Sunday, July 05, 2009
Shareholders can stay invested in Cummins India (CIL), a leading manufacturer of diesel engines. Though the stock is not inexpensive at Rs 273 (13 times its FY09 per share earnings), what lends confidence is its strong position in the domestic market. With the new government likely to increase thrust on improving road and power infrastructure in the country, Cummins appears well-positioned to leverage on the opportunity.
However, a drastic fall expected in its high margin export revenues may still mute overall sales and profits for the year.
Hit by recessionary trends in the overseas markets, the company expects its export revenues — in spite of the backing of its MNC parent, Cummins Inc — to be hit during the year.
For the year-ended March 2009, Cummins India reported a sales and earnings growth of over 40 per cent and 54.5 per cent respectively. The topline growth, however, was helped by the increased contributions from Cummins Sales and Service and Cummins Auto Services, two subsidiaries that the company had amalgamated with itself during the year.
Excluding contributions from the two, the company’s revenue and profit growth was limited to about 23 per cent and 32 per cent respectively.
On the margin front too, the company managed to better itself, what with operating margins expanding by 1.4 percentage points to 14.6 per cent, helped primarily by lower raw material cost.
Cummins’ performance for the last quarter, however, does not reflect a healthy picture. Net sales (excluding the amalgamated subsidiaries) declined 8.2 per cent, while its profits dropped by over 18 per cent.
Interestingly, the company saw its exports contribution equal that of its domestic revenues during the quarter.
While increased sourcing by Cummins Inc drove the export revenues, the management does not expect a continuance of such volumes in exports in the coming quarters.
On the contrary, it expects the export revenues to slide drastically due to the recessionary trends in the overseas target markets.
Cummins India’s guidance projects a fall of over 50-70 per cent in its export revenues for the year. While on the face of it such guidance may appear a tad too pessimistic considering that there have been slight signs of revival in most global economies, it still may not be way off the mark.
Any revival in global economies may take a couple of quarters to translate into orders for Cummins India. Besides, Cummins Inc itself has given a guidance with a 30 per cent fall in revenues this year.
Even so, channel inventories of its parent may be the first to get cleared in the event of revival in demand; curtailing export revenues for the Indian arm.
This may call for a greater reliance by the company on the domestic market.
key to growth
Cummins India appears well-placed to benefit from the government’s thrust on improving infrastructure, with its domestic operations straddling high potential sectors such as infrastructure, road development, telecom, construction, mining, auto and power.
While the bulk of its domestic revenues are made up from power generation (30-35 per cent) and industrial (10-15 per cent), revenues from the auto sector (5 per cent) may perk up in the coming years.
The JNNURM (Jawaharlal Nehru National Urban Renewal Mission) scheme, under which the government is aiming to provide improved public transport system in 63 cities, may help the company rake in decent growth in the auto segment, as the scheme would provide assistance to States as a one-time measure for the purchase of buses for the urban transport system. The company has already won the Delhi tender for the Commonwealth Games for the supply of engines for 2,500 buses.
Besides, with the availability of natural gas likely to improve, the demand for its gas-based generators and engine may also look up. That said, it still remains to be seen how far Cummins succeeds in capturing a meaty share of the domestic market, even as the shrinking overseas market is certain to attract competition.
While the company has made clear its intention not to participate in any price war, CIL may lose volume growth if competitors do cut prices.
However, to its credit, CIL’s strong balance-sheet with little debt and high cash (Rs 400 crore), not to mention its long-standing relations in the industry, do make it a strong contender in the domestic market.
Trends in order and revenue inflows over the next couple of quarters may, therefore, bear a close watch.
Over 45 million subscribers will get 8.5% return for 2009-10 on their provident fund deposits at a time when banks are lowering the deposit rates across the board.
Two days before the budget, the Employees` Provident Fund Organisation (EPFO) decided to retain the interest rate at 8.5% for the fifth consecutive year.
The decision to retain the interest rate was taken by EPFO`s policy-making body, Central Board of Trustees (CBT) which was chaired by labour minister M Mallikarjun Kharge.
The decision will now go to the finance ministry for ratification.
The payment of 8.5% interest rate on provident fund deposits, which are of the order of Rs 1,820 billion, is expected to leave a surplus of Rs 64 million during the current fiscal.
The EPFO has decided to retain the interest rate even as the interest being paid by the banks has been coming down in the recent past.
The country`s largest bank SBI recently decided to cut deposit rates by 25 to 50 basis points in May, while several others followed suit.
The decision to pay 8.5% interest rate was on expected lines as payment of a higher amount would result in a deficit in the EPFO`s account.
Investors with a long-term perspective can consider accumulating the stock of Container Corporation of India (Concor). An established player in multi-modal logistics, Concor appears best placed to benefit from the uptick in domestic trade and the likely revival in export-import volumes by the second half of the current year. While the government’s focus on implementing the dedicated freight corridors is a positive for Concor, any Budget proposal to step up infrastructure spending would also aid the company’s prospects. Public spending programmes will require substantial logistics support for transporting materials and goods and given its huge wagon inventory Concor will be a direct beneficiary from such a boost to improving infrastructure. With its extensive rail network, Concor also provides the best hinterland connectivity.
At the current market price of Rs 1,010, the Concor stock trades about 14 times its likely FY10 per share earnings. While this is not cheap, Concor’s dominance of the container rail business and its strong balance-sheet with no debt and significant cash (over Rs 1,763 crore) justify its premium valuation. For the year-ended March 2009, Concor reported only a 2 per cent growth in sales. However, helped by improved realisations, reflecting its ability to pass on tariff hikes to customers, the company managed to register a 9 per cent growth in profits. This capacity to build on revenues and earnings through a difficult 2008 lends confidence to its ability to sustain growth in the coming year as well. Concor’s diversified customer base and its strategic tie-ups with potential competitors in the container rail logistics space also do away with the fear of competition nibbling away a chunk of its market.
That said, much of the growth in the coming year is expected only from the domestic market and not from the high-margin Exim segment. Recessionary trends globally, as reflected by the poor trade volumes, are expected to take a toll on the company’s Exim business. In the just ended June quarter, Concor saw a 14 per cent growth in domestic traffic, whereas the international movement dipped by about 9 per cent. But even as the management expects the Exim volumes to pick up from the second half of year, Concor has increased it focus on improving its share in the domestic market. This may help it offset some of the fall in contributions from the Exim segment
Investors with a two-year horizon can buy the shares of KPIT Cummins Infosystems (KPIT), given the company’s cost cutting moves and measures to better realisations by working on key operating metrics.
This apart, improvement in outsourcing figures in verticals such as manufacturing and auto-electronics spends increasing among car manufacturers around the world indicate reasonable prospects for IT companies such as KPIT over the next couple of years.
At Rs 49.5, the share trades at five-six times its likely 2009-10 per share earnings, which is a discount to mid-tier IT companies such as Hexaware and Geometric.
KPIT has remained focused on the manufacturing vertical (to include manufacturing business, IT and auto-electronics contributing to over 80 per cent of its revenues) and to a lesser extent on semiconductor solutions and the BFSI verticals.
The company does not serve GM as a client and has not been affected by bankruptcies in the automotive sector.
The company’s revenues for 2008-09 grew by 36 per cent to Rs 793 crore over the previous fiscal, while net profit grew by 28 per cent to Rs 66 crore.
This growth has been led by growth in the auto-electronics segment (which is provision of automotive embedded software), which has grown by over 64 per cent in 2008-09 in a year where auto majors have gone bankrupt.
This has been made possible by the fact that car manufacturers around the world are increasingly adopting ‘electronics’ for more comfort features and design and also for new concepts such as electric cars and fuel efficient cars.
Studies by Strategy Analytics Automotive Electronics expects electronics to account for 35 per cent of the total cost of a car by 2010.
This creates a strong business case for software companies such as KPIT to provide services that can enable seamless integration.
The manufacturing business IT segment has also grown by over 27.8 per cent, driven by enterprise solutions implementations.
In both these segments the company has won new clients. Overall the number of $1 million clients has increased over the past year from 23 to 28 as of March 2009.
Internally, the company has taken several measures for improving realisations as well as for optimising costs.
KPIT has increased the proportion of fixed-price contracts over the last one year. From 12 per cent of revenues in 2007-08, it has grown to 18 per cent in FY09.
Fixed-price contracts ensure better realisations than ‘time and material’ form of billing, as it ensures optimal planning and use of resources for a project. This has also partly led to the debtor days reducing from 77 in FY08 to 69 in FY09.
The offshore component of revenues has also increased over the last one year to 55 per cent presently. Offshore component of revenues are low-cost ones compared to onsite component. This optimises the cost-structure for KPIT.
The company has taken price cuts to the tune of 5 percent, but it has managed to negotiate with clients to bring such projects offshore.
The company hopes to achieve 60 per cent revenues from offshore centres, going forward.
This apart, the company has also increased utilisation levels to drive volumes both offshore and onsite(to a larger extent).
From a cost perspective, it has also decreased the variable component of salaries, limited fresh hiring, deferred the timelines for campus joinees, and reduced bench.
From a geographic diversification angle, KPIT has also increased its revenues from Europe to 36 per cent from 32 per cent a year ago.
With several government utilities and manufacturing companies set to increase outsourcing from there, KPIT appears well positioned to tap into this market.
A recent study from research firm TPI points out that average contract values have increased from the EMEA (Europe and Middle Eastern Asia) region. The TPI report also points out that outsourcing in areas such as utilities and telecom is set to increase over the next few years.
KPIT continues to have Cummins as its top client and accounts for 39 per cent of its revenues. The concentration of revenues among its top 10 clients is still high at nearly 67 per cent.
These facts give rise to concentration risks. The repeat business percentage continues to be 90 per cent, indicating that ramp-ups among existing clients is not automatically happening.
Low valuations and a unique business model make the stock of Brandhouse Retail (BHRL) an attractive buy. BHRL functioned as the retail arm of textile player, S. Kumar’s Nationwide, and was hived off and listed as a separate entity in March this year.
At Rs 23, the stock trades at 7 times its FY-09 earnings and 6 times the estimated FY-10 earnings, which is a significant discount to its retail peers. Investors may invest in this stock with a horizon of one year, while limiting exposure due to the stock’s small-cap status.
BHRL’s primary business is to operate as a master franchisee for international brands. Here, it retails those brands that already have an established recall, ensuring a quicker pick up and sustenance of sales.
Its portfolio comprises Reid & Taylor, Dunhill, Carmichael House, Stephens Brothers and Belmonte. It retails these brands through exclusive outlets. The company is looking to expand this portfolio and will add new brands in the next few quarters.
This model places the company at an advantage; it operates on a pure buy-sell model for inventory, with production and distribution of the apparel undertaken by the producers of the brand, curbing costs for BHRL.
Additionally, advertising will be the responsibility of the brand’s producers and not BHRL, again helping on the cost front, while allowing BHRL to benefit from brand equity.
Mid-price joint venture
Besides being a franchisee of global brands, the company has also entered into a joint venture with mid-price Italian brand Oviesse, aimed at young adults and children.
This is a deviation from BHRL’s other brands that are concentrated on the premium end of the spectrum. BHRL will hold 62.5 per cent in the venture, and will bring in Rs 161 crore in equity over the next five years.
Oviesse stores will roll out later this year and the company aims at reaching a wider market, and move into smaller cities with this brand.
The company intends to open 190 stores in a span of five years. In addition to private brands through Oviesse, BHRL will retail those of its parent, S. Kumar’s Nationwide.
The company’s retail network spans 683 stores with plans to take this count to 900 by the end of this financial year calling for a capital investment of approximately Rs 28 crore.
BHRL expanded by about 2.5 lakh square feet in FY-09, primarily through debt. About half the company’s current store count for the past two years has been through franchisees — a move undertaken to counter the need for capital that would have been necessary had BHRL aimed at owning all stores.
The company will increase the count of its own stores in the future, given the softening rentals and signs of pick up in retail real estate, though franchisees would still be used for expansion.
With the company’s debt-equity ratio on the lower side at 0.9 times, with an interest cover of 9 times, funding problems seem unlikely. BHRL will cap debt at 2 times its equity.
Reid & Taylor is the biggest driver of growth, followed by Belmonte and Carmichael. Sales grew 76 per cent in FY-09 over FY-08, but a two-fold jump in interest and employee costs and a 78 per cent increase in costs of raw material brought down net profits, which grew by a mere 2 per cent.
Margins, consequently, have suffered, sliding from 10 per cent to 7.5 per cent at the operating level and 4 to 2 per cent at the net level.
Lower rentals and introduction of private labels may help expand margins in the coming quarters. An improvement in working capital turnover from 2.7 times in FY-08 to 3.4 times in FY-09 also bodes well.
The company is weighted on the premium apparel side, with plans to foray into the mid-price segment. It is the affordable segment that would deliver high growth. Similar to its peers, footfalls have been on the decline. Stores opened through its mid-price venture with Oviesse will take about two quarters to mature, which may tell on margins.
The market exhibited high level of volatility in intra-day trades during the week. The Sensex, after slipping in first half of the week, recovered towards the end on positive vibes from the Economic Survey and the Railway Budget. The index finally closed the week with a gain of 148 points at 14,913.
Among the index gainers — Tata Steel soared 13 per cent to Rs 438 and ONGC surged 9 per cent to Rs 1,041. HDFC, Mahindra & Mahindra, NTPC, SBI and DLF also ended with significant gains. On the other hand, Tata Motors plunged nearly 12 per cent to Rs 340. Reliance Communications, ACC, Hindalco, Jaiprakash Associates and Hero Honda were the other major losers.
The index is likely to face some resistance around 15,100, above which the index may rally up to 15,475-15,825 during the course of the next week. However, in case the index fails to sustain above 15,100, it may slip towards 14,685-14,550. It may witness an accelerated fall once below 14,500.
Overall, the market will continue to favour the bulls as long as the index stays above the 12,600 level. On the upside, the index may scale the 18,000-mark during the quarter. The NSE Nifty moved in a range of 190 points, from a high of 4,440 it slipped to a low of 4,250. The index moved on expected lines as it faced resistance at 4,450 and found support at 4,250.
Going forward, though it’s difficult to predict, the Nifty seems on the verge of a positive breakout with a short-term target of 4,660 in sight. But any negative news could see the index slip to 4,140.
RIL bounced higher in the early part of the week in line with our expectation but it could not surpass the first resistance at Rs 2,120 and moved sideways with a slight negative bias thereafter. Short-term resistances remain at Rs 2,120 and Rs 2,267 for the next week. Failure to clear these levels would imply that the stock can decline towards Rs 1,900 or Rs 1,800 in the near-term. Target above Rs 2,267 is Rs 2,490.
We remain circumspect about the medium-term view for the stock as long as it trades under Rs 2,267. Medium-term target for the stock is Rs 1,750 and Rs 1,522. Short-term traders can therefore initiate fresh shorts if the stock fails to move above Rs 2,267 on Monday.
State Bank of India (Rs 1,810.6)
SBI moved sideways with a positive bias last week and recorded an intra-week peak of Rs 1,820 on Friday. As explained earlier, a strong close above Rs 1,815 is required to make the short-term view positive. If the stock soars higher on Monday to a strong close, it would give the next target at Rs 1,935. Conversely, a strong decline below Rs 1,750 will imply that the medium-term down-trend has resumed that can take the stock lower to Rs 1,600 or Rs 1,500 in the near-term.
Medium-term view for the stock stays negative as long as it trades below Rs 1,900.
Tata Steel (Rs 438.3)
Tata Steel held above the support at Rs 380 in the early part of the week before moving sharply higher to Rs 442 by Friday. Key short-term resistance for the stock is at Rs 455. The stock needs to move beyond this level to attain the previous peak at Rs 496. Failure to move above Rs 455 will imply an impending decline to Rs 370 or Rs 326. The area around Rs 350 where the 200-day moving average is positioned will also be an important medium-term support in declines.
Key medium-term resistance for the stock is at Rs 460. The stock is currently struggling to move beyond this level. If it succeeds in doing so, next target would be Rs 557.
Infosys (Rs 1,800.9)
Infosys moved sideways last week in the range between Rs 1,750 and Rs 1,830. The medium-term uptrend from the February low of Rs 1,146 continues to be in force. But as explained earlier, the stock faces key intermediate resistance from the zone between Rs 1,850 and Rs 1,900. A downward reversal from here will pull the stock towards Rs 1,400 whereas a strong move above Rs 1,900 will make the long-term outlook positive again for the stock.
ONGC (Rs 1,134.6)
ONGC is also at crossroads. The stock is pausing near the key short-term resistance of Rs 1,130. A strong move above this level will take it to the former peak at Rs 1,219. But a reversal from here can pull the stock lower to Rs 990 again. The stock has strong medium- term support around this level and breach of this support will take ONGC lower to Rs 920 or Rs 850.
Maruti Suzuki (Rs 1,056.8)
MSIL continues to be in a strong medium-term uptrend and this view will be negated only on a weekly close below Rs 950. The short-term trend in the stock is, however, down and it can decline to Rs 1,015 or Rs 980 in the days ahead. Resistances for the week would be at Rs 1080 and Rs 1,120
Investors with a medium-term perspective can consider investing in Rashtriya Chemicals & Fertilizers (RCF).
The stock bottomed in November 2008 at the significant long-term support level of Rs 25.
Since then, it has been trending upwards shaping higher peaks and troughs.
In early June, RCF conclusively penetrated a key resistance level of Rs 70 and was able sustain above this level on daily closing basis.
The stock is undergoing a sideways consolidation in the range of Rs 70 and Rs 89 for the past one month.
Both the weekly and monthly momentum indicators are exhibiting bullish momentum.
In short-term, the stock has the potential to move up to Rs 89, traders can buy with stop at Rs 76.
Medium-term investors can enter with a target of Rs 100 and hold as long as it trades above Rs 70 .