Indian Equity Research and Investment Strategy
Bangalore based Real Estate company Sobha Developers QoQ profits declined from Rs 61.9 crore to Rs 40 crore for Q1-FY08.
Profits during Q1-FY07 was Rs 17 crore. Details are awaited from the management of the company. Bangalore has witnessed tremendous slowdown in Real Estate prices in the past few months where Sobha and Purvankara have their major projects.
Kotak Securities has initiated coverage on the prospects of India’s largest Realty player – DLF.
DLF, with 615 mn sq. ft of land acquired or under acquisition at low cost, is best positioned to participate in the strong growth we expect in the Indian real estate sector. Concurrently, DLF’s extensive experience in the commercial and retail sectors (it has developed 10 mn sq.ft) should help accelerate its aggressive plans for developing office space, shopping malls, SEZs and hotels.
Kotak estimates March 2009 NAV for DLF at Rs670/share. DLF’s net income is expected to increase to Rs112 bn in FY2010E from Rs19 bn in FY2007 driven by increase in revenues to Rs221 bn from Rs39 bn. More specifically, (a) DLF is to develop and sell 31 mn sq. ft of developed in FY2010E, up from 8 mn sq. ft in FY2007; (b) DLF to have 26 mn sq. ft of assets under lease by FY2010; and (c) DLF’s new initiatives (SEZs, hotels) to start contributing to revenues over the next few years.
DLF’s fully diluted EPS is expected to be Rs 37.5 for FY 08 and Rs 55 for FY 09. Kotak has set a price target of Rs 710, 5% premium to its NAV.
One should be very careful while investing in Realty stocks because the sector is overheated today and Indian Realty Stocks are the most expensive in the world according to S&P report. Further, FIIs have sold the following Realty stocks – DLF, Mahindra Gesco, Atlanta and Unity Infra.
Update from Citigroup:
Citigroup research has also initiated coverage on DLF with a BUY rating and a price target of Rs 725.
DLF is India’s largest developer with an emerging pan-India presence. We initiate with a Buy/Medium Risk rating and a Rs725 target price, based on a 25% premium to an estimated core NAV of Rs530 and ascribing Rs62 for other asset holdings and new JV businesses. The premium is based on DLF’s sizeable land bank; higher leverage to office, IT Parks/IT SEZs and retail mall assets.
DLF’s strengths are 1] Focus on scale with a portfolio mix of ~615m sq.ft spread across top-tier cities; 2] strong cash reserves in this liquidity strained environment, 3] a de-risked business model, with JVs in construction and hotels aiding growth, and 4] a robust earnings CAGR of 81% for FY07-10E.
Larsen & Toubro (L&T) has announced that the company has secured two more design and build contracts from Delhi Metro Railway Corporation (DMRC) for the construction of the underground station at Saket (Delhi) and a tunnel as part of its phase II project. Valued at Rs 203 crore the new station and tunnel will come up between Central Secretariat and Qutub Minar Corridors of Delhi Metro.
To be completed in 30 months, the construction of the Saket station involves 1500m of tunneling. The length of the station will be 284m. In addition, the construction involves a 945m link tunnel and a 260m Ramp, both of which to be completed in 24 months. Top down construction method will be adopted for the underground station at Saket (Delhi) while cut & cover method will be used for tunneling and NATM for 185 m of twin tunnel.
India’s over hyped IT consulting firm MindTree consulting will under perform the IT sector performance according to research initiated by SSKI. They have set a target price of Rs 510, potential downside of 12% from current levels.
Kindly read about MindTree’s Management and Business Operations in our coverage during IPO. MindTree experienced slow revenue growth of 31.5% yoy in FY07 against and 82% in FY06, 89% in FY05 and 58% in FY04. MindTree has the lowest billed employees per client at just 15 while Satyam and Wipro have the highest at 51. MindTree’s EBITDA margins, at 18.6% in FY07, appear quite low compared to those of peers. At 65% of revenues in FY07, the share of development revenues is high for MindTree compared to peers.
At 65% of revenues in FY07, the share of development revenues is high for MindTree compared to peers. A high share of development services leads to lower utilization. A 100-people team, working on creating IP, is not billed. IP licensing revenues constituted only 1.2% of the overall revenues in FY07.
Due to lower margins and a higher tax rate, the strong revenue growth would result in only 15% CAGR in net profit. The management to cut its original net profit guidance of $25.1m-25.2m (25.9-26.4% yoy growth) to $22.5m-22.6m, a growth of just 14%. MindTree revised its EPS guidance to Rs 24.5 for FY08.
Tech Mahindra is expected to post net profit CAGR of 43% over FY07-09 while MindTree would post an 11% CAGR (for better comparison, taking into account Bloomberg estimates for MindTree as well). However, MindTree trades at 17.4x FY09E earnings compared to 13.5x for Tech Mahindra (superior growth prospects). SSKI recommends an Underperform rating on MindTree with a target price of Rs 510.
Gati is planning to acquire Kausar, a Delhi-based firm with a presence in the cold chain segment.
Kausar, which reported a turnover of Rs 19 crore in FY 2007, is listed on the Delhi Stock Exchange (DSE) but has not witnessed any trading activity in the past few months, reports suggest.
Kausar has a strong presence in the cold chain segment in northern India and specialises in the transportation of meat, pedigree products, dairy products and pharmaceuticals. Kausar has a strong customer base with clients like Hindustan Unilever (HUL), Nestle, Dabur and Amul among others.
At present, Gati does not have any presence in the movement of perishable cargo and this acquisition will mark Gati’s entry into the cold chain space. The move by Gati to enter into the cold chain space comes on the eve of the increased requirements of cold chain facilities by retail giants like Reliance Retail, Bharti Wal-Mart and the Aditya Birla Group.
The US Sub-Prime Woes is having Ripple effect on the Indian Stock Market. BSE-SENSEX is down 390 points. Major losers in the Sensex are – Bharti Airtel Ltd, HDFC, ICICI Bank, NTPC and State Bank of India.
Adding to market woes is the Indian inflation which shot to 4.45%.
Asian stocks tumbled across the board, following a rout in global markets as credit jitters flared up, after France’s biggest listed bank BNP Paribas froze three funds that invested in US subprime mortgages.
The French bank’s move on Thursday, 9 August 2007, spooked global financial markets and prompted action from major central banks to calm markets, with the European Central Bank injecting record amounts of cash to prevent a financial system seizure.
In a newsflash, The Bank of Japan added 1 trillion yen ($8.5 billion) to the financial system and the Reserve Bank of Australia lent the most in more than three years, joining U.S. and European central banks in responding to a credit crunch.
Indian Economic Data:
INDIA JUNE INDUSTRIAL GORWTH AT 9.8% VS 9.7% YOY
INFLATION FOR THE WEEK AT 4.45% VS 4.36%
Tags: Invest India, Global Markets, Stock Market, Indian Inflation