund raising and thus, ratings.
Other rating opportunities include banks’ capital raising of over Rs 5 lakh crore to meet the minimum capital adequacy norm of 12 per cent.
The international business of CRISIL’s rating is also progressing well primarily due to S&P’s outsourcing to CRISIL.
While the research and advisory businesses have been vulnerable to the meltdown in equities until last quarter, the recent buoyancy in equities may perk up prospects for these divisions.
Despite the slowdown in domestic and global equity markets, IREVNA, CRISIL’s research arm, has managed to acquire more clients during the March quarter and Crisil Research, domestic research arm which provides EIC research, has managed to retain its clients.
IPO gradings, also part of CRISIL Research, may also contribute to the top-line if the expected level of primary market activity does materialise, due to divestments and private fund raising.
For the currently loss-making advisory business, infrastructure advisory may see some revival, given that the uncertainties pertaining to elections are over and that capital expenditure is expected to be back on track.
CRISIL Risk Solution, a part of advisory services, may see demand as banks and other financial institutions plan to strengthen their risk management framework ahead of Basel II.
Employee expenses form a chunk of operating expenses (40 per cent of revenues) for CRISIL. CRISIL increased headcount by 11 per cent last year anticipating higher demand for Bank Loan rating and other businesses. Employee expenses may moderate, going forward, due to lower pay hikes, as attrition levels moderate.
Though there are early signs of financial market revival worldwide, the business environment for International Research and Advisory business remains relatively uncertain. If the recent equity market revival is not sustained, both margins and client retention may pose a challenge.
Investors with a long-term horizon can consider buying the stock of Dr Reddy’s Laboratories (DRL) given its strong product pipeline, strengthening presence in key markets such as North America, Russia and India and the reduced uncertainty about the fortunes of its German business, Betapharm.
The earlier-than-expected approval for the company’s OTC generic Omeprazole by the USFDA also strengthens the case for investing in the stock. At the current market price of Rs 705, the stock trades at a somewhat high valuation of about 14 times its likely FY-10 per share earnings.
While Dr Reddy’s fairly stable line-up of Para IV and first-to-file pipeline and continued revenue contribution from the sale of Sumatriptan (the authorised generic version of GlaxoSmithKline’s Imitrex) provide for revenue upside, the recent surge in its stock price may stand in the way of any near-term gains. Investors should phase out their exposure to the stock.
Dr Reddy’s has a fairly strong pipeline of over 67 new drug applications pending approvals by the US FDA (Food and Drug Administration), which represent a substantial earnings trigger for the company. The latest USFDA approval for the company’s Omeprazole Mg drug, which is the generic version of AstraZeneca plc’s Prilosec, is a case in point. The approval will grant DRL access into a roughly $362 million market, which features just another generic player, Perrigo.
That said, the company will be tested on its marketing and brand recall prowess since the product will be OTC (over the counter) and not prescription-based.
Revenues from this product, therefore, will depend on client and order wins (with retail chains) by DRL.
However, since the formulation patent expires only in 2014, it leaves DRL with sufficient time to capitalise on this business opportunity. That the company already has ongoing relations with US retail chains such as Walgreens and Wal-Mart may also help.
The management expects to gain from at least one such high-value opportunity every year. Sumatriptan sales, which had pepped up the revenues significantly since its Nov ‘08 launch now enjoys a share of over 50 per cent in the market, which features four players.
This revenue opportunity, however, may remain only till August ‘09, by when DRL is slated to lose its exclusivity. This may lead to a decline in the company’s operating performance.
Launch of the generic Fondaparinux, which is used for the treatment of deep vein thrombosis, would be the next key earnings trigger to watch out for as the US regulator has already marked DRL’s application under priority review. Fondaparinux, which is marketed by GlaxoSmithKline under the brand name of Arixtra, had sales of about $180 million in the US in 2008.
Despite concerns of a falling ruble, DRL improved its revenues from Russia and CIS, well within the credit limit offered to its customers, by effecting price hikes.
It managed to grow its volumes by over 11 per cent in the country despite an industry de-growth of 0.2 per cent. Its stronghold is further reflected in the fact that its top ten brands in the country contributed to over 79 per cent of the revenue growth.
Overall, revenues from Russia registered a 43 per cent growth in FY-09. The management expects to maintain a healthy growth rate this year. However, excessive forex fluctuations can play spoilsport.
Betapharm in better position
Concerns over DRL’s German arm appear to be on the wane, with Betapharm securing 33 contracts with German health insurer, AOK. Its contracts make up 18 per cent of the overall volumes awarded by the insurer.
Besides, since DRL’s products have been cleared of the legal hurdles, it will soon start supplying its products. But given the German market’s transition to a tender supply market, margins are likely to be on the low side.
Moreover, since the eight products under the AOK tender are not among the top ten products of the company in the region, it may also result in de-stocking of those products.
For FY-09, the company recorded a one-time non-cash impairment loss with respect to intangible assets (Rs 316 crore) and goodwill (Rs 1,085 crore) in its German business, driven primarily by the shift in market dynamics towards tender-based supply model, characterised by decrease in market prices.
So while increased volumes and product launches may lead to Betapharm’s growth, the management expects to maintain profitability by cutting costs. It plans to cut down its sales force and shift manufacturing and select functions to India.
For FY-09, DRL’s sales growth in India remained muted at 5 per cent due to supply chain restructuring (to replenishment based-model) and a slow pace of product launches.
The management expects to ramp up product launches, both in-house and licensed, and increase product reach and coverage to grow from hereon.
Besides, it plans to tap corporate hospitals and rural areas. As for its Pharmaceutical Service and Active Ingredients (PSAI) business, which had suffered from fall in sales growth led by global inventory de-stocking and credit crunch, the management expects to pick up in performance by the second half of the year.
It has indicated at a reversal in trend with improved order booking. DRL’s strong IP expertise and DMF pipeline may help improve its score.
Tata Teleservices said that it would launch mobile services on the popular GSM platform by end-June under the Tata DoCoMo brand. Tata Teleservices, in which Japan’s NTT DoCoMo has a 26% stake, has already invested close to US$2bn to roll out a pan-India GSM network. The CDMA operator said it plans to launch commercial services on the GSM platform in a phased manner, starting with South India, followed by western and northern regions. "We expect to complete our pan-India rollout by the end of this year," Tata Teleservices’ president for GSM operations Deepak Gulati said. Currently, TTSL is India’s sixth-largest mobile operator with 35.7 million subscribers as of end-April on the CDMA platform. Close to 70% of the country’s 403-million mobile subscribers use the GSM platform.
The Parliamentary Standing Committee, headed by BJP leader Murli Manohar Joshi, has recommended a blanket ban on foreign direct investment (FDI) in retail. The 42-member panel has also opposed the entry of large domestic corporates in the retail trading of groceries, fruits and vegetables. It has also opposed building of large shopping malls to sell these products. The report presented by the committee avers that restrictions should be put for opening large malls by corporates for selling groceries, fruits, vegetables and other consumer products, which would thereby result in unemployment as the business of the neighbourhood kirana stores will be affected. The panel said that modern retailers would lead to job losses and force small stores out of business. According to the proposed report, the Government should stop issuing more licensees to MNC retailers or their joint ventures with local partners, for Cash and Carry stores, as it amounts to a back-door entry into the retail trade. Organized retailers account for just around 5% of India’s US$350bn retail sector. The report was tabled in the Rajya Sabha.
The Indian economy can grow at 9% despite a global downturn powered by higher public spending, Prime Minister Dr. Manmohan Singh said. "We cannot spend our way to prosperity though in the present situation there is considerable scope to spend particularly in infrastructure," Singh told the parliament today. He also stated that the Indian economy could achieve 8-9% growth with a high savings rate. The Government has scope for increasing public spending, particularly on upgrading infrastructure, despite a high fiscal deficit, the Prime Minister said today. "There is considerable scope for increasing public expenditure, particularly on infrastructure projects," he told the Lok Sabha.
Even though government finances are under strain, Dr. Singh said there is maneuverability to spend more on roads, ports and the rural jobs program in the short run. The economy grew at more than 9% in three of the past four years and may expand at 7% in the current fiscal year, Dr. Singh said. The budget deficit stood at 6.2% of gross domestic product (GDP) in the year ended March 31, 2009, more than double the Government’s estimates. Moody’s has kept India’s local-currency long-term rating at Ba2, two levels below investment grade, while Standard & Poor’s has a BBB- rating on India, the lowest investment grade.
Dr. Singh said his government is committed to stamp out terrorism and left-wing extremists, who are active in areas of the country rich in metals and minerals. If their activities are left uncontrolled, it will hurt the climate of investment in the country, he added. "At stake is the future of 1.5bn people living in South Asia," Dr. Singh said. "It is in our vital interest to try again to make peace with Pakistan but I do recognize it takes two hands to clap."
In the first quarter of 2009, CIOs experienced significant IT budget revisions as executives gained a greater understanding and solidified plans for addressing the global financial crisis, according to a worldwide survey of 900 CIOs by Gartner Executive Programs (EXP).
The survey was conducted from March 1 to April 30 2009 and sought to gauge the potential impact of macroeconomic concerns on IT budgets. These CIOs encompass more than US$77bn in revised IT spending. Forty-six% of respondents said that their 2009 IT budget had changed since it was finalized. The results of this survey were compared with the results of the Gartner EXP 2009 CIO Survey, conducted from September to December 2008, which had more than 1,500 responses.
CIOs in the original survey reported a flat budget with a minor increase of 0.16%. CIOs responding to the survey in the first quarter now report a weighted average decline of 4.7%. More than 90% of firms changing their budgets made a reduction in the first quarter, with the average reduction being 7.2%. Fifty-four% of respondents reported no change in their IT budget, with the remaining 4% reporting an increase in their IT budget.
"CIOs reported that renegotiating vendor contracts and head count reductions were the primary focus areas for accommodating budget reductions," said Mark McDonald, group vice president and head of research for Gartner EXP. "CIOs report shifting more work to in-house resources and delaying capital expenditures more than reducing IT project investments.".
Satyam Computer Services Ltd. disclosed standalone unaudited financial results for the quarter ended December 31, 2008. The company’s Profit After Tax (PAT) for the October-December quarter stood at Rs1.81bn while the total income for the period was Rs22.06bn. Operating profit (excluding other income) for the third quarter of FY09 is Rs3.64bn, while the operating profit margin is 15.87%. The PBIDT for the quarter stood at Rs2.76bn while the PBIDT margin was 12.51%.
For January 2009, Satyam's standalone PAT was Rs400mn on total income of Rs6.47bn. Operating profit (excluding other income) for January was Rs610mn, while the operating profit margin was 8.96%. The PBIDT for the month stood at Rs270mn while the PBIDT margin stood at 4.17%.
The company's standalone PAT for February 2009 was Rs520mn and total income at Rs6.73bn. Operating profit (excluding other income) for February was Rs1.18bn, while the operating profit margin was 17.46%. The PBIDT for the month stood at Rs790mn while the PBIDT margin stood at 12.4%.
The company had total orders worth US$380mn between January and March 26 and has 41,622 employees as on March 28. The company said that it lost 23 clients worth contract US$70mn and 24 clients withdrew purchase orders worth US$91mn.
Satyam's stock hit upper circuit for three consecutive days before easing off on the last day of the week. The value of the Satyam share surging past the open offer price of Rs58 per share, raising concerns that investors may not tender shares at a discount to the current price. If the open offer doesn’t succeed it will be positive for Tech Mahindra. Satyam, in any case, has to make a preferential allotment for the shortfall in the open offer, at Rs58 per share, which could be at a substantial discount.
Separately, Satyam's Board announced that up to 10,000 employees, or about a fourth of the staff, will be allowed to join a "virtual pool" by taking time off from work on sharply reduced pay for up to six months starting next week. The plan is expected to save the Hyderabad-based company, which now has some 41,600 staff, Rs10mn every day. Satyam spent around Rs 5bn on salaries in February, and staff costs account for more than half of the company’s expenses.
Employees, who have not been part of revenue-earning assignments, at least, for the past three months, including support staff, will join the "virtual pool". Around 14,000 employees are counted among the company’s non-billable resources. A Satyam statement said the "virtual pool" is a one-time programme, suggesting that further drastic measures to trim staff costs may not be needed.
We’ve had a choppy ride with a weak start on Monday and negative close on Friday. But the days in between saw plenty of action from the bulls which brought in another week of gains, the fourteenth in a row. The coming week is expected to be as uncertain with no real local cues, unless some untimely announcements come.
Of course from the global side there are always news and views which often come unannounced; enough to change the equation temporarily. The bulls are getting dizzy at this temporary top and will look at some distribution in portfolio before the make or break event comes in the form of the budget. The market has overtaken earnings by much more than a mile. Let’s wait to see if the first quarter numbers manage to bring in some smile!
After three straight months of decline, the health of the Indian industry appears to be slowly but surely improving, as the impact of the series of rate cuts by the Reserve Bank of India (RBI) and three stimulus packages by the Government picks up pace. Output at India's factories, mines and power utilities grew by 1.4% in April this year as against a growth of 6.2% in the same month last year, the Central Statistical Organisation said on Friday. The CSO revised March's sharp contraction of 2.3% to a decline of 0.75%. With this, the revised annual growth for the year ended March 31, 2009 now stands at 2.6% versus the previous estimate of 2.4%. In the previous financial year (2007-08), the industrial output had expanded by 8.5%.
Among the three main constituents of the IIP, Electricity has done exceedingly well in April with an expansion of 7.1% as against 1.4% in April 2008, while Manufacturing grew by 0.7% versus 6.7% and Mining output rose by 3.8% compared to 6.1%. A small disappointment is with the Capital Goods sub-segment, which witnessed a decline of 1.3% in April versus an impressive growth of 12.4%, while the Intermediate Goods grew by 7.1% as against 3.1%, and Basic Goods rose by 4.6% compared to 4%.
The overall Consumer Goods space shrank by 4.7% against 8.5% growth in the same month a year earlier, while output of Non-durable Goods fell sharply by 10.47% versus 10%, and Consumer Durables growth came in at 16.9% compared to 3.2%.
As many as 11 out of the 17 industry groups showed a positive growth during April 2009 compared to the corresponding month of the previous year. The industry group ‘Wood & Wood Products' showed the highest growth of 31.4%, followed by 12.6% in ‘Wool, Silk & Man-made Fibre Textiles’ and 10.2% in ‘Non-Metallic Mineral Products’. On the other hand, the industry group ‘Food Products’ showed a negative growth of 34.4% followed by a drop of 12.4% in ‘Leather & Leather & Fur Products‘ and a fall of 5.1% in ‘Other Manufacturing Industries’.
Acquired mining capacities that may deliver substantial volume additions and a likely recovery in iron ore prices over the next two years, make the stock of Sesa Goa a good investment for those with a two-year perspective. At Rs 203, the stock is trading at 8.5 times its fully diluted earnings for 2008-09. That is at a discount to its historic valuations as well as global iron ore majors such as BHP Billiton and Rio Tinto (15 and 18 respectively), making it an attractive investment within metal stocks.
Sustained signs of recovery in China’s steel sector, consolidation in the global iron ore sector and the additional volumes likely from Sesa Goa’s recent Rs 1,750-crore deal to acquire a 100 per cent stake in VS Dempo & Company, point to improved earnings prospects for the company.
A weak trend in spot prices of iron ore led to poor performance from Sesa Goa over the past two quarters, though the year 2008-09 saw a 30 per cent profit growth. Renewed Chinese buying this year and a recovery across the commodities pack has firmed up spot iron ore prices from their lows; though prices still hover far below their peaks.
The medium-term price outlook for iron ore has improved on the back of Rio Tinto and BHP Billiton proposing to join hands to produce iron ore. This, combined with a recovery in steel demand, can reduce China’s ability to bargain for a deep cut in iron ore contract prices.
The Dempo acquisition, funded entirely through internal accruals, will deliver numerous benefits for Sesa Goa. It is expected to give the company access to 70 million tonnes of mineable reserves, adding to its own reserve of 240 mt. Like Sesa Goa, Dempo markets much of its iron ore in the spot market. Apart from Nippon Steel of Japan, which procures a part of its requirement on long-term contracts; three fourths of the output goes to Chinese buyers at spot prices.
Though the acquisition may not help diversify geographical markets for the company, it promises a better position in the existing markets (mainly China and Japan, which account for 87 per cent of total spot market demand).
Dempo’s operations are also said to hold potential for margin optimisation. The 25 per cent addition to Sesa Goa’s sales volumes may offset any impact from lower iron ore realisations that are likely over the next couple of quarters. An unexpected dip in Chinese demand, rising freight rates and regulatory intervention to curb iron ore exports are the key risks to the earnings outlook.